The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to the survivor annuity rules for qualified plans. The advisor asked:
“Are defined contribution plans subject to the survivor annuity requirements?”
Highlights of the Discussion
As you may know, all defined benefit (DB) plans are subject to the survivor annuity requirements. There are some DC plans that must satisfy these rules as well, although they are few and far between (IRC Secs. 401(a)(11) and 417).
As background, for plans that must satisfy the survivor annuity rules, if a participant dies before plan distributions are required to begin (i.e., the annuity starting date), benefits must be paid to the surviving spouse in the form of a qualified pre-retirement survivor annuity (QPSA). If a participant dies after the annuity starting date, the participant’s account balance must be used to purchase a qualified joint and survivor annuity (QJSA). (See Treas. Reg. § 1.401(a)-20, Q&A 8(a), 1.401(a)-20.)
Under the Pension Protection Act of 2006 (PPA), starting with plan years beginning on or after Jan. 1, 2008, a plan is required to offer a qualified optional survivor annuity (QOSA) in the event a participant waives the QJSA. A QOSA is an annuity that is:
- for the life of the participant;
- has a survivor annuity for the life of the spouse equal to 75% if the QJSA was less than 75%, or 50% if the QJSA was greater than or equal to 75%;
- payable during the joint lives of the participant and the spouse; and
- the actuarial equivalent of a single annuity for the life of the participant.
First, any DC plan to which the minimum funding standard of IRC Sec. 412 applies (such as a money purchase plan) must follow the QJSA/QOSA/QPSA rules. However, even if a DC plan is not subject to minimum funding standard, it may still have to meet the QJSA/QOSA/QPSA requirements. In order to avoid the survivor annuity mandate the plan must meet all three of the following requirements:
- The plan must provide that the participant’s spouse is entitled to the full, nonforfeitable account balance upon the participant’s death. (If there is no surviving spouse or the surviving spouse properly waives the benefit, the designated beneficiary must be entitled to the account balance.)
- The participant does not elect a life annuity.
- The account balance is not from a “transferee plan” that is subject to the survivor annuity requirements, or separate accounting between transferred benefits and any other benefits under the plan has been established. (Separate accounting means the plan must allocate all gains, losses, withdrawals, contributions, forfeitures and other charges and credits on a reasonable and consistent basis between the accrued benefits subject to the survivor annuity rules and other benefits that are not. If such accounting does not exist, then the plan must make all benefits subject to the survivor annuity requirements.)
A DC plan is a transferee plan for any participant if it:
- holds a participant’s benefit that had been transferred to it by a DB plan after Jan. 1, 1985;
- is a DC plan subject to the minimum funding standard under IRC 412; or
- is a DC plan that is otherwise subject to the survivor annuity rules.
Note that a rollover contribution (including a direct rollover) is not a direct or indirect transfer that would cause the survivor annuity requirements to apply.
To view a schematic that illustrates when a DC plan may be subject to the QJSA/QOSA/QPSA requirements, click here.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2018, Retirement Learning Center, LLC. Used with permission.