We have now begun the “season of restatement” for 403(b) plans, which will run until March 2020. This is not a joyous yuletide sort of season; it is instead one of reckoning, I’m afraid. This is because we have been able to effectively ignore a number of difficult issues involving plan documents until now, because it was never critical to address them. But now we must.  It really is going to be a season of learning for us all-for the regulators at the IRS and DOL and practitioners as we try to weave our way to some sort of sensible solutions.

The application of the Spousal Consent and Joint and Survivor Annuity rules is one such issue which we need to consider.  In the 401(a) space, dealing with this issue is pretty straightforward.  The rules apply uniformly to all 401(a) plans through 401(a)(11) and 417, which is well coordinated with ERISA’s requirements under Section 205. As long as the default form of benefit under the plan is not a J&S benefit; and the spouse is entitled to the survivor benefits upon the participant’s death unless the spouse consents otherwise; the rules are met. If, however,  the plan is a money purchase plan, or holds money transferred in from a money purchase plan or a defined benefit plan, or the plan’s default distribution is an annuity payment, the spouse must consent to a lump sum distribution-or even to a loan. Many will remember the efforts we went through years ago cleansing those annuity payment requirements from plans and products, just so no spousal consent would be required for lump sum distributions or loans.

Now, though, we have to deal with documenting these rules as they apply to 403(b) plans. Its not so simple:

• 401(a)(11) and 417 do NOT apply to 403(b) plans This means the only way the spousal rights rules apply to 403(b)plans  is through ERISA Section 205.  This means that if you have a non-ERISA 403(b) plan, the spousal rights rules DO NOT apply. Be careful to avoid inadvertently applying them in the restatement.
• HOWEVER, many non-ERISA 403(b) annuity contracts impose the spousal rights rules as a matter of contract language, even though they may not be imposed as a matter of law. Because the underlying contract is technically part of the plan document, this means those spousal rights will apply as a matter of a plan term. Be careful with your documentation of this. There is an interesting problem here: if the central “wrap” plan document states there are no spousal rights, but the underlying contract states that there are, there is a conflict-and  IRS rules says that the wrap plan document language will govern. But the problem is that the insurer is legally bound to honor the spousal rights as a matter of contract, and CANNOT legally ignore such claims. Screwing up the plan document language will inevitably lead to litigation, especially given when large account balances are involved, so be careful.
• ERISA 403(b) plans are covered by the spousal rights rules, by virtue of ERISA Section 205. If the underlying annuity contract provides that the default payment is an annuity-as many old contracts, particularly individual ones will-ERISA will require spousal consents for lump sum payments and loans. Even if the wrap plan document makes the normal form of payment a lump sum in an attempt to “cleanse” this problem, the DOL has never concurred with the IRS’s position that the centralized plan documents control. The insurer is legally bound to follow the contract terms; and it is a registered security, which can cause security law problems if this language is ignored. So, again, be very careful in your restatement, especially if you have legacy contracts in the plan.
• Finally, there’s the “money purchase plan” issue. It is typical for a 403(b) plan to provide a set percentage of pay as the employer benefit under the plan, much like a money purchase plan. There is a very real and unresolved issue as whether or not this set formula makes the plan a “money purchase plan” which is subject to the J&S rules, even if you have avoided the “annuity” language problem noted above. There is a sound position that such plans are NOT money purchase plans. [*] This  is a substantial issue and one upon which you will need to make a determination when you restate the 403(b) plan.

[*] A money purchase plan is defined only by Code Section 401(a)(27), as a 401(a) tax qualification requirement-which does not apply to 403(b) plan. Under ERISA 205, an individual account plan becomes subject to the J&S rules only if it is a “money purchase plan” under Section302(a)(2)(B).  ERISA does not define “money purchase plan,” and it would be difficult to apply any other definition than that which is contained in the Code-which, here, does not apply to 403(b) plans.

_______

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.