Rights of Surviving Spouses To Pension Benefits
REA mandates payment of retirement benefits as a qualified joint and survivor annuity with a spouse (QJSA), and payment of a qualified pre-retirement survivor annuity death benefit to a surviving spouse (QPSA). These payments may be waived by a spouse who is not a member of the retirement plan under certain conditions.
The provisions of REA concerning QJSAs and QPSAs apply generally to pension plans. They are also applicable to profit-sharing and stock-bonus plans, unless the entire nonforfeitable death benefit is payable in full to a surviving spouse and other conditions are met. Also exempted from these provisions are IRAs and governmental and church plans.
Unless waived by a spouse, any payment during a member’s or participant’s lifetime must be as a qualified joint and survivor annuity. A QJSA is an annuity for the participant’s life with a survivor annuity for the spouse’s lifetime. The survivor annuity may not be less than 50% (or more than 100%) of the annuity payable during the joint lives of participant and spouse. A spouse’s consent is also required before a participant may use his accrued benefit to secure a loan from the plan.
Similarly, if the member dies before the annuity starting date, a qualified pre-retirement survivor annuity must be paid to a surviving spouse unless the survivor consents otherwise. In a defined contribution plan, e.g., a money purchase pension plan, the QPSA is an annuity for the survivor’s lifetime purchasable using one-half of the participant’s vested account balance. In other plans, the survivor annuity is based on what the survivor would have received had the participant retired with a QJSA (at certain specified times) and then died. If a plan provides a pre-retirement death benefit that exceeds the QPSA, the excess may be paid to any beneficiary the participant chooses.
These new provisions, which are reflected in both Sections 401(a)(11) and 417 and in ERISA Section 205 are important for a number of reasons. For one, surviving spouses are assured of minimum pension death benefits, as Congress intended. Correspondingly, plan members no longer have complete freedom in disposing of death benefits. Plans must be amended to include these provisions, and must operate accordingly to remain qualified. Failure to pay a survivor annuity may impose liability on plans and plan administrators to a surviving spouse. For example, a plan subject to REA is liable to a spouse if a lump sum is paid to a participant without the spouse’s con- sent, since payments which begin during a member’s lifetime must be in the form of a qualified joint and survivor annuity .Similarly, a plan may be liable to a spouse where a pre- retirement death benefit is paid to other beneficiaries, without the spouse’s consent.
These provisions are generally effective for plan years beginning after 1984, but are applicable only to participants who have at least one hour of service after 8122184. Although plans must comply with REA in operation, formal amendments are not required until the time provided in Section 1140 of TRA ’86.
Profit-Sharing and Bonus Plans
Profit-sharing and stock-bonus plans are not required to provide a QPSA or QJSA if the participant’s entire nonforfeitable account balance is payable to his spouse at death. The death benefit may be paid to another beneficiary only with the spouse’s consent. In addition, the death benefit must be available to the spouse within a reasonable time after a member’s death, generally 90 days, and the participant must not have elected payment in the form of an annuity at any time. Although the death benefit must be paid to a spouse, payments may be made to a participant in any form. Under Reg. 1.401(a)-20, the participant’s account following death must be adjusted for gains and losses, and the plan may not be a transferee plan or an offset plan. A transferee plan is one to which a direct or indirect transfer of a participant’s benefits was made after 1984, from a defined benefit plan or a money purchase plan. A plan may be a transferee plan as a result of a plan merger or spinoff, but not because of a rollover contribution. A profit-sharing or stock-bonus plan is an offset plan if it offsets benefits under a plan that is subject to REA.
Benefits covered. REA applies to benefit under frozen plans as well as under active plans. It applies not only to assets held by a trust, but also to insurance and annuity policies used to invest plan assets and pay benefits. Benefits from both employer and employee contributions are subject to REA. In the case of a defined benefit pension plan, the survivorship requirements apply only to benefits in which a member was vested immediately prior to death. Accordingly, REA is not applicable to proceeds of life insurance policies in excess of a member’s nonforfeitable accrued benefit immediately prior to death. In the case of a defined contribution plan, however (e.g., a money purchase pension plan), REA applies to all nonforfeitable benefits, including life insurance proceeds payable on death.
Once the annuity starting date is reached, no part of a. QJSA death benefit may be forfeited, despite Section 411(a)(3)(A). Where death is before the annuity starting date, neither a QPSA nor a profit-sharing plan death benefit may be forfeited. However, any additional death benefit may be forfeited if the plan so provides.
