Defined Benefit Plan Death Benefits

[Guest SCUDDESLER]

I ran across a unique (to me) defined benefit plan provision this morning and wonder what others think of it.

Under the death benefit provision, a surviving spouse is entitled to a death benefit as follows: (1) in the form of a QPSA (essentially a deferred life annuity equal to the survivor portion of the QJSA) or (2) a 60 month temporary annuity payable immediately. The actuarial equivalent of the temporary annuity may be distributed in lump sum form, if elected by the surviving spouse.

Assume the present value (as of the participant's death) of the QPSA is $35,000 using the Plan's mortality and interest rate assumptions and $42,000 using the 417(e) mortality and interest rate assumptions. The present value of the temporary annuity is $20,000 using the Plan's mortality and interest rate assumptions and $26,000 using the 417(e) mortality and interest rate assumptions.

Even though the present value of the QPSA is $16,000 more than the present value of the 60 month temporary annuity, is it OK for a participant to take the 60 month temporary annuity in the form of a lump sum anyway?

It seems to me that this is OK. Does anyone have any thoughts? Thanks.

[david rigby]

If the proposed benefit is intended to offer a lump sum whose present value is less than the 417 present value, does not sound kosher to me.

[Guest SCUDDESLER]

PAX: Thanks for your comment.

The present value of the QPSA using the 417 actuarial and interest rate assumptions is, in my hypothetical, $42,000.

The present value of the 60 month temporary annuity using the 417(e) actuarial and interest rate assumptions is $26,000.

Consequently, the present value of the 60 month temporary annuity is worth $16,000 less than the present value of the QPSA (where both present value computations were made using the 417(e) actuarial and interest rate assumptions).

The thing that bothers me, and maybe this is the thing that bothers you also, is that the value of the QPSA and the value of the 60 month temporary annuity are not actuarially equivalent to begin with--if they were, since the present value calculations described above both use the 417(e) actuarial and interest rate assumptions, the present value of one would be equal to the present value of the other (or so it seems to me). So a participant who elects the 60 month temporary annuity (paid in the form of a lump sum equivalent using the 417(e) assumptions) is giving up a portion of his/her otherwise payable benefit under the QPSA in order to receive payment earlier than he/she would if he/she took the QPSA. Do you have any additional thoughts/concerns? Thanks.

[MGB]

They can take the alternate benefit. However, they must be provided the residual value of the QPSA in some form on top of that. Taking the alternate benefit, given that it is worth less, cannot wipe out the QPSA.