Keep It Simple—Elimination of Joint and Survivor Annuity Form of Benefit
Many 401(k) and profit sharing plans offer joint and survivor annuities as a distribution option-—increasing the complexity and cost of administering these plans.
Some of our clients have asked for help in eliminating the joint and survivor annuity requirement in their plans to ease the administrative burden and to reduce the cost of administration. The additional effort of offering joint and survivor annuities and of providing the required disclosures was not justified because the experience was that employees did not use that option. In many cases, the plans offered annuity benefits because of the merger of another plan into their plan or because of the use of a prototype document (a form document used by the plan’s investment provider).
Generally, plans may not be amended to eliminate distribution options (and other legally protected features). Doing so could disqualify the plan. However, the law does permit the elimination of joint and survivor annuities from profit sharing and 401(k) plans—-in most cases-—as long as the plan offers a single sum (or lump sum) distribution that is “identical” to the eliminated annuity. That is, as long as the plan offers a lump sum payment option that is available at the same time and has the same value as the joint and survivor annuity, you can eliminate joint and survivor annuities. There are conditions to those amendments, including a requirement that notice must be given to participants at least 90 days before the effective date of the amendment. The cost of these amendments and notices are quickly recovered through the saving of time and money due to simplifying the plan’s distributions.
The Department of Labor recently issued Field Assistance Bulletin 2003-3 (located at our website at www.reish.com/pa/benefits/fabintro.cfm) concerning the charging of participants, or their accounts, for distributions. In that FAB, the DOL reversed its prior position and agreed that-—absent contrary language in the plan document-—participants could be charged reasonable amounts for distributions.
© 2003
Reish Luftman Reicher & Cohen. All rights reserved. The ERISA Report for Plan Sponsors is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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