Survivor annuities are also not required where the present value of a member’s nonforfeitable benefit is not more than $3,500. Under Reg. 1.417(e)-1(d), plans must provide for calculation of present values using Section 417 interest rates, if these rates result in a higher present value than the interest rates otherwise used by the plan.
Qualified joint and survivor annuity. A qualified joint and survivor annuity is an immediate annuity for the life of a participant, with a survivor annuity for the life of the participant’s spouse. The survivor annuity may not be less than 50% , or more than 100% of the amount of the annuity payable during the time when the participant and spouse are both alive. The QJSA for a married participant must be at least as valuable as any other optional form of benefit payable under the plan at the same time.
By an expansive and seemingly unwarranted interpretation of the Code, Reg. 1.401(a)-19, Q&A-25, requires a QJSA for an unmarried participant as well, unless the participant consents to another form of payment. A QJSA for an unmarried participant is an annuity for the participant’s life. Accordingly, an unmarried participant in a plan subject to REA must have the right to choose a lifetime annuity and must be furnished with the necessary information to make this choice. For example, a money purchase pension plan may not pay only a lump sum to an unmarried participant. A life annuity must also be available.
Qualified pre-retirement survivor annuity. A QPSA must be paid if death occurs before the annuity starting date. A QPSA in a money purchase pension plan is a survivor annuity with a value of not less than 50% of the participant’s nonforfeitable account balance at death. The plan must allow the surviving spouse to begin payments within a reasonable time after the member’s death.
A QPSA in a defined benefit plan is also a survivor annuity. Where death occurs after the plan’s earliest retirement age, the periodic annuity amount is calculated as though the participant retired with a QJSA on the day be- fore death. In the case of death before a member’s earliest retirement age, the periodic annuity amount is calculated by assuming the participant: (1) separated from service at death (or at the actual time of separation, if earlier); (2) survived until the plan’s earliest retirement age; (3) retired at that time with a QJSA; and (4) died on the following day.
Actuarial adjustments ate required if actual payment is earlier or later than the time used to calculate the QPSA. A plan must permit a surviving spouse to direct commencement of payments no later than the month in which the member would have reached his earliest retirement age. A plan, however, may permit earlier commencement or provide that the QPSA will be forfeited if a spouse does not survive until the plan’s earliest retirement age (or earlier distribution date). A plan may also provide for forfeiture if a spouse elects to defer payment and dies before payments begin.
Marriage requirements. A spouse on the annuity starting date is entitled to the QJSA survivor annuity , even if divorced from the member at the member’s death (except as otherwise provided in a qualified domestic relations order). Payments to a surviving spouse must continue, even if the spouse remarries.
A plan may adopt a one-year marriage requirement, although this is often not administratively feasible. If such a requirement is adopted, payments must nevertheless begin in the form of a QJSA on the annuity starting date. However, the QJSA will be forfeited if the member’s death or divorce occurs before one year of marriage. A profit-sharing plan or stock-bonus plan not otherwise subject to REA may also require one year of marriage for payment of a death benefit. However, unlike plans subject to the survivor annuity requirements of REA, the spousal death benefit may be forfeited if the one-year marriage requirement is not met when lifetime payments begin, even though the parties stay married for a year or more.
No consent is required if the plan administrator is satisfied that there is no spouse, if a spouse cannot be located, if the parties are legally separated, or if the participant was abandoned and there is a court order to that effect. A subsequent spouse is not bound by a prior spouse’s consent (except in the- case of a prior spouse’s consent to a plan loan).
A qualified pre-retirement survivor annuity may generally be waived by a participant with consent of his spouse, only on or after the first day of the plan year in which the participant reaches age 35, or when a participant separates from service, if sooner. Although an earlier waiver may be permitted, it becomes invalid on the first day of the plan year , on or after the participant reaches age 35, unless a new waiver is executed. Waiver of a death benefit under a profit-sharing or stock-bonus plan that is not subject to REA may be made at any time.
A distribution during a member’s lifetime cannot be made at any time in a form other than QJSA unless the QJSA has been waived by the participant, and the waiver has been consented to by his spouse. Consent of participant and spouse to a distribution other than a QJSA must be made no more than 90 days before the annuity starting date. A QJSA is an annuity that commences immediately. Thus, for example, a plan may not offer a participant separating from service at age 45 a choice only between a single-sum distribution at separation from service and a joint and survivor annuity that begins at normal retirement date (rather than immediately). Under Reg. 1.417 (e)-l, the plan must also offer a QJSA that commences immediately.
