Many retirement plans are required to distribute benefits to participants in the form of a Qualified Joint and Survivor Annuity (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.
A QJSA must be provided to all participants under a defined benefit plan, money purchase plan or target benefit plan.
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 which was required to provide a QJSA.
If the QJSA rule applies to a participant, a QJSA is mandatory unless the participant elects a different form of payment available under the plan. An election by a married participant to take a different form of payment, even if it is only for a portion of the participant’s benefit, is not effective unless the participant’s spouse also consents to the election. If the lump sum value of the participant’s benefit is $5,000 or less, a lump sum can be paid instead of a QJSA without obtaining the participant’s election or the spouse’s consent.
A common plan mistake submitted for correction under the Voluntary Correction Program (VCP) or discovered during an IRS audit is the distribution to a married participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse. This often happens when the sponsor’s human resources accounting system incorrectly classifies a participant as not married. 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 the Employee Plans Compliance Resolution System for a failure to obtain spousal consent requires the Plan Sponsor to notify the affected participant and spouse (to whom the participant was married at the time of the distribution) so that the spouse can provide spousal consent to the distribution actually made. If spousal consent to the prior distribution cannot be obtained because the spouse refuses to consent, does not respond to the notice or because the spouse 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.
Alternatively, the plan may offer the spouse the choice between:
- receiving the spousal benefit mentioned above or
- a single sum payment equal to the actuarial present value of that spousal benefit calculated using the applicable interest rate and mortality table under IRC 417(e)(3)
Making Sure It Doesn’t Happen Again
The QJSA rules are an important requirement that protects the interests of participant spouses. Plan sponsors should determine whether these rules apply to their plans. If they do, ensure that proper consents are secured before retirement benefits are paid out.