Past Imperfect Blooper

If this one doesn’t at least tempt a smile, you’re probably taking our work way too seriously.

But I must confess, not only did this one elude me completely, but I didn’t even catch it now at first, not until I had it brought to my attention today over morning cappuccino. Admit it, this is the first you’ve heard of this too. What I’d like to know is who out there pointed it out to the IRS, and how many of there were you.

In the September 21 Federal Register, the IRS corrected bloopers found in its August final regulations on the 411(d)(6) anti-cutback rule. Among the mistakes, which the correction observes “may prove to be misleading and are in need of clarification,” one key sentence of 1.411(d)-3(a)(3) is corrected to read as follows -

However, such an amendment does not violate section 411(d)(6) to the extent it applies with respect to benefits that accrue after the applicable amendment date.

The original version of the final regulations, published August 9, had that sentence as follows -

However, such an amendment does not violate section 411(d)(6) to the extent it applies with respect to benefits that accrued prior to the applicable amendment date.

Oops. Interesting bit of “clarification.” Run 411(d)(6) by me again, please. But hey, that slipped by me too, back when I posted on the final regs here, not to mention several dozen times since then when I’ve discussed Heinz with clients. Besides, we all knew what the agency meant. Like, no legitimate counsel would try to sneak in a quick loophole amendment in on this blooper, one would certainly expect. (Or if we wish to extend the clarification to the ridiculously obvious, the fact that the IRS correction is only explicitly stated as being retroactive to August 9, 2006, should not persuade anyone to try to find any false relief with respect to certain pre-8/9/2006 applicability expressed in the original final regulation. Quite obviously this particular amendment does apply to the past!)

So it gets a quick little chuckle, then I’m back to juggling to keep my own future separate and distinct from its past.

PPA Interest Rates for 2006 Plan Year Funding

The IRS has published interest rates for determination of current liability for single employer pension plans for plan years beginning during 2006, as modified by PPA §301. [Notice 2006-75]

A Notice of Some Passing Interest

Yes, PPA §301(b) amended IRC §412(b)(5)(B)(ii)(II) to extend PFEA relief from use of 30-year Treasury rates for current liability valuation through the 2006 and 2007 plan years. And yes, we expect the President to sign PPA into law next week. But until actual enactment of PPA, technically the snap-back interest rates remain the prevailing law. So the IRS gives us Notice 2006-74, quite certain to be obsolete well before its scheduled August 28 publication in Internal Revenue Bulletin 2006-35.

Follow-Up Final Regs on 411(d)(6) Protected Benefits

A plan amendment violates the anti-cutback prohibition of IRC §411(d)(6) if it places greater restrictions or conditions on a participant’s right to protected benefits, even if the amendment simply adds a restriction otherwise permissible under §411′s vesting rules, under final IRS regulations on §411(d)(6) protected benefits reflecting the Supreme Court’s 2004 Heinz ruling. The final regulations also provide a utilization test whereby certain early retirement benefits, retirement-type subsidies, or optional forms of benefit may be eliminated. [71 FR 45379]

Heinz Restrictions – In Central Laborers’ Pension Fund v. Heinz (02-891, 6/7/2004), the U.S. Supreme Court held that although certain conditions such as suspension-of-benefit rules may be elements of the benefit itself, a plan amendment could not impose such conditions on the benefit after it had already accrued. See discussion of the Heinz decision and background of earlier IRS guidance on Heinz compliance at Benefitsblog. See also proposed IRS regulations published in August 2005.

The final IRS regulations retain the agency’s broad interpretation of Heinz that a plan amendment may not impose new restrictions or conditions on a participant’s rights to §411(d)(6) protected benefits, even if the amendment merely adds a restriction or condition that is otherwise permitted under the vesting rules of §411(a)(3) through §411(a)(11). In particular, the IRS notes that the §411(a)(10) rules for a change in vesting schedule apply with respect to future accruals, whereas the Heinz ruling prohibits changes with respect to previously accrued benefits. The final regulations do provide a limited exception, however, for an amendment that changes a plan’s vesting computation period, as set forth in applicable Department of Labor regulations.

Utilization Test – The previously published 2005 final IRS regulations permitted two methods for elimination or reduction of §411(d)(6) protected benefits: elimination of redundant optional forms of benefit; or elimination of noncore optional forms of benefit where core options are offered. Today’s final IRS regulations add a third method whereby a plan may eliminate a generalized optional form if a utilization test is satisfied, designed to deem an optional form to be of no significant value if no participant had actually elected the form for distribution of benefits.

