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The Qualified Joint and Survivor Annuity (QJSA) notice distributed by the IRS is meant to protect a beneficiary and his or her spouse by requiring certain retirement contribution plans to pay a survivor annuity to a contributor's spouse of not less than 50 percent of the annuity paid to the contributor. This notice applies to money purchase pension plans, benefit pension plans, and profit sharing/401(k) plans that have an annuity option, unless the contributor and his or her spouse waive the annuity payment option.

However, it came to the attention of the IRS that many contributors were finding it difficult to understand their options with regard to the QJSA notice without seeking professional aid, and it was feared that contributors were choosing to receive benefits in a lump sum rather than cashing in on the terrific value that subsidized QJSAs can furnish.

In response to its concerns, the IRS modified the inclusion requirements of QJSA and Qualified Preretirement Survivor Annuity (QPSA) explanations of benefits late last year. In addition, the new IRS regulations also detail the means by which relative values of benefit forms should be disclosed to contributors. These regulations apply to plans with an annuity starting date of February 1, 2006 or later, and thus QJSA disclosures must have been provided to plan contributors on or before November 1, 2005.

What are the Two Types of Disclosures?

QPSA Disclosure

A QPSA disclosure is required to relate specific information to contributors. First, it must provide a general description of the QPSA, and, if the plan is selected, the conditions under which it will be paid. Information concerning its availability must also be provided. Finally, contributors must be informed of the financial effect a QPSA might have on his or her retirement benefits; for example, the disclosure should provide an estimate of the monetary increase or decrease of retirement benefits expected with the election of the QPSA. Alternatively, the disclosure is permitted to provide a generalized description of financial effects, with the condition that contributors are informed of their right to request more specific and detailed information.

The disclosure is not required in all cases. Rather, it is only a requirement if the QPSA is unsubsidized or is only partially subsidized and does not provide the contributor with the option to waive the QPSA or choose a beneficiary other than his or her spouse. Many plans do, in fact, fully subsidize, but some fully subsidized cash balance and money purchase pension plans permit nonspouse beneficiaries to be selected, and in these cases, the QPSA disclosure remains a requirement.

QJSA Disclosure

A QJSA disclosure notice is required to provide certain information for every optional benefit form. The optional form must be given a general description, and requirements for eligibility must be outlined. In addition, an explanation of the expected financial effects of the option's selection must be provided. For the included benefit plans the disclosure is also required to provide a numerically based comparison of the relative value of the optional benefit to the expected value of the QJSA. Finally, the disclosure must give a description of any additional material features of the optional benefit form.:

Methods for QPSA and QJSA Disclosures

According to the new IRS regulations, which are meant to simplify contributors' understanding of the QPSA and QJSA notices, all notices must be provided to contributors directly, either via hand delivery or through first-class mail to a known home address. In addition, the language of the notice must be written in plain language, with an avoidance of the excessive legalese that will disallow the "average plan participant"from fully comprehending its contents. The notices cannot simply be posted on a bulletin board or presented in some other public manner.

Content of QJSA Relative Value Disclosures (applies only to defined benefit plans)

Both QPSA and QJSA disclosures must contain information concerning the relative values of compared benefit options, but this can be a complicated calculation. In an attempt to standardize this process and aid in its successful and meaningful execution, the IRS regulations give several means by which the comparisons can be made.

  • The actuarial present value of the optional form of payment can be expressed and disclosed as a percentage or factor of the actuarial present value of the QJSA (or of the single life annuity if there is no spouse).
  • The payable value of an annuity can be provided given identical conditions, temporal and otherwise, as the QJSA and should be disclosed as the actuarial equivalent of each of the optional forms of payment.
  • The actuarial value of each of the optional forms of payment can be disclosed.

Grouping Rules for Relative Value Disclosures

In a further attempt to ease the process of calculating and disclosing relative value comparisons, when providing explanations, the IRS regulations permit the grouping of certain optional forms of payment given that the relative value of each of the payment forms is with five percentage points of the others in the group. Not every optional form of payment is then described in detail; rather, one is specifically described, and the others are stated to possess approximately the same value. If the grouped options have one member that provides a lump sum distribution, it is this member option that must be described specifically.

Another rule allows for the grouping of all optional forms of payment that have relative values within 95 percent of the QJSA. These optional forms of payment can then be described as being "approximately equal in value" to the QJSA.

In terms of a single life annuity, optional forms of payment whose relative values fall between 95 and 102.5 percent of the single life annuity can be grouped; the regulations permit these optional forms of payment to be described as being "approximately equal in value" to the single life annuity.

The Assumptions Used in Relative Value Disclosures

The idea of a relative value must be explained and described in the QJSA disclosure, and its purpose must be outlined. For example, the disclosure must state that the relative value comparison is meant to provide contributors with a way to compare the values of a distribution when paid using different options (e.g., lump sum versus annuity). It should also inform contributors that the comparison is calculated by converting the present value of optional forms of payment to a common form (e.g., the QJSA or a lump sum payment) in order to make a meaningful comparison. Additionally, contributors must be informed of the use of life expectancy calculations and interest assumptions when arriving at comparison values; it is required that the relative value disclosure contain a statement that "comparisons are all based on the average life expectancies, and under an annuity optional payment form the value of payments made will depend on actual longevity."

Optional Methods to Comply with QJSA Disclosures

While it is required by the IRS regulations that QJSA disclosure statements provide information on the financial effects of electing a particular optional benefit form, it is not required that this disclosure be tailored to individual contributors. Alternatively, it is permitted to provide general information only, with the stipulation that contributors are informed of where and how they can seek and obtain further information.

If a general explanation of the QJSA is provided, it can take the form of a chart or another, similar vehicle of comparison that displays the hypothetical financial effects of the selection of various optional forms of payment across a range of applicable ages. In addition, along with a general explanation, the disclosure must contain the amount payable to the contributor at the normal time of retirement or upon commencement beginning immediately under the normal payment option of the plan. Contributors must be informed of their right to seek individualized information.

Legal Issues in QPSA and QJSA Disclosures

As plan coordinators have worked to reform disclosures in order to meet the new requirements imposed by the IRS, coordinators and their actuaries have uncovered several plan design and qualification issues that will need specific and immediate attention from a legal professional to resolve. For example, dependent upon the actuarial assumptions used when determining relative value comparisons, some married couples might not gain the most benefit from a QJSA election, although this is required by the IRS regulations. In addition, it has been discovered that the actuarial factors used in determining the value of decreasing annuities may go against the requirements for tax qualifications. Finally, some plan coordinators have found that their plans offer optional forms of payment to employees that had not been offered previously.

What You Need to Do:

If you offer a benefit plan that falls under the new IRS regulations, you should be sure that any distribution packages with payments beginning on or before the effective date of February 1, 2006 are in compliance.

If you need to obtain annuity quotes, our company provides that service for a fixed fee.

Please call Hersh Stern at 866-866-1070 for details.

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