Massachusetts Life Producer Practice Exam

If a plan's trustee splits benefits between a retired employee and his estranged spouse, what IRS rule might this violate?

1. Early withdrawal penalty

2. Alienation of benefits

3. Minimum distribution rule

4. Qualified joint and survivor annuity

The correct answer is: Alienation of benefits

The situation described involves a plan's trustee dividing benefits between a retired employee and their estranged spouse, which raises the issue of the alienation of benefits. This principle under the Employee Retirement Income Security Act (ERISA) prohibits the assignment or alienation of pension benefits. Generally, this means that benefits cannot be taken away or redirected to someone else through voluntary means, and in many cases, such a division might invalidate the tax-advantaged status of the retirement plan. In a divorce situation, there are specific legal instruments known as Qualified Domestic Relations Orders (QDROs) that allow the division of retirement benefits without violating these alienation rules. However, if benefits are split outside this context or without proper legal documentation, it could violate the IRS’s alienation of benefits regulations, which protect the interests of retirees in their pension plans. This adherence to the alienation of benefits rule is crucial for ensuring that retired individuals maintain control over their retirement assets and are protected from having their benefits unduly claimed or influenced by estranged relationships. Understanding this principle helps in handling retirement benefits correctly in the context of divorce or separation.