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Governmental 457(b) Plans and Corrections

 “Are there any guidelines for correcting governmental 457(b) plan errors?” 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  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 Pennsylvania is representative of a common inquiry related to correcting governmental 457(b) plan errors.

Highlights of Discussion

Yes, there are.  The IRS gives a great deal of leeway to governmental 457 plans to self-correct many errors following the guidelines in its Employee Plans Compliance Resolution System (EPCRS) contained in Revenue Procedure 2021-30.

For a general summary, please see the IRS’s website guidance 457(b) Plan Submissions to Voluntary Compliance.  Note the section on “Governmental plan sponsors can self-correct.”  There is no IRS filing or fee associated with self correction, but the sponsoring entity should maintain adequate records to demonstrate it properly corrected the error in the event of a plan audit.

Here are the basics steps to self correction:

  1. Make any necessary corrections to put the participants in the position they would have been in if the error had not occurred.
  2. Document the steps you took to correct the error.
  3. Adjust your administrative procedures, if necessary, to make sure the mistake does not happen again.

Any reasonable and appropriate self-correction method described in Section 6 of EPCRS may be used.

Conclusion

The IRS has included correction principles in its EPCRS for 457(b) plan sponsors.  Governmental 457(b) plan sponsors have the added ability to self-correct many errors.

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401(k) Plans, Distributions and Spousal Consent

 “Do 401(k) plans require the spouse of a plan participant to consent to a plan distribution?” 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  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 Minnesota is representative of a common inquiry related to distributions, spousal consent and 401(k) plans.

Highlights of Discussion

  • The short answer is, “maybe.” It depends on whether the 401(k) plan is subject to the annuity distribution requirements under the Retirement Equity Act of 1984 (REA) or is considered a “REA safe-harbor” plan.
  • REA, in part, provided spousal protections with respect to defined contribution (DC) plan distribution options, and defaulted most plan disbursements for married couples to qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs), unless the participant and spouse executed certain waivers.
  • 401(k) plans that are subject to the REA annuity mandates require plan administrators to obtain written spousal consent to distribute plan benefits in a form other than an annuity [Treasury Regulation (Treas. Reg.) 401(a)-20, Q&A 17]. REA added the requirement to have spousal consent to take a distribution so that the nonemployee spouse would have some control over the form of benefit the participant chooses and would be, at the very least, aware that retirement benefits existed.
  • Regs at 1.417(e)-1(b)(2) and 1.401(a)-20, Q&A 27 provide for the following spousal consent exceptions for REA plans:
  1. For distributions made on or after October 17, 2000, a spouse’s consent is not required if the present value of the participant’s nonforfeitable accrued benefit, including both employer and employee contributions, on the date of the distribution is ≤ $5,000;
  2. If the plan administrator is satisfied there is no spouse or the spouse cannot be located;
  3. If the participant has a court order certifying his or her abandonment; or is legally separated;
  4. If the spouse is incompetent, the legal guardian can provide consent, even if the legal guardian is the participant;
  5. The plan must make required minimum distributions even though the employee, or spouse where applicable, fail to consent to the distribution (see Treas. Reg.401(a)(9)-8, Q&A 4).
  • REA safe-harbor plans, in contrast, are DC plans that are drafted to be exempt from the REA annuity requirements. The plan document will state whether it is a REA safe-harbor plan. Many, but not all, 401(k) plans are REA safe-harbor plans. Plan administrators are not required to obtain spousal consent for a distribution if the 401(k) plan is a REA safe harbor plan.
  • The criteria to be a REA safe-harbor plan are found in Reg. 1.401(a)-20, Q&A 3:
  • At death, a participant’s vested benefit must be payable to the spouse unless the participant is not married or the spouse consents to another named beneficiary;
  • The plan participant cannot elect payments in the form of an annuity;
  • The plan administrator separately accounts for and continues to apply the REA rules to amounts transferred from other plans subject to the REA rules (e.g., money purchase pension plans or target benefit plans).

Conclusion

Some 401(k) plans are subject to REA and, therefore, require distributions to be in the form of an annuity unless the plan administrator obtains proper participant and spousal waivers. Some plans are REA safe-harbor and do not require the plan administrator to obtain spousal consent for a distribution. The terms of the plan document will specify what type of plan it is.

© Copyright 2022 Retirement Learning Center, all rights reserved