Newell
Rubbermaid Inc. intends to offer approximately 3,300 former employees who have
deferred vested benefits under the company’s defined benefit pension plan a
one-time election to receive a lump-sum distribution of the present value of their
benefits by the end of 2015.
In
an 8-K filing with the Securities and Exchange Commission (SEC), the company said
this will reduce the size of its pension plan obligation and related expenses. The
benefit obligation associated with these former employees is approximately $120
million, equivalent to about 13% of the company’s benefit obligation.
According
to the filing, based on the average acceptance rate of similar offers of
approximately 50%, Newell Rubbermaid would recognize a one-time, non-cash
settlement charge in the fourth quarter. At that participation level, the company
would expect to incur a non-cash charge of approximately $35 million during the
fourth quarter, but it noted that it will not be able to determine the amount
of the fourth quarter charge until the offer is completed.
The Internal Revenue Service
(IRS) recently amended regulations that prevent companies from making lump-sum offerings to pension plan beneficiaries
who are already receiving regular payments of their benefits, but for
beneficiaries whose payments have been deferred, lump-sum offerings can still
be made.
Michael
A. Webb, vice president, Cammack Retirement Group, answers:
Excellent
question, since these two types of annuity benefits, which are found in some
types of retirement plans (including many Employee Retirement Income Security
Act (ERISA) 403(b) plans) are often confused with one another despite the fact
that they are two completely different types of benefits.
The
QPSA or Qualified Preretirement Survivor Annuity, is a preretirement death
benefit for a married plan participant, payable in the form of the immediate
annuity for the life of the surviving spouse of the participant that is
purchased with no less than 50% (and no more than 100%) of the participant’s
account balance at the time of the his or her death. The precise percentage is
stated in the plan document, but typically it is 50% of the account balance.
The
QJSA or Qualified Joint and Survivor Annuity is a retirement (as opposed to
death) benefit payable in the form of an annuity for the life of the
participant, and, if the participant is married, a survivor annuity for the life
of the spouse payable upon the death of the participant. Like the QPSA, the
survivor annuity percentage is specified by the plan, and again it must be at
least 50% (but no more than 100%) of the annuity benefit that was payable when
the participant was alive. Like the QPSA, this percentage is typically 50%. It
should also be noted that, if a plan requires a QPSA, a Qualified Optional
Survivor Annuity (QOSA) must also be made available to participants. If the
survivor annuity percentage is less than 75%, the QOSA must provide a 75%
survivor benefit. If the QPSA provides a survivor benefit of 75% or more, the
QOSA must provide a 50% benefit.
In plans which require the QPSA and QJSA, the
participant may waive the benefit. This waiver currently occurs in most cases,
since annuities are currently not a popular form of benefit payment (though
their popularity if increasing). However, in order for the participant to waive
the benefit in favor of, say a lump-sum or partial withdrawals, the
participant’s spouse must consent to the alternate form of benefit.
If
a retirement plan offers a QPSA, it must give a participant a QPSA notice
during the period beginning when he or she is age 32 and ending with the close
of the plan year before the participant is age 35, or within one year from when
an employee becomes a plan participant if he or she is hired after age 35. In
addition, in general, a participant cannot waive the QPSA prior to the first
day of the plan year in which the participant’s 35th birthday occurs. A plan
may allow the participant to waive the QPSA prior to that date, but the waiver
would then be revoked on the first day of the plan year in which the
participant turns age 35, requiring a brand new waiver to be completed at that
time, assuming that the participant still wishes to waive the QPSA. In the
Experts’ experience, this age-35 rule is often the source of confusion and
administrative error.
Not
all plans are required to offer a QPSA and QJSA. Plans that are not subject to
ERISA, such as non-electing church or governmental 403(b) plans, are not
required to offer the QPSA or QJSA. In addition, 401(k) profit-sharing or stock
bonus plans are not subject to the QPSA/QJSA requirement if:
The
participant’s death benefit is entirely payable to the participant’s spouse
(unless the spouse consents to an alternate beneficiary designation);
The
plan does not offer a life annuity or other similar lifetime income option, or
the participant does not elect such an option; and
Benefits
have not been transferred into the plan on behalf of the participant that are
subject to the QPSA/QJSA requirements.
Since,
as explained above, the spousal consent and other requirements (e.g. notice)
related to the QPSA and QJSA are somewhat burdensome, many plans that are not
required to offer a QPSA/QJSA indeed elect not to do so. For many ERISA 403(b)
plans, however, offering the QPSA/QJSA is not an option, since many 403(b)
plans offer annuity investments and their structure makes it impossible to
avoid the QPSA/QJSA requirements.
Thank
you for your question!
NOTE:
This feature is to provide general information only, does not constitute
legal advice, and cannot be used or substituted for legal or tax advice.