Notes and Brief Reports

Notes and Brief Reports The Retirement Equity Act of 1984: A Review* Last summer, Congress passed and on August 23, 1984, President Reagan signed into aw the Retirement Equity Act (REA) of 1984. This major piece of pension egisation amends the Empoyee Retirement Income Security Act (ERISA) 2 and the Interna Revenue Code (IRC) 3 primariy in response to pubic concerns that working women are not receiving their fair share of private pension benefits. In particuar, concerns were expressed that ERISA s participation and vesting rues caused many women who entered the abor force eary and took time out for chidrearing to fai to obtain a vested or nonforfeitabe right to their retirement benefits. Moreover, many widows of workers with vested benefits were discovering that the benefits they assumed were nonforfeitabe were in fact ost when their spouses died before becoming eigibe to retire. Confusion aso existed over whether ERISA preempted State divorce aws, thereby preventing pension pans from compying with domestic reations court orders aocating to a spouse a portion of the worker s pension as part of a property settement. REA attempts to address these concerns by acknow- * By Edmund T. Donovan, Office of Research, Statistics, and Internationa Poicy, Office of Poicy, Socia Security Administration. 1 Retirement Equity Act of 1984, Pubic Law 98-397. *The Empoyee Retirement Income Security Act of 1974, Pubic Law 93-406, 88 Stat. 829 (codified as amended in scattered sections of the Interna Revenue Code (IRC, West 1983) & 29 U.S.C.A. Sections 1001-1381 (1975 & Supp. 1984) hereinafter ERISA). The structure of ERISA is compex because it is enforced by both the Labor and Treasury Departments. Tite I of ERISA, which appies to a pension pans, is concerned with the protection of empoyee benefits and incudes sections on (1) reporting and discosure, (2) participation and vesting, (3) funding, and (4) fiduciary responsibiity. The reporting, discosure, and fiduciary provisions repace the Wefare and Pension Pans Discosure Act of 1958 and are enforced primariy by the Department of Labor. The Treasury Department has primary jurisdiction over participation, vesting, and funding. Tite II contains the same provisions as tite I with respect to participation, vesting, and funding, but in the context of conditions that must be satisfied for quaification of a pan. Tite II is in effect an amendment to the Interna Revenue Code of 1954. But whie faiure to meet the participation or vesting standards may resut in tax disquaification, the funding requirements are enforced by financia penaties. For a more compete discussion, see Dan M. McGi, Fundamentas of Private Pensions, Richard D. Irwin, Inc., 1984, chapters 2,4-1. 3 Uness otherwise indicated, a references are to the 1954 Interna Revenue Code as amended, and the reguations thereunder. edging the working patterns of women as we as the specia needs of surviving and divorced spouses. In genera, REA incudes new rues that: (1) (2) (3) (4) (5) (6) (7) ower the minimum age requirement for pension pan participation; increase the years of service counted for vesting purposes; iberaize the break-in-service rues for vesting purposes; prevent pans from counting maternity and paternity eave as a break in service for participation and vesting purposes; require quaified pension pans to provide automatic survivor benefits and aow for waiver of survivor benefits ony with the consent of the participant and the spouse; carify that pension pans may obey certain domestic reations court orders requiring them to make benefit payments to a participant s former spouse (or another aternative payee) without viaating ERISA s prohibitions against assignment or aienation of benefits; and expand the definition of accrued benefits protected against reduction. Other provisions in the new aw do not specificay reate to the treatment of women under pension pans but address perceived deficiencies in ERISA that appy across the board to a pension pan participants. These new provisions add recordkeeping and notice requirements and are discussed briefy. The new rues under REA generay take effect fat pan years beginning after December 31, 1984. The effective date for coectivey bargained pans is the par year beginning on or after the expiration of the ast co. ective bargaining agreement, or, if earier, the pan yea beginning on or after January 1, 1987. As wi be note< throughout this review, however, some provisions take effect immediatey. Minimum Participation Requirements Retirement pans that meet certain requirements prc. scribed in the IRC and in ERISA are caed quaifiec retirement pans. 4 The requirements are engthy, corn. 4 IRC section 401(a) (West 1983) prescribes most of the forma r< quirements these pans must satisfy to quaify for specia tax trea ment. Some of the substantive requirements are actuay described i section 401 but others are found in ater Code sections and are into porated in section 401 by reference. 38 Socia Security Buetin, May 1985/Vo. 48, No. 5

