Risky Distribution w/o Annuity Waiver/Spousal Consent?

[lkpittman]

Okay--bear with me on this one. We've got a client in a 1-man MPPP plan with substantial assets that wants to terminate the plan and roll to an IRA. He is 70. For reasons I won't go into here, he would like to avoid getting spousal consent, so we are trying to figure out a way to assert that the benefits are not subject to 417/annuity provisions. Chew on this: Assets were originally accrued in a DB plan back in the 80's/90s. Early 90's,the DB plan was terminated (determination letter received) and participant and spouse both executed the annuity waiver and elected to transfer the benefits to a newly established MPPP (by the way, this DB plan also survived the actuarial audit "witch hunt" back in the late 80's). This MPPP was set up to provide for a 0% contribution and no contributions were ever made to this plan. Now, the participant wants to terminate and roll the funds to an IRA without his spouse's consent. Okay--this may be far fetched--don't pummel me with the "rules" because I know them. But how about an argument that asserts that since this plan was set up with a 0% contribution, the plan is and never has been subject to 412? Thus, the plan would not be subject to the annuity requirements of 417? So . . . we could amend the plan under the 411(d) regs (1.411(d)-4) to eliminate the annuity provisions (remember, an annuity waiver/consent was already obtained back when the distribution/transfer occurred between the DB and the MP). I realize that this is pretty "creative," but I would like any comments . . . .

[david rigby]

As said so many times before, even though you are trying to be creative with the rules, what does the plan say?

BTW, I don't like your argument, but I'll leave that for the many minds better than mine.

BTW2, I don't see a need to terminate the plan. Since the participant is over NRA, the plan could permit distribution. Am I missing something?

[mbozek]

What is more important-- the rules or the risk issue? Will the plan distribution be disqualified if the owner/Plan adm/ employee does not get spousal consent as required by the plan.? If yes then the risk is minimal-- because the IRS does not audit rollovers to an IRA and the only risk is that the IRS would audit the plan after termination which is higly unlikely. There is little risk from the spouse- she would have to sue her husband/ his estate for the 50% benefit.

Finally, there is a question is whether your client has a claim of exemption from 412 if the IRS discovers the failure to obtain spousal consent. IRC 412(h)(5) exempts from the funding standards any plan which has not provided for employer contributions after 9/2/74. I dont know if the plan can be amended now to eliminate spousal consent on the grounds that the plan has never been subject to 412. The real question is what is the risk exposure to any advisor who proposes this course of action to the client-- Do you feel lucky today??

[jaemmons]

I may be missing something, but there was a waiver of the QJSA from the DB assets when they were terminated and rolled over into the MP. Since no benefits have accrued under the MP, I don't see any problem with the owner taking the rollover assets from his previously terminated DB plan and putting them into his IRA. The J&S rules I feel would only be applicable to any benefits accrued under the MP. Since there aren't any, no spousal consent would need to be required.

[lkpittman]

Okay--I expected the responses I got from pax and mbozek. Yes, pax, you are right, I wouldn't need to terminate the plan to allow distribution, but he's the only participant and once the $ is out, we'd have to "terminate" anyway. mbozek, good point on the actual "risk" involved. May be worth it--but why do you think that it is highly unlikely that the terminated plan will not be audited? We get terminated plans being audited quite often (although audits have slown down quite a bit of recent).

What do you guys think of jaemmons' response? I like it, of course . . . .

[JanetM]

Well I am not an ERISA atty - am a CPA. But I agree with jaemmons. Annuity waiver was signed when funds rolled from DB plan. MP has no contributions - nothing to be subject to J&S.

I think you could let him roll to IRA. He could have rolled the DB to IRA rather than MPPP and this would not even be an issue.

[lkpittman]

Thanks, Janet. You're right, he could have rolled the DB assets to an IRA, but he wanted to keep them in a qualified plan for "protection" purposes (he's a dr. and he was still practicing back then). Actually, the best thing would have been to put it in a PSP. But anyway, too late for that.

[JanetM]

An analogy -

Person has DB account - takes lump sum distribution (signs waiver to get out of DB plan). Rolls the money to 401(k) plan. No J&S provisions follow the funds to the new plan.

I think your doctor has this same situation. The part that has you wrapped around the axle is that he rolled into MPPP. Only the funds accrued in the MPPP are subject to the J&S provisions.

[mbozek]

LK: I thought my response also included invoking IRC 412(h)(5) as substantial authority for the omission of spousal consent. I dont think getting spousal consent from the DB plan before the rollover to the MP plan would permit the distribution without spousal consent from the MP plan if the plan requires spousal consent for a distribution. The question is whether the mp plan can be amended now to eliminate spousal consent before the owner takes a distribution and whether the plan would have substantial authority under IRC 412(h)(5) for not getting spousal consent. My view of the risk is that only a small preportion of plans are audited by the IRS after termination and the IRS is reducing the number of audits because of buget constraints.

[lkpittman]

mbozek--thanks. I understand your 412 position--it would be "sticky," at best, to try for exemption. Yes, my original "problem" was whether I could amend this plan to eliminate the QJSA. But jaemmons' position is that I can distribute without annuity waiver/consent even with the QJSA provisions in the plan (right, jaemmons?). You disagree?

[jaemmons]

You are correct. There aren't any benefits being distributed under the MP that are subject to the J&S rules. The exemption under 412 is for plans in existence prior to ERISA which were frozen and did not have any benefit accruals post 1974.

Since the DB benefits were already paid under the plan termination, which gave the dr's spouse the opportunity to have the benefits paid in the form of an annuity but she waived that option. Therefore, since the only assets of the MP consist of rolled over DB money, no spousal consent is required.

Grant it that this is my professional (not legal) opinion and I believe that it would be difficult for the IRS to see it otherwise, taking into account my logic.

[mbozek]

I disagree with Janet. While some ps plans are not required to obtain spousal consent before a lump sum is paid to a participant, regs 1.401(a)-20 A-3 require spousal consent where the plan is subject to the minimum funding standards. Therefore the terms of the plan govern whether spousal consent is required, since under ERISA 404(a) the plan must be administered in accordance with its terms. The question is whether the plan can be amended to eliminate the annuity provison if there are no employer contributions as permitted under IRC 412(h)(5). You should also read the plan document to see if the spousal consent provisions only applies to the employer provided benefits (but I have never seen such a provision approved by the IRS).

[mbozek]

Janet: Reg 1.401(a)-20 A-11 " all benefits provided under a plan including benefits attributable to rollover contribuions are subject to the survivor annuity requirement. "

[lkpittman]

Ouch! I so wanted to go the way of Janet and jaemmons.

Thanks for all your responses.

[lkpittman]

Just for fun . . . JanetM and jaemmons . . . can you cite any authority for your position (primary or secondary, even). Thanks!!!!!!!