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Beneficiary Designation


Lucky32

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I was reading an article in today's newsletter about the topic and came across something that I wanted to double check.  In not so many words, it said that if a 401(k) plan offers a life annuity distribution option, a married participant must obtain spousal consent for that type of payout.  Is this everyone's understanding?  If this is the case, I imagine amending the plan to remove this option would be a BRF violation. 

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Yes 401(k) that offer annuities have always been subject to those rules.

At one time you could not amend it out as the IRS viewed it as a 411 cutback, but now you can as some law changed it if you meet certain notice and timing requirements. I think the change was in the late 90s or early 00s but I forget which piece of legislation allowed you to remove the QJSA/QPSA from non-pension plans.

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26 C.F.R. § 1.411(d)-4/Q&A-2(e)(3)

https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(d)-4

Under Reorganization Plan No. 4 of 1978, the Treasury department’s rule also is both agencies’ interpretation for part 2 of subtitle B of title I of ERISA.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Dear Lucky 32,

Let me try to reconcile Peter and Lou’s comments. The regulation question pertaining to optional benefits Peter referred to was introduced by 53 FR 26058 (July 11, 1988). That regulation provided a transition permitting the elimination of optional benefits generally on or before first day of the first plan year after January 1, 1989, 26 C.F.R. § 1.411(d)-4, Q & A 8(c)(1) and 9(c)(2)). Thus, these optional benefits could once be eliminated, but it is no longer possible to do so.

Albert

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On September 6, 2000, the Treasury department published a final rule to amend the 1988 rule.

Under that amendment, a plan sponsor may amend its plan to remove an optional form of benefit (including an optional annuity) if the plan provides a single-sum distribution form otherwise identical to the optional form of benefit eliminated. Such an amendment must not apply to a participant with an “annuity starting date” earlier than the 90th day after “the participant has been furnished a summary that reflects the amendment and that satisfies the requirements of 29 CFR [§] 2520.104b–3[.]” (I’ve simplified those explanations, and omitted some conditions.)

For the details: Special Rules Regarding Optional Forms of Benefit Under Qualified Retirement Plans [final rule], 65 Federal Register 53901-53909 (Sept. 6, 2000), https://www.govinfo.gov/content/pkg/FR-2000-09-06/pdf/00-22668.pdf.

Also, the Treasury department published further amendments in 2004, 2005, and 2006.

https://www.govinfo.gov/content/pkg/FR-2004-03-24/pdf/04-6220.pdf

https://www.govinfo.gov/content/pkg/FR-2005-08-12/pdf/05-15960.pdf

https://www.govinfo.gov/content/pkg/FR-2005-09-13/pdf/05-17959.pdf

https://www.govinfo.gov/content/pkg/FR-2005-09-27/pdf/05-19222.pdf

https://www.govinfo.gov/content/pkg/FR-2006-08-09/pdf/E6-12885.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I thought there was something that said if the plan offeres annuities, but that an annuity was not the "normal form of benefit" or something like that, then the QJSA rules did not apply.  Me personally I eliminate annuities all the time because they are just awful (Except of course when required by law), but I did think there was an easier method of allowing for annuities. 

Austin Powers, CPA, QPA, ERPA

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I thought it was the opposite - you don't have to offer annuities but if you do then the spouse has to agree to any annuity version that's not the QJSA.  Yeah, been a while....  :)

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To avoid a command to provide a qualified joint and survivor annuity, it can be enough (if all other conditions are met) that the participant does not elect an annuity.

ERISA § 205(b)(1)(C)(ii) https://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true;

Accord 26 C.F.R. § 1.401(a)-20 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)-20.

As austin3515 notes, many individual-account profit-sharing plans preclude a choice of an annuity.

Further, many plans have no form of distribution beyond a single sum.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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yes I remember that.  normal form of distirbution is a lump-sum with ancillary option of an annuity but if they elect an annuity, it must be a QJSA unless the spouse consents. Otherwise no spousal waivers needed (except of course the beneficiary designation ones).

Austin Powers, CPA, QPA, ERPA

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From the EOB

2.a. Exemption requirements for profit sharing and stock bonus plans, including section 401(k) plans. For a profit sharing plan or stock bonus plan to be exempt from the QJSA requirements, the requirements described in 2.a.1) through 2.a.4) must be satisfied. IRC §401(a)(11)(B)(iii). Failure to satisfy any one requirement will subject the participant to the QJSA requirements. It is possible that these requirements, particularly those described in 2.a.2), 2.a.3) and 2.a.4), may be satisfied only for some of the participants. In that case, the plan would have to make the QJSA available at least to the participants who do not satisfy the exemption requirements. Treas. Reg. §1.401(a)-20, A-3.

2.a.1) Spouse must be death beneficiary in full. This requirement is satisfied if the participant's benefits are payable in full to the surviving spouse unless the spouse has consented to another beneficiary. As part of this requirement, the death benefit must be available to the spouse within a reasonable period following the participant's death (generally no more than 90 days), and the benefit payable to the spouse must be adjusted for gains or losses occurring after the participant's death. See Treas. Reg. §1.401(a)-20, A-3(b), and Section V of the chapter, relating to the payment of death benefits.