pex, and incude certain minimum participation standards.5 The minimum participation standards are designed to assure prompt participation in retirement pans by eigibe empoyees, to restrict excusion of empoyees from pan coverage by reason of advanced age, and to protect rehired empoyees so that short interruptions in covered service do not resut in engthy periods of nonparticipation in the pan. Under prior aw, a quaified retirement pan coud require empoyees with 1 year of service to be 25 years od before aowing them to participate or accrue benefits under the pan. The aw provided that an empoyee coud be excuded from participating in a retirement pan unti he or she reached age 25 or competed 1 year of service, whichever came ater. No provision required that persons under age 25 be admitted to participation, regardess of their ength of service. Retirement pans maintained excusivey for empoyees of an educationa institution by a tax-exempt empoyer were permitted to excude persons under age 30 from coverage if a empoyees covered under the pan were fuy vested after competing 1 year of service. The Retirement Equity Act owers the minimum age of mandatory participation to age 21 for empoyees with I year of service. Educationa organizations that coud require empoyees to be aged 30 and to have worked a year before becoming pan participants must now cover workers with a year of service beginning at age 26. The new minimum participation rues do not appy retroactivey, however. Thus, for exampe, a 24-year od worker with 3 years of service wi become a pan participant when the new requirement goes into effect, but his 3 years of service need not be counted as years of participation toward benefit accruas. Vesting Requirements Crediting years of service. Credited service is the yardstick for determining benefits under quaified retirement pans. Credited service must be computed to determine (1) whether or not an empoyee is eigibe to participate in a quaified pan; s (2) whether or not any portion of an empoyee s benefits is vested, that is, nonorfeitabe; ) and (3) what benefit has actuay :tccrued to a pan participant. ( t:kisa section 202(a) and IRC section 410(a). Section 410 incudes the provisions of ERISA section 202, but adds requirements I eating to pan coverage of empoyee groups to imit discrimination in..i\or of officers, sharehoders, and highy compensated empoyee5 ( ihc prohibited group ). 6 ERISA section 202(a)()(A)(i) and IRC section 410(a)()(A)(i). 7 ERISA section 202(a)()(B)(ii) and IRC section 4O(a)()(B)(ii). tris.4 section 202 and IRC section 410. ) E:RISA section 203 and IRC wction 41 I(a). IRC section 41 I arge- I! ~1111 I or-\ ERISA section 203, but incudes additiona vesting requirenicit\ in the cvcnt of discrimination in favor of the prohibited ~ro111~ or the partia or compete termination of a pan or the discontiiuancc ofcontrihution~. (1 ERISA wction 204 and IRC section 41 (b). The basic period used for determining credited service for participation eigibiity and vesting purposes is the year of service. Years of participation are used for benefit accrua purposes. The units used in computing both of these periods of service are defined in terms of the number of hours of service credited to an empoyee during a specified computation period, generay a consecutive 12-month period. For participation eigibiity and vesting purposes, a year of service is the competion of 1,000 or more hours of service during a particuar computation period. Increase in service years counted for vesting purposes. An empoyee s right to the accrued benefit derived from his or her own contributions under a quaified retirement pan must be vested at a times. * Benefits attributabe to empoyer contributions must be fuy vested when the empoyee attains norma retirement age.13 The rate at which an empoyee, before reaching norma retirement age, acquires a vested interest in his or her accrued benefit attributabe to empoyer contributions must satisfy one of the foowing three aternative minimum vesting schedues: Aternative 1, the o-year or ciff vesting I4 rue, requires that an empoyee s accrued benefit derived from empoyer contributions be 100 percent vested after 10 years of service. No interim vesting is required, athough it may be offered. Aternative 2, the 5 to 15-year or graded vesting I5 schedue, is satisfied if an empoyee who has competed at east 5 years of service obtains at east a 25 percent vested interest in his or her accrued benefit derived from empoyer contributions, and if the vested interest increases 5 percent each year during the next 5 years, and an additiona 10 percent each year during the foowing 5 years. Accordingy, benefits must be fuy vested after 15 years of service regardess of age. Aternative 3, the rue of 45,16 provides that any empoyee with 5 or more years of service must acquire at east a 50 percent vested interest in his or her accrued benefit derived from empoyer contributions whenever the sum of age and service equas or exceeds 45 with an additiona 10 percent vesting in each subsequent year unti the benefits become fuy vested. In a cases, the benefits must be 50 percent vested after 10 years of service, regardess of the participant s age and there must be 10 percent additiona vesting for each year thereafter. Under prior aw, an empoyee s years of service after age 22 had to be counted when the pan vested according to either aternative 1 or 2. Aternative 3 counts a years of service with the empoyer if during those years the empoyee participated in the pan. tt ERISA section 202(a)(3)(A) and IRC section 410(a)(3)(A). t2 ERISA section 203(a)() and IRC section 41 (a)(). 13 ERISA section 203(a)(2) and IRC section 41 (a)(2). 11 ERISA section 203(a)(2)(A) and IRC section 41 (a)(z)(a). 15 ERISA section 203(a)(2)(B) and IRC section 41 (a)(2)(b). th ERISA section 203(a)(2)(C) and IRC section 41 (a)(2)(c). Socia Security Buetin, May 1985/Vo. 48, No. 5 39

