SECURE Act and QDRO

[fmsinc]

I have been searching in vain for discussions concerning the impact of the SECURE Act on the allocation of pension and/or retirement benefits.  

Ex:  May a Participant in a 401(k) Plan elect an annuitized payout of his 401(k) Plan account prior to the divorce and thereby deprive the Alternate Payee of the ability to elect an immediate  lump sum tax free rollover or a taxable distribution? 

Thanks,  

David

[Effen]

I don't know, but I would think the AP would have the same rights to the annuity stream as they had for the lump sum.  I doubt there is anything the spouse can do to stop the Participant from making a valid election.  Once the annuity is in pay status, it likely can't be changed back to a lump sum if the two later get divorced.  

However, you scenario implies a QDRO already exists that provides for a lump sum to the AP.  In that case, the P can't do something in violation of the QDRO, and the Plan Administrator shouldn't allow the optional form of payment to be elected.  Just like in a DB plan when the participant wants a lump sum but they can't have it because a QDRO requires an annuity payment.

[fmsinc]

I suggested that the Participant might elect an annuity payout  of his 401(k) before the divorce became final and before a QDRO was submitted to the Plan Administrator.  There are a number of questions. 

First is whether the Alternate Payee would not have the right to receive a lump sum rollover or distribution. 

Second, is how do you compute the Alternate Payee's share if, for example, at the time of divorce the Participant has $100,000 in his 401(k) (all marital), and he continues to work another 10 years and by that time the value of his 401(k) is up to $200,000. 

Third, if the Alternate Payee will receive her share as an annuity, and she dies, what will happen to her unpaid share, and how can that be determined if it's a life annuity unless the plan creates a separate account for the Alternate Payee right at the beginning. 

 Fourth, will the Alternate Payee have the right to commence her annuitized payments whenever she wants to , or will she be bound to wait if, and and when, the Participant starts to take his share. 

Fifth, will the Plan adjust the Alternate Payee's share for gains, losses and investment experience?

Sixth, what type annuity options will be available to the Alternate Payee?  

Seventh, will the Alternate Payee be able to name a beneficiary for his/her unpaid share, or will it revert to the Plan?  

David

[Effen]

Yep, all good questions that the QDRO should address.  

[RatherBeGolfing]

22 hours ago, fmsinc said:

I have been searching in vain for discussions concerning the impact of the SECURE Act on the allocation of pension and/or retirement benefits.  

Is there a specific section of SECURE that you are referring to, or was it meant as a question?

[fmsinc]

The act provides in pertinent part:  

"SEC. 109. PORTABILITY OF LIFETIME INCOME OPTIONS.

(a) In General.—Subsection (a) of section 401 of the Internal Revenue Code of 1986 is amended by inserting after paragraph (37) the following new paragraph:

“(38) PORTABILITY OF LIFETIME INCOME.—

“(A) IN GENERAL.—Except as may be otherwise provided by regulations, a trust forming part of a defined contribution plan shall not be treated as failing to constitute a qualified trust under this section solely by reason of allowing—

“(i) qualified distributions of a lifetime income investment, or

“(ii) distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract,

on or after the date that is 90 days prior to the date on which such lifetime income investment is no longer authorized to be held as an investment option under the plan."

Will this result in a 401(k) Plan being treated like a defined benefit plan (with an annuitized payout to the Alternate Payee) rather than a defined contribution plan (with a lump sum rollover or distribution to the Alternate Payee)?   If the former, will is look more like a separate interest allocation determined as of the date of the divorce (or some other specified date), or like a shared interest allocation if as and when the Participant goes into payout status? 

More questions.  Will the Participant be able to take loans from his share?  Will the Alternate Payee be able to take loans from her share?  Will you Plan Administrators have to prepare for the possibility that you will inherit and have to deal with an entire new class of benefit recipients for a very long time in the future?

You would have thought somebody would have given some thought to these issues.  Oh....wait....there is no chance of that level of forethought.     

David    

[RatherBeGolfing]

I dont believe Sec 109 will upend the DC (or QDRO) landscape.  As I understand it, it deals with lifetime income options as an investment, not a benefit.  The portability issue has been that if you hold an annuity as an investment you are tied to that record keeper or pay substantial surrender fees.  What 109 does is allow you to move that investment if it can no longer be offered by the plan.  It does not add an annuity as a benefit, which is what I think your concerns would require.

