Wednesday, January 02, 2008

Defined benefit pension plans -- an old topic, but still deserves an overview

This is just a reminder note about how most older defined benefit pension programs work. Of course, many companies have frozen these as of a particular year.

A retiree who is legally married will normally be offered “life with 60 months certain” (or 5 years certain) as a default option. If the retiree dies before sixty months and the legal spouse is still alive (and was still legally married at the time of death) he or she continues receiving benefits up to sixty months from the time the retiree started receiving benefits. However, for the retiree himself or herself, the benefits continue until death. In the case of a same-sex couple, in a state where same-sex marriage is legal (Massachusetts) and where the couple used this possibility, then the pension would be treated the same way. However federal law does not give certain tax benefits to same-sex couples even when the state recognizes it, as explained in this Massachusetts Mutual document SEC info document (look for “same-sex marriage”).

Normally, a legally single person can name a beneficiary (like a domestic partner) and structure the benefit the same way. A typical example is American Airlines, here. Although maybe improbable, a few mean-spirited states could try to ban this for same-sex couples. I would expect the debate on this to continue, and further changes may happen in the law and in company plans.

A legally single person can also elect a Single Life Annuity with no period certain upon death. The liability of the company ceases upon the person’s death. The payments are slightly higher, typically about 2%.

Changing the default for a married person usually requires the permission of a spouse. (To the extent that this is driven by federal law, it’s unclear that it could be enforced in Massachusetts with a same-sex married couple, but hopefully that’s a moot point in practice.) It’s possible to lengthen the period certain (even as long as 240 months or 20 years), or it’s possible to construct a Joint and Full Survivor Annuity or Joint and Two-Thirds Survivor Annuity.

Visitors may want to check out the Fulcrum Inquiry Retirement Savings Calendar, here.

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