10-year CC annuity

[jpod]

Unmarried participant elected to receive DB Plan benefits in this form, and named a beneficiary to receive any further payments after her death, but did not provide for the contingency that that beneficiary would die inside of 10 years.  Participant died inside of 10 years, then beneficiary died later also inside of 10 years.  Who should get the remaining payments?  Plan document does not come close to addressing this.   Assuming no contrary precedent in administering this plan, I think it should be payable to the beneficiary's estate.  Anyone disagree, and if so why?  

[jpod]

What happens in the non-plan annuity world in this situation?  What would the insurance company do?    

[Effen]

The attorneys I work with would say the estate should receive the payments.  I have seen situations where the annuity is just paid to the executor, assuming they aren't splitting things up among a bunch of people.  Either way, let the lawyer figure it out.

I don't know how an insurance company would handle it, but I know they generally do a better job of maintaining the beneficiary information and doing death searches fairly often.

[Mike Preston]

Huh? As of the point in time where the P died, the B had a right to receive the balance of the payments.  If B died, then B's estate is entitled to the remaining payments. I've never seen a plan that would support any other interpretation.

[jpod]

Which estate?  The beneficiary's estate or the participant's estate? 

[Effen]

I would say the beneficiary's.

 

[My 2 cents]

35 minutes ago, jpod said:

Which estate?  The beneficiary's estate or the participant's estate? 

Under those circumstances, there is no possible justification (absent an explicit plan provision) for paying the remaining certain payments to anyone other than the beneficiary's estate (assuming that the beneficiary is not the participant's estate - in that case, flip a coin). No ifs, ands or buts, the remaining payments no longer relate to the participant after the participant has died.

A common approach for this in plan documents specifies that the beneficiary can elect, in lieu of receiving the remaining guaranteed periodic amounts, to be paid the commuted value of those amounts.  A typical approach to the situation where the beneficiary dies while receiving the guaranteed payments would be to automatically pay the commuted value of the remaining guaranteed periodic payments to the beneficiary's estate.  Commuted values are based on the plan's definition of lump-sum actuarial equivalence (usually the current rates applicable to the plan under IRC section 417(e)).

Potential complication:  Based on my understanding of the IRS regulations, if the plan's AFTAP is below 80% and the commuted value is over $5,000, paying the commuted value upon the death of the participant if the beneficiary wants a commuted value or upon the death of the beneficiary, could be restricted under Section 436 of the IRC.

[CuseFan]

Agree with those opining that remaining payments go to beneficiary's estate. Note that a contingent/secondary beneficiary designation by the participant would provide for a beneficiary to the remaining payments in the the event the primary beneficiary predeceased the participant, not to be a next in line - i.e., pay P, dies, pay B1, dies, then pay B2.

[My 2 cents]

3 minutes ago, CuseFan said:

Agree with those opining that remaining payments go to beneficiary's estate. Note that a contingent/secondary beneficiary designation by the participant would provide for a beneficiary to the remaining payments in the the event the primary beneficiary predeceased the participant, not to be a next in line - i.e., pay P, dies, pay B1, dies, then pay B2.

If you are saying that any contingencies in the identity of the beneficiary disappear upon the prior death of the participant, then I agree with you. Once the participant dies, I would expect the beneficiary in force as of the date of the participant's death to be locked in with respect to the entire package of death benefits.  I don't think that there are any methods available in qualified defined benefit plans that would allow there to be any contingencies remaining in effect as to the beneficiary after the participant has died.  Example:  primary beneficiary is spouse, secondary/contingent beneficiary is child.  If the participant survives the spouse, then the child is the beneficiary and receives any unpaid certain benefits.  If the spouse survives the participant, then the only way any of the remaining death benefit gets to the child is by the spouse dying and the child inheriting from the spouse's estate.  I don't think a mechanism exists within the plan for the certain payments after the death of the participant to go to the spouse until the spouse dies and then (if any payments remain) the remaining certain payments go directly to the child.

[CuseFan]

Yes, that is exactly my point.

[Mike Preston]

Huh? Why wouldn't a plan ALLOW a B to designate its own B' with respect to payments due but unpaid at B's death?

[david rigby]

Absent any relevant plan provision, I agree that the logical "next in line" is the beneficiary's estate.  However, if there is nothing on point in the plan, perhaps the committee (as defined in the plan) should create a "policy statement" prior to making the payment(s).

 

[My 2 cents]

39 minutes ago, david rigby said:

Absent any relevant plan provision, I agree that the logical "next in line" is the beneficiary's estate.  However, if there is nothing on point in the plan, perhaps the committee (as defined in the plan) should create a "policy statement" prior to making the payment(s).

 

How can a plan offer a certain and life optional form of payment (or normal form of payment!) without having adequate language concerning who the beneficiary is and what happens if the beneficiary dies while certain payments remain? 

If there is "nothing on point in the plan", then rather than creating a policy statement, the committee should adopt an amendment putting something on point in the plan.

