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Defined contribution plans and QJSA/QOSA/QPSA requirements

“Are defined contribution plans subject to the survivor annuity requirements for distributions?”

ERISA consultants at the Retirement Learning Center 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 Massachusetts is representative of a common inquiry related to the survivor annuity rules for qualified plans.

Highlights of the Discussion

As you may know, all defined benefit (DB) plans are subject to the survivor annuity requirements. There are also some defined contribution (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) 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 January 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 percent if the QJSA was less than 75 percent, or 50 percent if the QJSA was greater than or equal to 75 percent;
  • 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 pension plan) must follow the QJSA/QOSA/QPSA rules. However, even if a DC plan is not subject to the 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 of the following stipulations:

  1. 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.)
  2. The participant does not elect a life annuity.
  3. 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 January 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.

Conclusion

The following schematic illustrates when a DC plan may be subject to the QJSA/QOSA/QPSA requirements.

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