Qualified Pre-Retirement Survivor Annuity (QPSA)

What Is a Qualified Pre-Retirement Survivor Annuity?

A qualified pre-retirement survivor annuity (QPSA) is a lifetime annuity designed as a death benefit of certain pension plans. If a qualifying plan participant dies before retirement age, the QPSA makes regular payments for the lifetime of a beneficiary, usually the participant’s surviving spouse.

“The premise of this annuity is to ensure that a surviving spouse continues to receive income from a pension plan in order to provide financial support when the participant passes away,” Matt Lewis, Certified Long-Term Care specialist and vice president of insurance at Carson Group, told Annuity.org.

QPSAs are mandated components of some, but not all, types of retirement plans by the Employee Retirement Income Security Act, commonly referred to as ERISA. The law was enacted in 1974 to protect the retirement savings of workers.

QPSAs can be a valuable risk management component of a couple’s retirement plan, similar to life insurance. If it’s applicable based on your situation, review your plan’s documents for info about how your payment would be calculated.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

QPSA Benefit Amount

A QPSA pays the actuarial equivalent of a single life annuity for the surviving spouse. The purchase amount of the annuity must not be less than 50% or more than 100% of the account value of the retirement plan, but individual plan percentages vary. 

As Lewis explained, “The portion that a surviving spouse receives can vary according to the plan and most often is a percentage of the accrued pension that the participant would have received in retirement.  The specific design and rules regarding a QPSA will vary depending on the type of pension plan and what the employer’s policies are.” 

QPSA vs. Life Insurance

The benefits of a QPSA are similar to those of life insurance, in that both provide income to the surviving spouse after the participant’s death. However, there are a few differences between the death benefit provided by a QPSA and the death benefit provided by life insurance.

Traditional life insurance typically pays a lump-sum distribution to the policy’s beneficiary. The beneficiary of a QPSA doesn’t receive a payout upfront if the plan participant dies before reaching retirement. Instead, a QPSA pays the surviving spouse an income for the remainder of his or her life.

Another difference between a life insurance death benefit and a QPSA is how the proceeds are taxed. A life insurance benefit is non-taxable. The income from a QPSA is taxed as ordinary income. The reason for this tax treatment is that a QPSA is funded with money held in a qualified retirement plan, which contains pre-tax dollars.

Types of Plans Offering QPSAs

Not all types of retirement plans offer QPSAs. Retirement plans that must provide a QPSA include defined benefit plans, money purchase plans and target benefit plans.

Some qualified plans, however, are exempt from requiring QPSAs. These include:

• Defined contribution plans, such as 401(k)s.
• Plans that require a lump-sum distribution death benefit.
• Plans that do not offer a life annuity retirement benefit.
• Plans transferred from another employer that did not require a survivor annuity.

Defined contribution plans such as 401(k)s are exempt because they do not provide a defined benefit. A 401(k) plan defines the amount of money the participant and the employer contribute to the plan. 

A defined benefit plan specifies how much the plan participant will receive from the employer at retirement. Since the benefit is defined, ERISA requires that the income benefit be guaranteed.

Plans that offer an insurance-like death benefit to a participant’s spouse are not required to provide QPSAs because the surviving spouse receives full payment from the outset.

Plans that do not offer a life annuity retirement benefit are not required to provide a QPSA to a participant’s spouse because there is no income guarantee built into the plan that must be replaced if the participant dies.

Any defined benefit plan, money purchase plan or target benefit plan can elect to issue a lump-sum payment instead of a QPSA without the prior consent of either the participant or the surviving spouse in cases where the one-time distribution totals $5,000 or less.

Qualifying for the Benefit

In order for a surviving spouse to receive a QPSA, the participant must have been fully vested in the retirement plan as the death benefit is intended to replace retirement income.

The participant must have still been employed when they died in order for the surviving spouse to receive income payments. If the participant was retired and already drawing income from a plan in the form of a life annuity intended to continue throughout the surviving spouse’s lifetime, this benefit does not need to be replaced. In this case, a QPSA is unnecessary.

The surviving spouse and the participant must have been legally married at the participant’s time of death in order for the surviving spouse to receive a QPSA. A plan can provide that a couple must be married for at least one year in order for the surviving spouse to be eligible for benefits.

Unmarried Participants

ERISA mandates two forms of benefit distribution from qualified defined benefit plans. For married couples, the default is for the participant to receive retirement benefits in the form of a qualified joint and survivor annuity with the qualified pre-retirement survivor annuity as a death benefit. For unmarried participants, the default form is a single life annuity.

Unmarried participants are deemed to have waived the QPSA requirements. Importantly, if an unmarried participant later marries, that waiver is deemed null and void.

Additional Planning Considerations

Couples working beyond full retirement age and seeking to maximize Social Security benefits post-retirement may find it advantageous to appoint other beneficiaries of their QPSA. This is especially true for those who have saved enough to finance a long retirement and wish to leave a legacy to heirs.

Because a participant’s spouse is the default beneficiary, the written consent of both the participant and his or her spouse is required to reassign beneficiary benefits.

Plan participants in this position may also consider using plan assets to acquire a qualified longevity annuity contract (QLAC). This would allow them to delay annuity payments many years into the future, when other taxable income may likewise allow them to optimize their Social Security benefits.

Another important planning consideration arises when couples divorce. For example, a former spouse may be recognized by plan administrators as the participant’s beneficiary under a qualified domestic relations order. If your situation is complicated by divorce, consulting an attorney for tailored guidance may be necessary.

Frequently Asked Questions About QPSAs