401(k) with QJ&SA normal form

[Guest braindead]

Does anyone know what subsequent law increased the $1,750 cash out amount under Reg. Section 1.401(a)-(11)(a)(2) to $5,000?

[david rigby]

ERISA 1974 - $1,750.

REA 1984 - $3,500.

Taxpayer Relief Act 1997 - $5,000

[Guest Sieve]

The $1,750 limit permitting immediate distribution without consent was increased to $3,500 (Retirement Equity Act of 1984, eff. for py after 12/31/1984), and then to $5,000 (Taxpayer Relief Act of 1997, eff. py after 8/5/1997).

A minute too late . . .

[masteff]

Time out...

Are we talking about 1.401(a)-11(a)(2) or 1.411(a)-11©(3)?

See the cite in the original post.... as the subject addresses QJ&SA, I'm thinking we have a criss-crossed question.... the question really means the 401 reg but the $5,000 change was to the 411 reg.

[Guest Sieve]

Look at IRC Section 417(e)(1), which, by cross reference to IRC Section 411(a)(11), permits immediate distribution if QJSA present value doesn't exceed the amount indicated in IRC Section 411(a)(11). (See, also, Treas. Reg. Section 1.417(e)-1(b)(2)(i), first sentence, for a comparable cross reference to the 1.411(a)-11 reg.)

So, statutory change to IRC Section 411(a)(11) impacts the reg cited in the OP through IRC Section 417(e)(1).

Of course, the reg will lag behind the statutory change, but it's the statute that controls.

[Guest braindead]

I am referring to the $1,750 amount in 1.401(a)-(11)(a)(2), not 1.411. 1.411 discusses the consent rules and I am not concerned about consent since the Plan requires consent on all distributions, i.e. there is no mandatory cash out provision. The concern is in a 401(k) Plan with QJ&SA as the normal form but no mandatory cash out provision, can't you still limit the method of distribution to just a lump sum for account balances that are $5,000 or less (as long as the Plan permits) and therefore, do not give any QJ&SA notice to the participants while still requiring their consent to get their lump sum distribution? If that is true, what is the cite for the $5,000 amount since 1.401(a)-(11)(a)(2) still refers to $1,750?

[Guest Sieve]

As you point out, if the document does not permit a lump sum distribution for amounts less than $5,000 (or $3,500 or $1,750), then it matters not what the law permits. So, ultimately this is a plan document issue.

And, I wonder if there isn't, in fact, an exception to the requirement of a QJSA for distributions under $5,000 (or $3,500 or $1,750) in this plan. Here, for example, is what the GUST Corbel VS document says:

If, for Plan Years beginning after August 5, 1997, the value of the Participant's benefit derived from Employer and Employee contributions does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and, if the distribution is made prior to October 17, 2000, has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, then the Administrator shall direct the Trustee to immediately distribute such benefit in a lump sum without the Participant's and the Participant's spouse's written consent. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the Participant and the Participant's spouse consent in writing (or in such form as permitted by the Internal Revenue Service) to such distribution.

But, as for the statutory authority permitting such a lump sum payout for QJSA-required distributions from DC account balances less than $5,000 (or $3,500 or $1,750), here's my analysis . . . . . .

IRC Section 401(a)(11) requires payment in the form of a QJSA for any DC non-MPPP under which the participant elects a life annuity, a provision which appears to require that, even with spouse consent in a 401(k) plan requiring consent, the payment still must be as a QJSA.

But, IRC Section 401(a)(11) start with ". . . except as provided by [iRC] section 417 . . ." So, we look to IRC Section 417 to find exceptions to the QJSA rule of IRC Section 401(a)(11).

Look at IRC Section 417(e)(1). That permits a distribution "immediately" if the amount is not more than the 411(a)(11) dollar limit. Immediately means immediately, i.e. right now as a lump sum. So, that's an exception, from IRC Section 417, to the QJSA rule of IRC Section 411(a)(11). While IRC Section 417(e)(2) deals with consent being required above that dollar limit and not being required below that dollar limit, IRC Section 417(e)(1) permits an immediate distribution. And the regs under 417(e)(1) deal with restrictions to distributions which are subject to IRC Sections 417 and 401(a)(11). (See Treas. Reg. Section 417(e)-1(a)(1).)

Treas. Reg. Section 1.411(a)-11©(3)(i) says that " [t]he consent requirements are deemed satisfied if such value does not exceed the cash-out limit and the plan may distribute such portion to the participant as a single lump sum." (Emphasis added.) So, even without consent the distribution can be in a lump sum, based on the cash out limits (which are described in 1.401(a)-11©(3)(ii)), so certainly a single lump sum can be permitted with consent.

Note, by the way, that Reg. Section 1.401(a)-11(a)(2) was issued in 1977, shortly after the enactment of ERISA, when IRC Section 401(a)(11) did not mandate payment to a married participant as a QJSA absent spouse consent otherwise. Rather, IRC Section 401(a)(11) mandated that a participant's life annuity election be paid as a QJSA, but still permitted the participant to elect a lump sum payment without spouse's consent (as demonstrated, e.g., in example (1) of -11(a)(3)). The QJSA requirements, as we now know them, were subsequently enacted as an amendment to IRC Section 401(a)(11) and designation of a new Section 417 by the Retirement Equity Act of 1984. So, that reg predates the statutory changes to the cash-out amount as well as the other regs referred to above, and it basically has been updated by the simultaneously-issued subsequent regs related to the modern-day QJSA requirements (1.417(e)-1 & 1.411(a)-11), and its cash-out amount has been updated by statute and by those regs.