Benefit already in pay status

[Belgarath]

Boy, here's a strange one (at least to me) that I hope some of you DB'ers might have encountered, or may have an opinion.

Participant retired, 5 years ago. Was not married, and elected to receive benefits in the form of a 100% J&S, with his girlfriend as plan beneficiary and the measuring life for calculating the J&S payment.

Fast forward to now. His girlfriend decided she prefers a girlfriend as well, so he ditched her, and is now married to another woman. He, reasonably enough, wants to name his new wife as beneficiary. The plan document doesn't provide any real guidance on what happens now.

1. It seems logical to me that the plan benefit would not change, and is locked for both amount and duration based upon the life expectancy determined at the time of benefit commencement based upon the jt life expectancy of he and his ex-girlfriend. But what happens at death if he changes the beneficiary, who is a different age than the ex?

2. If I'm wrong on that, how should it be handled? Or if that's really unanswerable, how would you handle it if faced with this? Do you have to do something really involved, like taking the original accrued benefit, recalculating a J&S with the current spouse, then actuarially adjusting the whole thing to take into account benefits already paid and come up with the actuarially equivalent amount commencing now? For you actuaries, if such a result or something similar is required, is this relatively easy for you, or is it a very time-consuming calculation?

AAARGGGHH! Thanks in advance for any input!

[Andy the Actuary]

At least now you know where the name "pecker" came from because he is in a peck of trouble. IMHO, the election is fixed once the annuity start date has reached. Unless the Plan provides for a second annuity start date (or pop-up), the Plan must continue to pay benefits in accordance with its provisions.

If what peck-of-trouble boy is seeking is doable under the Plan, then it would seem you would take the present value of the benefit under the original option at the current date using the participant and former paramour's age. Then, determine a new amount by converting this present value using the new wife's age. The calculation is simple.

My personal advice to peck-of-trouble boy is to keep his new wife away from his old girl friend as I've yet to see plans that would allow for two new annuity start dates.

[Belgarath]

ATA - thank you. So just to clarify, you appear to be agreeing with my #1, right? But what happens if he dies? How does one determine the payout period to the spouse (or any new beneficiary, for that matter?) That's what truly has me flummoxed. Is it just for the remainder of the years in the jopint life expectancy as calculated initially when determining the benefit level?

[SoCalActuary]

ATA - thank you. So just to clarify, you appear to be agreeing with my #1, right? But what happens if he dies? How does one determine the payout period to the spouse (or any new beneficiary, for that matter?) That's what truly has me flummoxed. Is it just for the remainder of the years in the jopint life expectancy as calculated initially when determining the benefit level?

i am a little confused by your post, so here's my understanding of your original request.

He had a 100% J&S benefit to him with his chosen beneficiary. Now, he changes the beneficiary under acceptable terms of the plan document, and determines the actuarial equivalent of the 100% J&S to the retiree and his beneficiary (old one).

Now he requests a new 100% J&S benefit with a new beneficiary. It will create a new monthly benefit amount that is the actuarial equivalent, and will be illustrated in a relative value disclosure. He continues to receive the new benefit once elected. Upon his death, the new beneficiary will continue to receive the benefit until her death. That's all. You asked what is the payout period to the spouse. It is her remaining lifetime after his death. Do you have a good method to predict that time?

[Guest On Hiatus]

ATA - thank you. So just to clarify, you appear to be agreeing with my #1, right? But what happens if he dies? How does one determine the payout period to the spouse (or any new beneficiary, for that matter?) That's what truly has me flummoxed. Is it just for the remainder of the years in the jopint life expectancy as calculated initially when determining the benefit level?

The benefit form and payments are determined at the annuity strting date in accordance with the participant's election, unless the plan document provides that a change in beneficiary election is available in such a case. If it is, follow the plan's terms in figuring how to calculate the remaining annuity after the election change. (Which raises the additional question -- what are the plan's terms?)

[AndyH]

I've never seen a plan that allows an annuitant to choose a beneficiary under these circumstances. But I suppose since it is not a wife it might not be prohibited.

Is this all hypothetical, or have the responders actually seen such a thing or think it exists?

[Belgarath]

I'm not surprised that you are confused by my post, since I'm confused even asking it. My apologies.

It seems like there are (at least) two alternative here.

One is that the payment form and amount cannot change. If that is the case, then how does one calculate the duration of death benefit payments to a beneficiary who is different (and a different age) than orginally used when determining the payment amount?

