Exposure for Eliminating the QJSA Form of Benefit?

[J Simmons]

Profit sharing plans are not required to have the QJSA and QPSA forms of benefits, but many have had in their early history.

The 411d6 regs were changed a few years ago to permit the elimination of certain forms of benefit payout.

Many profit sharing plans have since been amended to remove the QJSA/QPSA forms of benefit, as they may do so without such disqualifying the plan from tax advantages.

But what about the spouse whose REA rights were stripped by such an amendment? Aside from the tax qualification issue for the profit sharing plan, if the plan as amended paid out all of the benefits in a lump sum on just the employee's signature, does the spouse have a valid claim against the plan for the survivor benefits after the employee dies?

[J Simmons]

Anyone have any insight about this?

[Bird]

My recollection is that the when the IRS issued the regs they said they recognized that this was an issue but effectively said "oh well." That is, the spouse's rights are eliminated and that's the end of it; the spouse has no recourse.

[rcline46]

You are forgetting the 4 rules that permit a PSP to avoid the QJSA rules. The important one here is that the spouse MUST be the beneficiary of 100% of the account balance unless she/he signs a waiver. So no the REA rights have not been eliminated, they have actually been enhanced from 50% to 100%.

The ability for the participant to assign a separate beneficiary for 50% of the benefit is one reason many practicioners feel it is important to have the QJSA in the plan.

[J Simmons]

Thank you, Bird and Rcline46, for your responses.

The situation that I'm facing is a plan I've been advising since last summer was set up in the late 1970s. In 2002, it was amended to eliminate the QJSA in favor of just a lump sum payout option. In 2005, one of the employees retired and elected payout of the lump sum at that time. No spousal consent was required, and he was paid the lump sum. He died a few months ago, and his widow's attorney is making a lot of noise. He has a 'working knowledge' of ERISA and his position is that since the widow's REA rights attached to the benefits that accrued pre-2002 amendment and she did not sign a consent or waiver, she's entitled to a REA survivor benefit on the pre-2002 amendment benefits. It's not the tax qualification of the plan that is in issue, but whether the sponsoring employer could take her spousal rights away through amendment. His claim is based on the plan document having provided, while the benefits accrued, that payout could not be made to the employee without the spouse's consent.

I've taken the position that the spousal rights do not attach prior to the time of payout to or the death of the employee. At that time, the plan did not provide the QJSA as a form of benefit, normal or optional, and that the spouse's consent to payout of benefits AT THAT TIME was not necessary.

I fear that the plan will be incurring substantial litigation costs unless I can locate some authority for my position.

[Bird]

You are forgetting the 4 rules that permit a PSP to avoid the QJSA rules. The important one here is that the spouse MUST be the beneficiary of 100% of the account balance unless she/he signs a waiver. So no the REA rights have not been eliminated, they have actually been enhanced from 50% to 100%.

True but now the participant has the ability to take a distribution, while living, without the spouse's consent. I think that's the situation J Simmons is referring to. It's a cutback to the spouse, maybe in a non-technical sense, but definitely permitted.

[Kimberly S]

This was a current spouse when the distribution was taken, if I'm reading the prior entries correctly. If they filed a joint tax return couldn't it be argued that she did effectively receive the benefit when it was distributed to her husband?

This is the best argument I've heard for ALWAYS getting spousal consent on a distribution over $5,000 regardless of the J&S requirements of the plan!

[J Simmons]

To expand just a bit further on what the widow's attorney is saying--and it seems he has experience with this issue--he cites to ERISA 205(b)(1)©(iii) requiring for the 'profit sharing exception', as to a participant, that the plan not be a transferee of benefits for a DB plan or other plan subject to minimum funding.

He argues that a mere amendment cannot strip these spousal rights that have once attached to benefits accrued before the amendment. He points out that merely amending a money purchase pension plan to be or merging it into a profit sharing plan will not 'divest' those money purchase benefits of their attributes as such, even citing to Rev 94-76, and then asks if the employer can't denude those money purchase benefits of their attributes by folding them into a profit sharing plan what authority is there that the employer can denude the pre-2002 amendment benefits of the spousal right attributes by amending the plan? Again, it's not the tax qualification, but the ERISA protection of rights that he's barking about.

[rcline46]

Oh dear, see what happens when you don't provide all of the information up front? If there were money purchase plan assets transferred to the profit sharing plan, that is the plans merged and it was not a rollover, then the spousal rights in the money purchase assets cannot be removed by amendment. The same holds true if the mppp was amended into a profit sharing plan.

So, the amendment could only affect the PSP monies, not the MPPP monies assuming they were in the plan, and the attorney is correct. If this is the case, the Trustee and the Plan Administrator have a problem.

THe only salvation would be to prove the spouse enjoyed the use of the distribution, and get a spousal consent signed now. Spousal use of the distribution could be argued to be consent, but it is not going to be easy. Note this is ONLY for the MPPP monies. The PSP monies are ok.

[J Simmons]

No, there are no MPP benefits involved; the widow's attorney is using those rules by analogy. His argument is if you can't merely strip MPP benefits of their attributes by amendment putting them under a profit sharing plan and documentation, how can you strip QJSA attributes that attached to profit sharing benefits when and as they accrued merely by an amendment to the plan documentation.

[Bird]

If there's no MP money then there are no spousal rights, period, end of story. As I noted below, I think the IRS commented on this (but I could be wrong); if I can come up with it I'll re-post. No promises.

This is the best argument I've heard for ALWAYS getting spousal consent on a distribution over $5,000 regardless of the J&S requirements of the plan!

Sorry but I disagree with this 100%. If spousal consent is not needed and you make it a requirement you are impinging on the participant's rights. Suppose the spouse won't consent, or perhaps puts a price tag on the consent? For something that's NOT required?!

[Guest mjb]

What is the basis for the QJSA in the PSP. As I understand it, the QJSA is only a benefit which must be waived by spousal consent if the QJSA is designated under the PSP plan as the normal form of benefit. If the QJSA is only an optional form of benefit under the plan which must be elected by the participant at the time of distibution there is no cutback if the annuity option is eliminated from the plan before an election is made if a lump sum form is available. See Reg. 1.411(d)-4 A-2(e)(3) example

By the way doesnt the spouse have to file a claim for benefits with the PA before suing?

[J Simmons]

Thank you for the responses.

The claim with the PA is the stage we're dealing with right now.

All the benefits accrued to the employee were paid to him in a lump sum, upon only his signature.

The widow has lodged a claim for surviving spouse benefits. We're at the initial claims determination stage.

The QJSA was, prior to the amendment of this plan, stated in the plan documents to be the normal form of benefit, not just an optional form.

I think the real determinant here will be whether the spousal rights attached when and as the benefits accrued (then the widow is probably entitled to a survivor benefit) or only attached at the time of payout (then the employer won't have to pump more funds into the plan just to pay survivor benefits, given that the plan has already paid out all the benefits that accrued to the now deceased employee).

The mere concept of a QDRO suggests that ERISA recognizes that spousal rights accrue when and as the benefits accrue, but that is a reflection of state community/marital property rights (albeit accruing when and as the benefits themselves do). The QJSA/QPSA rights are as to a form of payment. They only impose requirements for, among other things, spousal consent at the time of payout. That cuts in favor of the plan--the rules in the plan document at the time of payout specified lump sum as the normal form of benefit.