Mandatory 100% QJSA

[Ananda]

The requirement is that a QJSA must provide a spousal benefit of 50% to 100% of the participant's benefit. Most plans allow the participant to elect a 50% , 75% or 100% QJSA. A company wants to amend their plan to make the 100% QJSA mandatory unless spousal consent is obtained. While this clearly meets the IRC QJSA spousal consent requirements, doesn't this raise other plan concerns. For example, the plan participant by being forced to elect the 100% QJSA will be receiving a significantly reduced annual benefit. Is this problematic?

[C. B. Zeller]

Generally a participant wouldn't be "forced" to select a particular form of benefit, since whenever a plan is subject to QJSA it also has to offer the participant a QOSA. If they make the QJSA the 100% survivor annuity, then the QOSA would be a 50% survivor annuity. The QOSA can be elected by the participant without spousal consent.

1.411(d)-3(c) provides rules about how and when redundant forms of benefit can be eliminated.

[CuseFan]

Bang zoom CBZ!

[fmsinc]

From a family lawyer's perspective this is a very bad idea. 

First, a 50% joint and survivor annuity more closely approximates the amount or retirement annuity benefits received by an Alternate Payee per a QDRO. 

Second, there is a cost to providing a QJSA - an actuarial reduction in the retirement annuity to deal with the payment of benefits over two lifetimes.   

Third, I know of only one ERISA qualified plan that will allocate the cost of the QJSA to the Alternate Payee if directed to do so in the QDRO.  Such an allocation is common in Federal retirement plans (FERS, CSRS and Military).

Most private plans deduct the "cost" off the top before allocating what remains of the retirement annuity between the parties.  In most cases the amount of the Alternate Payees share of the Participant's retirement annuity will be less than 50% of the entire retirement annuity.  Since the cost comes off the top, the parties will pay the "cost" in the same ratio a their respective shares of the retirement annuity, and the Participant will pay the larger share.  The Alternate receives 100% of the benefit since the Participant will be dead. 

Example. Assume a $5000/month annuity payable at retirement and that the parties were married for 240 months during which the Participant accrued creditable service toward retirement, and the Participant had 360 months of creditable service at retirement.   The time rule of of sharing defined benefit plans formula would be $5000/2 = $2,500 x 240/360 = $1,667/month to the Alternate Payee. 

Now assume that the actuarial reduction for a QJSA is $500/month.  That leaves $4500 to be divided between the parties and the new computation is $4500/2 = $2250 x 240/360 = $1500 to the Alternate Payee.  So the Alternate Payee has paid $166 of the $500 cost of the QJSA and the Participant has paid $334.  Unhappy Participant.   

I have spent 35 years preparing QDROs and helping parties and their attorneys navigate the options.  This would be a colossal disaster.  

David

[Mike Preston]

David, please stick to lawyering.  Your example would be actuarial malpractice if submitted by an actuary to a court. I don't have time to lay it all out for you but basically you are comparing apples to oranges and assuming they are the same thing.  Your $1,667 is payable to the alternate payee for as long as the participant is alive.  While your $1,500 is payable for a potentially much longer period of time.  To merely subtract one from the other without making an actuarial adjustment is not the way it should be done.

[Ananda]

Thank-you for your responses. While I hear the QDRO concerns and impact on the QOSA calculation, I'm not hearing or aware of any plan qualification or any type of tax or ERISA violation resulting from a mandatory 100% QJSA plan amendment. Agreed?.

[C. B. Zeller]

I agree they can amend the plan to designate the 100% survivor annuity as the plan's QJSA. I am not clear on what you mean by "mandatory" 100% QJSA.

[Nate S]

On 1/21/2022 at 9:32 AM, Ananda said:

Thank-you for your responses. While I hear the QDRO concerns and impact on the QOSA calculation, I'm not hearing or aware of any plan qualification or any type of tax or ERISA violation resulting from a mandatory 100% QJSA plan amendment. Agreed?.

By  'mandatory' do you mean identify the 100% survivor annuity as the 'normal form of benefit' for married participants?  This would be fine, but in a pre-approved Plan document, the participant would still maintain the ability to elect an optional survivor annuity without spousal consent; and also, with spousal consent, an alternative of at-least one of the following: one lump-sum; partial withdrawals; installments; or purchase of or providing of an annuity in a form specified by the document (or at a purchase rate equivalent to the accrued benefit).  Unmarried participants would the have a normal form of a lifetime, or a period certain annuity; as well as the same alternative aforementioned options.

Since all these annuity forms are provided an equivalent value (lump-sum value under 417 notwithstanding); I don't necessarily see the benefit to the Sponsor of getting approval for such an arrangement as you describe.  (CBZ or Mike, feel free to correct me here!)The impact of such an amendment may only be prospective, excepting the XX% survivor option, all the prior forms must still be provided for benefits accrued as of the amendment date; so lump sums if available now would still be payable for the current accrued benefit, and either the lifetime or period certain option would remain for the same.  Only new participants or new accrued benefits could be so restricted.