Chapter 10: Distributions & Insurances Flashcards by Geoff White

Congress enacted rules requiring pension plans, profit sharing plans & stock bonus plans to make available distributions in the form of an annuity, payable over the joint lifetime of the participant and or his or her spouse unless what?

The spouse affirmatively agrees to a different benefit form.

Furthermore, that agreement must be in writing and witnessed

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The law also permit certain benefits to be provided by insurance which include life, accident, and health benefits. There’s a limit on the amount of these benefits, and they must be what to the normal purpose of a plan?

Incidental.

The ambiguous phrase means that the plan must predominantly provide retirement benefits

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A plan must provide a qualified joint and survivor annuity unless what?

What feature must both the QJSA and the QPSA offer?

Exempt from this requirement

Distributions have death payment features

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The Q JSA has two variants what are they?

A joint and 50% survivor annuity for the remaining lifetime of the surviving spouse.

A joint and 100% survivor annuity would provide a surviving spouse to the same annuity payment. The Participant received during their lifetime.

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The QJSA is the joint and survivor annuity that the participant is required to receive minus what?

Absent any election to the contrary

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The Plan document must specify the survivor annuity percentage that will apply to the QJSA. Can the Plan provide two or more survivor annuity options and let the participant elect?

Yes

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If the Participant is not married, the QJSA is the mandatory form of benefit benefit absent the participants election to the contrary and is simply what?

A life annuity which provides payments during the participants life

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Does the statutory provision require payment of a QJSA to an unmarried participant?

Not specifically

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A defined contribution plan may satisfy the QJSA requirements by purchasing a non-transferable annuity contract from an insurance company. What must be used to purchase the QJSA?

The entire vested account balance

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The level of annuity payment under the QJSA will depend on these for criteria:

Account value
Age of the participant
Age of the participant spouse
Annuity purchase rates

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AQJ essay must always be provided to participants under a DB plan, a money purchase plan or a target benefit plan. What is the requirement with a profit plan or stock bonus plan?

It is not required if the plan satisfies certain requirements

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A profit plan or stock bonus plan is exempt from the QJSA obligations if all requirements are satisfied. Failure to satisfy anyone requirement will do what?

Subject the Participant to the QASA rules

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What are the four requirements that must be met to relieve the responsibility of following the QJSA rules in a profit-sharing or stock bonus plan?

The spouse must be the beneficiary in full

Life annuity option cannot be elected. (This is satisfied if there is no life annuity option in the plan or if the participant does not elect into the plans, life annuity option.)

Account balance does not include direct transfer from a plan that was subject to QJSA

No floor offset arrangement with the DB plan

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So all four criteria need to be satisfied in order to relieved of the QJSA requirement.

The third criteria “ account balance does not include direct transfer from a plan, subject to QJSA” has some wiggle room. What’s the wiggle room? There are two items to consider.

Item 1: If the balance includes a direct transfer from my Q JSA Plan, and if separate accounting is set up for that balance inside of the account, then the Q J essay rule can be limited to just that separate account.

Item 2: a direct transfer does not include a rollover or elective transfer of distributable benefits

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A company offers a money purchase plan and a profit-sharing plan. The company decides to terminate the money purchase plan and emerge the plan into the profit-sharing plan. What will happen to the Q JSA requirement and why?

Separate accounting will be run and the the QJSA requirement will be specific to the money purchase plan assets.

The mere transfer of the assets into the profit training plan will not require the profit-sharing plan to apply QJSA rules.

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What are some examples in the profit plan or certain participants might have to deal with the QJSA requirement and others wouldn’t?

If the plan permits, life annuity options, and a participant takes advantage of that.

A Participant might receive a transfer from a Q JSA Plan

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What requirement is absolutely necessary in a stock bonus or proctoring plan to relieve the responsibility of Q JSA?

Surviving spouse is the automatic beneficiary

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If the QJSA rule applies to a participant, the QJSA form of payment is mandatory unless the Participant:

Alex, a different form of payment available under the plan.

Married Participant will need spousal approval

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A plan that is subject to the QJSA rules must also provide participants a second annuity option called a?

Qualified optional survivor annuity

QOSA

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What’s difference between the QOSA and the QJSA?

The QOSA value is the actuarial equivalent of the QJSA

If the QJSA annuity provided is less than 75% then the QOSA must provide for a 75% annuity.

If the QJSA annuity provided is 75% or greater the QOSA must be a 50% annuity.

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In the furtherance of protecting beneficiaries in the event of a pre-Retirement death by a Participant, the QJSA rules apply what type of pre-retirement survivor benefit must be made available in addition?

