New QOSA Rules

[Guest Grumpy456]

A DB plan defines the normal form QJSA as a joint and 50% survivor annuity and provides actuarially equivalent J&66-2/3%S and J&100%S annuities as optional forms of benefit.

Under PPA, the plan appears to have two options:

(1) make the joint and 100% survivor annuity the normal form QJSA and the J&50%S annuity an optional form of benefit or

(2) add a J&75%S annuity.

For a variety of reasons, the plan sponsor wants to do (1).

The plan's QPSA rules say that the QPSA is based on the survivor annuity percentage of the normal form QJSA. Which means that prior to PPA, the QPSA was based on the 50% survivor annuity percentage. Unless I change the plan's QPSA language, after redefining the plan's normal form QJSA as a joint and 100% survivor annuity, the QPSA will be based on the 100% survivor annuity percentage.

Here's my question:

Can the QPSA be based on the 50% survivor annuity percentage or must it now be based on the 100% survivor annuity percentage that is part and parcel of the plan's new normal form QJSA?

[J Simmons]

Are you certain you can make that switch from the normal form of payment being a J&50 to J&100? If a participant's spouse does not consent to another form, this plan re-design would reduce the amount payable to the participant during his/her life from already accrued benefits (albeit boosting what the spouse would be getting as a survivor annuity after the participant dies)?

[Guest Grumpy456]

Given that the two forms of QJSAs are actuarially equivalent, I didn't think there was a cut-back issue. Do you think there is/might be one? Why?

It's my understanding that since the plan's J&50%S annuity, J&66-2/3%S annuity and J&100%S annuity are actuarially equivalent, regardless of which form of J&SA is the default or "normal form" for a married participant, the participant may elect any of the three different forms without first obtaining spousal consent. Do you agree?

[Everett Moreland]

The following from 1.411(d)-4(b)(2)(ii) suggests that changing the designation of which JSA is the QJSA is not a cut back:

"A plan that provides a range of three or more actuarially equivalent joint and survivor annuity options may be amended to eliminate any of such options, other than the options with the largest and smallest optional survivor payment percentages, even if the effect of such amendment is to change which of the options is the qualified joint and survivor annuity under section 417."

Allowing the participant to choose among the JSA options without spousal consent should avoid any concern about a cut back.

[Guest Grumpy456]

Q&A-13 in IRS Notice 2008-30 reads as follows:

Q-13. Must a plan that is subject to Section 401(a)(11) offer to participants, as an alternative to a qualified preretirement survivor annuity described in Section 417©, a preretirement survivor annuity that is based on a QOSA?

A-13. No. A plan that is subject to Section 401(a)(11) must offer participants a QOSA that is an alternative form of distribution to the QJSA. There is no requirement that the plan offer to participants, as an alternative to a qualified preretirement survivor annuity described in Section 417©, a preretirement survivor annuity that is based on a QOSA.

* * * * *

By implication, this Q&A suggests to me, absent further guidance, that if, as in this case, a plan's QJSA is changed from a J&50%S annuity to a J&100%S annuity that I also need to change the plan's QPSA from 50% to 100% (although I don't need to retain the 50% QPSA since, after the amendment, it will relate to the QOSA).

Does that make sense or have I missed the boat? The thing that bothers me about this sort of issue is that the answer is either so obvious that the IRS didn't think it worth mentioning or it's something that they didn't think to address.

Any thoughts would be appreciated. Thanks!

[Guest chordbender]

No. This approach short-circuits to IRC 417©(1)(A) so the preretirement death benefit becomes the 100% type. This in turn roughly doubles the plan's costs for preretirement death benefits. Example for a $100 life annuity otherwise payable at the commencement of the spousal benefit -

The 50%-type QPSA would pay .9 (J&S factor) x 100 x .5 = $45.

The 100%-type QPSA would pay .82 (J&S factor) x 100 x 1 = $82 (over an 80% increase).

If we see this gambit we should almost always strongly advise against it (or shut it off as quickly as IRC 411(d)(6) allows).

IRC 417©(1)(A) says “the payments to the surviving spouse under such annuity are not less than the amounts which would be payable as a survivor annuity under the qualified joint and survivor annuity under the plan.”

[Andy the Actuary]

Did we ever get a definitive resolve on the QPSA issue?

Namely, suppose pre-PPA J&S was J&50% and QPSA was J&50%. if you change QJSA for J&50% to J%100% to avoid offering J&75%, then will QPSA have to be changed from J%50% to J&100%?

[Mike Preston]

I don't know why the controversy ever developed. Isn't 1.401a-20, Q&A16 pretty clear?

[Andy the Actuary]

I don't know why the controversy ever developed. Isn't 1.401a-20, Q&A16 pretty clear?

Yes, Q&A 18 of the referenced regulation is clear. However, it was in place long before PPA so perhaps the question is has this issue been addressed formally or informally to the point that the intention of PPA was not to increase the QPSA?

[Mike Preston]

Well, you don't have to increase the QPSA if the Q's are the actuarial equivalent of the normal form and the normal form isn't changed. Or am I missing something fundamental?