The other is that a new payment amount is actuarially determined on a current basis, taking into account the appropriate present value, and post-death payments to the surviving spouse are based upon that new number. Per Socal's post "He had a 100% J&S benefit to him with his chosen beneficiary. Now, he changes the beneficiary under acceptable terms of the plan document, and determines the actuarial equivalent of the 100% J&S to the retiree and his beneficiary (old one).

Now he requests a new 100% J&S benefit with a new beneficiary. It will create a new monthly benefit amount that is the actuarial equivalent, and will be illustrated in a relative value disclosure. He continues to receive the new benefit once elected. Upon his death, the new beneficiary will continue to receive the benefit until her death. That's all."

Since the plan is silent on this issue, then it seems that the most reasonable approach is to utilize the second alternative, which the actuary will be able to calculate.

I thank you all greatly for your assistance with this! It has been a big help.

[Guest On Hiatus]

Since the plan is silent on this issue, then it seems that the most reasonable approach is to utilize the second alternative, which the actuary will be able to calculate.

Unless the plan document explicitly allows an annuitant receiving a joint and survivor annuity to change the contingent annuitant after the initial annuity starting date, it does NOT allow such a change. If the Plan does allow such a change, then the method for calculation ought to be at last hinted at in the plan document. (Otherwise, the optional form is not definitely determinable -- a big no no in db world.)

[Effen]

One is that the payment form and amount cannot change. If that is the case, then how does one calculate the duration of death benefit payments to a beneficiary who is different (and a different age) than orginally used when determining the payment amount?

Most likely this is not an option. The amount of the J&S was determined based on the beneficiary when he made the election. Once it has commenced, 99.9% of the plan documents would not allow him (or her, or her, or her) to change anything.

Now he requests a new 100% J&S benefit with a new beneficiary.

Most likely this is not a option. You generally can't change beneficiaries once it has commenced. I have never seen, nor heard of, a document that would allow a new beneficiary on a J&S to be changed after benefits have commenced.

You might also want to check the document to see if it even permitted a non-spousal J&100. Most plans do not allow for non spousal beneficiaries on the J&S. Maybe the first beneficiary was improper to begin with.

My best advice is stay out of this and let a lawyer decide.

[Belgarath]

"You might also want to check the document to see if it even permitted a non-spousal J&100. Most plans do not allow for non spousal beneficiaries on the J&S. Maybe the first beneficiary was improper to begin with."

Believe it or not, the document did allow this. But, there's nothing in the document about changing it.

Thanks all. Sounds like the original thought I had about the payment being locked may have been valid. I was getting hung up on the beneficiary change, and it sounds like he may be out of luck. Kind of a strange result, though, that you can't change a beneficiary to your spouse when you originally named a non-spouse as the beneficiary. Probably not what was ever intended by statute/regs.

Anyway, we'll run it by the actuary. Thanks again for all your comments.

[david rigby]

I agree with AtA, SoCal, AndyH, and Effen. Just my opinion:

1. Confirm that the plan did permit a J&S with a non-spouse (I'm skeptical; in 30+ years, I've never seen this, and I've seen a lot of plans). Your 2:48pm post indicates you have confirmed this.

2. If the plan is silent on permitted changes, then the answer is "no changes are permitted". That would preclude amending the plan to add the ability to change, since such amendment could not reduce any rights already in existence.

3. If the plan already permits a change (again, very doubtful), does the first contingent annuitant get nothing? I doubt that also.

[AndyH]

1. Confirm that the plan did permit a J&S with a non-spouse (I'm skeptical; in 30+ years, I've never seen this, and I've seen a lot of plans).

I have actually seen many plans that allow this, including a large one that I have worked on for a long time. In my many years, however, I can count on one hand the number of people who have asked for such calculations (yes, the option is clearly noted on the election forms), and I have never seen anyone choose such an option. Usually it is a child that the annuitant is interested in covering, but the numbers result in too steep a reduction even considering the MDIB rules.

[Belgarath]

If you want to find something, I guess there's nothing like looking for it. The "plan document" language I was provided with was not, in fact, the actual plan document language. Once I got the actual document, I was able to review and focus upon the issues you have all so kindly outlined, and discovered that a J&S should not have been permitted in the first place. So this is now correction mode, as the plan has an operational error.

Your comments have been extremely helpful, and I thank you for your input.

[Andy the Actuary]

So this is now correction mode, as the plan has an operational error.

