DISTRIBUTION AND ESTATE PLANNING FOR DEFERRED COMPENSATION AND IRA BENEFITS

By Noel C. Ice

ARTICLE 1 IMPORTANT Preliminaries. 1

1.1 Disclaimer. 1

1.2 The Taxonomy of Employee benefits. 1

1.2(a) The Difference between Pension Benefit Plans and welfare Plans. 1

1.2(a)(1) Employee Pension Benefit Plans. 1

1.2(a)(2) Employee Welfare Benefit Plans. 2

1.2(b) Pension Plans and Profit Sharing Plans/ Defined Contribution Plans and Defined Benefit Plans. 2

1.2(b)(1) Pension Plans. 2

1.2(b)(1)(A) Defined Benefit Pension Plans. 2

1.2(b)(1)(B) Defined Contribution Pension Plans. 3

1.2(b)(2) Profit Sharing And Other Plans That Are Not Pension Plans. 4

1.2(b)(3) Pension And Profit Sharing Plans Are Employee Pension Benefit Plans. 4

1.2(c) Deferred compensation plans/ Qualified and Nonqualified plans/ ERISA and non ERISA plans. 5

1.2(c)(1) Governmental and Church Plans. 5

1.2(c)(2) Excess Benefit Plans. 5

1.2(c)(3) Top Hat Plans. 5

1.2(c)(4) IRC §457 Plans. 6

1.2(c)(5) Taxation/Coverage Under ERISA. 8

1.2(c)(6) IRAs. 8

1.2(c)(7) SEPs and 403(b) Plans. 9

1.2(c)(8) Plans Without Employees. 10

1.2(c)(9) Bonus Plans Such as Phantom Stock Plans May Not be Pension Plans. 11

1.3 Community property laws. 11

ARTICLE 2 SURVIVOR BENEFITS UNDER THE RETIREMENT EQUITY ACT. 13

2.1 In General. 13

2.2 Important Terms. 13

2.2(a) The QJSA. 13

2.2(b) The QPSA. 13

2.2(c) What is a Life Annuity?. 14

2.2(d) When Is The QJSA paid?. 14

2.3 The Statutory Scheme. 15

2.3(a) Survivor Benefits As A Condition of Plan Qualification.- IRC §401(a)(11). 15

2.3(b) Plans To Which The Survivor Benefit Rules Apply And Plans to Which They Don’t apply.- IRC §401(a)(11)(B). 15

2.3(b)(1) The Survivor Annuity Rules Apply To All Qualified Pension Plans And To Certain Other Defined Contribution Plans. 15

2.3(b)(2) The Survivor Annuity Rules May Not Apply To IRAs Or Other Plans Not Governed By §401(a).--What About 403(b) Annuities And SEPs? What About Rabbi Trusts and §457 Plans?. 16

2.3(b)(3) The Survivor Annuity Rules Do Not Apply To IRAs Or SEPs. 17

2.3(b)(4) The Survivor Annuity Rules Sometimes Apply And Sometimes Do Not Apply To 403(b) Annuities. 18

2.3(b)(5) The Survivor Annuity Rules Do Not Apply to Top Hat Plans, Rabbi Trusts or §457 Plans. 19

2.3(b)(6) The Requirements For Exempting Certain Defined Contribution Plans From The Survivor Annuity Rules—The Profit Sharing Plan Exception. 19

2.3(b)(6)(A) The Plan Must Not Be Subject To The Minimum Funding Standards. 19

2.3(b)(6)(B) The Exemption Is Basically Confined To Certain Profit Sharing Plans, Certain §403(b) Plans, ESOPs And Stock Bonus Plans. 19

2.3(b)(6)(C) The Participant Must Not Have Elected To Receive His Benefit In The Form Of A Life Annuity. 20

2.3(b)(6)(D) The Participant's Entire Account Balance Must Be Payable To The Participant's Surviving Spouse Unless There Is A Waiver By Both The Participant And The Spouse. 20

2.3(b)(6)(E) The Plan Must Not Be A Direct Or Indirect Transferee (In A Transfer After December 31, 1984) Of A Plan Which Was Subject To the QJSA Rules. 21

2.3(b)(6)(F) One Good Reason For Not Wanting To Be Exempted From the Survivor Annuity Rules. 21

2.3(b)(7) The Survivor Annuity Rules Do Not Apply To A Distribution Before The Annuity Starting Date If The Present Value Of The QPSA or QJSA Does Not Exceed $3500.- IRC §417(e)(1). 21

2.3(c) Special Rules Applicable To Plans Subject To The Survivor Annuity Requirements.- IRC §417. 22

2.4 Waiver of the QPSA And The QJSA. - IRC §417(a)(2)(A) And §417(a)(1)(A). 22

2.5 The Written Explanation Of The QPSA And The QJSA, And The Notice Of Rights Under §411(a)(11). 23

2.5(a) The Written Explanation Of The QPSA, The QJSA And Of Rights Under IRC §411(A)(11) Is A Condition Of Plan Qualification. 23

2.5(b) The Contents Of The Written Explanation Of The QPSA And The QJSA. 23

2.5(c) Waiver And Consent Under 411(a)(11). 23

2.5(d) Notice Under §411(a)(11). 24

2.5(e) Time Periods During Which Notice Must Be Given. 24

2.5(f) Definition of Term “Annuity Starting Date.”. 24

2.5(g) Waiver of the 30 Day Advance Notice period. 25

2.5(h) Consequences Of The Failure To Give The Written Explanation Of The QPSA And The QJSA. 25

