Survivor benefits when employee terminated prior to REA and died this

[Guest LMalone]

Employee Bob participated 1971 to 1982 in a defined benefit pension plan that offered no death benefits. Bob has been a terminee with vested benefits, waiting until attainment of normal retirement age (to be attained in 2010) to commence payment of his benefit. Bob died in January 2002. Of course, the plan was amended for REA many years ago, but the plan terms under which Bob participated gave no survivor benefit.

Question: Is Bob's widow entitled to minimum survivor benefits under REA?

Thanks.

[Guest Harry O]

REA required plans to offer a survivor annuity election to employees terminating prior to 8/84 with a vested benefit. See section 303(e)(2) of REA, Reg. 1.401(a)-20, Q&A 45.

You need to find out whether the plan offered the survivor annuity election to the former employee and whether he declined the coverage.

[mbozek]

my experience tells me that no one is going to be able to locate such records or there will not be any record that the decedent elected the J & S. Real Q- how did this issue arise?? IS spouse asking aobut the J & S?

[Guest LMalone]

Spouse made the request. Employer is not adverse to paying.

Reg. 1.401(a)-20, Q&A-46. It is unlikely a notice was provided, but if the wife gets the required minimum survivor benefits under REA (which is what the plan currently provides), is the notice requirement deemed satisfied?

(It's good to know there are some old-timers out there who are familiar with 22 year-old requirements.)

[mbozek]

Then pay her the REA benefit contingent on her signing a waiver of the right to the pre rea benefit in writing based upon the uncertainty of a rea benefit election in plan records. By the way does plan have a record of any participant electing a pre rea j & s? Need to consult counsel to draft waiver.

[Guest LMalone]

Curious about your waiver suggestion -- why would a waiver of pre-REA benefit be necessary when there was no pre-REA death benefit in the plan? She is getting more than she would have received under the pre-REA plan.

Thanks again for your information.

[mbozek]

To avoid having the plan prove that it provided the notice to the deceased participant. It is my understanding that if the notice was not provided to a participant then the spouse has a right to a J & S benefit. This is why u need to consult with counsel.

[Guest Harry O]

Prior to REA there was no requirement that a plan provide a survivor annuity prior to early retirement eligibility. So the spouse is probably entitled to zippo absent the special REA election (assuming the plan provided no survivor benefit in this case).

My recollection is that the employer only needed to send the notice. There was no requirement to get a positive election by the employee and there was no requirement for spousal consent if the employee declined the coverage.

If you can show that the notices were generally sent (even though you may not have a copy of the notice specifically addressed to the deceased employee), I would decline to provide the survivor annuity. If you feel generous, make sure you charge her for the QPSA coverage (assuming the plan has such a charge).

[mbozek]

Asking for the waiver is the consideration provided by the spouse which is the qud pro quo for paying the rea benefit. Even if the er can prove the notice was sent that is not legally sufficient if there is no record that a notice was sent to the participant - Most plans do not even keep copies of the notices that were prepared. Also Do not require the spouse to pay for the QPSA coverage because it will violate the ADEA unless the plan has prepared a table showing the actuarial cost of the coverage specific to the plan population. I have never seen a plan that has done this study because of the cost.

[Guest Harry O]

I would disagree . . .

The plan administrator should only have to demonstrate that it sent the notices to the impacted employee group and that its processes and procedures were followed and there is no reason to believe that such procedures would not have resulted in the mailing of a notice to the employee in question. This is especially true with notices like this where there is no requirement that the employee acknowledge receipt or make an affirmative election. Most plans that I have worked with have copies of the notice that was sent but do not have a copy of the notice in each impacted employee's file.

Many plans charge for QPSA coverage and the cost of such coverage is determined without regard to the plan's particular demographics. Where in the law does it say that only the plan's demographics can be taken into account? If that is the case, use of standard mortality tables would be prohibited since they obviously are generated from the population at-large. The charge needs to be reasonable and nondiscriminatory. I have never heard of this plan-specific ADEA issue . . . it would certainly have ramifications beyond the little 'ol QPSA charge.

[mbozek]

Its in the section under the equal benefits/ equal contributions rule issued by the EEOC-but only employment lawyers read these rules.- Plan cant reduce benefits of persons 40 and over unless its is on the basis of an actuarial reduction justifiying a reducing for increase age. There is case law on it. I advise clients to eliminate the QPSA coverge cost provision because it doesn't cost very much to get rid of it. By the way it does have ramifications beyond the little old QPSA change- it applies to LTD benefits among others-- its just that plan admin /actuaries don't read case law. An employer recently got wacked because it charged retirees over 65 a higher premium for health ins than employees under 65. Also because this is a ADEA violation a case would be heard by a jury which can double the damages if the violation is intentional as well as require the employer to pay the enmployee's legal fees. There is no reason for an employer to take litigation risk on such a trivial provision. The problem with the benefits community is that administrators are not aware of non benefits laws ( e.g.,ADEA, Securities laws) that impact their plans.

[Guest Harry O]

I am aware of the equal cost / equal benefit principle and the Erie case. I'm not sure how you can say that most QPSA charges are almost per se violations of the age discrimination rules. Most plans use tabular rates that apply generally but are derived from generally accepted mortality tables. I agree that the cost to the employer is not high but it is a clearly appropriate charge given the risk that the employer is assuming.

If your analysis is correct, why don't all plans that use tabular early retirement factors or fixed percentage J&S reductions (e.g., a 50% J&S is 90% of the single life annuity) have problems? Probably because there is some reasonable actuarial justification for these practices.

Maybe there is an actuary listening in who can offer some insight. I'm clearly starting to get outside my expertise here!

Interesting discussion . . .