It would be worthwhile (if you haven't done so) to check with legal counsel regarding whether or not correction is appropriate. That is, legally married in the particular state may include a common law spouse. I had a case in Texas where a spouse's benefit was payable to common law spouse.

[Effen]

Agree with ATA. The ex live-in might also be able to argue she has a "contract" with your Don Juan to provide the benefit and she is entitled no matter what the plan provides. Looks like the plan has some issues to resolve as well as your participant. Probably time to for everyone to lawyer up.

All this said, he still probably can't give the new spouse the J&S since they weren't married at the time benefit commenced. If you argue the plan should have never paid the benefit to the live-in, then you need to adjust Don's payments to reflect that it should have been a life only and not a J&S. The new spouse is still SOL since she jump on the poor sap too late.

[Andy the Actuary]

To quote Cole Porter, participant may wish to tell new spousette, "It was great fun, but it was just one of those things."

[Belgarath]

Thanks all. Effen, yes, that is precisely what will be done. (FWIW, since he's still alive, nothing has been paid to the ex, so it's just a matter of proper adjustment for his payment - both past and future. We'll leave that to the actuary.)

"All this said, he still probably can't give the new spouse the J&S since they weren't married at the time benefit commenced. If you argue the plan should have never paid the benefit to the live-in, then you need to adjust Don's payments to reflect that it should have been a life only and not a J&S. The new spouse is still SOL since she jump on the poor sap too late. "

[tymesup]

I second the notion that the old girlfriend may have a right to the survivor benefit.

Note that by permitting a change of beneficiary, the plan could suffer an actuarial loss. The old girlfriend could now be in poor health, with the current wife in fine fettle.

[Guest Kabert]

I second the notion that the old girlfriend may have a right to the survivor benefit.

Note that by permitting a change of beneficiary, the plan could suffer an actuarial loss. The old girlfriend could now be in poor health, with the current wife in fine fettle.

If the plan allows/permits it, then the participant could presumably have a new election with a new annuity starting date. The benefit would be recalculated under his newly elected benefit form (hopefully just a straight life annuity, given his history). The prior beneficiary doesn't have any special spousal protection that would typically apply in the former-spouse-but benefits-have-commenced already situation. I agree with what others have said though - it's very rare for plans to allow a new election/new annuity starting date. A plan should never allow a swap of beneficiaries due to the actuarial risk that the new beneficiary will live longer than the initial one.

[mbozek]

Under the Carmona decision, spousal rights to a survivor annuity vest when the participant spouse retires. If there is no spouse at retirement there is no spousal survivor annuity benefit that can be paid if the participant marries at a later date. See 1.401(a)-20 Q/A 25(a).

The reason that plans don't pay a survivor annuity to a non spouse is not just the additional cost but because the participant incurs a taxable gift equal to the value of the survivor annuity when the benefit vests, i.e., when the benefit commences. If the benefit value is more than $13,000 the particpant must file a gift tax return even if no tax is due. There is no taxable gift for transfers of a survivor annuity to a spouse.

[AndyH]

What would be different if the participant elected a life annuity with 10 years certain and then died?

[mbozek]

What would be different if the participant elected a life annuity with 10 years certain and then died?

If the participant elected life w/10 yr certain and named the girlfriend as beneficary he would incur the gift tax if the beneficary designation is irevocable.

[AndyH]

How would irrevocable be defined here? If a married person had his spouse waive a death benefit in favor of someone else, as I understand it that waiver applies only to the named beneficiary and the specified payment term. So it would be irrevocable without the spouse's additional consent, which must be within a limited time of the annuity starting date, so wouldn't that mean that any waiver by any spouse in favor of another beneficiary creates a gift tax after the waiver period expires? Just surprised I've never heard of this before.

[mbozek]

How would irrevocable be defined here? If a married person had his spouse waive a death benefit in favor of someone else, as I understand it that waiver applies only to the named beneficiary and the specified payment term. So it would be irrevocable without the spouse's additional consent, which must be within a limited time of the annuity starting date, so wouldn't that mean that any waiver by any spouse in favor of another beneficiary creates a gift tax after the waiver period expires? Just surprised I've never heard of this before.

Irrevcable is an election by the participant to transfer a property interest to a non spouse which he cann not revoke unilaterally. In DB retirement plans it usually occurs when benefits commence because the participant cannot change his designation of a beneficary of the survivor's interest in the benefit. In a DC plan there is no transfer as long as the participant can change the designation of a non spouse beneficiary without obtaining consent of another party. A transfer to a non spouse occuring at death is subject to the estate tax.

