Consentual or Non-Consentual

[Andy the Actuary]

The intention is to make distributions to a terminating Plan shortly -- say January 1, 2009. Plan assets have been invested in a money market fund. Excess plan assets will be allocated to the participants by increasing benefits. The election package will state this fact but will communicate the benefits without regard to any possible increase since the exact amount is not known. The Plan, indeed, will have excess assets.

Participant Molly Potts has a lump sum of $4,850 based upon her formula benefit. After allocation of excess assets, her lump sum is expected to be around $5,100. I.e., less than the consentual limit before excess asset allocation and greater than the consentual limit after excess asset allocation.

Question: Should election package require spousal consent even though lump sum based upon non-increased benefit is less than $5,000? This, of course, is a "damned if you do, damned if you don't" situation. Comments from the peanut gallery?

[J Simmons]

Here are a few peanuts to consider:

IRC § 417(e)(1) defers the valuation issue to § 411(a)(11): "A plan may provide that the present value of a qualified joint and survivor annuity or a qualified preretirement survivor annuity will be immediately distributed if such value does not exceed the amount that can be distributed without the participant's consent under section 411(a)(11). No distribution may be made under the preceding sentence after the annuity starting date unless the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consents in writing to such distribution."

IRC § 411(a)(11)(A) sets the measure for mandatory distribution if "the present value of any nonforfeitable accrued benefit" is $5,000 or less.

Treas Reg § 1.417(e)-1 provides: "A defined benefit plan must provide that the present value of any accrued benefit and the amount (subject to sections 411©(3) and 415) of any distribution, including a single sum, must not be less than the amount calculated using the applicable interest rate described in paragraph (d)(3) of this section (determined for the month described in paragraph (d)(4) of this section) and the applicable mortality table described in paragraph (d)(2) of this section." (Emphasis added.)

Treas Reg § 1.411(a)-7(a) provides:

In general, the term "accrued benefit" refers

only to pension or retirement benefits

. Consequently, accrued benefits do not include ancillary benefits not directly related to retirement benefits such as payment of medical expenses (or insurance premiums for such expenses), disability benefits not in excess of the qualified disability benefit (see section 411(a)(9) and paragraph ©(3) of this section), life insurance benefits payable as a lump sum, incidental death benefits, current life insurance protection, or medical benefits described in section 401(h). For purposes of this subparagraph a subsidized early retirement benefit which is provided by a plan is not taken into account, except to the extent of determining the normal retirement benefit under the plan (see section 411(a)(9) and paragraph © of this section). The accrued benefit includes any optional settlement at normal retirement age under actuarial assumptions no less favorable than those which would be applied if the employee were terminating his employment at normal retirement age. The accrued benefit does not include any subsidized value in a joint and survivor annuity to the extent that the annual benefit of the joint and survivor annuity does not exceed the annual benefit of a single life annuity.

Treas Reg § 1.411(a)-11(a)(2):

For purposes of this section, an accrued benefit is

valued taking into consideration the particular optional form in which the benefit is to be distributed

. The value of an accrued benefit is the present value of the benefit in the distribution form determined under the plan.

Rev Rul 81-9, 1981-1 CB 178:

Situation 3.

May a plan that is required to provide an early survivor annuity within the meaning of section 1.401(a)-11(b)(3) of the regulations discontinue this coverage after the plan is terminated?

Held,

Yes. Section 411(d)(3) of the Code provides that upon the termination of a trust qualified under section 401(a) the rights of all affected employees to all benefits accrued to the date of such termination are nonforfeitable. In general,

the term "accrued benefits" refers only to pension or retirement benefits

and does not include pre-retirement death benefits. See section 1.411(a)-7(a) of the regulations.

Accordingly, early survivor coverage need not be continued for participants who continue in employment with the employer after the plan has been terminated.

I suspect that there might be some ASPA Q&A with IRS/DoL officials that address your question.

[Andy the Actuary]

Thank you. I'm taking the position of asking for spousal consent. Better to ask for spousal consent if not needed then not ask if it is needed. Of course, Murphy's Law will have it that some estranged spouse won't give the consent.

We get into the category of spending lots of money on attorneys on a matter of so minuscule consequence. The exposure is too small to ponder (just a couple folk affected).

[Mike Preston]

Clearly it applies. It is your choice as to whether you ask for it or not. If you don't and the amount ends up being over, then you need to ask for it then.