A qualified pre-Retirement survivor annuity QPSA

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The QPSA is purchased with the vested amounts in a defined contribution account left to the beneficiary. The amount used to purchase the QPSA must be within this range of the rest of the account balance?

No less than 50% and no more than 100% of the rest of the account balance

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A participant must receive the explanation of the QPSA and an opportunity to waive the benefit.

What should the explanation of the QPSA contain?

General description

How it’s paid

How it’s elected

Financial affect of the QPSA election

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The financial effect of electing to waive, the QPSA may be provided through a general description, such as in the form of a chart. What can the participant request in terms of an estimate? If the election is made, what is a circumstance where the statement is not required?

**If a reduction in benefits is expected**: An estimate as to the projected reduction to his or her retirement benefits. **If no reduction is anticipated**: the QPSA does not reduce the retirement benefit.

The QPA ex explanation must be provided during the period that begins with a plan year in which the participant attained age 32 and ends with a plan year in which the participant attained what age? If an employee becomes a participant after that age, when should the employee be notified?

35 No later than one year after the employee becomes a participant

A waiver of the QPSA may be made at any time after the first day of the Plan year in which the Participant attains 35. The Plan may permit the Participant to wave the QPA before age 35 but the waiver becomes invalid at 35 and what is required?

A new notice in waiver. Must be provided.

Spouse will consent to the QPS waiver must contain the three following

Being in writing Witnessed by a notary Acknowledge the effect of the Participant election

The QPSA waiver and the spouse consent to that waiver do not have to address the form of payment that will be made to the non-spouse beneficiary. The consent is not valid unless they consent to what?

The naming of of any non-spouse beneficiary designated to receive the pre-retirement benefit

The spouses consent for a QPSA waiver, which seeks to name a beneficiary other than the spouse can or cannot be satisfied in a prenuptial agreement?

Cannot

If the QPS essay is fully subsidized, what happens to the waiver election availability?

Then the waiver election is not available and the QPSA becomes automatic

If the QPSA is payable to the s surviving spouse, there are two consent rules that might be applicable. The spouse cannot be permitted to receive the QPSA before the participant reach reached what age? The plan may permit the spouse to elect what instead of the QPSA?

Age 62 Optional form of payment

Similar to involuntary distributions lump sum payments may be provided by the plan if the value of the QPSA does not exceed what amount? Is the plan able to exclude rollovers when calculating?

$7000 The S rollovers can be excluded to determine if the vested balance is less than $7000

The plan may require the Participant and spouse to be married for how long on the date of the participants death for the QPSA rules to apply? It’s important to know that this is a Plan election and not a regulation.

One year If the length of marriage is less than one year to the day on the date of the Participant death in the QPSA rules dO not apply

What determines whether it is the QPSA or the QJSA that is utilized for payments of benefits in the event of a participants death?

If the participant dies before the annuity starting date, then the QPSA must be used. If it is after the annuity starting date, then the QJSA is used

If the QPSA has been waived than the pre-retirement death benefit is provided to whom?

The beneficiary named by the recipient to whom the spouse has consented as part of the waiver

If the QPSA has not been waived, then there may or may not be a portion of the Participant’s vested account balance that is subject to the QPA, true or false?

True

If a participant dies while working and out of their vested account balance, the Q PSA was set at a 50% level what two things will happen?

1) the trustee will purchase an annuity contract to provide the QPSA annuity payments with 50% of the vested balance 2) the payment of the non-QPSA, which will be directed to the named beneficiary according to the terms of the plan.

Some plans will provide that the spouse must consent to a non-spouse beneficiary in all circumstances, even where the QPSA is not waived, but the law does or does not require such a provision?

Does not The terms of the plan will control the extent of the spouses consent rights

The total death benefit under a DC plan can exceed the account balance, true or false?

False

A plan may forfeit benefits, including vested account benefits upon the death of the participant, true or false? What if a QPSA is present? What if only the spousal benefit rule is present?

True However: if the QPSA rule applies, then QPSA funds cannot be forfeited only non-QPSA funds can be. If the spousal benefit rule applies, then benefits, must be paid in full to the spouse, and no death benefit forfeiture is permitted.

What is one contribution type that cannot be death benefit forfeited?

Employee deferrals

A 401(k) plan may provide the death benefits are made payable in a particular form and at a certain time and consent of the beneficiaries is not required to make the distribution, regardless of value, true or false?

If written into the plan and a QPSA or QJSA is not present

Is a 60 day rollover option available for a non-spouse rollover for a death benefit?

No only a trustee to trustee you roll over is permitted

What are the three exemptions to the 10 year distribution window for a death benefit under the secure act?

