The IRS has announced that, in each issue of its quarterly “Retirement News for Employers,” there will be a column on a “common mistake that happens in retirement plans.” The IRS states that they will “describe the problem, how it happened, how to fix it, and how to lessen the probability of the problem happening again.” The first mistake that is being showcased in its Fall 2004 Issue is the problem of distribution to a participant of a benefit “in a form other than the required Qualified Joint and Survivor Annuity (e.g., a single lump sum) without securing proper consent from the spouse.” For those who might not be familiar with this issue, the article gives a good run-down of the J & S rules:
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. . .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.
The article goes on to note that the lack of spousal consent occurs many times because the sponsor’s human resources accounting system incorrectly classifies a participant as not married. However, the error can also occur when the employer doesn’t really know and understand the terms of the plan, or may have inadequate help in administering the plan. Either way, here is the “fix” for the error, as mentioned in the Newsletter and as also required under Revenue Procedure 2004-33 in Appendix A (via Benefitslink.com):
Normally, the correction method under VCP 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.
This means that the fix for this type of error has two unpleasant consequences:
(1) Notifying participants that there has been a mistake, and that there needs to be spousal consent to the distribution; and
(2) Having to pay out some “double” benefits if the plan can’t obtain the spousal consent for some reason (failure to respond, marital difficulties, divorce, etc.). (Unfortunately, the fix might also appear to present some “gaming” opportunities for spouses who happen to understand the rules, i.e. if I don’t consent, I get a benefit? Hmm. . . )
All of this highlights the importance of performing ongoing plan compliance audits to ensure that the plan is being operated in accordance with its written terms, the Internal Revenue Code, and ERISA. Even inadvertent errors can be costly.