[fmsinc]

 The SECURE Act implements a new requirement on defined contribution plans, such as 401(k), profit sharing, and ERISA covered 403(b). The requirement states that a participant’s statement must not only provide the current value, it must also state the lifetime income that could be derived from the value by purchasing a lifetime annuity. The Department of Labor (DOL) still needs to finalize details on how this formula will work. This requirement will go into effect 12 months after the DOL issues guidance.

So somebody out there is looking a the possibility of a payout in a form other than a lump sum.  So I don't understand your distinction between an "investment" and a benefit.  

[FPGuy]

The Act does not require Plans to offer an annuity payout, only to inform participants of the approximate actuarial equivalent of a projected account balance. The Act also lays out some ground rules to facilitate the ability of a Plan to offer participants the opportunity to purchase annuity contracts and also to remove some roadblocks, such as limited portability, to their doing so. Annuity contracts as a qualified retirement plan investment are commonly available through 403(b) plans - the TIAA side of TIAA CREF. As to your QDRO questions, benefit splitting comes in two forms: shared payment and shared interest. With a shared payment, the AP may be dependent upon elections made by the participant and the latter's life expectancy. In the case presented, the participant has begun a life annuity. The QDRO cannot change that so the AP has to take a shared payment of the annuity, and if the participant gets hit by a bus on Tuesday (and the annuity is life only, no certain period), that's it for the AP's interest. Conversely if the AP gets hit by the bus, the participant no longer has to split the payments. With a shared interest, the AP is treated as if he/she were also a participant and is free to elect a distribution option accordingly. No problem if actual participant gets his by the bus, but if AP does, his/her shared interest does not revert to participant.

 

[RatherBeGolfing]

4 hours ago, fmsinc said:

So somebody out there is looking a the possibility of a payout in a form other than a lump sum.

The possibility of a payout in a form other than lump sum was there before SECURE. It just isnt used  by very many plans.  DC plans will have to provide a lifetime income illustration, they will not have to offer lifetime income as a benefit. The illustration and the benefit are completely separate issues.

[fmsinc]

Your response does not address my question that will arise in a divorce context only.  I am not concerned about the lifetime illustration. 

Ex:  The parties are married but there are storm clouds on the horizon.  

Can the Participant husband elect an annuitized payout of his DC  plan account BEFORE THE DIVORCE AND BEFORE HE RETIRES?  

If he can do so, will that election be superseded by a QDRO directing that the Alternate Payee wife receive a lump sum rollover or taxable distribution? 

Or must the QDRO provide the Alternate Payee with only one option, a portion of the annuity on an if, and when paid basis?  

Will a life annuity be the only option, or will some form of QJSA be available?  

The answer to these questions may profoundly change the way retirement assets are addressed in divorce cases.   

[Bird]

fmsinc, as noted by others, there is nothing about the SECURE act that changed your scenario.  Yes a Participant could elect an annuitized payout, whether storm clouds are on the horizon or not.  A QDRO could not supersede such an election.  I don't think it would amount to "getting away" with anything as the spouse would probably request and be entitled to some kind of payments, not directly from the plan but with the knowledge that the participant is getting "x" per month.  I'm far from an expert but I don't see anything profound about it.

[fmsinc]

Trust me.  If the husband has $600,000 in a 401(k) Plan, the wife will want her $300,000 in a lump sum rollover (or taxable distribution but no 10% penalty) as soon after the divorce as possible so that she can invest with her financial advisor as she deems appropriate.  She is NOT going to want to wait for an annuitized payout that will commence at some uncertain point in the future (or can it be accelerated like a shared allocation of a defined benefit plan), perhaps long after the divorce is final. 

She is not going to be happy to find out that her ex-husband elected a life only annuity so that her share of the annuity will end on his death which might occur within a year or two leaving her with less than she is entitled to.  (And what happens to the balance in the annuity "account"?)  She is going to want to want QJSA and a QPRA elections, but if the husband made the election prior to the divorce and was not required to make those elections for his then current wife, and if the non-election cannot be changed by a QDRO, she will be in serious trouble.  And she is also going to insist on being named as the death benefit beneficiary of the annuity if and to the extent that is an option.  

In the world of QDROs we almost never deal with annuity payouts of defined contribution plans.  It's almost always cash at the time of divorce.  I have seen a few cases where the Plan will reallocate the annuity between the parties making the adjustments necessary to account for each party life expectancy. 

Also note that pension and retirement accounts are deemed at law to be "property" and not income (even though when they are in pay status they look, feel and smell like income).  Note also that court's don't generally have jurisdiction to award alimony as a substitute for property, although the parties have often done that as part of a settlement agreement - helped along by the fact that prior to January 1, 2019, the income tax consequences were the same in either case.  Unfortunately,  the TCJA of 2017 eliminated the deductibility of alimony by the payor and made it not taxable to the payee, so it is no longer possible to use alimony as a workaround that would have the same tax consequences as an annuity payout to each party of his/her share of a defined contribution plan. 