Since waiver of a QJSA is effective only if made no more than 90 days before the annuity starting date, consent to payments under a deferred annuity policy must be made within 90 days of the time payments actually begin. The annuity starting date is the date payments commence under the annuity policy rather than the date the policy is distributed to a participant.
While benefits are immediately distributable, a participant’s consent is required even where distribution is in the form of a QJSA. Benefits are immediately distributable prior to the later of a participant’s normal retirement age or age 62.
Under Reg. 1.401(a)-19, a plan may provide that a spouse’s consent is irrevocable once it is given. A participant, however, must always be allowed to change his election during the election period, subject to further spousal consent if necessary. A participant’s waiver of a QPSA or QJSA, and a spouse’s consent, must specify beneficiaries, including any class of beneficiaries or contingent beneficiaries. For example, if a spouse consents to naming A’s children as beneficiaries, her consent will be required to name different beneficiaries. A participant’s waiver of a QJSA (and spouse’s consent) must also specify a particular optional form of benefit, which may not be changed without the spouse’s later consent. Optional forms of payment, however, need not be specified in the- case of a QPSA or profit-sharing plan death benefit.
A plan may permit a spouse to execute a general consent, which permits a participant to change beneficiaries and form of payment without further consent. To be valid, the general consent must acknowledge that the spouse has the right to limit consent to a specific beneficiary and a specific optional form of benefit, and that the spouse is voluntarily electing to relinquish both of these rights. A general consent may be limited to certain beneficiaries or forms of payment.
Under Reg. 1.417(e)-1, a plan must provide participants with a written explanation of the QJSA required by Section 417(a)(3) no less than 30 days, and no more than 90 days, before the annuity starting date.
Pursuant to Reg. 1.401(a)-19, a written explanation of the QPSA required by Section 417(a)(3XB) must be given within whichever of the following ends later:
1) The period beginning with the first day of the plan year in which a participant attains age 32 and ending with the close of the plan year preceding the plan year in which the participant attains age 35.
2) The one-year period ending after the individual becomes a participant.
3) The one-year period ending after the QPSA is no longer fully subsidized.
4) The one-year period ending after Section 401(a)(11) first applies to the participant (e.g., transfer of a participant’s benefit from a plan not subject to the annuity rules to a plan which is, or election of an annuity under a profit-sharing plan).
In the case of a participant who separates from service before age 35, the information must be provided within the period ending one year from the time of separation. It is unclear whether these requirements to provide information also apply in the case of a death benefit under a profit-sharing or stock-bonus plan not otherwise subject to REA.
The following terms and conditions of a QPSA and QJSA must be provided under Section 417(a)(3) and Reg. 1.401(a)-II(c)(3):
1) For plan years beginning after 1988, a general description of the eligibility conditions and other material features of op- tional forms of benefit and sufficient information to explain the relative values of these optional forms (e.g., the extent subsidized relative to the normal form, and interest rates used).
2) While a benefit is immediately distributable, a participant must be informed of his right, if any, to defer receipt of the distribution. Under Reg. 1.411(a)-11, no significant detriment may be imposed for failure to consent to the distribution.
3) A general description of the QJSA or QPSA, the circumstances in which each will be paid in the absence of an election, the availability of such an election, and a general explanation of the relative financial effects on a participant’s annuity by making the election. This may include a description of the benefits a participant would receive under the QJSA stated as an arithmetic or percentage reduction from a single-life annuity.
4) Upon request, information must also be provided as to the financial effect of an election on the participant’s annuity.
Under Reg. 1.401(a)-19, spousal consent is also required where a participant’s accrued benefit is to be used as security for a loan from a plan. No such consent is required, however, in the case of a profit- sharing or stock-bonus plan not subject to Sections 401(a)(11) and 417. The consent must be given no earlier than the beginning of the 90- day period that ends on the date on which the loan is to be secured. It must be in writing and must acknowledge the effect of the loan.
A consent of one spouse prior to the loan is binding on a subsequent spouse. If a loan is secured while a participant is not married, no consent is required at a later time. Loans secured by a participant’s plan benefits are deducted prior to calculating a QJSA, QPSA, or profit-sharing plan death benefit.
It is not clear whether state or Federal courts would recognize contractual obligations con- tained in a prenuptial agreement to waive a QJSA, QPSA, or profit-sh3;.ring death benefit. Uncertainty arises from the issue of whether Congress intended the consent provisions of Sections 401(aXll) and 417 and ERISA Section 205 to be exclusive