Exceptions apply to the following. A minor child Disabled or chronically ill beneficiary Spouse Beneficiaries who are less than 10 years younger

The survivor annuity under the Q JSA is payable to the individual who was the Participant spouse at the annuity, starting date, even if that individual is no longer married to the participant at the date of the participants death-true or false?

True Though, a QDRO may modify this rule

If the Participant elected to receive a life annuity, then there is no death benefit unless the life annuity was purchased with what?

Less than the entire vested account balance

If a life annuity includes a term certain, payments are guaranteed to continue throughout that term. If the participant dies before the term ends, the post retirement death benefit is the payment of what?

The remaining term certain

If a joint in survivor, annuity includes a term certain, the post retirement. Death benefit will include payments during the term certain if both the participant and the survivor beneficiary die before what?

The end of the guaranteed period

If the Q JSA rules are applicable, then a spouse must consent to a loan, true or false?

True for account balances over $5000

Before a distribution can be made (for those other than involuntary), the following information must be provided to the Participant:

Written notice, explaining **optional forms of payment** Notice of participants **rights to delay** payment until normal Retirement age Information about the **Direct rollover option** and information on other tax issues

If the Participant is vested account balance is $7000 or less the QJS rules are still applicable in terms of notices, true or false?

False

Once a participant reaches normal retirement age, the plan may require that a distribution be taken, true or false?

True

Notice 402F which the IRS requires as a written explanation for rollover options contains what information related to taxes?

Tax consequences of not making the rollover. Any special income tax elections available?

There are two versions of the 402F rollover notice that are safe Harbor versions. What are they?

Pretax Roth balances and earnings

When an involuntary distribution or automatic rollover is made to a Participant whose account balance is not in excess of the $7000 cash out limit, is a direct rollover notice required?

Yes If the account balance is less than $200, then no.

Suppose the participants were Roth account is $150 and non-Roth accounts total $1200. Can the Plan treat the two accounts as different and therefore not extend a rollover notice to the Roth account?

Yes

$100 There’s a $50,000 maximum limit for all such failures in a calendar year

When a plan makes an automatic rollover to an IRA is part of a cash out distribution, the fiduciary remains responsible until the earlier of:

The date the participant takes control over the IRA One year after the benefit is transferred to the IRA

A Notice must be provided to a terminated employee of a force out to an IRA with a notice period of how many days? If the distribution is not able to occur within that date range, what should the plan sponsor do if the intention is to still distribute the funds?

Notice should be provided 30-180 days prior to distribution. Send out an updated notice

What should a plan sponsor do if the force out distribution happens after 180 days has passed but a new notice was not sent?

EPCRS provides a means of correction. By obtaining retroactive consent from the participant (and spouse if required.) for a distribution that is occurred more than 180 days after the notice date.

Is it a violation of the maximum 180 day notice period for a distribution if an earnings trail is posted to the Participant account after 180 days has elapsed?

No, it’s not if the preliminary distribution occurred before the 180 days elapsed

Does the original distribution notice cover additional allocations such as a profit share Safeharbor non-elective contribution if a force out has already occurred?

No, in this case, a separate notice would be required on this follow up force out

If a participant receives a notification from the plan of its intention to distribute their assets, does a participant have the right to request a periodic payment?

No. Any distribution in this event would be a lump sum distribution either for a rollover if the participant had set up a new IRA or had an employer account or a cash distribution in a lump sum.

Is a rollover notice due to an employee who has an account balance less than $200?

Not for balance is under $200

If a plan has QJSA rules that apply, is the plan allowed the standard force out provisions, where balance is less than $1000 are distributed and balances between one and $7000 can’t be rolled over into an IRA with proper notice?

Yes A QJSA does not have to be made available to the Participant for balances in this range.

If a full summary of an rollover notice is provided inside of the summary plan description is a plan then eligible to use a summary notice for distribution rather than a full notice?

Yes, if the full notice is previously been provided

A terminated participant with a balance that exceeds a cash out limit and who is he Participant in a plan that has a QJSA option, is such a Participant able to take a cash distribution or roll the funds over into an IRA?

If they complete a waiver, or if married, also have their spouse sign off on the waiver than yes

Properly executed spousal waiver for a Q JSA account has the following three elements:

Being in writing Acknowledge the effect of the election Be witnessed by a notary or Plan representative

In a plan that offers a QJSA, is spousal consent require required for a implant Roth conversion?

No, it is not

What are 4 exceptions to spousal consent requirements on QJSA’s?

