June 22, 2022

By Michelle C. Yau and Laura E. Older

If you are a married person who participates in a pension plan, you should be on alert that your plan might violate the federal law ERISA’s actuarial equivalence, anti-forfeiture, and joint and survivor annuity requirements. You’ve worked for the same length of time at the same company as your unmarried co-worker. You’re both ready to retire, yet it’s possible that your single co-worker might take home more pension benefits than you and your spouse. While ERISA requires that both your pensions be overall worth the same, a growing number of lawsuits allege that companies are failing to ensure that pensions are actuarially equivalent—and specifically that the companies’ failures are systematically underpaying married couples. This means that you and your surviving spouse could be the subject of a “marriage penalty” resulting in a substantial loss of benefits.

There are a number of lawsuits currently challenging this conduct. In one case, pension plan participants allege that their plan used outdated mortality tables to determine the value of joint and survivor annuities, resulting in married retirees not receiving their full ERISA-protected pension benefits.

Here’s what you need to know.

What Is The Survivor Annuity?

If you are a married plan participant, unless you specifically choose otherwise, you will receive pension benefits in the form of a joint and survivor annuity—a benefit that pays an annuity both to the participant for your life and for the life of your surviving spouse.

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

For married participants, however, the default form of pension payment is a joint and survivor annuity. A joint and survivor annuity provides the participant with a payment stream for her/his own life, and then, if s/he has a surviving spouse when s/he dies, for the life of the spouse.

The survivor annuity is expressed as a percentage of the benefit paid during the participant’s life. Typically, the surviving spouse will receive 50%, 75%, or 100% of the benefit the participant received.

How Is The Survivor Annuity Calculated?

To calculate a married participant’s (and their spouse’s) joint and survivor annuity, the plan starts with the participant’s single life annuity, then uses actuarial assumptions to convert it to a joint and survivor annuity. When the plan makes that conversion, ERISA requires the joint and survivor annuity be the “actuarial equivalent” 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 a participant and their spouse. The interest rate accounts for the value of future pension payments, reflecting the time value of money, while the mortality table provides the expected likelihood of that future payment being paid to the participant or their survivor based on published tables showing the statistical life expectancy of a person at a given age.

When plans make these actuarial conversions, several provisions of ERISA and the relevant regulations ensure that the plans in fact provide participants an annuity with the same economic value as the single life annuity.

  1. ERISA requires that joint and survivor annuities be “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 retirement benefits is non-forfeitable and states that paying a participant less than the actuarial equivalent value of their accrued benefit results in an illegal forfeiture of vested benefits.

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[.]”

Why Does This Matter?

Some pension plans may violate some or all these rules by using outdated mortality and interest rate assumptions when converting single life annuity to joint and survivor annuities. Using up-to-date mortality assumptions is vital to ensuring actuarial equivalence of benefits, as 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 participants 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 plan and your rights is a vital first step. Take the time to leaf through your pension resources, particularly the “Plan Document,” which outlines the plan’s details and which ERISA requires plan administrators to give to participants upon request. 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, make sure you are clear about the value of the pension that you worked years to earn. ERISA protects an employee’s right to their earned retirement benefits. Those rights are non-forfeitable. If a company pays a retiree less than the actuarial equivalent value of their pension, the company is causing an illegal forfeiture of a person’s hard-earned retirement income.

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For further information, consider these resources:

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.

Laura E. Older, an associate in Cohen Milstein’s Employee Benefits/ERISA practice, represents the interests of employees, retirees, plan participants and beneficiaries in ERISA cases across the country. Ms. Older can be contacted at: t: 202 408 4600 / lolder@cohenmilstein.com.