Pursuant to its initiative to encourage retirement plans to offer better lifetime income options (see yesterday’s blog ), in Revenue Ruling 2012-3, the Internal Revenue Service (the “IRS”) has provided guidance on the application of the QJSA/QPSA rules to the purchase by a defined contribution plan of a deferred annuity contract to provide retirement benefits. The Revenue Ruling posits situations involving a defined contribution 401(k) plan, which allows the participant to direct the investment of his/her contributions (e.g., elective deferrals and matching contributions thereon) into a separate account through which the contributions are immediately applied to purchase a deferred annuity contract from an insurer. The Ruling makes three important points.
Point One: The plan will not be subject to the QJSA/QPSA rules with respect to a participant, so long as the following conditions are met:
–the plan is neither a defined benefit plan nor a defined contribution plan that is subject to the funding standards of § 412 of the Internal Revenue Code (the “Code”), thus meeting the first two conditions in § 401(a)(11)(B) of the Code;
— the participant’s entire nonforfeitable benefit under the plan is payable in full, on the death of the participant prior to the annuity starting date, to the participant’s surviving spouse (or, if there is no surviving spouse, the participant’s designated beneficiary), thus meeting the condition in § 401(a)(11)(B)(iii)(I) of the Code;
–the plan is not a direct or indirect transferee of a plan that was subject to the QJSA and QPSA requirements with respect to the participant, thus meeting the condition of § 401(a)(11)(B)(iii)(III) of the Code; and
–the participant may not elect to have his/her benefit paid in the form of a life annuity, thus meeting the condition in § 401(a)(11)(B)(iii)(II) of the Code. This condition may be satisfied even if the deferred annuity contract pays a life annuity unless the participant elects otherwise by his/ her annuity starting date. However, the condition fails to be satisfied-and the deferred annuity contract (but not the entire plan) becomes subject to the QJSA/QPSA rules- if the participant makes no election by the annuity staring date, and thus will receive payment in annuity form.
Point Two: If the deferred annuity contract pays benefits only in an annuity form, the amounts payable under the contract will generally be subject to the QJSA/QPSA requirements. This obtains because the participant will be treated as having elected a life annuity, and thus failing to meet the condition for exception to the QJSA/QPSA requirements in § 401(a)(11)(B)(iii)(II) of the Code.
Point Three: If the deferred annuity contract pays a death benefit to the participant’s surviving spouse in the form of a life annuity, based on 100% of the contributions used to purchase the contract, the deferred annuity contract feature of the plan satisfies the requirements in the Code and regulations for a QPSA (see § 1.401(a)-20, Q&A-20). Further, if the life annuity may not be waived in favor of another form of payment or a nonspouse beneficiary, since the deferred annuity contract fully subsidizes the costs of the QPSA (i.e., no charge is imposed for the coverage), the plan is not required to provide the written QPSA explanation or obtain any spousal consent (§ 417(a)(3) and (5) of the Code ) with respect to the deferred annuity contract.