The Retirement Equity Act of 1984 (P.L. 98-397, Aug. 23, 1984) (REA or REACT) amended ERISA and the Internal Revenue Code to require that all qualified plans provide certain death benefits to a Participant's surviving spouse.[1] Except in the case of certain profit sharing plans (and their non-pension kindred) these benefits must be paid in the form of a life annuity, in the absence of waiver and consent. In the case of certain profit sharing plans (and their non-pension kindred) the entire account balance of the participant must be paid to the surviving spouse, in the absence of waiver and consent, but only if the participant dies prior to the commencement of benefit distributions. See below.
If the benefit is required to be paid as an annuity, the annuity at retirement must be in the form of a Qualified Joint and Survivor Annuity, which will hereinafter sometimes be referred to as a QJSA; or, if death occurs prior to retirement, the annuity must be paid in the form of a Qualified Preretirement Survivor Annuity, which will hereinafter sometimes be referred to as a QPSA.
In a defined benefit plan, the QJSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50% (and is not greater than 100%) of the amount of the annuity which is payable during the joint lives of the participant and the spouse, and which is the actuarial equivalent of a single annuity for the life of the participant.[2] The QJSA in a defined contribution plan subject to REA[3] is defined similarly to that of a QJSA in a defined benefit plan, although the annuity to be provided will be whatever can be purchased with the participant's nonforfeitable account balance.
The QPSA is an annuity payable to the surviving spouse in an amount which is not less than the amounts which would be payable as a survivor annuity under the QJSA.[4] However, in the case of a defined contribution plan, the IRC contains a special rule which defines the QPSA as an annuity for the life of the surviving spouse having a value of no less than one-half the participant's nonforfeitable account balance under the plan, determined at date of death.[5]
One would assume that a life annuity is an annuity for life. However there is a very perplexing Pre-REA treasury regulation illustrating the joint and survivor annuity rules which clearly suggests that a life annuity may be an annuity payable for a term certain:
“(b) Definitions. As used in this section-(1) Life Annuity. (i) The term “life annuity” means an annuity that provides retirement payments and requires the survival of the participant or his spouse as one of the conditions for any payment or possible payment under the annuity. For example, annuities that make payments for 10 years or until death, whichever occurs first or whichever occurs last, are life annuities.”[6] (Underlining added.)
What about an annuity for 2 years or until death, whichever occurs first? How about 1 year? I find this regulation to be extremely disconcerting, since an annuity even for 10 years or until death, which ever first occurs, is simply not an annuity for life, in the ordinary sense with which the word life is usually considered. Further, even if the annuity were for life or ten years whichever last occurred, the payments during life would be less than otherwise, to compensate of the 10 year certain feature. What about life or 1000 years, whichever last occurs? How much monthly income would that type of “life annuity” generate? Since this regulation was issued prior to the passage of the Retirement Equity Act, it may be of dubious authority.
The QJSA must be immediately payable at the same time that any other benefit form would be payable. Therefore, a plan cannot offer a participant separating from service at age 45 a single choice between a single sum distribution immediately or a an annuity that would be a QJSA except that it does not commence until normal retirement age.[7] This is because under the IRC 411(d)(6) regulations, any options that the plan offers as to timing must be available to the participant, and the employer cannot retain the discretion to override the participant’s determination of this issue. On the other hand, neither the QJSA nor any other benefit exceeding $3500 in total value can be forced upon the participant (i.e., paid without consent) before the participant attains the later of age 62 or normal retirement age under the plan.[8]
The survivor benefits requirements of REA are stated as a condition of plan qualification by §401(a)(11) of the IRC.
§401(a) is the IRC section that begins "A trust . . . forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust if . . . " From 401(a)(8) through (a)(28) each paragraph generally commences with "A trust shall not constitute a qualified trust under this subsection [401(a)] unless . . . "
Consistent with this general pattern, §401(a)(11) begins:
"In the case of any plan to which this paragraph applies, except as provided in section 417, a trust forming part of such plan shall not constitute a qualified trust under this section unless-
"(i) in the case of a vested participant who does not die before the annuity starting date, the accrued benefit payable to such participant is provided in the form of a qualified joint and survivor annuity, and
"(ii) in the case of a vested participant who dies before the annuity starting date, and who has a surviving spouse, a qualified preretirement survivor annuity is provided the surviving spouse of such participant."
