Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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A qualified retirement plan that is not a pension plan is generally not subject to the QJSA/QPSA requirements described at ¶ 3.4.02 . The exceptions would be, if the plan offers retirement benefits in the form of annuities, or was merged with a pension plan, or if it has a benefit formula that is integrated with a pension plan, then the plan is subject to the pension plan rules. See Reg. § 1.401(a)-20 , A-4, A-5. Most significantly for estate planning, in order to be “exempt” from the QJSA/QPSA requirements, a profit-sharing plan must provide “that the participant’s nonforfeitable accrued benefit is payable in full, upon the participant’s death, to the participant’s surviving spouse (unless the participant elects, with spousal consent that satisfies the requirements of section 417(a)(2), that such benefit be provided instead to a designated beneficiary).” Thus, the only way a profit -sharing plan can be “exempt” from the QJSA/QPSA requirements is by paying 100 percent of the participant’s account to the participant’s spouse at the participant’s death unless the spouse consents to waive this right. Even though it must offer certain spousal benefits under REA, an exempt profit-sharing plan is still critically different from a pension plan. Under an exempt profit-sharing plan, the employee can withdraw ALL his benefits from the plan whenever the plan permits him to do so (typically, upon separation from service, although some profit-sharing plans permit in-service distributions) WITHOUT the consent of his spouse. He can then roll the benefits over to an IRA and continue to enjoy tax deferral without any further obligations to his spouse under federal law ( ¶ 3.4.04 ). The trade-off is that, if the employee dies BEFORE having withdrawn the benefits from the plan, 100 percent of his benefits (including proceeds of any life insurance policy held in the plan) must be paid to the surviving spouse, unless she has consented to waive this right. Reg. § 1.401(a)-20 , A-12(b). IRAs and Roth IRAs are not subject to REA; neither ERISA § 205 nor IRC § 401(a)(11) applies to IRAs or Roth IRAs (with the possible exception of SEP-IRAs and SIMPLEs, a subject beyond the scope of this book). Finally, we come to the special case of 403(b) plans. Although 403(b) plans are subject to some of the same § 401(a) requirements as qualified plans (see § 403(b)(10) , (12) ), § 401(a)(11) is not one of the 401(a) provisions “imported” into § 403(b) , which would make it at first appear that 403(b) plans are not subject to REA. However, even though the tax Code REA provisions don’t apply, some 403(b) plans are subject to ERISA—which has its own set of QJSA/QPSA requirements. Therefore, “to the extent that section 205 [of ERISA] covers section 403(b) contracts and custodial accounts they are treated as section 401(a) plans” for purposes of the QJSA/QPSA requirements. Reg. § 1.401(a)-20 , A-3(d). Therefore, some 403(b) plans are subject to REA and some are not. The 403(b) plans NOT covered by ERISA (and therefore not subject to REA) are those funded exclusively by means of elective employee deferrals (salary reduction agreements). 403(b) plans funded in whole or in part by employer contributions are subject to ERISA and therefore also to the REA requirements. DOL Reg. § 2510.3-2(f). IRAs, Roth IRAs, and 403(b) plans