Under the IRC no income, gift or estate tax is imposed on transfers between spouses which is why the gift tax is ignored by DB plans because spouses are usually the only beneficaries with an irrevocable right to a benefit. Under current tax law gifts to non spouses are not taxable until the total amount of lifetime gifts to all non spouse beneficaries exceeds $5 milion. However a gift tax return must be filed by the participant with the IRS if the total amount of gifts to a non spouse beneficary in a tax year exceeds $13,000 even if no tax is due. Since few taxpayers are aware of this rule it is widely ignored and most of those who are are aware of it just dont file because transfers are not reported to the IRS.

[AndyH]

Thanks for the information. News to me (and others I assume).

[SoCalActuary]

How would irrevocable be defined here? If a married person had his spouse waive a death benefit in favor of someone else, as I understand it that waiver applies only to the named beneficiary and the specified payment term. So it would be irrevocable without the spouse's additional consent, which must be within a limited time of the annuity starting date, so wouldn't that mean that any waiver by any spouse in favor of another beneficiary creates a gift tax after the waiver period expires? Just surprised I've never heard of this before.

Irrevcable is an election by the participant to transfer a property interest to a non spouse which he cann not revoke unilaterally. In DB retirement plans it usually occurs when benefits commence because the participant cannot change his designation of a beneficary of the survivor's interest in the benefit. In a DC plan there is no transfer as long as the participant can change the designation of a non spouse beneficiary without obtaining consent of another party. A transfer to a non spouse occuring at death is subject to the estate tax.

Under the IRC no income, gift or estate tax is imposed on transfers between spouses which is why the gift tax is ignored by DB plans because spouses are usually the only beneficaries with an irrevocable right to a benefit. Under current tax law gifts to non spouses are not taxable until the total amount of lifetime gifts to all non spouse beneficaries exceeds $5 milion. However a gift tax return must be filed by the participant with the IRS if the total amount of gifts to a non spouse beneficary in a tax year exceeds $13,000 even if no tax is due. Since few taxpayers are aware of this rule it is widely ignored and most of those who are are aware of it just dont file because transfers are not reported to the IRS.

mjb might be a little too aggressive on this tax advice. I do not recall any examples in 40 years where a qualified plan benefit generated a gift tax by a beneficiary designation. Perhaps there are some examples, court cases or PLRs on the subject. This gets way more complex with the PPA changes allowing non-spouse beneficiaries. In short, are you sure about this?

[mbozek]

How would irrevocable be defined here? If a married person had his spouse waive a death benefit in favor of someone else, as I understand it that waiver applies only to the named beneficiary and the specified payment term. So it would be irrevocable without the spouse's additional consent, which must be within a limited time of the annuity starting date, so wouldn't that mean that any waiver by any spouse in favor of another beneficiary creates a gift tax after the waiver period expires? Just surprised I've never heard of this before.

Irrevcable is an election by the participant to transfer a property interest to a non spouse which he cann not revoke unilaterally. In DB retirement plans it usually occurs when benefits commence because the participant cannot change his designation of a beneficary of the survivor's interest in the benefit. In a DC plan there is no transfer as long as the participant can change the designation of a non spouse beneficiary without obtaining consent of another party. A transfer to a non spouse occuring at death is subject to the estate tax.

Under the IRC no income, gift or estate tax is imposed on transfers between spouses which is why the gift tax is ignored by DB plans because spouses are usually the only beneficaries with an irrevocable right to a benefit. Under current tax law gifts to non spouses are not taxable until the total amount of lifetime gifts to all non spouse beneficaries exceeds $5 milion. However a gift tax return must be filed by the participant with the IRS if the total amount of gifts to a non spouse beneficary in a tax year exceeds $13,000 even if no tax is due. Since few taxpayers are aware of this rule it is widely ignored and most of those who are are aware of it just dont file because transfers are not reported to the IRS.

mjb might be a little too aggressive on this tax advice. I do not recall any examples in 40 years where a qualified plan benefit generated a gift tax by a beneficiary designation. Perhaps there are some examples, court cases or PLRs on the subject. This gets way more complex with the PPA changes allowing non-spouse beneficiaries. In short, are you sure about this?

If you read my post you would have noted that the gift is created when the transfer is irrevocable, e.g., when benefits commence. Merely designating a non spouse as a beneficiary does not create a taxable gift if the participant can designate a new beneficary. See reg 25.2511-2©.

see reg 25.2511-1(a): The gift tax applies to transfers by way of gift whether the transfer is in trust or otherwise. For example, a taxable transfer may be effected by assignment of the benefits of an insurance policy.

