Blogging Employee Benefits

March 24, 2006

Revised Regulations for Relative Value Disclosures

Filed under: Distributions, IRS, Regulations — Fuguerre @ 7:27 am

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%).
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