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Money Purchase Plan- No QJSA Notices Given

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Client began a Money Purchase Plan about 10 years ago using a document supplied by a bank. The document states the normal form of benefit is a lump-sum payment...there is no mention of the qualifed joint and survivor annuity rules. The IRS issued a determination letter during the GUST restatement process with no mention of the problem.

The SPD for the group contains the proper QJSA language, but the distribution form being used does not contain an explanation of the QJSA or require a spousal waiver.

Any idea of the costs associated with self-reporting to the IRS and taking remedial action? Plan has roughly $10mm in assets and 700 or so participants.

What remedial action does the IRS want to see in this type of situation? How can the plan offer a QJSA waiver to a participant and his spouse when the money has already been distributed and likely spent?

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Are you sure it's a money purchase plan?

Are you sure the plan/sponsor is subject to the J&S rules?

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Yes and yes. We had the same thoughts initially and looked to see if it could be classified as a profit-sharing plan, but it is a undoubtedly a money purchase plan.

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Guest taxesquire
Client began a Money Purchase Plan about 10 years ago using a document supplied by a bank. The document states the normal form of benefit is a lump-sum payment...there is no mention of the qualifed joint and survivor annuity rules. The IRS issued a determination letter during the GUST restatement process with no mention of the problem.

The SPD for the group contains the proper QJSA language, but the distribution form being used does not contain an explanation of the QJSA or require a spousal waiver.

Any idea of the costs associated with self-reporting to the IRS and taking remedial action? Plan has roughly $10mm in assets and 700 or so participants.

What remedial action does the IRS want to see in this type of situation? How can the plan offer a QJSA waiver to a participant and his spouse when the money has already been distributed and likely spent?

I guess since the forms don't mention QJSA, the plan has not been administerred according to those rules. This could probably be corrected through the VCP process, although you'd need to review those requirements 1st. The application fee for a plan your size is $8,000, or at least it was last year.

I think the bigger problem is that I think the proper correction is for you to locate all those spouses and try to get their approval of the distribution chosen by the participant. For any of those who don't consent, you may need to payout an annuity on top of what was alrady distributed. Yes, this means a sizable windfall for the spouse and participant.

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taxesquire: Windfall, maybe, maybe not. If the spouse does not consent the Plan may have a perfectly good claim against the participant for the money improperly distributed to him. No harm in threatening that in the follow-up letter, if not the first letter. I don't recall anything in EPCRS or said by IRS in speeches that this would not be permissible in the context of VCP.

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Guest mjb

JPOD: You care to share the legal rationale for your theory that the participant has recieved a windfall. If the amount of the vested accrued benefit is paid to the participant in accordance with the terms of the plan (which is a binding contract) at the time the distribution is paid, then the participant has not received any excess benefit. The fact that the plan has failed to comply with ERISA in securing the spouse's consent to the lump sum does not mean that the participant received excess benefits which constitutes unjust enrichment for which the plan is entitled to a recovery since the participant has received the amount to which he is contractually entitled. The plan may have a liability to the spouse under ERISA for the failure to secure the consent to a lump sum but that does not mean that the participant received an overpayment if the benefit was paid to him in accordance with the terms of the plan at the time he received it.

Under ERISA 511 making false or fraudulent statements to intimidate a particpant for the purpose of interfering with any right to which a participant is entitled under a plan (e.g. plan benfits) is punishable by a $10,000 fine and 1 yr in prison.

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mjb: Calm down; everything will be all right. I assume that the plan is adequately drafted and says something like "benefits will be paid in the form of a J&S absent a waiver and spousal consent." So, with that language, you would advise the plan or the employer or both that they have absolutely no legal recourse against the participant, and that they should roll over and play dead and eat the difference if they can't secure a spouse's consent?

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As I understand things, if the plan cannot obtain spousal consent and waiver of the QJSA for the already distributed benefits, then the spouse, upon the death of the participant, has the right to contact the plan and request the annuity payments due them under the original QJSA.