Under the utilization test, the generalized optional form must have been available to at least a minimum number of plan participants during a look-bak period. The final regulations set the look-back period as the 2 plan years immediately preceding the amendment’s adoption, together with the pre-adoption portion of the plan year of the amendment’s adoption. An employer may elect to exclude the month of amendment adoption together with the 1 or 2 immediately preceding months (to the extent those preceding months were in the pre-adoption period of the plan year of the amendment adoption) from the look-back period.

The generalized optional form being eliminated must have been available to at least 50 participants during the look-back period. A special rule permits the plan to take into account participants who elected a single-sum distribution of at least 25% of the participant’s accrued benefit, provided that the applicable number of participants for the utilization test is increased from 50 to 1,000.

Separate Application of Redundancy Rules – The final regulations change the previously published redundancy method to permit separate application with respect to each portion of a participant’s benefit to which separate distribution elections apply.

Effective Dates – The restrictions against plan amendments modifying suspension of benefits apply to periods beginning on or after July 7, 2004, the date of the Heinz decision. Retroactive correction under Rev. Proc. 2005-23 of previous amendments of plan is required only for plan amendments adopted on or after January 1, 1989. Restrictions against plan amendments with respect to vesting apply to plan amendments adopted on or After August 10, 2006.

The utilization test may be used for plan amendments adopted on or after January 1, 2007.

Separate application of the redundancy rule is permitted for a plan amendment adopted on or after August 10, 2006.

And Don’t Forget PPA – Before too eagerly applying the redundancy rule to sweep out the benefit option family of joint and contingent options with continuation percentages of 50% to 100% as scoped out under Reg. §1.411-(d)-3(c)(4)(ii), make sure you acquaint yourself with PPA §1004, generally applicable to plan years beginning on or after 1/1/2008.

Revised Regulations for Relative Value Disclosures

Revised final regulations have been published by the IRS under IRC §417(a)(3) relating to relative value disclosures in explanations of a pension plan’s qualified joint and survivors annuity (QJSA) and qualified preretirement survivor annuity (QPSA). [TD 9256; 71 FR 14798] Highlights -

• Basic Effective Dates Retained – Although many plans and practitioners had sought further delay, the basic effective date remains intact: for QJSA notices, the requirements are generally effective for distributions with annuity starting dates on or after 2/1/2006. (Note: for 417(e)(3) distribution options with actuarial present value less than that of the QJSA – for example, a lump sum distribution that does not reflect the value of early retirement subsidies – the rules took effect 10/1/04.) However, revision of the rules relating to disclosures of optional forms of benefit approximately equal to the QJSA (described below) need not be applied to QJSA explanations provided before 1/1/2007. Moreover, except with respect to distribution options subject to the original 10/1/04 effective date, reasonable good-faith compliance with the relative value regulations is acceptable for QJSA notices provided before 1/1/07.

• Eligibility for 2/1/06 Effective Date – As had been provided in 2005 proposed regulations, the actuarial present value of an optional form is treated as not less than the actuarial present value of the QJSA if two conditions are met: (i) The actuarial present value of the optional form is not less than that of the QJSA for an unmarried participant using 417(e) assumptions; and (ii) The actuarial present value of the QJSA for an unmarried participant is not less than that of the QJSA for a married participant using reasonable actuarial assumptions.

• Retroactive Annuity Starting Dates – Required information must be provided for optional forms of benefit with retroactive annuity starting dates that are available with payments commencing at the time the QJSA notice is provided.

• Coordination with QJSA-Most-Valuable Rule – As under the 2005 proposed regulations, disclosure of relative values of 417(e) distribution options using the applicable assumptions under 417(e)(3) does not cause a plan to fail the requirement that the QJSA be the plan’s most valuable form of benefit.

• Approximate Equivalence to QJSA – Reflecting concerns over professional standards, the rules have been revised to restrict disclosure of optional forms as being approximately equal in value to the QJSA only to those within a range of 95% to 105% of the actuarial present value of the QJSA.

• Social Security Level Income Option – Reflecting dispute over the applicability of 417(e)(3) to a social security level income option, examples of relevant optional annuity forms have been dropped from the regulatory provisions addressing effective dates, but merely because the IRS agrees that placement of the issue in that portion of the rules is inappropriate. The IRS points to separate regulations under 417(e) to retain the position that social security level income optional distribution forms are not eligible for exemption from the minimum present value requirements of 417(e)(3).

• Reasonable Actuarial Assumptions – For optional forms other than those subject to 417(e), reasonableness of interest and mortality assumptions is determined without reference to individual circumstances (e.g., participant’s specific health conditions). Applicable assumptions under 417(e) are permitted, but not required, for relative value disclosures for those distribution options.

• Bifurcated Distributions – If separate benefit elections are made with respect to two or more portions of a participant’s benefit (e.g., such as in the case of preservation of a portion of benefit from a predecessor plan), then relative value and financial effect disclosures may be made separately for each separate portion.

