The point is that a profit-sharing plan subject to the REA survivor annuity rules provides a greater opportunity for flexibility for estate planning purposes, because the participant can designate an individual or entity as a beneficiary other than the surviving spouse for 50% of the account.

A recent case shows how the QPSA provision works in a profit-sharing plan. In National Automobile Dealers and Associates Retirement Trust v. Arbeitman (9th Cir.July 10, 1996-No. 95-3137), the decedent-participant was employed by two auto dealerships, each of which adopted identical profit-sharing plans pursuant to an industry-related master pension and profit-sharing plan and trust.16

Prior to divorce, the participant designated his then wife as the beneficiary of one plan; this beneficiary designation was not changed after the divorce. The plan's terms specified that the QPSA rules were applicable, so that 50% of the value of the account balance had to be distributed to the participant's new wife as the surviving spouse. The surviving spouse argued that the remaining 50% could not be distributed to the ex-wife and that she (the surviving spouse) was entitled to the entire account balance, because she (the surviving spouse) had not consented to the designation of the ex-wife as the beneficiary of the no-QPSA 50% portion of the account balance. The court pointed out that spousal consent was not necessary to permit the non-QPSA 50% portion of the account balance to be distributed to any beneficiary designated by the participant. Accordingly, the court held that the ex-wife was entitled to 50% of the account balance. The message of this article is simple. Foremost, we estate planners must determine what our clients want. We should not assume that a client who is a participant in a profit-sharing plan which is not subject to the REA survivor annuity rules actually wants his or her surviving spouse to receive the entire account balance, in effect, as a lump sum. If the client does not want that result, you should consider making the profit-sharing plan subject to the REA survivor annuity rules as one method of achieving your client's goals.17

Endnotes

1-There are five conditions for a profit-sharing plan to be exempt for the REA survivor annuity rules:

  1. the non-forfeitable account balance must be payable in full to the surviving spouse
  2. the participant does not elect a payment in the form of a life annuity
  3. with respect to the participant, the plan is not a transferee or offset plan
  4. the benefit is available to the surviving spouse within a reasonable time after the participant's death
  5. the benefit is adjusted for gains or losses occurring after death consistent with the plan rules governing such adjustments for other plan distribution. Code Sec. 401(a)(11)(b)(iii); Reg. § 1.401(a)-20 Q&A-3(a) and (b)

2-Reg. § 1.401(a)-20 Q&A-8(a). The QJSA rules apply not only to the retirement distributions, but to all distributions made during the participant's lifetime. Reg. § 1.401(a)-20 Q&A-9.

3-Reg. § 1.401(a)-20 Q&A-8(a); Reg. § 1.401(a)-20 Q&A-10(a).

4-Reg. § 1.401(a)-20 Q&A-20.

5-See, National Automobile Dealers and Associates Retirement Trust v. Arbeitman, (8th Cir. 7/10/96, No. 95-3137) discussed below.

6-The author has been told that employers, particularly large employers, seem to prefer profit-sharing plans which are not subject to the REA survivor annuity rules, because such plans are easier to administer by reason of the lump-sum distributions at the participant's death. The issue is whether this convenience to the employer outweighs the potential adverse effect to the participants' estate planning goals caused by the lump-sum payments.

7-Reg. § 1.401(a)-20 Q&A-33(a).

8-Reg. § 1.401(a)-20 Q&A-24(a)(1), confirms that loans can be made without spousal consent because the profit-sharing plan is not subject to Code Sec. 401(a)(11). See, also, note 3 and Reg. § 1.401(a)-20 Q&A 33(A) (account balances can be used as security for loans).

9-Reg. § 1.401(a)-20 Q&A 3(b)(1); Reg. § 1.401(a)-20 Q&A 22(b). These regulations provide that 90 days after the date of death is considered to be a reasonable time, that a longer period may be acceptable under the circumstances, and that the distribution to the surviving spouse is to receive the same timing treatment as any other distribution to a participant.

10-Under the so-called "Rule of 72" any combination of years multiplied by the interest rate (here, 8 x 9%) which produces "72" will double the amount at the start of the measuring period.

11-In the case of a large employer, the wishes of a client (and even a number of other employees) may not be sufficient reason to persuade the employer to change a profit-sharing plan which is not subject to the REA survivor annuity rules. But, for the client who has a significant role in the employer's business, the change should be easy to accomplish given the estate-planning importance of having a profit-sharing plan subject to the REA survivor annuity rules.

12-Of course, the participant and spouse could execute a waiver and consent whereby the spouse agrees to some other form of disposition of the profit-sharing plan's account balance at the participant's death.

13-This issue was discussed in the author's prior article appearing in the August 26, 1996 issue of Pension and Benefits Week in the context of qualifying for the so-called spousal "rollover" for individual retirement accounts.

14-If the participant believes that some other form of distribution to the surviving spouse is desirable in place of the 50% QPSA annuity, there is an alternative to a waiver and consent which may be acceptable to the participant. The plan can give the surviving spouse the right to change the form of distribution to any other form permitted by the plan (e.g. lump-sum or installment payments that satisfy Code Sec. 401(a)(9)). Reg. § 1.401(a)-20 Q&A 31(b)(3).

15-There is always the question as to whether the waiver and spousal consent has been done correctly. See Lasche v. George W. Lasche Basic Retirement Plan, 870 F.Supp. 336–(SD FL 1994)(Merrill Lynch plan consent form held invalid).

16-Although the court's opinion is not clear, the briefs in this case clearly disclose that two profit-sharing plans were involved. The facts do not state whether the participant-decedent was aware of the QPSA provision and affirmatively decided that his former wife should have the non-QPSA 50% amount or just forgot to change the pre-divorce beneficiary designation. The trial court found that, after the divorce, the participant and his ex-wife maintained an amicable relationship and that the participant provided more support to the ex-wife and his children than he was legally obligated to provide. Whatever the reason for not changing the beneficiary designation, the case is important if only because it illustrates how the QPSA rule works in a profit-sharing plan. Actually, because of the almost bizarre fact situation involved, this case also illustrates the beneficial effect of the flexibility resulting from a profit-sharing plan that is subject to the QPSA rule. The brief of the ex-wife's counsel stated: "By the time of Harold's [the participant's] death, Donna [participant's second wife] and Harold each had petitioned to dissolve their marriage, had fought throughout their divorce proceedings, and were living apart from each other." Without the QPSA rule being applicable, the entire profit-sharing plan account would have gone to the second wife; the ex-wife, who continued to have an amicable relationship with the participant and the mother of his two children, would have received nothing. With regard to the second profit-sharing plan involved in Arbeitman, the participant did not name a beneficiary, so that benefit went to the surviving spouse under the beneficiary-default provision in that plan.

17-One approach would be to amend the plan to provide that an amount up to 50% of a participant's account balance as of his or her death shall be distributed to any beneficiary designated by the participant. This would violate one of the conditions necessary for establishing a profit-sharing plan which is not subject to the REA survivor annuity rules. See note 1, above.

Reprinted with permission of Pension and Benefits Week, October 14, 1996. Research Institute of America. Subscriptions: 800-421-9025, $250/ yr.