DISCLOSURE REGARDING OPTIONAL FORMS OF BENEFIT FINAL REGULATIONS

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1 DISCLOSURE REGARDING OPTIONAL FORMS OF BENEFIT FINAL REGULATIONS On December 16, 2003 Treasury released final regulations that require enhancements to the content of the qualified joint and survivor annuity (QJSA) notice and qualified preretirement survivor annuity (QPSA) notice currently required under certain qualified retirement plans. These enhancements make available to participants detailed information to assist them in deciding whether to elect the normal form of benefit or one of the optional forms of benefit available under the plan. Effective Date The final regulations were effective on December 17, 2003 and apply to QJSA explanations with respect to distributions with annuity starting dates on or after October 1, 2004, and to QPSA explanations provided on or after July 1, However, on July 1, 2004, the IRS released Announcement announcing a delay in the effective date for the QJSA explanations. The final regulations will now be effective for QJSA explanations for annuity staring dates beginning on or after February 1, The effective date for the QPSA explanations was not changed. Background Internal Revenue Code (IRC) section 401(a)(11) requires that for the plan types listed below, the normal form of benefit for a married participant be a QJSA. -Defined benefit plans -Target benefit plans -Money purchase plans -Profit sharing and/or 401(k) plans that: contain assets transferred into the plan from a plan that requires the QJSA as the primary mode of distribution choose to use a QJSA as the primary mode of distribution For the purposes of this article only the requirements and enhancements applicable to defined contribution plans will be addressed. QJSA and QPSA Defined A QJSA provides an annuity for the lives of the participant and the participant s spouse. Upon the death of the participant at least 50% of the payment will continue to be paid to For educational purposes only. Not intended as tax or legal advice. 1

2 the participant s spouse. If the participant dies before reaching normal retirement age a QPSA will be paid to the participant s spouse. The QPSA must provide an annuity to the spouse that is at least 50%, but not more than 100% of the participant s account value. The participant may elect to waive the QJSA and QPSA options in favor of any other optional form of benefit offered under the plan, if the participant s spouse consents to the waiver and if certain other conditions are met. To assist the participant and the participant s spouse in deciding whether to waive the QJSA and QPSA the plan administrator must provide written notice to the participant containing an explanation of the QJSA and QPSA and certain related information. Content of QJSA Participant Notice Currently, under IRC Section 417(a)(3) the QJSA notice must be in writing, written in a manner calculated to be understood by the average participant and must contain an explanation of: The terms and conditions of the QJSA The participant s right to waive the QJSA option The effect of waiving the QJSA option The rights of the participant s spouse The right to revoke the waiver election The effect of revoking the waiver election Under the final regulations, section 1.417(a)(3)-1 is added requiring that the notice be enhanced to provide a meaningful comparison of the relative economic values of the forms of benefit available under the plan, without the participant having to make any additional calculations. The notice must include specific information regarding the benefits available under the plan for each particular participant. Alternatively, the notice can contain generally applicable information instead, however the notice must inform the participant of the right to request additional specific information regarding his/her own benefits under the plan, and must be told where to get information regarding any of the optional forms of benefit. The information that must be provided in the notice or made available to the participant upon request is: A description of each optional form of benefit A description of the eligibility conditions for each optional form of benefit (the amount payable under the form of benefit to the participant during the participant s lifetime and the amount payable after the death of the participant) A description of the financial effect of electing the optional form of benefit* (i.e. the amount payable under the form of benefit to the participant during the participant s lifetime and the amount payable after the death of the participant). A description of any other material features of the optional form of benefit For educational purposes only. Not intended as tax or legal advice. 2