• Disclosure of Normal Form – For purposes of disclosing the plan’s normal form of benefit, reasonable estimates such as are used to disclose participant-specific information may be used.

• Use of Participant-Specific Information – Inclusion of participant-specific information does not cause a notice to fail rules permitting reliance on generally applicable information.

• Simplified Disclosures of Financial Effect – Simplified presentations of financial effect and relative value are permitted for disclosure of a significant number of substantially similar optional forms (for instance, an array of joint and survivor annuities with survivor payments available at any whole number percentage between 50% and 100%).

Transition Relief for IRC §409A(b)

Taxpayers have through 12/31/2007 to bring nonqualified deferred compensation plans into compliance with respect to rules under IRC §409A(b) relating to offshore trusts and financial health triggers, under transition relief announced by the IRS. [IRS Notice 2006-33]

IRC §409A(b) requires income inclusion and additional taxation if an offshore trust is used in conjunction with a nonqualified deferred compensation plan or if assets become restricted upon a change in the employer’s financial health. The Gulf Opportunity Zone Act of 2005 (GOZA) §403(hh) clarified the effective date for IRC §409A(b) to be 1/1/2005, including amounts relating to compensation deferrals earned and vested on or before 12/31/2004. As further directed by GOZA, the IRS has provided a limited transition period for plans to come into compliance with §409A(b) –

• Definition of Nonqualified Deferred Compensation – The definitions under 409A(a) apply for purposes of compliance with 409A(b).

• Grace Period Assets – With respect to the provisions of §409A(b), “grace period assets” are assets set aside, transferred, or restricted on or before 3/21/2006, including actual earnings credited on such assets after 3/21/2006. Subsequent setting aside, transfer, or restriction of such assets will not be eligible for the transition relief.

• Compliance Transition Relief – With respect to grace period assets, the income inclusion and additional taxation provisions of IRC §409A(b) will not be triggered if the plan comes into compliance on or before 12/31/2007.

• Pre-2008 Payments – Payment of nonqualified deferred compensation through 12/31/2007 will be treated as having first been made from grace period assets. Payments included in income before 2008 will be treated as having complied with 409A(b) for pre-payment periods.

• Pre-2008 Disassociation – If grace period assets are no longer associated with payment of nonqualified deferred compensation on or before 12/31/2007 (for instance, through dissolution of a trust), then the plan is treated as having complied with 409A(b) through the date of the disassociation.

• Good Faith Compliance – Until further guidance has been published by the IRS, taxpayers may rely on reasonable, good faith interpretation of IRC §409A(b).

EGTRRA Amendment Extension for SIMPLE IRAs

If your SIMPLE IRA plan has not been amended for the tax law changes enacted by EGTRRA by the deadlines contained in Revenue Procedure 2002-10, your plan is no longer eligible to receive tax deferred contributions for yourself or your employees after December 31, 2001. However, amending your plan under the EGTRRA relief initiative will enable you to retain the many favorable tax benefits of your plan.

Employers that sponsor SIMPLE IRAs are being offered an extension through 12/31/2006 to amend their plans for EGTRRA. Sponsors that previously failed to amend their SIMPLE IRAs for EGTRRA may either adopt the latest version of the IRS model SIMPLE IRA plan (revised August 2005) or adopt the SIMPLE IRA plan document that their financial institution has updated for EGTRRA. [Employee Plan News; Retirement News for Employers; SIMPLE IRA Plan Document Compliance and Relief]

Previously, SIMPLE IRA plans needed to be amended for EGTRRA no later than the end of 2002 (or, in the case of prototype SIMPLE IRA plans, 180 days after the plan was approved by the IRS) in order to be eligible for tax preference treatment after 12/31/2001. [Rev. Proc. 2002-10] SIMPLE IRA sponsors may determine if a plan is in compliance by checking the date on the plan document. If an IRS model plan (Form 5304-SIMPLE or Form 5305-SIMPLE) is being used, then the date in the upper left-hand corner should be either March 2002 or August 2005, else an updated version must be completed and signed by 12/31/2006. SIMPLE IRA sponsors not using an IRS model plan should contact the custodian or trustee of the plan to assure updated compliance. See also SIMPLE IRA Plans and the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and FAQs regarding Relief for SIMPLE IRA Plans.

The IRS intends to provide notice of the relief period through individual correspondence to each known SIMPLE IRA sponsor, including those whose plans are already in compliance with EGTRRA. The IRS also encourages SIMPLE IRA plan custodians, trustees, and sponsors of SIMPLE IRA prototype plan documents to remind their clients of the requirement for updated plan documents. [Letter 4083; Letter 4084]