Life and Death Planning for Retirement Benefits

194

Life and Death Planning for Retirement Benefits

403(b) plans that are subject to ERISA and offer annuity benefits to the participant will be subject to REA’s full QJSA/QPSA requirements, just like a pension plan ( ¶ 3.4.02 ). A 403(b) plan that is subject to ERISA but that does not offer annuity benefits ( i.e., a plan funded exclusively with mutual fund custodial accounts pursuant to § 403(b)(7) ) can use the alternative compliance procedure available to “exempt” profit-sharing plans ( ¶ 3.4.03 ). There are exceptions to the REA requirements, even for covered plans. These exceptions, are usually not significant in estate planning, but may be significant in a particular client’s situation. For example, no spousal consent is required for distribution of benefits to the participant when the total value of his benefits is under $5,000. Reg. § 1.411(a)-11(c)(3) . There are modified rules for ESOPs ( § 401(a)(11)(C) ) and exceptions for certain benefits accrued before REA’s effective date (1984). No spousal consent is required if “it is established to the satisfaction of a plan representative that the consent...may not be obtained because there is no spouse, because the spouse cannot be located ....” § 417(a)(2)(B) . Even the “significant” exceptions can be insignificant if the plan negates the exception by giving the spouse more rights than REA requires, usually for reasons of administrative convenience. For example, REA does not require that a QPSA, or 100 percent -death-benefit-in- lieu-of-QPSA, be paid to a spouse who was married to the participant for less than a year prior to the date of death. § 417(d) ; § 401(a)(11)(D) . However, many retirement plan designers decided it was easier to grant the same rights to all spouses, regardless of the length of the marriage. Similarly, the value of the legally-required QPSA (which is supposed to be equivalent only to the survivor pension the spouse would have received under a QJSA) is less than the total value of the employee’s accrued benefit in the plan. However, some plans simply award every nonconsenting spouse 100 percent of the value of the participant’s benefit, presumably because that is administratively easier than figuring out for each individual employee and spouse what would have been the relative values of their shares under a QJSA. The spouse loses her REA rights upon divorce or legal separation or her “abandonment” of the participant. Reg. § 1.401(a)-20 , A-27. (Instead, she may receive a share of the benefits through a “qualified domestic relations order” issued in connection with the divorce; see § 414(p) .) § 417 and regulations contain elaborate rules that must be complied with in order to have a valid spousal consent to the participant’s waiver of the QPSA or the QJSA. The IRS has published sample spousal consent forms. Notice 97-10, 1997-1 CB 370. REA creates serious, and sad, difficulties when a mentally disabled spouse is unable to consent to the desired estate plan. In that case consent can be provided only by the spouse’s legal guardian. Reg. § 1.401(a)-20 , A-27.  The participant’s waiver of a QPSA, and the spouse’s consent to such waiver, must be given after the beginning of the plan year in which the participant reaches age 35, and prior to the employee’s death. § 417(a)(6)(B) . The IRS, unlike the Code itself, permits waiver of Various REA exceptions and miscellaneous points Requirements for spousal consent or waiver