2.5(i) When Should The QPSA And QJSA Explanation Be Given?. 26

2.5(i)(1) QPSA Explanation. 26

2.5(i)(2) QJSA Explanation. 26

2.6 The Extent Of The Survivor's Benefit. 27

2.6(a) Plans Exempted From The Annuity Rules- IRC §401(a)(11)(B)(iii)(I). 27

2.6(a)(1) Distributions Following The Participant's Death. 27

2.6(a)(2) Distributions During The Participant's Lifetime- IRC §411(a)(11). 27

2.6(b) Defined Benefit Plans. 27

2.6(b)(1) Distributions Where A Participant Survives To The Annuity Starting Date: The QJSA- IRC §417(b). 27

2.6(b)(2) Distributions Where A Participant Dies Before The Annuity Starting Date: The QPSA- IRC §417(c)(1)(A). 28

2.6(c) Defined Contribution Plans Subject To REA-IRC §417(c)(2). 29

2.6(c)(1) The QJSA. 29

2.6(c)(2) The QPSA. 29

2.7 The Consequences Of Not Waiving The QPSA. 30

2.7(a) Post Death Waiver By Surviving Spouse. 30

2.7(b) The Effect Of A Beneficiary Designation In The Absence Of A QPSA Waiver. 30

2.8 Waiving The QPSA Prior to The Plan Year In Which The Participant Attains Age 35. 31

2.9 Misdescription of the QPSA Benefit in Plan Ancillary Documents. 31

ARTICLE 3 Does The Non-Employee Spouse Have A Community Property Interest In The Participant's Qualified Plan Or Ira Benefits That Is Transferable By Will Or Intestacy?. 32

3.1 The California Terminable Interest Doctrine. 33

3.2 Valdez V. Ramirez, 574 S.W.2d 748 (Tex. 1978). 33

3.3 Employee Savings Plan of Mobil Oil Corp. v. Geer, 535 F. Supp. 1052 (S.D. NY 1982). 35

3.4 MacLean V. Ford Motor Co., 831 F.2d 723 (7th Cir. 1987). 35

3.5 ALLARD V. FRECH, 754 S.W.2d 111 (Tex. 1988). 35

3.6 Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991)-Contra To Allard and Boggs. 36

3.7 Meek v. Tullis, 791 F.Supp 154 (W.D. Louisiana 1992). 36

3.8 Boggs v. Boggs. 37

3.8(a) The Boggs Facts. 37

3.8(b) The District Court Finding. 37

3.8(c) The Fifth Circuit Decision. 38

3.8(d) Is Boggs Important?. 40

3.8(e) The Supreme Court Decision. 40

3.8(e)(1) The Seven to Two Decision. 40

3.8(e)(2) The Five to Four Decision. 41

3.8(e)(3) The Undoubted Law. 42

3.9 Unresolved Problems in the Law Post Boggs. 43

3.9(a) Is the Nonparticipant’s Interest to be Included as Part of the Nonparticipant’s Estate If it Cannot Be Transferred?. 43

3.9(b) If the Nonparticipant’s Spouse’s Interest Is INCLUDABLE in the Estate, Does it Qualify For the Marital Deduction?. 44

3.9(c) What is the Interest of the Participant, On the Participant’s Death?. 47

3.9(d) How Does Boggs Affect Estate Planning?. 49

3.9(e) Possible Solutions to the Boggs Dilemma. 50

3.10 Distinguish IRAs, SEPs And Plans Covering Only Owners-IRAs and SEPs are Not ERISA Plans. 50

3.11 Income Taxation On Distribution of Nonparticipant Spouse’s Community Property interest—Who Pays the Income Tax?. 51

3.11(a) IRAs. 51

3.11(a)(1) The General Income Taxation Rules Under the Statutes. 51

3.11(a)(2) IRC §408(g). 51

3.11(a)(3) PLR 8040101. 52

3.11(a)(4) PLR 199937055. 52

3.11(b) Qualified Plans. 52

3.11(c) Death of the Nonparticipant—Nonqualified Plans. 55

3.11(d) Death of the Nonparticipant (or Participant) as an Assignment of Income. 55

3.12 Who Pays the Premature Distribution Tax On Distribution of The Nonparticipant Spouse’s Community Property interest?. 56

3.13 Beneficiary Designation Forms For the Nonparticipant. 56

3.14 Is a Probate Order A QDRO. 57

ARTICLE 4 A Decedent’s Interest under a Deferred Compensation Plan Is Generally Not subject to Administration Whether Or Not it is a Probate Asset, And Whether the Decedent is the Participant or the Participant’s Spouse IN A Community Property State. 58

4.1 Property Subject to the Sole Management of the Surviving Spouse. 58

4.2 The Liability Of The Survivor's Special Community For Debts. 58

4.3 Where Do Probate Assets Not Subject To Administration Fit In The Order Of Abatement. 59

4.4 The Survivor's IRA Or Qualified Plan Interest Is A Graphic Example Of The Survivor's Special Community. 59

4.5 Can The Executor Fund A Pecuniary Gift With The Decedent's Interest In The Survivor's Special Community?. 59

ARTICLE 5 CAN CREDITORS REACH a Person’s INTEREST IN A QUALIFIED PLAN OR IRA? 1