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Treas. Reg. § 1.401(a)-20 says that, "to the extent that [ERISA] section 205 covers section 403(b) contracts and custodial accounts they are treated as section 401(a) plans [for purposes of the J&S requirement]." ERISA section 205 (29 USC § 1055) states as follows:

(b) Applicable plans

(1) This section shall apply to—
(A) any defined benefit plan,
(B) any individual account plan which is subject to the funding standards of section 1082 of this title [i.e., a defined benefit or money purchase plan], and
© any participant under any other individual account plan unless—
(i) such plan provides that the participant’s nonforfeitable accrued benefit (reduced by any security interest held by the plan by reason of a loan outstanding to such participant) is payable in full, on the death of the participant, to the participant’s surviving spouse (or, if there is no surviving spouse or the surviving spouse consents in the manner required under subsection ©(2) of this section, to a designated beneficiary),
(ii) such participant does not elect the payment of benefits in the form of a life annuity, and
(iii) with respect to such participant, such plan is not a direct or indirect transferee (in a transfer after December 31, 1984) of a plan which is described in subparagraph (A) or (B) or to which this clause applied with respect to the participant.
Clause (iii) of subparagraph © shall apply only with respect to the transferred assets (and income therefrom) if the plan separately accounts for such assets and any income therefrom.

Thus, if an ERISA 403(b) plan is set up as a money purchase plan, it must provide for a J&S. If it is set up as a profit-sharing plan and provides that a participant's nonforfeitable accrued benefit is payable to the spouse, it is not subject to the J&S requirement unless the participant elects a life annuity or to the extent that the 403(b) is a direct or indirect transferee of a plan with a J&S requirement.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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So if a 403b is set up as a profit sharing plan and it provides that a participant's nonforfeitable accrued benefit is payable to the spouse, then no J&S requirement? No QPSA notice? The adoption agreement can limit distributions to lump sum only?

I was confused by your last line above: "unless the participant elects a life annuity." Can a participant do this if the document calls for lump sum only?

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Its complicated.

The requirement to offer an annuity as the normal form of benefit in an ERISA 403b plan depends on whether the plan is administered as a money purchase plan or a PS plan. Under ERISA money purchase plans are considered to be retirement plans subject to the funding standards of ERISA which requires that the normal form of benefit be a life annuity with a 50% survivor benefit for the spouse. However the requirement of the annuity as a normal form of benefit in a 403b plan does not apply to a PS plan where the normal form is a lump sum, e.g., 401k plans with an employer match.

According to an old IRS ruling a money purchase plan provides for a fixed contribution of the employees' comp (e.g., 5%) annually without any further action by the plan sponsor. A PS plan provides for discretionary employer contributions which are formally approved each year. So if an employer must annually declare what is the employer contribution to be deposited in the employees' 403b accounts, it is considered to be a PS plan exempt from the requirement to offer an annuity as the normal form if the spouse receives a death benefit of 100% of the account balance unless spouse signed a waiver under ERISA..

However a 403b PS plan with discretionary employer contributions can make a J & S annuity the normal form of benefit with a lump sum available only if there is spousal consent..

These rules are contained in some IRS pronouncements issued years ago when there was concern that offering an annuity as an optional form of benefit in a 401k plan would trigger the requirement that the annuity would be the normal form of benefit instead of a lump sum and that spousal consent would be required if the employee applied for a loan.

With regard to ERISA 403b plans where the employer make annual contributions the rules appear to be

1. If the plan funding is an annuity contract the normal benefit must be a life annuity with a 50% spousal survivor benefit

2. If the plan is funded solely with mutual funds and the employer makes discretionary annual contributions the normal benefit can be a lump sum without spousal consent if the spouse is automatically vested in 100% of the benefit upon employee's death.

3. If the 403b plan investment options includes both annuities and mutual funds the answer will depend on whether contributions are fixed or discretionary and whether the normal form of benefit is a lump sum or or annuity. Note- Most 403b plans with both funding options will provide that annuity is the normal form of benefit to avoid having to do an analysis.

mjb

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401(a) profit sharing plans that offer annuity distribution options can declare that the normal form of distribution is a lump sum. They can also eliminate the annuity form. If a 403(b) plan has migrated from an annuity environment to a mutual fund environment and has no annuity products, does it escape the annuity distribution rules?

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So if a 403b is set up as a profit sharing plan and it provides that a participant's nonforfeitable accrued benefit is payable to the spouse, then no J&S requirement? No QPSA notice? The adoption agreement can limit distributions to lump sum only?

I was confused by your last line above: "unless the participant elects a life annuity." Can a participant do this if the document calls for lump sum only?

No. However, if a contract permits a life annuity, a married participant cannot be permitted to elect it without the consent of the spouse.

mbozek, do you think the old rulings survived the addition of section 401(a)(27), which permits a 401(a) profit-sharing plan to provide for contributions not based on profits, but requires the plan document to specify that it is a profit-sharing plan? Obviously, this section is not by its terms applicable to 403(b) plans. But I'm wondering whether it has modified the definition of "profit-sharing plan" to the point that even a 403(b) plan that provides for fixed contributions could be a profit-sharing plan, if the plan document says it is.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Carole:

Its an interesting idea but I have no clue as to whether the IRS thinks 401(a)(27) would apply to 403b plans. I don't know if the IRS would have an opinion because the requirement of providing an annuity in a money purchase plan as the normal form is a Title I requirement which is enforced by the DOL under Title I.

mjb

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FWIW - see the following wording from the Sungard document regarding this issue for ERISA plans. In essence, once you get through all the cross-referencing, including sections I haven't included, it says that J&S applies only if:

A. The employer has elected to have it apply in the Adoption Agreement, or

B. If the participant elects a life annuity, or

C. Subject to the special transfer clause

(G) Joint and Survivor Exception. If the Plan is not an ERISA Plan, Section 6.04 does not apply unless the Employer in its Adoption Agreement or an Addendum thereto elects to apply Section 6.04 to all Participants. If the Plan is an ERISA Plan, then the preceding provisions of Section 6.04 will apply only to Participants who are not Exempt Participants unless the Employer, in its Adoption Agreement or an Addendum thereto, specifies that the preceding provisions of Section 6.04 apply to all Participants.

(1) Definition of Exempt Participants. All Participants are Exempt Participants except the following Participants to whom Section 6.04 must be applied if the Plan is an ERISA Plan: (a) a Participant as respects whom the Plan is a direct or indirect transferee from a plan subject to the ERISA §205 requirements and the Plan received the Transfer after December 31, 1984, unless the Transfer is an Elective Transfer described in Section 9.05(E); or (b) a Participant who elects a life annuity distribution (if applicable).

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