If the spouse dies first, or if they never contact the plan, then the plan has nothing more to do.

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Guest mjb
Client began a Money Purchase Plan about 10 years ago using a document supplied by a bank. The document states the normal form of benefit is a lump-sum payment...there is no mention of the qualifed joint and survivor annuity rules. The IRS issued a determination letter during the GUST restatement process with no mention of the problem.

The SPD for the group contains the proper QJSA language, but the distribution form being used does not contain an explanation of the QJSA or require a spousal waiver.

Any idea of the costs associated with self-reporting to the IRS and taking remedial action? Plan has roughly $10mm in assets and 700 or so participants.

What remedial action does the IRS want to see in this type of situation? How can the plan offer a QJSA waiver to a participant and his spouse when the money has already been distributed and likely spent?

JPOD:

1. Where do you see anything that says that benefits will be paid in the form of a J & S annuity absent a waiver? The OP states that the normal form of benefit under the plan is a lump sum with no mention of a J & S annuity.

2. You care to explain how the plan can claim a that the participant was incorrectly paid if amount he was paid under the normal form is lump sum? If he was paid in accordance with the language of the plan how can the plan demand a refund?

3. You still have not provided a legal theory for recovery against the participant who received the benefit that he was specifically entitled to receive under the terms of the plan. The fact that the plan had a defect in its requirement under law to obtain spousal consent does not mean that the participant received an excess payment since he received the amount due under the plan. The plan can not demand return of an excess amount since none has been paid which is why the accepted course is to get the spouse's waiver.

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I apologize to everyone. I did not read the original post carefully, and as a result I thought that this was a document with QJSA language but with operational errors.

I think the result is as PLAN MAN stated it: if you can't get the appropriate waiver and spousal consent, you hope that the spouse dies first.

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Guest taxesquire
As I understand things, if the plan cannot obtain spousal consent and waiver of the QJSA for the already distributed benefits, then the spouse, upon the death of the participant, has the right to contact the plan and request the annuity payments due them under the original QJSA.

If the spouse dies first, or if they never contact the plan, then the plan has nothing more to do.

Good point. I do think the IRS would want the plan to contact the spouse to mention the consent rights and (hopefully) get the consent.

I also agree with the point made elsewhere in this stream that if the spouse does not consent, a letter should be sent to the participant requesting a return of the overpayment. I don't know if the plan has true legal recourse, but it's worth a shot and ERISA might require an attempt in order to protect/preserve/retrieve plan assets.

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Guest mjb

1.If you dont know whether the plan has recourse to request a return of the overpayment how can you recommend that the plan ask for it back?

2. What is the amount that should be returned?

3. What provision of the plan would require a return of the accrued benefit since the plan provides that the normal form of benefit is a lump sum without any J & S requirement?

4. What provision of ERISA requires a plan adminstrator to demand return of an accrued benefit that was paid to a participant under the term of the plan?

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Guest taxesquire
1.If you dont know whether the plan has recourse to request a return of the overpayment how can you recommend that the plan ask for it back?

2. What is the amount that should be returned?

3. What provision of the plan would require a return of the accrued benefit since the plan provides that the normal form of benefit is a lump sum without any J & S requirement?

4. What provision of ERISA requires a plan adminstrator to demand return of an accrued benefit that was paid to a participant under the term of the plan?

If it is an overpayment, then the plan can get it back - it just might not be worthwhile for them to do more than a letter to get it back.

That would be an actuarial calculation based on what amount should have been distributed and what amoeunt was distributed.

The general provision that says that a plan should only pay reasonable expenses allows for this.

As an aside, the IRS believes this, too. In a recent VCP application, the plan accidentally distributed 100% of the account balances w/o regard to the vesting schedule. We wanted to just let it go, but the IRS insisted we send a letter asking for the money back and indicating that if they didn't pay us back those amounts, they need to redo their returns to claim the excess as taxable income that is not eligible for rollover.

