Spousal rights and Lump Sums

[Guest lbach]

If a Participant terminates employment, and wants a lump sum distribution from a 403(B) plan, are there any joint and survivor annuity requirements? Or are those requirements only triggered if a Participant elects a life annuity? The Employer is a tax-exempt subject to ERISA. I understand the preretirement survivor annuity requirements.

[Carol V. Calhoun]

The joint and survivor annuity requirements definitely would not apply if the plan is not subject to ERISA. Even if the employer is an ERISA-covered employer, most salary-reduction-only 403(B) plans are not treated as ERISA plans.

If the plan is subject to ERISA, the question gets more complicated. A joint and survivor annuity is required unless the plan is considered a "profit-sharing plan" under ERISA. In the case of a qualified plan, the Internal Revenue Code states that a governmental entity can have a profit-sharing plan, and that contributions to a profit-sharing plan need not be based on profits, so long as the plan itself states that it is a profit-sharing plan. However, these provisions do not apply to 403(B) plans. It is therefore unclear whether a 403(B) plan can ever be a profit-sharing plan, and if so, what would have to be done to make it one.

Even if the plan is considered a profit-sharing plan, a joint and survivor annuity requirement would be required if the participant elected a life annuity.

[mbozek]

J & S annuity is only applicable to 403(B) plan sponsored by private 501©(3) organization which is a money purchase plan, i.e., provides for employer contribution on a regular basis, such as 5% of compensation a year. 403(B) plan can be established with no mandatory employer contribution, i.e., employer may make a discretionary contribution at the end of each year which is a form of profit sharing plan. No annuity beneift need be provided and distribution can be limited to lump sum only. Public employer is not required to offer J & S annuity under any type of 403(B) plan.

Avoiding annuity option is prudent investment decison because annuity products usually come with high fees and load charges which can eat up 200-250 basis points a year plus commissions (exception is TIAA-CREF which charge 25-50 basis pts).