Remember to change death benefit provisions in plan if plan is being amended to eliminate QJSA. In amendments to regulations under §1.411(d)-4, adopted on September 6, 2000, a profit sharing plan or stock bonus plan that currently offers the QJSA may be amended to eliminate that option without having to protect it with respect to accrued benefits. For details, see Part D.2. of this section. If elimination of the QJSA, pursuant to these regulations, is intended, make sure that the death benefit provisions of the plan satisfy the requirement described in 2.a.1) above, particularly in the case of preretirement death benefits. Some plans provide that spousal consent over a beneficiary is required only with respect to the portion of a preretirement death benefit that is payable in the form of a qualified preretirement survivor annuity (QPSA). If the QJSA is being eliminated by plan amendment, then subsequent to the elimination of the QJSA, the spouse’s consent will be required over the entire preretirement death benefit, pursuant to the requirement described in 2.a.1) above. For more details on preretirement death benefits, including the QPSA, see 4. below for a brief discussion, and Section V of this chapter for a more detailed explanation.

2.a.2) Life-contingent annuity options not available or annuity options not elected. This requirement is satisfied if there are no life annuity options in the plan or, if there are, the participant does not elect into the plan’s life annuity distribution options. In most plans drafted to be exempt from the QJSA rules, no life annuity options are available, so this rule will be satisfied for all participants. However, if a life annuity option has been eliminated from the plan but, because of the §411(d)(6) anti-cutback rule, the option needs to be protected, the QJSA rule may become applicable to some participants.

IRC §411(d)(6) protection waived for some amendments. Due to the amendment of §1.411(d)-4 on September 6, 2000, it is now possible to eliminate all annuity options from a profit sharing plan or stock bonus plan, without having to protect such options with respect to accrued benefits. For details, see Part D.2. of this section. With these regulations, it is easier to make a “clean break” from the QJSA rules and not have to continue the QJSA payment option for any participants (unless the condition in 2.a.3) below cannot be satisfied with respect to a participant).

2.a.2)a) QJSA rule not triggered unless participant actually elects annuity option if one is available under the plan. If a participant is otherwise exempt from the QJSA requirement, the QJSA rule does not have to be triggered unless the participant actually elects a life annuity option. However, once a life annuity option is elected by the participant, the IRC §417 requirements will thereafter apply to all of the participant's benefits unless a separate accounting is made of the portion of the account balance subject to the life annuity election. See Treas. Reg. §1.401(a)-20, A-4.

2.a.2)b) Plan design considerations. Because of this element of the exemption requirements, many plan document drafters stay away from any annuity options under the plan so that the QJSA requirements never can come into play (assuming the rest of the exemption requirements are satisfied). This is particularly common in pre-approved plan documents, such as a prototype plan document. Under this approach, the employer is given a choice for designing the distribution options of the plan. Under one approach, the employer limits all distributions to either a lump sum distribution, installments over a specified period, or a combination of both, but no life-contingency distribution options. Where the employer chooses this design option, the plan document automatically applies all of the other exemption requirements so that the plan is exempt from the QJSA rules. But an alternative approach takes advantage of the election reference in Treas. Reg. §1.401(a)-20, A-4, as described in 2.a.2) above. Under this approach, the QJSA requirements are only triggered at the time the participant elects to have life annuity options available to him or her. The simplest way to design this approach is to have the plan generally permit only distribution options that are not life-contingency options, such as a lump sum distribution or a specified-term installment option, but for a participant who wants life-contingency options, the plan makes available an annuity contract investment. The annuity contract investment can be irrevocable or revocable, but the timing of when the QJSA rules are triggered depends on the revocability of the investment in the deferred annuity contract. This is precisely the approach that exists in the scenarios described in Rev. Rul. 2012-3, which is discussed in 4. below.

Austin Powers, CPA, QPA, ERPA

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I was hoping somebody would say at what point in time the election of a life annuity would be made.  I assume that you are talking about the time the Participant terminates employment and is eligible for a distribution.  And I  assume that at the time of the election the parties are happily married.  Yes.  That matters to me. 

A question I have asked on this blog before transports you to my world, where the parties are happily married at the time of the annuity election, but divorce years later and the now former spouse wants her share of the Participant's 401(k) as an immediate lump sum distribution.  Will the QDRO supersede the annuity election?  I have not been able to find anyone who can answer that question.  I am not ever sure what type of annuity payouts are available.   If the Participant opts for a single life annuity does the former spouse have to consent. Let me say that differently, to what sort of annuity option does the former spouse NOT have to consent. Can the 401(k) Participant rollover his 401(k) balance to an annuity that does not fall within the umbrella of the 401(k).  

This is destined to be a major issue in family law cases.  I see in coming because I have been involved in the preparation of DROs since 1986 on an almost fill time basis.    

 

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The participant elects the annuity option (or lump sum) prior to their annuity starting state (ASD, or for ease of discussion, their benefit commencement date). A 401(k) plan would have to purchase the annuity from an insurance company. Once that happens, it is done. If a life annuity, it stops when the participant dies. If a J&S then the surviving spouse gets survivor portion. A divorce after the ASD does not change either scenario, nor does it change the (now ex) spouse as J&S beneficiary (if that was elected).

There is no more 401(k) account balance or lump sum available. An ex-spouse's only option - unless the insurance annuity contract says otherwise - is a shared interest QDRO that gives the ex a percentage of the monthly annuity payments. For example, say a 50% J&S was elected and ex gets a 50% QDRO award on a $1000/month annuity payment. Participant and ex each get $500/month and then ex continues to get $500/month after participant death as the survivor annuity. If ex dies first then participant should get $1000/month (if QDRO properly drafted). 

My perspective is from DB plans, which routinely pay annuities from the plans. DC plans cannot pay life annuities so they have to use the account balance to purchase from an insurance company. Maybe those contracts are more flexible than DBPs on QDROs, but I doubt it. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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