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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has issued IRS Letter Ruling 201048044 clarifying the application of the QJSA rules under Code Sec. 401(a)(11) and Code Sec. 417 to 401(k) plan distributions under an investment option that provides guaranteed annual lifetime income. According to the IRS, the election to receive the guaranteed benefits, but not the election to participate in the investment option, will require the benefit to be paid as a qualified joint and survivor annuity.
Target date fund would provide guaranteed annual lifetime retirement income
A limited partnership sponsored a 401(k) plan that proposed a new plan investment option consisting of a target date fund that would provide guaranteed annual lifetime retirement income. Participants would be able to choose to invest all or a portion of their funds in the plan under the option.
Under the option, as retirement age approaches, a portion of the participant's investments would be automatically directed into group flexible premium variable deferred annuity contracts issued by insurance companies. The portion of the participant's funds invested in the option that would be directed towards variable annuity contracts would be gradually phased in, beginning at the time the participant attained age 50. By the time the participant attained age 60, all funds in the option would be invested in variable annuity contracts. Because of the guaranteed secured lifetime income benefit, a participant's investment in equity markets relative to fixed income investments would not (unlike traditional target date funds) be adjusted downwards as the participant approached retirement age.
Upon retirement (but no earlier than age 62) a participant may elect to receive lifetime payments in amounts determined as a guaranteed percentage of the asset value of the portion of the participant's individual account under the option. Alternatively, a participant may decline to make an election and withdraw funds on an ad hoc basis until all funds have been withdrawn from his or her account.
In the event a participant makes a withdrawal election, the participant, absent any further action, will receive guaranteed withdrawals for the remainder of his or her lifetime in amounts equal to or greater than the initial guaranteed withdrawal amount. Note, although guaranteed withdrawals would be treated as withdrawals from the participant's account for purposes of determining the participant's account balance, the guaranteed withdrawals would be paid regardless of the amount of funds, if any, remaining in the participant's account.
Guaranteed withdrawals as life annuity under QJSA rules
The initial issue reviewed by the IRS was whether guaranteed withdrawals under the option would constitute a life annuity for purposes of the qualified joint and survivor rules of Code Secs. 401(a)(11) and 417. Note, the joint and survivor requirements generally do not apply to self-directed 401(k) plans unless a participant elects payments in the form of a life annuity.
Initially the IRS explained that, under IRS Reg. §1.401(a)-11(b)(1)(i), a life annuity is an annuity that provides retirement benefits and conditions payments or possible payments under the annuity on the survival of the participant. The IRS noted that the election by a participant to begin guaranteed withdrawals would be an election by the participant of an annuity that provided retirement payments and required the survival of the participant as a condition of receiving annuity payments. Accordingly, the IRS concluded that the election to receive guaranteed life withdrawals (but not the election to merely participate in the investment option) would be an election to receive benefits in the form of a life annuity, requiring application of the QJSA requirements.
Annuity starting date
The second issue addressed by the IRS was the applicable annuity starting date for QJSA purposes. The annuity starting date, under Code Sec. 417(f)(2)(A), is the first day of the first period for which an amount is payable as an annuity, or (if the benefit is not payable as an annuity) the first day on which all events have occurred which entitle the participant to a benefit.
The IRS concluded that the applicable annuity starting date for QJSA purposes would be the date the participant elects to receive the guaranteed benefit and the dates (if any) that an increase in the guaranteed withdrawal amount occurs as a result of an internal transfer or an external rollover. As a consequence of the IRS position, a QJSA waiver and any required spousal consent would need to be provided within 180 days prior to the participant's election to receive the guaranteed benefit (or the date of an increase in the guaranteed amounts). Absent such a waiver under Code Sec. 411, the guaranteed annual lifetime retirement benefit would need to comply with the QJSA rules.
IRS Letter Ruling 201048044.
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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