The malpractice exposure for family lawyers could be enormous.  

David  

[RatherBeGolfing]

Rev. Rul. 2012 –3

 

[fmsinc]

Now I understand:  Glad I don't have to deal with this stuff. 

I assume this is the guideline for what you need to do in order to avoid having a QJSA in connection with a defined contribution plan?   

第一部分

第401节-合格的退休金，利润分享和股票红利计划

（同样§§401（a）（11），417; 26 CFR 1.401（a）-20。）

在确定的供款计划下将遗属年金要求应用于延期年金合同。

Rul牧师2012 –3

问题

当延期年金适用于《内部税收法》第401（a）（11）和417条中所述的合格联合和遗属年金（“ QJSA”）和退休前遗属合格年金（“ QPSA”）规则如何适用在下述情况下，根据利润共享计划购买了合同？

情况1
公司A赞助计划X，这是一项符合以下条件的获利分享计划
§401（a）具有合格的现金或§401（k）中所述的递延安排。计划X的任何部分都不是员工持股计划。计划X规定了选举延期和匹配供款。

计划X的参与者被允许在计划可提供的任何投资选择（包括由保险公司签发的递延年金合同）中指导其选择性递延和匹配供款账户的投资。该计划按投资和捐款来源分别核算所有金额。

计划X下没有其他年金选项，该计划不是另一计划的资产或利益的直接或间接受让方。

计划X参与者在延期年金合同中的投资金额在投资时用于购买合同，该合同规定从第一个月的第一天开始付款，该月的付款从参与者退休或达到年龄的较晚日期开始65岁以下的人（除非是拥有5％所有权的参与者，否则规定了较早的开始日期）
§416，在70½岁之后退休）。递延年金合同下的应付金额固定为在第一期的第一天的第一天，该天根据合同支付了该金额（年金起始日期）。递延年金下的应付金额
 
年金起始日的合同取决于该日合同下的累计金额，以及用于确定该日年金购买率的精算假设（包括利率和死亡率假设），但要遵守最低购买率保证集在合同中。在延期年金合同中投资的金额可以在年金开始日期之前的任何时间转移到其他投资中。

通常，计划X下的延期年金合同以多种寿险年金形式之一支付给付，这些寿险年金形式可以在年金开始日结束的180天期间内选择，但参加者可以在年金开始日之前的任何时间选择日期，以单笔付款。如果参加者在年金开始日期未结婚，并且是50％的共同年金和遗属年金（尚存的配偶作为共同年金），则如果不选择其他形式，则付款方式为终身纯年金。 ）在精算上等同于
在该日期已婚的参与者的情况。如果参加者在年金开始日期结婚，并且参加者选择了与共同生还者作为共同年金的共同年金和幸存者年金形式不同的终身年金表，并且获得者的年金不少于联合年金金额的50％或100％以上。因此，例如，如果参与者选择满足第417（g）条所述合格合格的遗属年金（“ QOSA”）定义的年金，则无需配偶同意。

计划X规定，如果参与者在延期年金合同下的年金起始日期之前去世，则该参与者的尚存配偶（或者，如果没有尚存配偶，则该参与者的指定受益人）将获得与不可撤销的应计福利相等的死亡利益。根据合同规定，截至死亡之日。递延年金合同项下的不可剥夺的应计收益是合同价值，其中考虑了100％的选举递延款项和对等供款。如果是已婚参加者，则死亡抚恤金将以年金的形式支付给在世的配偶，以其在世的终身（除非该在世的配偶选择单笔付款）。

对于未投资在延期年金合同中的金额，计划X规定，在参与者死亡时，应在以下情况下支付参与者的不可没收的应计收益（由计划由于持有的未偿还的参与者贷款而持有的任何抵押权益减少）。参加者的尚存配偶全额（或，如果没有尚存的配偶或尚存的配偶经公证，则为指定的受益人）。

参与者P投资了部分计划X的延期选修和

[C. B. Zeller]

Try to paste as plain text - this is what your post looks like to me:

 

Unless you were making a joke about IRS guidance being about as clear as Chinese, in which case, carry on...

[fmsinc]

I was indeed being totally sarcastic.  Reading the Code and Regs so many decades ago ended by thoughts of becoming a CPA.  The law suited me better, but reading Revenue Rulings, as I occasionally must, brings back the nightmares. 

David