QOSA and QJSA and other JSAs

[ChrisB.]

I would like to get some thoughts on the following:

Assume a plan offers three JSAs: a 50% JSA, a 75% JSA, and a 100% JSA.

The plan designates the 50% JSA as the QJSA.

I assume that means the 75% would be the QOSA. 29 U.S.C. § 1055(d).

Now, I understand that the QJSA and the QOSA must be actuarial equivalent to the offered SLA. 29 U.S.C. § 1055(d).

What about the 100% JSA. Is that also subject to AE requirements?

Thanks for your thoughts and comments!

[Sellarsian]

Been a few years but my understanding was:

• no optional form of payment may be less valuable than the accrued benefit defined in the plan, and
• the QJSA may not be less valuable than any other available option.

These comparisons are based on 417(e) assumptions if the optional form, such as lump sum, is subject to 417(e), but otherwise is based on "reasonable" assumptions -- with no explicit guidance as to what is reasonable.

If that's still right then, in your situation, it should be ok if the 100% JSA is less valuable than the 50% JSA (the QJSA), so long as, under reasonable assumptions it is not less valuable than the accrued benefit stated in the plan -- typically, the amount payable as a SLA.

[fmsinc]

See the complaint in the case of Knight v. IBM  filed in the US District Court for the Southern District of New York. See also attached a comment by Cohen Milstein.   Without going into detail, this class action representing IBM employees alleges that the IBM had been using out of date life expectancy tables that resulted in artificially lower benefit payouts.  The Complaint mentioned the fact that ERISA requires a joint and survivor annuity to be the “actuarial equivalent” of the single life annuity. ERISA §§ 205(d)(1)(B), (d)(2)(A)(ii), 29 U.S.C. §§ 1055(d)(1)(B), (d)(2)(A)(ii).  

Furthermore, that for married participants, the default form of pension payment is a joint and survivor annuity or “JSA.” A joint and survivor annuity provides the participant a payment stream for his own life, and then, if he has a surviving spouse when he dies, for the life of his spouse. ERISA § 205(a)-(d), 29 U.S.C. § 1055(a)-(d). The survivor annuity is expressed as a percentage of the benefit paid during the participant’s life; typically, the surviving spouse will receive 50%, 75%, or 100% of the benefit the participant received.  

For clarity, a single life annuity is a retirement annuity (a "pension") that is paid to the Participant for the life of the Participant and terminates on the Participant's death.   A joint and survivor annuity, (a "Qualified Joint and Survivor Annuity - "QJSA"), is structured so that the share due to the Participant is shared with the Alternate Payee during the concurrent joint lives of the parties, and, on the death of the Participant prior to the death of the Alternate Payee, the survivor annuity benefit will continue to be paid to the Alternate Payee for his/her life.  

It is important to understand that the survivor annuity is not free.  The amount of the retirement annuity will be reduced to pay the cost of the survivor annuity.  The amount of the reduction is normally computed by actuaries at the time of retirement who will look at the ages and relative ages or the parties and their life expectancies to determine how much of a reduction in the retirement annuity will be sufficient to pay the survivor annuity following the death of the Participant.  [Some plans, like FERS and CSRS, use a flat percentage deduction from the retirement annuity to fund the survivor annuity.  Actuaries are not involved.]

so....

The point is that both a single life annuity and a QJSA annuity are funded by the same pile of dollars reduced to present value.  The Plan puts a certain amount of dollars in a theoretical fund and that amount can be used to pay either a single life annuity or a joint and survivor annuity. They are payment options from the same source of funding.  

If there is no survivor annuity election then the Participant will receive $X as a retirement annuity and the marital portion of that retirement annuity can be allocated between the Participant and the Alternate Payee as agreed or as directed by the trial court using a QDRO.  If a survivor annuity for the Alternate Payee is intended, then the Participant will receive a retirement annuity of $x less the cost of the survivor annuity, and the marital portion of this reduced retirement annuity can be allocated between the Participant and the Alternate Payee as agreed or as directed by the trial court using a QDRO.  If the Participant predeceases the Alternate Payee, the Alternate Payee will receive a survivor annuity equal to the option elected - 25%, 33%, 50%, 66%, 75% or 100% of the amount of the retirement annuity.  Not all plans offer 25%, 33%, or 66%.  All plans must offer 50% and can offer more. Note that the greater the percentage of the survivor annuity the greater the reduction in the retirement annuity to fund the survivor annuity.  So there is no free lunch.  

Some planning is possible here.  For example, if the Participant is old and or in bad health and the Alternate Payee is substantially younger and in good health, it may make sense to elect a 100% joint and survivor annuity.  If the opposite is true, than a 50% or less survivor annuity may make more sense.  

The ultimate point is that the actuarial equivalence cannot be determined until the parties have elected or the court has awarded a QJSA in the amount of 33%, 50%, 66%, 75% or 100%.  At that point the retirement annuity is reduced to pay the cost of the QJSA and you will have your actuarial equivalence.  It can be any combination of retirement annuity + QJSA = the same present value = actuarial equivalence. 

Chris says that the Plan designates 50% as the QJSA, but that's not the Plan's choice,  The Court or the parties have the option for 50% or 75% or 100%.  In all cases the equivalence will be the same.  Percentage of QJSA up = retirement annuity down.  It's not for the Plan to designate only one option if they offer multiple options.

David 
 

Knight v. IBM Attorney Comment.pdf Knight v. IBM - Complaint.pdf

[ChrisB.]

On 8/30/2023 at 4:26 PM, Sellarsian said:

no optional form of payment may be less valuable than the accrued benefit defined in the plan,

Thank you very much. If you know, can you tell me the regulation that says "no optional form of payment may be less valuable than the accrued benefit defined in the plan"?

 

[ChrisB.]

Thank you, fmsinc for your response to my question. I appreciate it. I will read through these today. Best, Chris.

[Sellarsian]

2 hours ago, ChrisB. said:

Thank you very much. If you know, can you tell me the regulation that says "no optional form of payment may be less valuable than the accrued benefit defined in the plan"?

 

Chris, sorry I cannot readily provide the cite, but I would look at ERISA vesting requirements (sec 411 of the Code).

Suppose I am vested in an accrued benefit of $1,000/mo payable as a SLA at age 65, and opt to take this entire benefit in the form of a J&S 100% with same age beneficiary at, say, $600/mo. Because under any reasonable current interest and mortality assumptions this is going to show as less valuable than the original accrued benefit, implementing it would represent an impermissible forfeiture of my vested benefit.