Eliminating QJSA as the Normal Form of Benefit
When companies terminate 401(k) plans with annuity options, they face a potential problem. That is, what course of action should they take if they don’t receive responses from some of the participants?
We are working for a company facing that very problem. The company was in the process of terminating the 401(k) plan of an acquired entity. In the process of distributing plan assets, the company sent notices to participants regarding distribution elections. Although most participants signed and returned their distribution forms, twelve failed to do so. Of those twelve, half had account balances less than $5,000. Our client attempted to find the twelve individuals, in accordance with the DOL guidance on locating missing participants. However, their efforts did not produce results.
As background, the IRS has provided guidance in the form of a Revenue Ruling that, in order to terminate a qualified plan, the date of termination must be established, and all plan assets must be distributed as soon as administratively feasible after the date of termination. The Revenue Ruling also provides that, if distributions are not completed within one year following the date of termination specified by the employer, it will be presumed ongoing.
In our case, the 401(k) document provided that the normal form of benefit was a qualified joint and survivor annuity (“QJSA”). That provision was problematic, because the participants were married and neither they nor their spouses could be located to waive the annuity. As a practical matter, most insurance companies will not sell annuities without an application signed by the participant. In working with our client, we proposed the following solution.
Since the plan had been amended to comply with the automatic rollover rules for accounts less than $5,000, the first step was to rollover those accounts to IRAs. That left the six remaining missing participants with accounts greater than $5,000. In order to distribute their accounts, the second step of the solution was to amend the plan to eliminate the QJSA option as the normal form of benefit. We were able to eliminate QJSA in this instance because the plan was a non-pension defined contribution plan (and was not a transferee plan with respect to a pension plan) and the participants had a single sum distribution option. By eliminating the QJSA option as the normal form of benefit, the plan was able to take advantage of DOL guidance which provides that a terminated defined contribution plan without annuity options can distribute all benefits as involuntary single-sum distributions. As a result, the plan was able to distribute the plan assets of the six remaining missing participants with account balances greater than $5,000.
NOTE: The new Pension Protection Act will permit terminating defined contribution plans to transfer the accounts of missing participants to the PBGC.
© 2006
Luftman Reicher & Cohen. All rights reserved. The Report to 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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