Irregularity in Election of Form of Benefit

[Tax Geek]

We began paying a joint and 50% survivor annuity to a participant from our defined benefit plan several months ago. The distribution election was made by the participant’s court-approved guardian, due to the participant’s apparent mental issues. However, we have now been informed that the guardianship is being terminated by the court. There is some dispute as to whether the guardianship was necessary or appropriate in the first place, but at this point the court has simply terminated it going forward and states that the participant is capable of managing her own affairs.

As a result of the (perhaps inappropriate and unnecessary) guardianship, the participant did not have the opportunity to choose the form of benefit she might have preferred, but is instead stuck with the benefit form chosen by the guardian. I am having difficulty finding any authority for allowing the participant to make a different election now. The situation doesn't fit any of the usual exceptions for modifying an annuity payout. Has anyone encountered a situation like this before and, if so, are you aware of any authority for a new election now? Or has anyone obtained IRS approval of an exception in similar circumstances?

Thanks much!

[david rigby]

Follow the terms of the plan, which probably does not anticipate a second election, for anyone.

However, if the governing authority (maybe the corporate Board of Directors, for example) wants to permit a new election, such election can be created via plan amendment. The plan should seek advice from ERISA counsel on how (or whether) to do this (discrimination? precedent?, etc.)

[My 2 cents]

Not a lawyer but just want to point out two things:

1. Assuming that the joint annuitant is the participant's spouse (granted, that might not be so), the QJSA would have to be paid in the absence of a valid election to the contrary. So if the benefit is being paid as a QJSA, you don't even need a good election establishing that the benefit is to be paid as a QJSA to justify paying the benefit in that form. The court appointed guardian's saying "start paying it now" would have been enough.

2. The person who made the election was a court-appointed guardian. Assuming that there was proper documentation presented to the plan administrator, the plan administrator's following the guardian's direction is entirely justifiable. It is pretty much a certainty that following the direction of the guardian cannot be challenged (at least absent active fraud in obtaining the guardianship or in using that authority, and even then the plan administrator could probably succeed in standing fast on the election that had been made). At the time the election was made, the guardian had the unquestionable authority to make the election and the plan administrator need not go through contortions to undo the election (possibly unless compelled to do so by the court that had granted the authority). Of course, if the sponsor feels that an injustice has been done and that whatever steps that are needed to undo the election should be taken, that's a different story. Then see what an ERISA counsel thinks. But if the plan administrator wants to keep the benefit in the form as elected, that is probably the end of it.

[Tax Geek]

Thanks much for the responses. The plan doesn't allow for a change and I don't think there's much appetite for an amendment. And I tend to agree with My 2 cents point #2 - the guardianship was valid at the time the election was made. There is no finding of fraud. Thanks again.