Posted by Maria T. Hurd, CPA
When plans have a Qualified Joint and Survivor Annuity default form of benefit, or when a plan offers life annuity options, spousal consent must be obtained for any distribution or loan out of the plan, except when the plan provides for involuntary cash-outs for balances amounting to $5,000 or less.
Qualified plans that must offer a QJSA include defined benefit plans, money purchase plans (MPPP) or target benefit plans, but many 403(b) plans also have a QJSA default form of benefit because of the abundance of life annuity investment options used in those arrangements.
A profit sharing or stock bonus plan is not required to provide a QJSA if it satisfies these requirements:
- The death benefit of the plan is payable in full to the surviving spouse unless the spouse has consented to another beneficiary;
- A life annuity option cannot be elected in the plan or the participant does not elect into the plan’s life annuity options; and
- The benefit is not the result of a direct transfer from another plan that was required to provide a QJSA.
Although profit sharing plans are not required to provide a QJSA, spousal consent may still be required if a plan merger occurs, and assets from a plan that required a QJSA are merged into the profit sharing plan, such as assets from a MPPP. On the other hand, if a money purchase pension plan is terminated, rather than merged, rollovers from the MPPP lose their character, and spousal consent is not required for subsequent distribution of those assets from the profit sharing plan’s rollover account.
If the QJSA rule applies to a participant, spousal consent is required for the participant to elect a form of payment available under the plan that is not a QJSA. A QJSA is an annuity that provides a life annuity to the participant and a survivor annuity for the spouse’s life following the participant’s death. The survivor annuity must be no greater than 100% and no less than 50% of the annuity paid during the participant’s life. In this case, the QJSA rules protect the interests of participant spouses.
The Operational Mistake
A common plan mistake is the distribution to a participant of a benefit approved automatically via an electronic distribution request, and the plan sponsor not realizing that it is responsible for securing the spousal consent. This error can also happen when the sponsor’s census incorrectly classifies a participant as not married, or when an incorrect distribution form without the spousal consent section, is used to approve the distribution. The failure to provide proper spousal consent is an operational qualification mistake that would cause the plan to lose its tax-qualified status.
Normally, the correction method under VCP for a failure to obtain spousal consent requires the plan sponsor to notify the affected participant and spouse at the time of the distribution to secure a spousal consent for the distribution that has already been made. If the spouse refuses to consent, does not respond to the notice, or cannot be located, the spouse is entitled to a benefit under the plan equal to the portion of the QJSA that would have been payable to the spouse upon the death of the participant had a qualified joint and survivor annuity been provided to the participant under the plan at his or her retirement. Such spousal benefit must be provided if a claim is made by the spouse.
Preventing Future Errors
Plan sponsors to which the QJSA rules apply must educate their plan officials and establish processes to ensure that proper consents are secured before retirement benefits are paid out or loans are issued. For specific guidance from the IRS Fix-It Guides, plan sponsors can visit the IRS website.