QJSA Rules

[ERISAAPPLE]

If a plan allows life annuity distributions, but requires the payment of a single lump sum to an insurance company to purchase a single premium annuity, do the QJSA rules apply?  

[My 2 cents]

If the plan is a defined benefit plan under ERISA and thus must meet the QJSA requirements, sure you can buy annuities from an insurance company, but (a) if the annuity is an immediate annuity payable as other than a QJSA, the participant (and spouse, if there is one) must agree to waive rights to receive payment under a QJSA form and (b) if the annuity is a deferred annuity, the purchased annuity must provide for payment as a QJSA (using the plan's equivalence basis for conversion from the normal life annuity form) unless at the time the benefit is to commence the participant (and spouse, if there is then one) must agree to waive rights to receive payment under a QJSA form.

Doesn't matter what the agreement between the plan and the insurance company says - NO SHORTCUTS if the plan is not exempt from the QJSA requirements!  Note that what I said in the above paragraph holds when the plan terminates and has to annuitize the benefits.  The plan's equivalence factors are required to be reflected (unless the insurance company's rates are invariably more favorable), and the insurance company must take that into account in setting their annuity pricing.

[david rigby]

I'm reading the original question as referring to a DC plan.  Perhaps ErisaApple will clarify?

 

[My 2 cents]

Do defined contribution plans that allow life annuities have to satisfy the QJSA requirements?

It is not mentioned (or possibly even relevant to the question), but don't forget that the insurance company must apply UNISEX rates to convert account balances to life annuities!  That has been the rule for decades.  All benefit payment forms under any kind of retirement plan must not discriminate on the basis of gender.

[Luke Bailey]

Yes, in the case of participants who choose the life annuity. See Treas. reg. 1.401(a)-20, Q&A-3(a)(2). The fact that the plan purchases an annuity rather than making the distributions itself makes no difference.

[ERISAAPPLE]

It is a DC plan.

[ERISAAPPLE]

15 hours ago, Luke Bailey said:

Yes, in the case of participants who choose the life annuity. See Treas. reg. 1.401(a)-20, Q&A-3(a)(2). The fact that the plan purchases an annuity rather than making the distributions itself makes no difference.

I agree with you Luke, but I am going to play the Devil's advocate.  If the plan only allows the purchase of an annuity, and if the plan reports the distribution as a taxable lump sum distribution, why couldn't the distribution be deemed to be a lump sum to the participant with the participant buying the annuity?  

[My 2 cents]

2 hours ago, ERISAAPPLE said:

I agree with you Luke, but I am going to play the Devil's advocate.  If the plan only allows the purchase of an annuity, and if the plan reports the distribution as a taxable lump sum distribution, why couldn't the distribution be deemed to be a lump sum to the participant with the participant buying the annuity?  

If an annuity is purchased, even in the case of an annuity purchased by a defined contribution plan, wouldn't it inevitably be taxed under the annuity rules?  For there to be taxation under the lump sum rules, the participant would have to elect a lump sum and then go out into the marketplace and buy an annuity.  I thought that in this situation, the plan provides for an option to receive an annuity, which would then either be paid or purchased by the defined contribution plan.

[Luke Bailey]

ERISAAPPLE, My 2 cents has given you the same answer that I would have. If a DC plan contains a provision under which the participant can elect an annuity distributions (e.g., a life annuity) from the plan, and the plan document permits (as it should, since it would almost never be in a position to bear the risk) the plan to accomplish this via an annuity contract (either held by the plan as its asset or, I think, as a noncancellable, nontransferable annuity issued by the insurer to the participant), the participant is taxable only as annuity payments are received, and the distribution is not an eligible rollover distribution.

[ERISAAPPLE]

To take advantage of the annuity taxation, the annuity must meet certain rules, e.g., it must be nontransferable, etc. 

Could a plan intentionally not meet those rules so that the annuity distribution would be fully taxable, and thereby avoid the QJSA requirements?  I don't think the DOL would agree with this analysis - that you can avoid the QJSA requirements (assume the plan is subject to ERISA) by taxing the distribution annuity.  I think they would argue the taxation is independent of the ERISA rules.      

Again, I am just thinking out loud here and was wondering what you all think.  Obviously the safe approach is to obtain spousal consent to the participant's waiver.

[david rigby]

Could the participant take a lump sum distribution directly to IRA, then have the IRA purchase whatever annuity is desired (possibly spending less than 100% of the IRA value)?

[ERISAAPPLE]

Yes, but that doesn't answer the question.  Before you get to the lump sum, the participant would have to waive the QJSA, and the spouse would have to consent to that waiver, if the QJSA rules apply.

 

 

[david rigby]

Yes, the J&S waiver would apply.

[Luke Bailey]

The plan could do this in a way that would result in a lump sum for tax purposes (e.g., distribute a surrenderable or transferrable annuity), but that would violate the terms of the plan and therefore disqualify it if the plan provides that the participant can take an annuity form of distribution.