Is this J&S Annuity Qualified?

[Guest jfreeborn]

Recently, I came across a J&S annuity in a plan that is reduced when EITHER the participant or spouse dies. I am wondering if any of you think that it satisfies the requirements of 417 and 1.401(a)-11(b)? It seems to me that it doesn't b/c the regs seem to require an annuity for the life of the participant and a survivor annuity for the spouse. If the benefit reduces when the spouse dies, then the participant receives a survivor annuity instead of a life annuity. Any thoughts?

[Andy the Actuary]

Suppose life annuity was $1,000/month. Would increased amount be paid under this special J&S while both living? Could you provide some numbers for example?

Also, is the plan's QJ&S defined as your special annuity or is your special annuity simply an optional form of payment?

[david rigby]

It's does not appear to meet the definition of QJSA in 1.401(a)-11(b)(2).

Could the described form be an option, rather than a default definition of QJSA?

[Guest jfreeborn]

Suppose life annuity was $1,000/month. Would increased amount be paid under this special J&S while both living? Could you provide some numbers for example?

Also, is the plan's QJ&S defined as your special annuity or is your special annuity simply an optional form of payment?

Andy,

Thanks for the reply. The plan docs do not describe a "qualified" annuity, but do describe the previously described annuity as their J&S annuity. The plan allows for the participant to select a 50%, 66 2/3%, or 100% J&S annuity. It never mentions which is qualified.

By way of example: Participant elects 50% J&S annuity and begins to receive $1,000/month. His wife dies, and now he receives $500/month. There is no option for a typical J&S annuity.

[Andy the Actuary]

Suppose life annuity was $1,000/month. Would increased amount be paid under this special J&S while both living? Could you provide some numbers for example?

Also, is the plan's QJ&S defined as your special annuity or is your special annuity simply an optional form of payment?

Andy,

Thanks for the reply. The plan docs do not describe a "qualified" annuity, but do describe the previously described annuity as their J&S annuity. The plan allows for the participant to select a 50%, 66 2/3%, or 100% J&S annuity. It never mentions which is qualified.

By way of example: Participant elects 50% J&S annuity and begins to receive $1,000/month. His wife dies, and now he receives $500/month. There is no option for a typical J&S annuity.

so, we have 1000ax versus 500ax + 500ay???? They are equivalent only if x=y, subsidized if x>y, and a rip off if x<y. This option doesn't appear to satisfy anything, let alone common sense. Notwithstanding her untimely and unforeseen death, no doubt Anna Nicole would have prodded her loving octogenarian hubby Howie to elect this form of payment on a Joint & 100% basis. I'm sure the Plan Sponsor wouldn't have been too happy about his once it was discovered how underfunded this election made the plan.

If you were the actuary, what would be your FT assumption under 430 for beneficiary designation and form of payment?

[eeyore]

Andy: I think you misunderstood the form of payment. If the formula produces $1,000 life annuity, then option will be adjusted, say to $970 or conceivably to $1,030, depending on the ages. Then this amount would be payable while both parties are alive. Upon the first death, the amount paid would be reduced to fraction X amount that had been paid. This is a perfectly reasonable option, especially when the fraction is 2/3 or 75%, on the grounds that living expenses for the survivor will reduce upon the death of one member of the couple, but generally they won't go to half. I saw a lot of plans where this form of benefit was offered as an option, but was never the qualified J&S form. At 50%, it is as you described (but with an adjustment for the ages), and at 100%, it is identical with a standard J&100%S.

[Andy the Actuary]

Well, let's see. I indicated that the life annuity amount was $1,000/month and asked for an example. The response was $1,000 so long as both living that reduced to $500 on first death. Mr. Jfreeborn, am I misinterpreting your response? Are you saying that the $1,000 in your example does not relate to the $1,000 in my question? If so, please provide an example. Clearly, I'm unacquainted with the payment form which is why I asked for some numbers.

Mr. eeyore appears to be saying ax = .5 x r x (ax + ay) or r = 2 ax / (ax + ay). Mr. J-F, is this what you mean?

[Guest jfreeborn]

Well, let's see. I indicated that the life annuity amount was $1,000/month and asked for an example. The response was $1,000 so long as both living that reduced to $500 on first death. Mr. Jfreeborn, am I misinterpreting your response? Are you saying that the $1,000 in your example does not relate to the $1,000 in my question? If so, please provide an example. Clearly, I'm unacquainted with the payment form which is why I asked for some numbers.

Mr. eeyore appears to be saying ax = .5 x r x (ax + ay) or r = 2 ax / (ax + ay). Mr. J-F, is this what you mean?

Andy,

sorry if I'm confusing things here. I'm not an actuary, so I can't respond to your last question. My question was simply whether an annuity would be "qualified" under the code if it was a first to die annuity. I know these types of annuities were around before ERISA. Insurance companies used to offer them all the time. But I thought ERISA said that they were no longer qualified, and as such, no one (except my case) offers a first to die annuity.

For what it's worth, in my case, here are the values associated with the various benefits.

1) 50% J&S Annuity: $620 with $310 payable to survivor

2) 66 2/3%: $568 with $379 payable to survivor

3) 75%: $545 with $ 409 payable to survivor

4) 100%: $486 and $486

Year of birth of participant is 1924

Souse year of birth is 1921

Participant was 71 at retirement and spouse was 74

Thank you all for responding. I'm really at a loss

[Andy the Actuary]

And in your case, how much was straight life annuity without death benefits?

[Guest jfreeborn]

And in your case, how much was straight life annuity without death benefits?

I believe it was $565. The calculations I've run and that the plan ran, show the 50% benefit was the most valuable. But, I still dont think it's qualified but it decreases upon either spouses death.

[Andy the Actuary]

Okay, thank you. Mr. eeyore was correct that I misunderstood.

1.401(a)-11(b)(2) states "means an annuity for the life of the participant . . ." However, neither this provision nor (b)(1), which defines life annuity, stipulate that the annuity must be level. What is being overlooked?

[My 2 cents]

An annuity that decreases upon the death of either the participant or the joint annuitant is a true joint and survivor annuity (as opposed to the usual form, which is a true contingent annuity). It has been, since the passage of ERISA, our understanding that either form fully meets the requirements for being a QJSA. If not fully subsidized, it should go without saying that the equivalency factors should fully reflect the characteristics of the form.

The use of a true joint and survivor annuity, while definitely permissible, is rare because the benefit itself was fully earned by the worker and it seems somewhat unfair for the worker to lose much of the value of the retirement benefit due to the untimely death of the worker's spouse. The form is more commonly used when annuities are purchased using joint assets.

While a typical life annuity to 50% contingent annuitant conversion factor might be around 90% (higher if the contingent annuitant is older, lower if the contingent annuitant is younger), a conversion factor for a 50% true joint and survivor form should be closer to 100%. In fact, unless faulty methods are being used, if the participant and the joint annuitant are the same age, a life annuity of $X and a 50% true joint and survivor form of $X MUST have exactly the same value, so the conversion factor when the two people are the same age MUST be 100%. It comes down to the difference between ax and 0.5ax + 0.5ay. If x=y, the two quantities must be exactly equal.