The Issues:
The Pension Protection Act and the LGBT Community

Frequently Asked Questions

What is the Pension Protection Act?

It is an act signed into law by President Bush that allows for the "rollover" of retirement benefits from non-spouse beneficiaries to their partners.

When was the Pension Protection Act passed?

August 17, 2006.

What does the Pension Protection Act mean for LGBT couples?

A couple of things:

Non-Spousal Rollover
Previously, even though many companies allow same-sex partner beneficiaries, in the event of death the surviving partner (and other non legally married beneficiaries) were forced to withdraw the entire benefit sum -- resulting in severe early withdrawal tax penalties. The taxable sum also bumped the beneficiary into a higher tax bracket.

Now, non-legal beneficiaries (including same-sex partners) can transfer their deceased partner's retirement funds into an IRA account and either draw down the benefits over a five-year period, or over his or her own life expectancy.

Hardship Distribution
Under the Hardship Distribution rules, individuals who list their same-sex partners as beneficiaries under a 401(k) plan can now withdraw monies from their retirement fund in case of the partner's medical or financial emergencies.

Previously, employees could only utilize their 401(k) funds for the emergencies of legally recognized spouses and dependents.

Is my partner covered?

In order to benefit from the Pension Protection Act, make sure your partner is designated as the beneficiary on your benefits and 401(k) packages. Contact your human resources or benefits specialist at your job to adjust your information.

Who else does the Pension Protection Act help?

Anyone who has been designated as a retirement plan beneficiary. This may include siblings, for example.

What are some scenarios under this new law?

Here are some scenarios that better illustrate the differences these laws make:

Under Former Rollover Pension Rules:
Amy, 61, and Sandy, 63, have been together for 30 years. Amy works for a small business with no retirement plan and earns $30,000 a year. Sandy works at a company where she has saved for retirement for many years. Sandy has a $162,000 balance in her 401(k) plan when she dies suddenly. Amy is required to receive Sandy's entire retirement plan distribution in one lump sum. As a result, Amy is forced into a 33 percent marginal tax bracket rather than the 15 percent tax bracket she would have been in based on her earned income. Amy's federal tax liability for the year goes from $2,980 to $49,360. Because of the steep taxes paid on this withdrawal, the total balance received by Amy is reduced by tens of thousands of dollars, eating away at the resources intended to finance retirement.

After the new law:
In the same scenario, Sandy's sudden death again leaves Amy devastated. But under the new law, Amy is able to roll Sandy's 401(k) funds over into an inherited Individual Retirement Account where she can either take them out over a period of five years or over her own life expectancy. Amy avoids a large tax penalty and is able to use Sandy's 401(k) funds to finance retirement as planned.

Under Former Hardship Rules:
John and Paul were together for 20 years and had a 2-year-old son when Paul was diagnosed with cancer. The costs for Paul's treatment were high and they needed help. John turned to his 401(k) plan but under the former hardship distribution rules, they did not qualify and were unable to withdraw funds from their retirement plan to help them during this emergency -- something a married couple would have been able to do. Instead the couple had to max out their credit cards at high interest rates. While Paul survives the cancer, their steep credit card payments mean their son's college saving plan is put off for years and they are never able to find the same financial footing they once had.

After the new law:
John and Paul are in the same situation. But under the new hardship rules, they can now access John's retirement funds to cover the costs for Paul's medical bills. Surviving the cancer, Paul, John and their son are able to enjoy the rest of their lives together and begin saving for their son's college immediately.

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