The **one year rule** **court order** and the part Participant is legally separated. **Abandonment** Participant has been abandoned by the spouse and cannot be located **Competence** the spouse is not legally competent to give consent

Is a spousal consent required if the participant elects QJSA?

No, it’s only ever require required. If the participant seeks to waive the QJSA.

Can a Participant that’s eligible for a distribution consent to distribution more than 180 days in advance?

If an annuity form of payment is elected by the participant, the annuity starting date does not have to begin until after the date of the Participant election, true or false?

True

The QPSA explanation must contain: A general _______ Circumstances under which it will be ______ if elected The _________ of the election of the QPSA If applies, the Financial ________ of choosing the QPSA

Description Paid Availability Effect

The QJSA and QPSA explanations must be written explanations. Acceptable methods of delivery are: _______ _______ Mail to the _____ ______ address ________ Delivery _________ __________

First class mail to the last known address Hand delivery E delivery

Assume there is a plan that has a QJSA rule and an employee who is eligible for a in-service withdrawal and has an account balance that’s $18K and is fully vested. The employee wants to take $2000 out, leaving him with a $16,000 balance. Explain the notice requirement. What Right and separately, what Option must they be informed of? What 2 Notices must be provided?

Must be informed of his **payment options** Must be informed of his **right to delay** distribution Must be provided a **QJSA explanation** Must be provided a **rollover notice**

If a plan is going to force out eligible account balances in service, so those under $7000 that are otherwise eligible, such as having to reach the normal retirement age; then the document should provide for that rule and what must also be prescribed? If the QJSA rules apply then how must the distribution occur?

A **default form of payment** must be prescribed The form of payment **must be via QJSA** Special note: this is all about the form of payment. If there is a QJSA rule on the plan then the form of payment must be a QJSA, if that rules not present then the default form of payment needs to be communicated

If a plan is written in such a way as to allow for force out of eligible account balance is under $7000 for active employees once they reach Retirement age, when a forced distribution is allowed, the participant must be given: One _______ Notice __________.Period

Final notice Election.

Let’s say you have an employee who terminated employment and they were participating in the 401(k). They have a account balance of $3000 that’s fully invested which contains referrals and match. But their account balance also contains a $27,000 rollover from their prior employer constituting a total account balance of $30,000. Can the Total account balance be forced out as a rollover to an IRA?

Yes, it can According to 401 831B, rollover balances that were rolled into a plan can be disregarded for force out limits

If a plan with a QJSA rule is terminating and a participants vested interest exceeds the involuntary cash out limit, and the Participant does not consent to an immediate distribution- then what must the plan do?

He had deferred annuity contract that will commence benefits at normal retirement age

A fiduciary has a duty to take what types of steps to locate a participant in determination of a plan, keeping in mind that fees and expenses incurred must be reasonable and necessary?

Reasonable steps This is a fiduciary duty and must be followed

What is the option that plans can utilize in order to offload balances for employees that cannot be found and can also help former employees to find their balances in the future?

The government PBGC program

If Participant has purchased life insurance inside of a 401(k) plan and then dies with the life insurance and force the proceeds under the contractor or payable to whom depending on how the policy is set up.

The beneficiary or to the plan depending on how the policy is set up

The amount that the life insurance company will pay is called the ______ amount.

Face

The owners of life insurance policies in plans, actually pay more each year than the term cost and expenses. The excess amount is invested by the insurance company. in later years, the invested portion and the earnings are called __________ accumulation, and may be used to pay part of the _______ or the policy may be ___________ed and the owner can remove all or a portion of the reserves.

Reserve accumulation Premium Surrendered

The portion of the reserve accumulation of the life insurance policy that would be paid to the owner. If the policy is surrendered is generally called the _____ ________ value.

Cash surrender value

Because the term portion of the premium for a life insurance policy inside of a 401(k) plan provides insurance for the current year, the IRS teams have to be a current benefit. Therefore, unlike the balance of the Retirement Plan, the participant is required to _____ _______es on the benefit that the participant receives during the year. The taxable amount is equal to the _______ cost of the insurance.

Pay taxes Term cost

Each year the plan must issue a form 1099R to an insured participant reflecting that participant current benefit, true or false?

True

The net insurance proceeds paid to the beneficiary of a life. Insurance policy are include included in the beneficiaries, gross income, true or false?

False

The phrase net insurance proceeds means the amount by which the face amount of the policy exceeds the what? A portion of the proceeds equal to the reserve accumulation are subject to what?

Reserve accumulation (the cash surrender value) Normal tax rules for Plan distribution

Dans Profit Sharing Plan account includes a life insurance policy. Dan dies on August 1st. At Dans Death, the Cash Surrender Value of the policy is $60k. The policy pays proceeds of $300k. What are the Net Insurance Proceeds? Are they included as r excluded from the Beneficiaries Gross Income?