ERISA §205(a) contains a similar rule. ERISA §205(a) mandates that a qualified joint and survivor annuity and a qualified preretirement survivor annuity shall be provided by each pension plans to which the section applies. As in the case of IRC §401(a)(11), there are exceptions from ERISA §205(a).
§401(a)(11)(B) specifies the plans to which the general survivor annuity rules apply. The rules apply to all plans subject to the minimum funding rules of IRC §412. Further, unless certain conditions are met, the rules also apply to defined contribution plans not subject to minimum funding requirements. Simply put, the survivor annuity rules apply to all qualified plans except for certain profit sharing plans and their close kindred (stock bonus plans, 401(k) plans, ESOPs, etc.).
ERISA §205(b)(1)(C) contains a similar rule, except that the exception is for “individual account” plans that are not subject to the funding standards of ERISA §302, instead of for “defined contribution plans” not subject to the funding standards of IRC §412. Though the wording is different the meaning is the same.
The term “individual account plan” is defined in ERISA §3(34) and means the same thing as a “defined contribution plan.”
“The term “individual account plan” or “defined contribution plan” means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.”
The fact that there is an ERISA Title I rule in addition to an Internal Revenue Code rule may be important in the case of certain plans that may be subject to ERISA Title I, but that are not subject to IRC §401. Very few examples come readily to mind, but one important example is an IRC §403(b) plan.
Are §457 Plans and Rabbi Trusts individual account plans? Maybe, but since they are “top-hat plans,” Part 2 of Title I of ERISA, including §205 (the joint and survivor annuity rules), does not apply![9] A top-hat plan is an “unfunded”[10] plan maintained for a select group of management or highly compensated employees.
Since the Internal Revenue Code makes the survivor annuity rules applicable through application of IRC §401(a)(11), and from there to §417, it might follow that these rules will not apply to IRAs (Individual Retirement Arrangements), SEPs (Simplified Employee Pensions), 403(b) annuities, Rabbi Trusts or §457 Plans, since these are not plans governed by §401. This is important to note. The only problem is that the joint and survivor annuity rules are also found in Part 2 of Title I of ERISA, §205, as indicated above, and here there is no clear exception for 403(b) annuities or SEPs or any other funded “individual account plan.” ERISA, §205 applies to “pension plans” including “individual account plans.”
If §205 applies to SEPs, then the exception for individual account plans in which the surviving spouse is the sole designated death beneficiary would generally not apply because the employer’s contribution under the SEP is made to each employee’s individual IRA, and most IRAs don’t mandate that a spouse be the death beneficiary. Whether or not any portion of Title I of ERISA applies to IRAs and SEPs may depend upon the degree of employer involvement.[11] However, since a SEP is a form of IRA, and since IRAs are exempt from Part 2 of ERISA,[12] it follows that SEPs and other IRAs cannot be subject to the joint and survivor annuity rules even if the requisite degree of employer involvement is present, because the joint and survivor annuity rules are found in Part 2!
In regulations issued August 22, 1988, the Treasury held that the joint and survivor annuity rules do not apply to IRAs, including SEP-IRAs, even if they are subject to Title I.[13] The jurisdictions of the Department of Labor and the Treasury Department in ERISA cases frequently overlap. The DOL and others may be bound in those areas where the Treasury has been granted the power to interpret ERISA. If the Treasury has the regulatory authority to interpret the joint and survivor annuity rules in civil actions brought under Title I, then the joint and survivor annuity rules do not apply to IRAs, including SEP-IRAs for any purposes, tax or otherwise, even if those plans are subject to ERISA. Although an ERISA litigant in a civil case is not necessarily bound by regulations issued by the DOL or the IRS, the courts will give “considerable deference” to such regulations.
In Schwartz v. Gordon, 761 F.2d 864 (2nd Cir. 1985), a self employed individual sought to bring an action for breach of fiduciary duty under Title I of ERISA. However, the DOL regulations held that a Keogh plan covering only self-employed individuals was not a plan covering employees for Title I purposes. The plaintiff contended that the regulation was overbroad and that he should not have been bound by it.