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To ensure a stream of income to surviving spouses VS Earliest Retirement age


Guest angelf

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"Am I alone in thinking it unfair or inequitable for a plan to tell a widow she has to wait 10 or 20 years to get a pension benefit if her husband died at an early age? In theory a husband who starts a job at age 18 could work 20 years and then die at age 38, the wife would then have to wait 17 years for a partial pension or 27 years for a full pension. Would you want your wife to have to go through that? "

First, since a plan can force the participant to wait until retirement age to collect a benefit, how is this "inequitable" to the surviving spouse? Of course I would prefer my spouse to be able to start collecting benefits presently (albeit drastically reduced, as pointed out earlier by Mike), but then I'd prefer the same treatment for myself, too. And if I terminate employment at age 40, I can't start collecting a benefit.

Beyond what's "equitable" or "fair" depending upon your viewpoint - what's your deal here? Are you an attorney representing a surviving spouse who wants to currently collect a survivor benefit, and has been denied? You seem to have an agenda of some sort - which is fine. I'm dubious that you'll obtain the kind of answer on these boards that you are apparently looking for. Nevertheless, certainly an interesting question and discussion thread.

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but then I'd prefer the same treatment for myself, too [as the participant].

For what it's worth, I think this answers the 'Is it equitable?' question. Generally, spousal beneficiaries get the options the participant would have had.

And as I read the posts, I came to ETK's conclusion (post #21) that one could look at it with the point of view that a retirement/pension plan is established to provide a stream of income at retirement to the participant or beneficiary, not a life insurance benefit.

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Sorry, but nothing you have posted is inconsistent with the plan's ability to defer distribution until the participant's early retirement age. You are, essentially, making things up that are not written in the regs, the law, the explanations or any court case.

To ensure a stream of income to surviving spouses is made up?

While the purpose of the REA change you refer to is to provide for a retirement benefit to surviving spouses, the legislative history, the statute and the IRS Regs all provide that the commencement of the benefit can be delayed until the earliest date that the participant could have retired which is consistent with the intent of ERISA/REA that spousal annuities are to be paid as a form of retirement benefit, not as a death benefit on account of premature death of a participant before the earliest date that retirement benefits may commence.

mjb

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Every plan I've worked on (admittedly all of them very small) has permitted a participant or a beneficiary to take their benefit at termination of employment, regardless of age. Why would that not be an option in this case?

It is if the plan permits lump sums to spouses, although the amount will be heavily discounted for age at death. I think the OP wants the plan to pay a pre retirement survivor annuity benefit beginning in the year of death.

mjb

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Let me add a clarification to mbozek's comment. *IF* the plan allows for lump sums at termination of employment, *THEN* the plan must also allow for immediate commencement of a retirement annuity at termination of employment. (1.401(a)-20, off the top of my head)

I have never seen a plan of any size allow for lump sums at termination of employment but *NOT* allow for a lump sum on death. I suppose it is possible that a plan could be approved by the IRS with that specific design, although I have my doubts.

In any event, once a spouse is entitled to a lump sum, it is my understanding that the spouse must be given the option to commence an annuity immediately, in lieu of receiving the lump sum, just like the participant must be given the option in similar circumstances at termination of employment.

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Every plan I've worked on (admittedly all of them very small) has permitted a participant or a beneficiary to take their benefit at termination of employment, regardless of age. Why would that not be an option in this case?

Erisa was changed when the Retirement Equity Act was passed. Among many other changes Rea allowed plans to set an earliest retirement age requirement. Prior to the change ERISA itself had an earliest retirement age requirement. This was deemed to be inequitable, thus the Qualified Preretirement Survivor Annuity was born. As a result a plan may require that the surviving spouse of a deceased plan participant wait until Earliest retirement Age. Hence no immediate Death Benefit for the spouse

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Let me add a clarification to mbozek's comment. *IF* the plan allows for lump sums at termination of employment, *THEN* the plan must also allow for immediate commencement of a retirement annuity at termination of employment. (1.401(a)-20, off the top of my head)

I have never seen a plan of any size allow for lump sums at termination of employment but *NOT* allow for a lump sum on death. I suppose it is possible that a plan could be approved by the IRS with that specific design, although I have my doubts.

In any event, once a spouse is entitled to a lump sum, it is my understanding that the spouse must be given the option to commence an annuity immediately, in lieu of receiving the lump sum, just like the participant must be given the option in similar circumstances at termination of employment.

So Mike what does the Immediate part in 1.401(a)-20 Q&A 18 mean?

Q–18: What is a qualified preretirement survivor annuity (QPSA) in a defined benefit plan?

A–18: A QPSA is an immediate annuity for the life of the surviving spouse of a participant. Each payment under a QPSA under a defined benefit plan is not to be less than the payment that would have been made to the survivor under the QJSA payable under the plan if (a) in the case of a participant who dies after attaining the earliest retirement age under the plan, the participant had retired with a QJSA on the day before the participant's death, and (b) in the case of a participant who dies on or before the participant's earliest retirement age under the plan, the participant had separated from service at the earlier of the actual time of separation or death, survived until the earliest retirement age, retired at that time with a QJSA, and died on the day thereafter. If the participant elects before the annuity starting date a form of joint and survivor annuity that satisfies the requirements for a QJSA and dies before the annuity starting date, the elected form is treated as the QJSA and the QPSA must be based on such form.

