Immediate Lump Sums and the QJSA

[John Feldt ERPA CPC QPA]

This question pertains to Defined Benefits plans that offer immediate lump sums, but have no early retirement provisions.

An enrolled actuary that we work with has stated that a DB plan would not have to offer immediate annuities, that they could make the annuity options only available at retirement, even if the plan allows for immediate lump sums upon termination of employment, further stating that no annuity options exist before Normal Retirement if the plan does not have early retirement provisions.

However, we believe that in order for the lump sum to be payable now, the participant must waive a QJSA that would be payable during the 90-day period that includes the annuity starting date. But, if no annuity is payable during that 90-day period (as the enrolled actuary has suggested), then the participant has not waived anything and therefore has not made a valid QJSA waiver.

Q1. Must a plan that offers immediate lump sums also have early retirement provisions that start immediately upon termination?

Q2. Must a plan that offers immediate lump sums also offer an immediate QJSA that would be eligible to have payemnts begin during the 90-day (soon to be 180-day) QJSA waiver period?

[Guest Harry O]

If a plan offers a lump sum (in excess of the $5,000 cashout limit) to a participant it must also offer a QJSA payable at the same time. Otherwise the employee and spousal consent to the lump sum is not valid. See Reg. 1.401(a)-20, Q&A 17. Again, I'm assuming the plan is offering immediate lump sums in excess of $5,000 to participants who terminate employment at, say, age 46.

I really don't think there is any doubt that you need to offer a QJSA in these circumstances. You may wish to consider retaining a new actuary or at least limiting his services to performing plan valuations . . .

[David MacLennan]

From Treas Reg 1.417(e)-1(b)(1):

A QJSA is an annuity that commences immediately. Thus, for example, a plan may not offer a participant separating from service at age 45 a choice only between a single sum distribution at separation of service and a joint and survivor annuity that satisfies all the requirements of a QJSA except that it commences at normal retirement age rather than immediately. To satisfy this section, the plan must also offer a QJSA (i.e., an annuity that satisfies all the requirements for a QJSA including the requirement that it commences immediately).

Can't be more clear than that!

[John Feldt ERPA CPC QPA]

Exactly. I'll keep you posted on how our EA responds to these excellent cites.