417(b)(2) Violation

[BTG]

Has anyone seen any examples of how to correct a violation of Code Section 417(b)(2), which provides that a plan's QJSA must be actuarially equivalent to its straight-life annuity, or 1.401-(a)-20, Q&A-16, which provides that a plan's QJSA must be at least as valuable as any other form of benefit for married participants?

[david rigby]

OK, I'll bite.

How does a plan violate this?

[BTG]

OK, I'll bite.

How does a plan violate this?

The plan doc sets forth formulas for calculating all J&S forms of benefit, including the QJSA. The formulas call for reductions to be made to the monthly benefit payable based upon the survivor percentage elected and the age difference between the spouse and the participant. However, because the reductions are not based on actuarial equivalence factors (in violation of 417(b)(2)), there is the potential that the QJSA form of payment could be less valuable (on an actuarial equivalent basis) than other forms of payment (in violation of 1.401(a)-20, Q&A-16).

In other words, some married participants are receiving QJSAs that are worth less (actuarially) than a straight-life annuity.

The plan has a determination letter approving the formulas, so there wouldn't seem to be a threat of disqualification. However, I'm not sure that a determination letter could be used as a defense against claims by affected participants. (I know such claims may be unlikely, but I just want our client to be able to make an informed decision on how to best deal with this.)