3 Description of the Financial Effect The plan is permitted to provide reasonable estimates of the financial effect of the optional forms of benefit available to the participant based on data from an earlier date than the annuity starting date, reasonable estimates of the applicable interest rate, a reasonable assumption for the age of the participant s spouse, or reasonable estimates of the amounts that would be payable under a purchased annuity contract. If a reasonable estimate is used the notice must explain that it is an estimate and upon request from the participant the plan will provide a more precise calculation. Alternatively, the QJSA explanation may include a chart (or similar device) showing the financial effective of optional forms of benefit in a series of examples specifying the amount of the optional forms of benefit payable to a hypothetical participant at a representative range of ages and a comparison of the financial effect of electing the optional forms of benefit to the QJSA. Reasonable assumptions may be used for the age of the participant s spouse and any other variables that affect the financial effect of the optional form of benefit. The financial effect of electing an optional form of benefit may also be expressed in other ways, such as showing the optional form as a percentage of the amount payable under the QJSA, as long as the method provides enough information that a participant can determine the amount of benefits payable under the optional form. The chart must include a statement describing the effect of significant variations between the assumed ages or other variables on the financial effect of electing the optional form of benefit. The chart must also provide the amount payable to the participant under the QJSA commencing either immediately or at normal retirement age. Further a statement must be included that offers to provide the participant a statement of financial effect that is specific to the participant for any presently available optional form of benefit along with information on how the participant can obtain the additional information. For defined contribution plans the explanation regarding the financial effect with respect to an annuity form of benefit must include a statement that the annuity will be provided by purchasing an annuity contract from an insurance company with the participant s account balance under the plan. Content of QPSA Notice Per IRC 417(a)(3)he QPSA notice must be written in a manner calculated to be understood by the average participant and must include a general description of the QPSA including the following information: The terms and conditions of the QPSA The participant s right to waive the QPSA option The effect of waiving the QPSA option The rights of the participant s spouse The right to revoke the waiver election The effect of revoking the waiver election For educational purposes only. Not intended as tax or legal advice. 3

4 Under the final regulations the notice must now be enhanced to include: The circumstances under which it will be paid if elected The availability of the election of the QPSA A description of the financial effect of the election of the QPSA on the particular participant s benefits (an estimate of the reduction to the participant s estimated normal retirement benefit that would result from an election of the QPSA) As with the QJSA, the final regulations permit the notice to contain generally applicable information instead of information specific to the particular participant, provided the participant is informed of the right to request additional specific information regarding his/her own benefits under the plan. Alternatively, this information may be contained in the form of a chart showing the reduction to a hypothetical participant s normal retirement benefit as a result of the QPSA election at a representative range of participant ages as a result of the QPSA election, using a reasonable assumption for the age of the hypothetical participant s spouse relative to the age of the hypothetical participant. The chart must also include a statement offering to provide, at the participant s request, an estimate of the reduction to the participant s estimated normal retirement benefit, and a description of how a participant may obtain this additional information. Timing of the QJSA Notice The QJSA notice must be provided to participants no less than 30 days and no more than 90 days before the annuity starting date. However if, after receiving the notice, the participant affirmatively elects a form of distribution with spousal consent, the distribution may be made in less than 30 days from the date the participant receives the explanation if the following requirements are met: The explanation to the participant clearly indicates that the participant has the right to at least 30 days to consider whether to waive the QJSA and consent to another form of benefit. The participant is permitted to revoke an affirmative distribution election at least until the annuity starting date, or if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the QJSA is provided to the participant. The distribution does not commence before the expiration of the 7-day period that begins the day after the explanation of the QJSA is provided to the participant. For educational purposes only. Not intended as tax or legal advice. 4

5 Timing of the QPSA Notice The explanation of the QPSA and the opportunity to waive the benefit must be provided during the period of time that begins with the plan year in which the participant attains age 32 and ends with the plan year in which the participants attains age 35. If an employee becomes a participant after this time the explanation must be given no later than one year following the employee s initial participation date. If the participant becomes subject to the QPSA after the normal notice period, the explanation must be given no later than one year after the QPSA becomes applicable. The QPSA may be waived any time after the first day of the plan year in which the participant attains age 35. The plan may permit the participant to waive the QPSA before age 35, but the QPSA becomes invalid at age 35 and a new notice and waiver period must be provided. If the participant separates from service before age 35 he must have an opportunity to waive the QPSA at that time. If the participant has not received the explanation at the time of separation from service, the notice must be given no later than one year after separation, unless the participants takes a full distribution of his account value before that time. Delivery of QJSA or QPSA Notice Acceptable delivery methods include first class mail to the last known address of the participant or hand delivery. Posting the explanation is not an acceptable delivery method. For educational purposes only. Not intended as tax or legal advice. 5