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Guest mjb

In your example the participant received a payment in excess of his vested benefit. The OP doesnt mention an excess benefit, in fact the participant received his vested benefit. So how did he receive an excess benefit that must be returned? You still havent demonstrated how payment of the participants's vested benefit w/out spousal consent is an overpayment of an accured benefit.

How do you determine an actuarial calculation in a DC plan which has an account balance?

You still have not cited any authority that would require the return of the "overpayment" regardless of whether "reasonable expenses would allow for this. " In other words there is no overpayment that must be returned.

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Guest taxesquire

look...you're being a bit ridiculous to think that I'm going to go research points of law in a voluntary forum like this. If you want to go get cites for your points, go ahead - I don't recall seeing you back up your arguments.

In general, you are not required to administer your plan in accordance with its terms if it would violate the law. The participant did not get the amount to which s/he was entitled, b/c that amt is supposed to be restricted by the QJSA rules, so the participant did get more than s/he was entitled.

Now I understand that you would take the conservative approach and have the employer pay more into the plan for benefits, but that is not necessarily the most appropriate measure.

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One of the correction methods of EPCRS calls for the Plan Sponsor to "notify the affected participant and spouse (to whom the participant was married at the time of the distribution), so that the spouse can provide spousal consent to the distribution actually made or the participant may repay the distribution and receive a qualified joint and survivor annuity." Rev Rul 2006-27, sec 6.04(1).

Otherwise, the correction is to provide the spouse a benefit "equal to the portion of the qualified joint and survivor annuity that would have been payable to the spouse upon the death of the participant had a qualified joint and survivor annuity been provided to the participant under the plan at the annuity starting date for the prior distribution. Such spousal benefit must be provided if a claim is made by the spouse." Rev Rul 2006-27, sec 6.04(2)(a). The plan can offer the spouse an actuarially-equivalent lump sum payment instead of a survivor annuity form of benefit. Rev Rul 2006-27, sec 6.04(2)(b).

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Otherwise, the correction is to provide the spouse a benefit "equal to the portion of the qualified joint and survivor annuity that would have been payable to the spouse upon the death of the participant had a qualified joint and survivor annuity been provided to the participant under the plan at the annuity starting date for the prior distribution. Such spousal benefit must be provided if a claim is made by the spouse." Rev Rul 2006-27, sec 6.04(2)(a). The plan can offer the spouse an actuarially-equivalent lump sum payment instead of a survivor annuity form of benefit. Rev Rul 2006-27, sec 6.04(2)(b).

I did some more reading on this issue and saw the same guidance. While the VCP fee is not terribly significant, the prospect of providing a QJSA for any spouse who does not predecease her husband is downright scary. This is a multi-employer DC plan. How does the plan finance such an expense?

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Guest mjb

Same as any other employer obligation- by making a contribution to the plan or using forfeitures. The QJSA for the spouse is problematic because the spouse is unlikely to be aware of her right to the annuity.

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Since we are on this topic, I have a situation (DB this time) where QPSA information was not adequately conveyed. Is there some statute of limitations on how many years we need to go back? This plan has been around a looooong time. My understanding is that if the spouse died first, we are in the clear, but if the participant died, we owe the spouse the full J&S benefit regardless of past payments. Correct?

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Yes and yes. We had the same thoughts initially and looked to see if it could be classified as a profit-sharing plan, but it is a undoubtedly a money purchase plan.

So the plan specifically says it is a money purchase plan? Absent such a statement, it is not a money purchase plan. It seems to me that you have a drafting error here. Whats not clear is if the drafting error is the absence of the QJSA language or the sentence that says "this is a money purchase plan"

I dont see how its possible to have an SPD that is that far off from the plan doc... but my solution would be to propose to the IRS that this is a profit sharing plan and that it was a drafting error that said Money Purchase and move on

They may very well buy that since the plan has a favorable DL and no QJSA language

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