IRC 401: Plan Qualification and J&S Annuity

[Guest jfreeborn]

Individual worked for a large non-profit and is a participant their defined benefit plan. She has been retired and in pay status for a few years. Recently, her husband died. The plan then reduced her benefit by 50%. Plan reps refer to this as a "true" joint & survivor annuity. Apparently, the benefit is reduced regardless of whether the participant or non-participant spouse dies first.

Participant says that she did not know she signed up for this. The benefit election form shows participant checked a box next to a benefit described as “Joint & Survivor Annuity with a survivor benefit of ___% (enter 50, 66 2/3, 100).” Participant checked this box.

The SPD for this plan describes Joint and Survivor Annuity as follows: “Benefits will continue for another person in the even of your death. You may elect to receive an adjusted income during your life and, upon you death, 100% of this income will continue for the life of the person you designate. Alternatively, you may elect to receive an adjusted monthly income while you are both alive and then 50%, 66-2/3% of that amount will be paid to the survivor for life when either of you dies.”

My Question:

It appears from the description above, that the SPD is offering a 100% joint and survivor annuity and a “true” JSA. However, the benefit election form did not differentiate b/w the two. It only had that one option I described above.

It seems participant would have an argument at the very least, that the benefit election form was ambiguous as to whether she was electing a 50% JSA or a true JSA. On a larger scale though, does this plan lack the option of a Qualified Joint & Survivor Annuity as required by IRC section 401? Anyone have any suggestions or advice here? Is it possible this plan is not qualified or that the non-profit status of the plan my allow it not to offer a QJSA?

Thank you thank you for any help

[david rigby]

In 30+ years, I've never seen that benefit in a qualified plan. It may be more common in govt. plans.

Other than that, my suggestion is that the participant may wish to spend an hour with an experienced ERISA attorney.

[Andy the Actuary]

I'm older than David and have never seen the likes of this one. Surprisingly, it appears to satisfy the definition of QJ&S (see IRS Reg. 401(a)-11(b)(2)). I hope someone will jump in if they disagree with this conclusion.

Participant should ask for copy of the Plan document in effect when participant retired to assure this is was the Plan called for. If not, then she may be able to get this resolved without lawyering up. If so, then it will be a matter of determining whether or not communication was adequate and that might be lawyering up.

Again, it would be worthwhile to learn if any professionals have ever seen this "true" J&S. It wasn't even discussed in Jordan's life contingencies.

By the way, I was unable to conclude from the SPD passage that the Plan was offfering a tradition J&S. It seems that the SPD language could be contrued as describing the strange J&S option.

[SoCalActuary]

Again, it would be worthwhile to learn if any professionals have ever seen this "true" J&S. It wasn't even discussed in Jordan's life contingencies.

Sure it was.

1/2 of the total benefit is valued at his life annuity rate.

1/2 of the total benefit is valued at her life annuity rate.

When one dies, their life annuity ends.

When the other dies, their life annuity ends.

Sorry Andy, but it is that simple.

[Kevin C]

I'm looking at mid-90's era distribution paperwork and an SPD from one of the large actuarial firms that lists that kind of annuity option. They refer to it as a "Joint and Survivor Option". They also describe a "Joint and Contingent Option" where the annuity amount changes only on the participant's death. To make matters more interesting, it says the automatic form of payment is a "Qualified Joint and 50% Survivor Annuity", where 50% of the annuity amount is payable to the spouse upon your death for your spouse's lifetime and if your spouse dies first, your benefit does not change. To their credit, the distribution paperwork clearly describes each of the payment options and what causes the amounts to change.

If my memory serves me, at a former employer we called the annuity described in the OP a Joint and Last Survivor Annuity.

[Andy the Actuary]

Again, it would be worthwhile to learn if any professionals have ever seen this "true" J&S. It wasn't even discussed in Jordan's life contingencies.

Sure it was.

1/2 of the total benefit is valued at his life annuity rate.

1/2 of the total benefit is valued at her life annuity rate.

When one dies, their life annuity ends.

When the other dies, their life annuity ends.

Sorry Andy, but it is that simple.

Don't understand your post. I certainly knew how to value it. I just don't recall having ever seen it discussed.

