Is Your Retirement Plan Imposing a Marriage Penalty? What You Need to Know

June 22, 2022

If you’re married and enrolled in a pension plan with Intel, your plan’s Survivor Annuity may have been miscalculated in violation of the Employment Retirement Income Security Act (ERISA). Learn more about the Intel case.

If you are a married person who receives a monthly pension check from a private company, you should be on alert that the company might be shortchanging you by paying you less than the actuarial equivalent value of your pension.  A federal law, ERISA, contains many protections for the pensions of retirees including actuarial equivalence requirements, anti-forfeiture rules, and joint and survivor annuity requirements.

For example, you are legally entitled to receive the same economic value (“actuarial equivalence,” as discussed below) for your spousal pension as for if you took your pension as a single life annuity (also discussed below). In other words, ERISA requires that the pensions paid to married retirees are worth the same overall as the pensions paid to single retirees.

Several lawsuits have been filed claiming that companies are failing to pay their married retirees actuarially equivalent pensions—and specifically that they are systematically underpaying married retirees (and their surviving spouses). In cases against IBM, CITGO and AT&T (filed by our law firm), the retirees allege that their plan used outdated mortality tables to calculate their spousal pensions, which resulted in an unlawful “marriage penalty.”

Here’s what you need to know:

What Is the Survivor Annuity?

If you are a married retiree, you will receive pension benefits in the form of a joint and survivor annuity—a benefit that pays monthly pension payments for your life and for the life of your surviving spouse (unless you and your spouse opt out).

Generally, a retiree’s pension benefit is expressed as a “single life annuity,” meaning it pays a monthly benefit just to the retiree for his or her entire life.

For married retirees, however, the default pension is a joint and survivor annuity, which is a spousal annuity that provides the retiree with monthly pension payments for her/his own life, and then, pays a percentage of that monthly pension to the surviving spouse for his/her life. This joint and survivor annuity is expressed as a percentage of the retiree’s monthly payment that will be paid to the surviving spouse (i.e., 50%, 75%, or 100% of the retiree’s monthly pension).

How Is the Survivor Annuity Calculated?

To calculate the amount of a joint and survivor annuity, the plan starts with the amount of the retiree’s single life annuity, and then uses actuarial assumptions to convert it to a joint and survivor annuity. When the plan makes that conversion, ERISA requires the amount of joint and survivor annuity is “actuarial equivalent” to the amount of the single life annuity. Actuarial equivalence is a computation designed to ensure that, all else being equal, all forms of benefit payments have the same economic value.

Generally, an actuarial equivalence computation considers both an interest rate and the expected longevity of the retirees and their spouse. The interest rate reflects the time value of money, while the mortality table reflects the expected likelihood of each payment being paid to the retiree or surviving spouse based the statistical life expectancy of a person at a given age.

When plans make these actuarial conversions, ERISA provides several protections to ensure that married retirees get the same economic value from their pensions as single retirees. For example:

1. ERISA requires that every joint and survivor annuity is “the actuarial equivalent of a single annuity for the life of the participant.”
2. ERISA requires that, if an employee’s accrued benefit “is to be determined as an amount other than an annual benefit commencing at normal retirement age [of 65] . . . the employee’s accrued benefit . . . shall be the actuarial equivalent of such benefit[.]”
3. ERISA provides that an employee’s right to their vested pension payments is non-forfeitable and states that paying retirees less than the actuarial equivalent value of their accrued pension results in an illegal forfeiture of their vested pensions.

Echoing the statute’s actuarial equivalence requirements, Treasury regulations make clear that actuarial “[e]quivalence may be determined] on the basis of consistently applied reasonable actuarial factors.”[i]

Why Does This Matter?

Some pension plans may violate some or all these rules by using outdated mortality and interest rate assumptions when converting a retiree’s single life annuity to a joint and survivor annuity. Using up-to-date mortality assumptions is vital to ensuring actuarial equivalence of benefits, as the average life expectancy in the U.S. has increased significantly in the last forty years. Outdated assumptions result in underestimated lifespans. Importantly, this can result in underestimated monthly pension payments for married retirees and their spouses who choose a joint and survivor annuity—in other words, a marriage penalty.

How Can I Tell If My Pension Is Affected by A Marriage Penalty?

Whether you’re already retired, considering retirement, or even just enrolled in your company’s pension plan, knowing your rights is a vital first step. Take the time to leaf through your pension resources, particularly the “Summary Plan Document,” which outlines the way your pension plan works and which you are entitled to by law. Ask yourself questions like:

• What types of benefit options (lump sum, single life annuity, joint and survivor annuity) are available to me?
• Does the plan state that the benefits are actuarially equivalent?
• Which mortality table does the plan use to calculate benefits?

At the end of the day, you may want an understanding about the value of the pension that you worked years to earn. ERISA protects an employee’s right to get the full value of their vested pensions. Those rights are non-forfeitable. If a company pays a retiree less than the actuarial equivalent value of their pension, the company may be causing an illegal forfeiture of a person’s hard-earned retirement income.

Get More Information.

For further information, consider these resources:

• U.S. Department of Internal Revenue Services Retirement Topics – Qualified Joint and Survivor Annuity
• U.S. Department of Labor Employee Benefits Security Administration Pension Benefit Statements – Lifetime Income Illustrations

The content above is for informational purposes only and should not be read or interpreted as legal advice. Please reach out to a lawyer for legal advice.

About The Authors:

Michelle Yau, chair of Cohen Milstein’s Employee Benefits/ERISA practice, has spearheaded some of the most significant ERISA class actions in the nation. In 2022, Chambers USA named her a “Top Ranked” individual in ERISA Litigation and in 2021, she was named a Law360 Benefits MVP.  Ms. Yau combines ardent dedication to protecting her clients’ retirement assets with rare insight into complex financial transactions and actuarial issues, informed by her Wall Street and government experience. Ms. Yau can be contacted at: 202 408 4600 / myau@cohenmilstein.com.