Benefits & ERISA Law

DC Plans, Distributed Annuities, Spousal Consent and QJSAs

By Nick Curabba et al.

One of the most nagging issues related to distributing annuities from defined contribution plans is how and when to apply the spousal consent and qualified joint and survivor annuity ("QJSA") rules to distributions.  We can list the "basic" rules (although as with most tax-related benefit rules, "basic" is really a misnomer):

RULE 1: Electing annuity payments directly from a DC plan triggers the standard spousal consent and QJSA rules.  That generally means any type of annuity distribution that differs from a standard, statutorily defined QJSA first requires a notarized waiver from the participant's spouse.

RULE 2: Rule 1 applies to annuity payments, UNLESS the starting date of the annuity is deferred.  This is treated as an "in-kind" lump sum distribution, to which the same rules apply as would to a lump sum distribution (which is another way of saying that no spousal consent will be required).  

RULE 3: Even "withdrawals" from that "distributed annuity" contract will only be subject to the lump sum distribution rules, and not be considered annuity payments in the application of the spousal consent and QJSA rules. This generally means that systematic withdrawals or periodic partial lump sum distributions from the distributed annuity would generally not be subject to the spousal consent/QJSA rules.

RULE 4: The point at which payments from that deferred contract become "annuitized" is when spousal consent rules/QJSA rules apply.  This means different things for different contracts.  Lets try a couple of examples:

·                  Example 1.  The distributed annuity contract allows the former participant to elect to start guaranteed monthly payments at any time before his or her 65^th birthday.  The spousal consent and QJSA rules will apply at the point of the election to start taking lifetime payments.

·                  Example 2.  The distributed annuity contract has an account balance and guarantees that an amount equal to 5% of the original account balance will be paid out over the former participant's lifetime, even after the account balance runs out.  As long as there is an account balance, the payments are merely lump sum withdrawals. Once the account balance runs dry, and the payments are being made from the insurance company's assets, annuitization has occurred.  This means that the spousal consent and the QJSA rules will apply at that point.

The practical effect? If the guaranteed lifetime payout (here, the 5%) does not equal what a QJSA would be (and payable as a survivor annuity to the spouse), spousal consent may be required. If the spousal consent is not obtained, then the guaranteed amount may need to be adjusted to meet the QJSA standards.

In any event, it appears that naming a beneficiary other than the spouse-without the proper consent-on the distributed annuity which has not yet been "annuitized" may also be a problem which could cause "disqualification" of the distributed annuity.

Full post as published by Benefits Biz Blog on September 26, 2008 (boomark / email).