[SoCalActuary]

Again, it would be worthwhile to learn if any professionals have ever seen this "true" J&S. It wasn't even discussed in Jordan's life contingencies.

Sure it was.

1/2 of the total benefit is valued at his life annuity rate.

1/2 of the total benefit is valued at her life annuity rate.

When one dies, their life annuity ends.

When the other dies, their life annuity ends.

Sorry Andy, but it is that simple.

Don't understand your post. I certainly knew how to value it. I just don't recall having ever seen it discussed.

I have seen this benefit provided in the past, but not in private pension plans recently. After all, Social Security uses the 2/3 survivor benefit as its normal form. 150% PIA while both alive, dropping to 100% PIA on death of first person.

I was only commenting on your Jordan reference.

This benefit did not require any multi-life calculations.

Now the 2/3 J&S is more interesting. It needs the joint life value.

[Andy the Actuary]

I can top anybody:

Option was a J&50% with 10 years certain, with 100% pop-up if beneficiary died before participant reached age 70, and with automatic cola that capped at 150% of initial payment. Now, I know that wasn't in Jordan.

[david rigby]

I think SoCal is correct about reference to Jordan, beginning on page 191 of the Second Edition (1975). Certainly one of the greatest books ever published.

Andy is correct that the "pop-up option" is not discussed in Jordan, but it was discussed in my class, led by one of the greatest actuarial educators ever.

[Andy the Actuary]

Jordan . . . Certainly one of the greatest books ever published.

You may want to withhold this thought from your eHarmony.Com questionairre.

[Guest jfreeborn]

Jordan . . . Certainly one of the greatest books ever published.

You may want to withhold this thought from your eHarmony.Com questionairre.

*Update*

I received the Plan Document and under the definitions section it describes Joint and Survivor Annuity as follows: "An annuity for the life of a Participant and Joint Annuitant with a survivor annuity for the life of the individual who survives. The joint annuity is actuarially adjusted to reflect the fact that benefits are paid to the survivor after the death of EITHER the Participant or the Joint Annuitant."

Compare that with what's in the SPD:

“Benefits will continue for another person in the event of your death. You may elect to receive an adjusted income during your life and, upon you death, 100% of this income will continue for the life of the person you designate. Alternatively, you may elect to receive an adjusted monthly income while you are both alive and then 50%, 66-2/3% of that amount will be paid to the survivor for life when either of you dies.”

And...the original benefit election form:

As I stated earlier, the original benefit election form gave 5 options. Life only, lump sum, guaranteed income payment, and the Joint and Survivor Annuity with a survivor benefit of ___% (enter 50, 66 2/3, 100).”

It appears that there is no QJSA offered. The benefit election form, SPD, and Plan Doc call it such, but it is not actually a QJSA. Anymore thoughts???

[david rigby]

Compare that with what's in the SPD:

... You may elect to receive an adjusted income during your life and, upon you death, 100% of this income will continue for the life of the person you designate.

Is this a QJSA?

[Guest jfreeborn]

Compare that with what's in the SPD:

... You may elect to receive an adjusted income during your life and, upon you death, 100% of this income will continue for the life of the person you designate.

Is this a QJSA?

That's part of the issue I am having. I do not think what the SPD describes is a "Qualified" J&S annuity.

[John Feldt ERPA CPC QPA]

I can top anybody:

Option was a J&50% with 10 years certain, with 100% pop-up if beneficiary died before participant reached age 70, and with automatic cola that capped at 150% of initial payment. Now, I know that wasn't in Jordan.

Now just add in the actuarial adjustments to equalize all of the annuity streams (including the value of the pop-up amounts) for the benefit commencing before age 62, so that at age 62 when social security starts, you have an equalized payment. Then add a nonqualified benefit on top of that for benefits in excess of the 415 limit (but then offset that for any benefits accrued when they worked for you outside the U.S. for any pensions earned under retirement plans or benefits similar to social security provided in those countries) and track all of the participant's and surivor's amounts in your automated website that the participants can log in to look over. I know I missed something else here too, maybe it's the FICA tax on the NQ benefit, hmmm, oh well. Yeaehaw, gulp.