Does Qualified Optional Survivor Annuity Requirement Apply?

[WestCoast]

Company has a defined benefit plan that provides for only a single life annuity for unmarried participants, and a joint & 50% survivor annuity for married participants. The plan has no other forms of distribution, and married participants CANNOT waive joint & 50% survivor benefit or name a beneficiary.

Company and the plan's actuary take the position that this arrangment meets the requirements of Code section 417(a)(5), hence the usual QJSA and QPSA rules don't apply . . . and, the recently added qualified optional survivor annuity ("QOSA") requirement does not apply. In a nutshell, they explain that, when 417(a)(5) applies, it knocks out all of the QJSA, QPSA, and QOSA requirements in 417(a)(1)(A).

Makes sense to me, but . . . the IRS guidance to date merely says that if Code section 401(a)(11) apply to a plan -- i.e. a defined benefit plan -- then the QOSA must be added to the plan.

Any thoughts? If the QOSA requirement applies, I'd rather tell the company to to a nonamender VCP, instead of having an IRS review during the next determination letter submission say "failure to amend for PPA, audit cap sanction."

Thanks in advance.

[Andy the Actuary]

(1) What is your interest given that you are neither Plan Actuary nor the Company?

(2) 417(a)(5) refers to the QJSA. 417(a)(5) has not been amended to include QOSA. However, (from Notice 2008-30) states tha a Plan "must provide to a participant who waives the QJSA an opportunity to elect a qualified optional survivor annuity (“QOSA”). . ." Hence, since under the conditions you stated there is no waiver (or potential waiver) of the QJSA at question, one can conclude that QOSA does not apply. Keep in mind this opinion comes from "Andy the Actuary" and not "Andy the Attorney."

[WestCoast]

(1) What is your interest given that you are neither Plan Actuary nor the Company?

(2) 417(a)(5) refers to the QJSA. 417(a)(5) has not been amended to include QOSA. However, (from Notice 2008-30) states tha a Plan "must provide to a participant who waives the QJSA an opportunity to elect a qualified optional survivor annuity (“QOSA”). . ." Hence, since under the conditions you stated there is no waiver (or potential waiver) of the QJSA at question, one can conclude that QOSA does not apply. Keep in mind this opinion comes from "Andy the Actuary" and not "Andy the Attorney."

I am legal counsel to the company (a new client) and we are sorting out whether to submit a "nonamender" VCP application for failure to amend the plan for the QOSA requirements.

I do believe that the QOSA requirement does not apply, because Code section 417(a)(5) explicitly says that, if a plan meets the 417(a)(5) requirements, then the rest of 417(a) won't apply, so that would include the QOSA requirement found in 417(a)(1).

What's bothering me is the Service's blanket statement in Notice 2008-30 that plans "subject to Code section 401(a)(11)" (which includes ALL defined benefit plans) must comply with the QOSA requirement.

Perhaps the IRS might say: "What's the big deal? So, you have to allow the participant the opportunity to pick a QOSA. You don't have to provide spouse consent, etc."

I'd just hate have the company busted during a determination letter review. (The company is on cycle this year.)

[My 2 cents]

Am I missing something? Why not banish all legal questions by allowing married participants the option to receive a joint and 75% annuity instead of the joint and 50%? Too much work? You won't need to bother with spousal consent for such an election, since both forms fall within the legal definition of a qualified joint and survivor annuity.

You already took the position that it was not mandated, right? You are going to apply for a determination letter when you restate in this year's cycle, right? How can it make things worse by putting the option in? If it is mandatory, they will notice. Remember, you are not giving the married participants the option to waive away the qualified joint and survivor annuity, since either a QJSA or QOSA would still be a qualified joint and survivor annuity.

[david rigby]

IMHO, WestCoast is correct, with a strict reading of IRC 417(a)(5), which appears to exempt a plan from all of 417(a) under certain conditions. Similar in ERISA section 205.

However, read both Notice 2008-30 and the "Technical Explanation of H.R. 4 prepared by the Joint Committee on Taxation" (http://www.dol.gov/ebsa/pensionreform.html, page 258 of PDF document). It appears the "flavor" of both interprets the intent of PPA section 1004 to require all DB plans to offer at least 2 J&S forms of payment. I see nothing in either that addresses the situation raised by WestCoast.

My guess is a zero chance that the average IRS agent would understand this subtle distinction, even though you can always hang onto a strict reading of the IRC if you believe the regulatory guidance is incorrect or inconsistent. BTW, since an IRS Notice is not a regulation, it's binding on the IRS but not on the plan. (Is that an accurate synopsis?)

Next is the legal counsel's function of advising the plan sponsor whether it's worth the bother of fighting the IRS. I look forward to reading the result.

[WestCoast]

UPDATE -- I contacted the IRS in Washington re the QOSA guidance, the Code, and the question posed here. Per Jim Flannery at IRS, the IRS agrees that, under the facts outlined above -- i.e., fully-subsidized QJSA with no waiver right -- the QOSA requirement does not apply. And, the IRS guidance in the Notice does not conflict, i.e., refer to "generally" qualifier near the beginning of the Notice.

[Guest Not such a bad guy]

UPDATE -- I contacted the IRS in Washington re the QOSA guidance, the Code, and the question posed here. Per Jim Flannery at IRS, the IRS agrees that, under the facts outlined above -- i.e., fully-subsidized QJSA with no waiver right -- the QOSA requirement does not apply. And, the IRS guidance in the Notice does not conflict, i.e., refer to "generally" qualifier near the beginning of the Notice.

have fun with that, if the plan is a DB plan coming in as a cycle D filer or later, the determ agent will require that amendment to be made, it is listed on notice 2008-108 as a mandatory requirement of any defined benefit plan. The good news is that as long as there is a TIMELY "good faith attempt" to comply with PPA, a CAP will not be warranted, since this is only one of several req items, you could omit it accidently and see if it gets picked up ( unless the case gets picked up by exam, that might get you a CAP).