Since participants can ultimately elect to choose between Alternate Forms Of Benefit, the choice of Normal Form for the plan is somewhat arbitrary.
Life Only is the simplest to understand, simplest to explain, and is referenced directly at numerous places in the code and regulations. These are all arguments for using Life Only as the Normal Form.
In particular, when it comes to paying out a large Lump Sum benefit, the Lump Sum amount is limited to the equivalent of the maximum Life Only benefit according to the 415 limits, not the equivalent of a more valuable form of benefit.
Example: Take a participant Joe Greene retiring in 2006 at age 62, with spouse Joy Greene who is 3 years younger. Joe has 10 years of Participation in the plan and a 3-year average salary of $205,000.
The maximum annuity benefit he can receive (based on 415 limits) is $175,000 per year, or $14,583.33 per month. This can be paid out at this rate as a Life Only benefit. The value of this benefit is $2,499,940.
This means that if the plan has been fully funded to pay out the Joint And Survivor benefit (#2), but Joe wants to roll his maximum benefit to an IRA (perhaps to terminate the plan), the plan will be left in an overfunded position by about $560,000, which can be highly problematic (see article on Overfunded Defined Benefit Plans). That is, about half-a-million dollars to much has been contributed to the plan, which could become subjected to the confiscatory 4980 Excise Tax.
The above example serves to highlight the potential problem for a small plan that chooses to use 100 Percent Joint And Survivor as the Normal Form of benefit in order to boost their retirement plan contributions. Yes, the assumed 100 Percent Joint And Survivor form of payment will serve to boost their initial contribution level, but if the owner plans on ultimately terminating the plan and rolling the assets out to an IRA, the use of the 100 Percent Joint And Survivor Normal Form must be viewed as a front-loading scheme in their expected pattern of plan contributions. The potential collision of objectives (make maximum contributions but ultimately roll assets out to an IRA) must be monitored and managed year-by-year. It must be recognized that several years prior to the actual retirement date contributions may have to be drastically reduced or even eliminated.
On the other hand, if the owner intends to maintain the plan after retirement (such as for future generations), the 100 Percent Joint And Survivor strategy can make good long-term sense.
Some sponsors choose a particular Normal Form of benefit in order to suggest and promote a particular form of payment for distribution. For the sake of married participants, an employer might specify 50 Percent Joint And Survivor as the Normal Form. Or, to be even-handed with both married and single participants, they might designate 10 Years Certain And Life as the Normal Form. Both of these forms serve to counteract the ostensibly unfair outcome when a Life Only benefit ceases if the participant dies within a few short months of retirement.