QJSA for ONE SOURCE ONLY

[MoJo]

Help settle a debate....  Assume a 401(k) plan is defined in such a way as that employee deferrals are distributeable only in a single lump sum when a distributeable event occurs, but any employer money (match, non-elective) is distributeable ONLY in the form of an annuity and ONLY after a distrubetable event AND attainment of the plan's Normal Retirement Age.  Clearly the annuity distribution option must comply with the QJSA requirements (J&S Annuity and/or spousal consent).

What about the deferral distributions?  Is spousal consent required for that distribution as well?  The debate is, if you look at the regs - says a "PLAN" is subject to the QJSA requirements when the annuity distribution exists - with the exception of a plan that is a "transferee" of money from a plan that was subject to the QJSA rules - and then ONLY that source need comply with the QJSA rules.

The plan design referenced above seems, in some ways analogous to the "transferee" source scenario, but the regs say the "plan" is subject to the rules when the annuity exists and it doesn't seem that the rules were written with this plan design in mind.

My team is rather conservative on such matters, and seem to believe that the "plan" as a whole is subject to the QJSA rules when an annuity exists, and the ONLY exception is the "transferee" plan exception - which allows only the transfered source to be QJSA constrained - which this scenario isn't.

We may be over-thinking this - but it's my team's job to vet this kind of stuff....

Thoughts?

 

[Bird]

I vote that you do not need spousal consent for the 401(k) part.  No substantiation for that position but I'm pretty sure "plan" has been interpreted to mean "account" or "source" within a plan in other situations...in fact in this very situation although I don't have cites.

[MoJo]

1 minute ago, Bird said:

I vote that you do not need spousal consent for the 401(k) part.  No substantiation for that position but I'm pretty sure "plan" has been interpreted to mean "account" or "source" within a plan in other situations...in fact in this very situation although I don't have cites.

Not that I doubt you, Bird, but the lawyer in me (and my team) always looks for something to hang our hat on.  That approach has a certain amount of logic to it - but....

[jpod]

On the one hand, it is probably an oversight in the drafting of the regulation and it may be fair to assume that IRS will agree with Bird.  On the other hand, there is absolutely no telling what a judge may say in an action brought by a spouse (or a surviving or former spouse).  I'd take the conservative approach.   

[Belgarath]

Can you rely on the "separate accounting" clause in 1.401(a)-20, Q&A-4?

Q-4: What rules apply to a participant who elects a life annuity option under a defined contribution plan not subject to section 412?

A-4: If a participant elects at any time (irrespective of the applicable election period defined in section 417(a)(6)) a life annuity option under a defined contribution plan not subject to section 412, the survivor annuity requirements of sections 401(a)(11) and 417 will always thereafter apply to all of the participant's benefits under such plan unless there is a separate accounting of the account balance subject to the election. A plan may allow a participant to elect an annuity option prior to the applicable election period described in section 417(a)(6). If a participant elects an annuity option, the plan must satisfy the applicable written explanation, consent, election, and withdrawal rules of section 417, including waiver of the QJSA within 90 days of the annuity starting date. If a participant selecting such an option dies, the surviving spouse must be able to receive the QPSA benefit described in section 417(c)(2) which is a life annuity, the actuarial equivalent of which is not less than 50 percent of the nonforfeitable account balance (adjusted for loans as described in Q&A 24(d) of this section). The remaining account balance may be paid to a designated nonspouse beneficiary.

 

[Bird]

3 hours ago, MoJo said:

Not that I doubt you, Bird, but the lawyer in me (and my team) always looks for something to hang our hat on.  That approach has a certain amount of logic to it - but....

I hear you/no problem.  I guess in hindsight I could have expanded and said that I'd flat-out tell them they can't do it because it doesn't fit in my document, and they're taking things to extremes.  I can get away with that in my (small plan) world but I'm not sure that isn't the thing to say no matter the size of the plan.

[MoJo]

22 minutes ago, Bird said:

I hear you/no problem.  I guess in hindsight I could have expanded and said that I'd flat-out tell them they can't do it because it doesn't fit in my document, and they're taking things to extremes.  I can get away with that in my (small plan) world but I'm not sure that isn't the thing to say no matter the size of the plan.

Well, you've raised another good issue - as to how this can be accomplished within the confines of our document.  The problem is, it isn't a client that wants to do this - its sales....  Guess who will win that argument?

 

1 hour ago, Belgarath said:

Can you rely on the "separate accounting" clause in 1.401(a)-20, Q&A-4?

Thanks Belgarath.  I believe that may be a peg to hang our hat on....

[Bird]

18 hours ago, MoJo said:

The problem is, it isn't a client that wants to do this - its sales....  Guess who will win that argument?

Arggh.  The other option is to literally have a second plan for the employer contributions.

[MoJo]

7 minutes ago, Bird said:

Arggh.  The other option is to literally have a second plan for the employer contributions.

Yea.  That has it's own complications (and we've suggested it)....

[BG5150]

Why would sales want to push this type of product?  Unless they expect the plan/participants to purchase the annuities through the company.

[MoJo]

2 hours ago, BG5150 said:

Why would sales want to push this type of product?  Unless they expect the plan/participants to purchase the annuities through the company.

Two words:  "guaranteed income."  I'm told that those words have been getting a lot of use lately, and not having a solution is considered a deselector in the sales process...