In its opinion, the 3rd Circuit said rollovers do not trigger ERISA joint and survivor annuity requirements at all. A federal district court had ruled the Retirement Equity Act (REA) required William Knapp to obtain his wife Evelyn’s consent before taking money out of a profit-sharing plan he created under his own business and putting the assets in various trusts to pay benefits to Evelyn and his children upon his death. The only funds in the Profit Sharing Plan were William’s assets from previous employer-sponsored retirement plans.
According to the appellate court, under the REA, when a participant dies before becoming eligible to receive distributions of vested benefits, the surviving spouse is entitled to a qualified pre-retirement annuity. In addition, the REA requires that plan fiduciaries pay out almost all benefits in the form of qualified annuities unless both spouses consent in writing to another form of distribution.
However, the court pointed out that plans meeting the following three conditions are exempt from REA requirements:
- The plan provides that accrued benefits go to the participant’s spouse on his death,
- The plan does not allow payment to the participant alone in the form of a life annuity, and
- The plan must not have received money from a plan subject to the qualified annuity requirement.
Although the plans from which William rolled over his funds were subject to qualified annuity requirements, the appellate court determined the profit-sharing plan was not a “transferee” of plans to which the requirements applied. According to the 3rd Circuit opinion, Treasury Department regulations that interpret the REA provide that the third condition is only met through a merger, spinoff, or other such business transaction, “and any rollover contribution made at any time, are not transactions that subject the transferee plan to the [qualified] annuity requirements with respect to a participant.’
The 3rd Circuit opinion in Leckey v. Stefano can be viewed here.