[mbozek]

They violate the equal cost/equal benefit rule because they use some arbitrary age, e.g, 55, as the dividing line for charging for the QPSA coverage or they use a generic table not specific to the plan as the basis for the reduction. Under the City of Lebannon case the ec/eb rule requires the use of an actuarial table of cost/reduction specific to the covered group. I once represented a spouse who was told to pay a charge of 1% for the spousal annuity under a fortune 500 company plan because the employee was over 55 at termination. Employees under 55 did not have to pay for the coverage. Under the ec/eb rule the plan could charge for spousal coverage only if the plan had prepared a cost table based upon the plan's population. The plan agreed to eliminate the charge for all over 55 participants and paid my client's legal fees. EEOC would disagree with your statement the charge is approppriate given the risk the employer is assuming. If there is no analysis of the population of the plan with regard to cost then the QPSA charge is not appropriate under the Ec/eb rule.

[MGB]

In my close to 25 years in this business as an actuary, I have rarely run into benefits professionals that have not followed EEOC law and court cases just as closely as other developments. I don't know who mbozek works with, but in the large plan community, the comments just don't apply.

I find it hard to believe that the 10s of thousands of plans (mostly union) out there that charge for QPSA based on standard actuarial tables are doing something wrong. I am unaware of any court case or indication from the EEOC that such factors (or any analysis of the equal cost/benefit rule) must be based on the plan's population.

To base on the plan's population, you would get into other outlawed discriminatory practices. For example, wouldn't you charge less to females (they have a lower chance of dying) and charge more to blacks (they have a higher chance of dying)? Even if you didn't do this within a single plan, assume the employer is a conglomerate with multiple plans. Some plans may have a higher concentration of these characteristics and charging them different amounts than you did in other plans would be a bigger transgression than using general population statistics on all of them.

After Erie, the EEOC added the Erie analysis to their field manual (two months before the change in administration). Later (new administration) they removed these references to review their stance on it and formally stopped any litigation in this area. I have been involved in providing information to them in their deliberations on what to do next. None of their work has focused on a specific plan's population and has all been in the context of general population statistics (e.g., what value does the medicare benefits represent).

Having said that, I do know of one problem with the equal cost/benefit rule with standard approaches to charging for the QPSA. This problem came from the IRS's interpretation of OBRA'86, not the EEOC. The proposed regulations on continued benefit accrual from the IRS included a lot more age discrimination rules than just post-retirement accruals. In trying to decipher some of the language (I gave multiple presentations on this at Enrolled Actuaries meetings following the release of these proposed regulations in the late 80s), I had discussions with the main author of the regulations and found out additional items that they intended to include in the final regulations (however, they later backed off and have never finalized this).

The setup is this: Suppose the amount of the charge for the QPSA is grouped into age bands. A very common approach to this is using the same charge across a five year grouping, with progressively higher charges in higher age bands. Let's assume that the charge for a particular age band is the actuarial equivalent for the lowest age in each band, i.e., there is no subsidy at that age. The charge should be higher (based on general population statistics) at the highest age in the age band, but isn't because of the equal charge across the age band. Therefore, there is a subsidy at that age (e.g., 44). But, the next age up (e.g., 45) is the lowest age in the next age band, and it is not subsidized.

Now we have a participant at age 44 getting a subsidy that the person at age 45 does not get (with a similar situation at 49 and 50, 54 and 55, etc.). That is a clear violation of age discrimination rules.

It does not have to be age bands for this to occur. Even with a different charge at each age, one needs to be assured that there is a uniform (or no) subsidy across all ages, or at least there is a nondecreasing subsidy (it can increase as the age increases).

Having said that, the person at the IRS that was gung-ho on this idea left soon thereafter and this issue has disappeared into proposed regulation land never to surface again.

[MGB]

mbozek,

I agree that a step from 100% subsidy to paying for it at 55 is clearly against the rules. It was my impression that plans with this (which was quite common pre-REA) provision got rid of it in the late 80s following the IRS's proposed regulations.

I would be interested in a cite of when and where the Lebanon case was to be able to review it.

[mbozek]

MGB: I had a similar response from the actuary who represented the plan that had the 1% reduction. His claim was that it was permissible because it did not violate the IRS rules for reduction of benfeits. However the client's lawyers decided to eliminate the charge after reviewing the applicable rules under the ADEA. I think the reason this charge continues in plans is because benefits people aren't aware of the EEOC position and the case law. Actuaries tell me the amount of the charge is de minimus and most corporate plans have eliminated it because the plans are overfunded. There is no reason for a plan/ employer to take litigation risk in this matter. The change in the EEOCs position because of a change in adminstration is irrevalent in how the law will evolve since an employee can bring a lawsuit against the plan and recover damages and legal fees under the ADEA.

[MGB]

I just lightly skimmed the Lebanon case (don't have more time now).

It appears to me the problem there was the general population data indicated that a reduction in payments was appropriate (this was LTD benefits) due to increasing costs. However, the reductions in the plan were not based on that general population data, but only pointed to it as justification for their having a reduction. I do not see any reference that the reductions should be based on the plan's population; only that a comparison of the plan's actual reductions to cost information from general population data is not done in an appropriate manner.

[mbozek]

You are missing the point--Under EEOC reg 1625.10(a), the application of the equal cost /equal benefit rule to allow a reduction of benefits is an exception to the ADEA and must be narrowly construed. The Employer/plan has the burden of proving that every element of the exception has been "clearly and unmistakably met". These requirements make litigation attorneys very nervious. The City of Lebannon case has been constructed in conjunction with the EEOC regs to mean that an employer must do an actual study of the plan population to determine what is the "approximate equivalency in cost"- using generic tables is not appropriate. I think I have exhausted my interst in this issue-- Again given the risks it is not worth keeping this type of provision in a plan.