$240k Excluded ($300k-$60k.)

If the Beneficiary of a Life Insurance benefit in a plan receives payment over more than 1 year, the exclusions for the net insurance proceeds must be:

Prorated over the payment period

Because an insured (life) participant pays taxes each year on the term cost of the plan, when the participant takes a distribution or when the participant dies and the beneficiary receives the face amount of the policy, the accumulated term costs that have been claimed as income constitute a _____ in the policy. So the value of the policy equal to those accumulated costs is distributed it the participant/beneficiary as taxable or tax free?

Basis Tax Free

Suppose Dan’s spouse Karen, who is his beneficiary, elects to receive a lump-sum payment of Dans Death Benefit. The payments total $375k. $300k of which represents proceeds from the Insurance Policy. The Cash Surrender for the policy is $60k. Finally, $75k of Dans plan balance are ER Profit Share (and earnings). Dan made no after tax contributions to the plan. The only amounts taxes to Dan were term costs under the insurance policy of $10k. Karen computes the following: Total Distribution:$375k Exclusion for Net Proceeds $300k-$60k cash surrender value= Term costs:$10k Total exclusions from income equal: Exclusion for Net Insurance plus what? Amount included in come from full account balance =

$240k Term Costs $240k+$10k=$250k $375k-$250k=$125k

Contributions made on behalf of a self-employed individual for the purchase of life, accident, health or other insurances are always deductible, true or false?

False. Such contributions would be taxable for common law employees and so they are taxable for the self-employed individual as well

Life insurance in a defined contribution plan must be what? Therefore, the cumulative premium cost for the insurance can not exceed what percentage of aggregate contributions? This is determined by taking the entire premium cost of the term insurance +1/2 of what additional cost?

Incidental 25% Any premium cost for a whole life insurance policy

The IRS treats Universal life insurance as term insurance for purposes of the 25% limit, true or false?

True

The 25% rule that applies to life insurance in a defined contribution plan is known as what rule? For the purposes of this rule, the aggregate account contributions include what contribution sources?

The percent – of – contributions rule Employee and employee employer contributions (employee contributions are actually considered employer contributions), and forfeitures.

A pension plan may show life insurance benefits are incidental on a benefit basis. Rather than using the percent of contribution rule, life insurance benefits are incidental and a pension plan if the insurance benefit is no more than 100 times the anticipated monthly annuity benefit. This is called the what rule?

The hundred times rule

The 100 times rule is more often used by defined-benefit plans because the benefit is already stated in the form of an annuity at normal retirement age. If the pension plan is a money purchase plan or a target benefit plan, the anticipated monthly annuity is determined by Projecting the accumulated_______ ________ at normal retirement age, based on what?

The accumulated account balance The plans contribution formula

Maintaining an incidental benefit limit is complicated when a QDRO is present. How does that impact a percent of contributions rule? For plans using the hundred times rule how would a QDRO impact the computation?

For plans using percent of contribution rule, the limit is based on the aggregate contributions made by the employer….. so the QDRO benefits would not affect the calculation of the limit For plans using the hundred times rule, the inclusion or exclusion of a QDRO award would likely impact the computation significantly.

For life insurance to be incidental, the policy must either be converted to ______ ______ or distributed to the Participant no later than the _______ _______ date under the plan.

Retirement income. Normal retirement date

Can the life insurance policy be continued beyond retirement age, if the participant does not elect to retire?

Yes

Let’s say that the face amount of a life insurance policy in a 401(k) plan exceeds the 401 regulation limit. What could happen to the plan?

Compliance with the incidental life insurance limit is a plan qualification issue because the limits are imposed by 401. The plan could be disqualified if not corrected through EPCRS.

If a profit sharing or stock bonus plan purchases life insurance only with seasoned contributions what happens to the limit?

The incidental life insurance limit does not apply

What are seasoned contributions as it pertains to contributions for life insurance policy from an employer?

They have been accumulated in the trust for at least two years After profit-sharing contributions of accumulated for two years, it is permissible for the plan to permit distribution of those amounts for purposes, such as contribution for life insurance, making them seasoned contributions.

A plan may provide for the purchase of life insurance with after tax employee contributions. Does the incidental life insurance limitation apply to these types of contributions?

No, these types of employee after tax contributions are not subject to the incidental benefit limit However, the limit would apply to pretax or roth deferrals under a 401(k) arrangement

Chapter 10: Distributions & Insurances Flashcards

(111 cards)