Or is it this?

Mandated Benefits 2011 Compliance Guide

Qualified Preretirement Survivor Annuity

If the participant is vested but dies before becoming eligible for early retirement, the benefit is based on the assumption that the participant left service on the date of death, survived to the earliest retirement age, retired with JSA at that age, and then immedaitely died. The spouses benefit is then payable from the assumed date of retirement.

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Well, it doesn't mean what you think it means, that's what. I will go so far as to say that it is an unfortunate choice of words. But the explanation that follows the first sentence is clear. The spouse gets no less than what the participant would have gotten, but is certainly not entitled to more. If the benefit under the plan would not commence until the participant would have reached the earliest retirement age under the plan, then the same holds true for the spouse.

There are many places in regulations that I have railed against in the past. There is a portion of that regulation that demands the QJSA be the most valuable benefit. Yet, many plans for many years did not increase the QJSA if the plan provided a lump sum that was essentially subsidized by 417(e). I said that wasn't allowed, many times, on this site and others. Finally, the IRS came out with a "clarification" that said when they said that QJSA must be the most valuable, they meant "most valuable except for 417(e)".

You are dealing with the same kind of thing. "Immediate" in this sense means immediately when the participant would have reached the earliest retirement age, rather than deferred until normal retirement in all cases. And as I've already said, the choice of words was at the least, unfortunate.

It isn't the first time nor the last that the regulations have or had words and phrases that are not precise enough to clearly communicate the actual intent.

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Furthermore, angelf, you are deliberately trying to cite out of context of the full regulations. While Q&A-18 defines the type of annuity to be paid. Q&A-22 defines when it is paid.

"Q–22: When must distributions to a surviving spouse under a QPSA commence?

A–22: (a) In the case of a defined benefit plan, the plan must permit the surviving spouse to direct the commencement of payments under QPSA no later than the month in which the participant would have attained the earliest retirement age. However, a plan may permit the commencement of payments at an earlier date." {emphasis added}

As to Q&A-18, the term "immediate annuity" is a specific type of annuity. It is standard jargon in our industry. You cannot construe the word "immediate" separately from the word "annuity".

My last word on the subject is:

If Congress felt its intent in REA was not being followed, they've had 27 years to fix it. Write them letters if you're so concerned about it.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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It is sometimes unclear in the regulations whether the IRS is using classic definitions or making up new ones. As masteff has correctly indicated, the term "immediate annuity" has a technical meaning which the IRS may have been referring to. An "immediate annuity" is contrasted against an "annuity due" in this context.

And the definitions of those two terms are difficult logically, because they actually mean the opposite of what a non-actuary usually thinks they mean.

Here are a few definitions from the Pacific Life website:

annuity due. A series of periodic payments for which the payment occurs at the beginning of each payment period. Also known as annuity in advance. Contrast with ordinary annuity.

annuity immediate. See ordinary annuity.

ordinary annuity. A series of periodic payments for which the payment occurs at the end of each payment period. Also known as annuity immediate and annuity in arrears. Contrast with annuity due.

So, angelf, it is entirely possible that the IRS was attempting to say that the form of annuity must be paid with the first payment at the end of the period as opposed to the first payment being made at the beginning of the period. The period in question would always commence at the participant's earliest retirement age. This would essentially give plans a full month to commence a monthly annuity to a beneficiary whose spouse died at or after the earliest retirement age.

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Ok I have one final point to raise before I close this topic. To all thank you for the excellent information even it was a bit off topic or if it differed from my point of view. Has there ever been a been a situation where the surving spouse began receiving the interest of the deferred benefit? Date of death ends plan participation, but what about the interest that continues to accrue on the benefit. There seems to be no guidance on this.

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Ok I have one final point to raise before I close this topic. To all thank you for the excellent information even it was a bit off topic or if it differed from my point of view. Has there ever been a been a situation where the surving spouse began receiving the interest of the deferred benefit? Date of death ends plan participation, but what about the interest that continues to accrue on the benefit. There seems to be no guidance on this.

Remember that the benefit as an annuity is usually adjusted for "actuarial equivalence", which is another way of saying that interest adjustments are built into the values. If you take a benefit sooner, it gains less interest than a benefit taken closer to retirement age. This rule also applies to lump sum payments. A lump sum payable now is smaller than one taken at a later date. With that knowledge and a compound interest calculator, you start thinking like an actuary.

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Ok I have one final point to raise before I close this topic. To all thank you for the excellent information even it was a bit off topic or if it differed from my point of view. Has there ever been a been a situation where the surving spouse began receiving the interest of the deferred benefit? Date of death ends plan participation, but what about the interest that continues to accrue on the benefit. There seems to be no guidance on this.

Remember that the benefit as an annuity is usually adjusted for "actuarial equivalence", which is another way of saying that interest adjustments are built into the values. If you take a benefit sooner, it gains less interest than a benefit taken closer to retirement age. This rule also applies to lump sum payments. A lump sum payable now is smaller than one taken at a later date. With that knowledge and a compound interest calculator, you start thinking like an actuary.

Hi SoCal lump sum is not the issue here. Interest on a death benefit that the plan makes a surviving spouse wait for is.

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