Under IRC 2523 the gift tax does not apply to transfers to spouses.

Reg. 25.2511-1(e) If the donor transfers less than his entire interest in property the gift tax is applicable to the interest transferred.

If the taxable estate +lifetime gifts exceeds $5 million, transfers of retirement benefits to non spouse beneficaries under the PPA are subject to the estate tax, not the gift tax, because the transfers occur after death.

As noted above the gift tax has little impact on taxation because life time gifts are subject to a $5 million exemption. However gifts of an interest in an annuity to a non spouse which exceed $13,000 in a year trigger a reporting requirement to the IRS even if no tax is due.

[masteff]

Curiously IRS Pubs 571 and 721 make mention of this (and 721 clearly supports what MJB is saying), while Pubs 575, 590 and 950 are silent. (I don't read anything into the omission because there are lots of other minor issues that 575, 590 and 950 fail to cover.)

From 721 (emphasis added):

"Federal Gift Tax

If, through the exercise or nonexercise of an election or option, you provide an annuity for your beneficiary at or after your death, you have made a gift. The gift may be taxable for gift tax purposes. The value of the gift is equal to the value of the annuity.

Joint and survivor annuity. If the gift is an interest in a joint and survivor annuity where only you and your spouse can receive payments before the death of the last spouse to die, the gift generally will qualify for the unlimited marital deduction. This will eliminate any gift tax liability with regard to that gift.

If you provide survivor annuity benefits for someone other than your current spouse, such as your former spouse, the unlimited marital deduction will not apply. This may result in a taxable gift.

More information. For information about the gift tax, see Publication 950, Introduction to Estate and Gift Taxes, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and its instructions."

[SoCalActuary]

With the PPA change to allow non-spouse beneficiaries, the unmarried community has taken this to believe they are now to be treated equally. Your interpretation is different. So now I ask a practical question:

Have you actually filed any gift returns for the value of the survivor annuity?

If so, how did you handle the relationship with the income tax and gift tax interplay?

[mbozek]

With the PPA change to allow non-spouse beneficiaries, the unmarried community has taken this to believe they are now to be treated equally. Your interpretation is different. So now I ask a practical question:

Have you actually filed any gift returns for the value of the survivor annuity?

If so, how did you handle the relationship with the income tax and gift tax interplay?

I don understand what you mean by treated equally since only hetrosexual married couples can make tax free transfers of property to each other. See Pub 17, P20. I understand that there may be some exceptions as to how income from jointly owned property of same sex couples is taxed by the IRS to them individually under community property laws of states which allow marriage of same sex couples but that is beyond my expertise as I avoid any CP matters.

As I noted previously taxpayers routinely ignore the requirement to file a gift tax return because there is no penalty for not reporting the transfer to the IRS if no gift tax is due so I am not aware of any one who has ever field a gift tax return because a non spouse was irrevocably designated as a beneficiary. I am aware that the IRS has issued a subpoena to public officials in CA to turn over information on filing of deeds to real property to determine if real estate is being transferred under the gift tax laws to non spouses by creating a joint tennacy with right of survivorship. Under the gift tax law the creation of such a joint tennancy can result in a gift of the pro rata amount of property interests created- 1 joint tennant = gift of 50% of value. Appearently the IRS believes that there is a failure to file gift tax returns and pay gift tax on these transfers.

I dont understand your Q on the interplay between the gift tax and income tax which apply to separate transactions. Any gift tax is paid by the participant on the value of the survivor annuity transferred only if the total gifts exceed $5 Milliion. The beneficiary is taxed on the amount of the taxable benefits received.

[david rigby]

... the unmarried community ...

There's an unmarried community?

[SoCalActuary]

Nice humor, Dave. I am not part of that community, but I know a few who are in. Latest population trend: the 1% are more than 80% married folk, while the 99 are less inclined.

[Effen]

the 1% are more than 80% married folk, while the 99 are less inclined

Hugh?

[SoCalActuary]

the 1% are more than 80% married folk, while the 99 are less inclined

Hugh?

Are you referring to Mr. Hefner?

[jpod]

From what I know about Federal estate and gift tax I have no reason to quarrel with MJB's analysis, except that I doubt that the E&G ramifications play a role in very many plan sponsors' decision not to allow for non-spouse surviving annuitants.