43 minutes ago, Mike Preston said:

Huh? Why wouldn't a plan ALLOW a B to designate its own B' with respect to payments due but unpaid at B's death?

Well, if it did, then that's something on point, isn't it?  Then all the plan administrator has to do is make sure that the beneficiary is made aware of that provision and has the opportunity to name his or her beneficiary for any guaranteed payments due after the original beneficiary's death.

There is, however, the problem with meeting the 401(a)(9) rules. If someone elects a 15 year certain and life form, dies 2 years after the payments started, and the beneficiary dies 2 years after that, are you permitted to continue making monthly payments for the remaining 11 years? 

[david rigby]

1 hour ago, My 2 cents said:

If there is "nothing on point in the plan", then rather than creating a policy statement, the committee should adopt an amendment putting something on point in the plan.

Yes of course, the sponsor should consider amending the plan for some better identification of procedure(s).  But the current situation may demand an immediate action, and the committee is probably the vehicle to address the immediate need.

[Mike Preston]

1 hour ago, My 2 cents said:

There is, however, the problem with meeting the 401(a)(9) rules. If someone elects a 15 year certain and life form, dies 2 years after the payments started, and the beneficiary dies 2 years after that, are you permitted to continue making monthly payments for the remaining 11 years? 

OK, I'll play along...... what part of 401(a)(9) gives you pause?

[My 2 cents]

5 minutes ago, Mike Preston said:

OK, I'll play along...... what part of 401(a)(9) gives you pause?

Isn't there something in the rules about paying out non-spousal death benefits over a period not exceeding 5 years?  If this doesn't fall under that part of the rules, then I presume that there would be no 401(a)(9) issues.

[Mike Preston]

Not that I'm aware of.  You may be thinking of the rules that require distributions in accordance with 401(a)(9) to commence by the end of the calendar year following death and, if they don't, a complete distribution of the account must be done by the end of the 5 year period.

If anything, I'd be concerned with the opposite: 

Once benefits have commenced, the IRS now takes the position that commuting the value of future payments is a prohibited increase except in certain cases (like plan termination).  The regs also allow a spousal beneficiary to commute the value of future payments upon the death of the employee.  But I don't see a similar allowance for a beneficiary's beneficiary to do the same thing.

Are you aware of anything else or were you just randomly commenting because you have time on your hands?

[My 2 cents]

It is my understanding that the only limitation on commuting the value of the remaining payments occurs when the AFTAP is below 80%. 

The only time that commutation can occur is after the death of the participant (by the beneficiary's choice) or upon the death of the beneficiary (usually with no option to continue payments to the beneficiary's beneficiary, especially when the plan does not offer the beneficiary the ability to name a beneficiary).

This cannot be swept in with the IRS's ban on offering a lump sum window to retirees.   The situation is totally different, and the practice of commuting the remaining payments when the participant or beneficiary dies while payments remain under a certain and life option has been prevalent (if not universal) for decades.

[Mike Preston]

Are you disagreeing with my assertion that the exceptions to increases in the 401(a)(9) regs don't cover B's of a B? If so, please explain why they felt the need for an exception for the commutation of a spouse's benefit?

[My 2 cents]

In my opinion, the expressed intent by the IRS in Notice 2015-49 to restrict allowing retirees to accelerate their distributions (based on a desire on the part of the IRS to disallow lump sum windows applicable to retirees in pay status) does not apply with respect to distributions related to certain payments remaining under certain and life or certain only payment options upon the death of the retiree.  While Section 436 may prevent the beneficiary of a deceased participant from receiving a commuted value, Section 401(a)(9) (with the modifications related to Notice 2015-49) would not.  Commutation of remaining certain payments upon the death of the participant has explicitly been permitted since the dawn of time, and all plans containing such provisions have routinely received favorable determination letters from the IRS.  Many plans I have seen explicitly require the payment of a commuted value upon the death of a beneficiary receiving certain payments after the death of the participant.

Further, A-14 (a)(5) of the IRS regulations explicitly permits the beneficiary under a joint and survivor annuity (without restriction to a spouse beneficiary) to elect a single sum payment in lieu of the survivor portion under that annuity upon the death of the annuitant.  It would make no sense to me to allow the contingent annuitant under a 50% contingent annuity form to cash out the value of that 50% lifetime annuity and not to allow the beneficiary of a deceased participant entitled to 75 remaining monthly certain payments under a certain only or certain only form to do the same.

I am having some difficulty finding the spousal exception for commutation to which you refer in the 401(a)(9) regulations.  Please provide a cite if you want me to address that further.  Thank you.

[Mike Preston]

In my plans J&S are only available to spouses.  You've got the right section.  And, yes, I agree that it makes no sense that they should have written the rules to allow increases that exclude a B's B to commute certain payments.  As I said, I was not at all concerned about your assertion that continued payments in accordance with the certain payment stream could violate 401(a)(9) but if there were something to be concerned with it would be the fact that the exceptions to the prohibition on increases don't appear to include a B's B that commutes remaining payments. You may argue with yourself from this point.  I think the cite's have been exhausted.