The new aw now requires that a service performed after age 18 be counted when cacuating the vested portion of a worker s benefit. The new rues for counting service under aternatives 1 and 2 appy to anyone with at east an hour of service after the provision takes effect. Effect of Changes in Participation and Vesting Requirements on Workforce The Empoyee Benefit Research Institute (EBRI) recenty pubished estimates of the number of workers ikey to benefit from the changes in participation and vesting requirements brought about by REA. Using a simuation mode and new survey data, EBRI estimated that REA wi add around 583,000 new participants and 325,000 new vested workers in 1985. Athough new participants are more ikey to be women, sighty more than haf of a the new vested workers are expected to be men. In a, the number of workers affected by the new participation and vesting requirements is ess than 1 percent of the Nation s tota abor force of more than 100 miion. The actuaria costs of these new requirements are estimated not to exceed $233 miion, athough increased administrative costs coud significanty increase that cost. Break in Service Rues Break in service defined. A quaified retirement pan may provide that for participation eigibiity and vesting purposes an empoyee incurs a -year break in service for a consecutive 12-month period in which he or she is credited with 500 or fewer hours of service (or the equivaent). s A break in service may resut in oss of credit for prebreak years of service for participation and vesting purposes. Service foowing a break in service. Before REA was enacted, defined benefit pans (those providing a definite schedue of benefits) were aowed to disregard, for participation and vesting purposes, the service years of nonvested empoyees before a break in service if the number of consecutive break-in-service years equaed or exceeded the number of years of service before the break. This provision is referred to as the rue of parity. To iustrate, assume an empoyee eaves her empoyer to have a chid after competing 3 years of service and when she has no vested benefit from 17 See Empoyee Benefit Rerearch Institute, Impact of Retirement Equity Act (EBRI Issue Brief No. 39), February 1985. 1s ERISA section 203(b)(3)(A) and IRC section 41 (a)(6)(a). A year of5ervicc is generay defined in terms of a I-year period during which the empoyee works 1,000 hours or more. Aternativey, the eapsed time approach, as described in Department of Labor Reguations, section 2530.200b-3(d)(e) or (f), coud be used. 19 IRC sections 410(a)(5)(D) and 41 (a)(6)(b) and ERISA sections 202(b)(4) and 203(b)(2)(D). empoyer-derived contributions. She is reempoyed after incurring 4 consecutive -year breaks in service. Under prior aw, the empoyee s 3 years of service coud be disregarded since she had no vested rights under the pan and her consecutive -year breaks in service exceeded the number of her prebreak years. Under REA, defined benefit pans wi now have to count prebreak years of service for participation and vesting purposes uness the number of consecutive -year breaks in service is equa to or greater than five or the aggregate number of years of service before the break occurred. This rue appies ony to nonvested participants; the service of workers with any vested benefit in a defined benefit pan is aready protected by ERISA. This new break-in-service rue for defined benefit pans permits empoyees to eave their empoyer for up to 5 years eary in their careers whie retaining credit for their initia period of service if they are rehired. It is designed to accommodate working patterns of women who eave the workforce for severa years to care for their chidren. It aso protects empoyees who remain in the workforce but work for another empoyer for a time and then return to a previous empoyer. The new aw aso changes break-in-service rues for defined contribution pans (those providing benefits based on the amount contributed to the participant s account) and defined benefit retirement pans funded soey by insurance contracts. Under prior aw, if a participant in one of these pans experienced a -year break in service, his or her post years of service did not have to be taken into account in determining the vested percentage in prebreak empoyer-derived benefits, whether or not he or she had any vested rights under the pan. 2o The prebreak years were used ony in determining the vested percentage in postbreak empoyer-derived accrued benefits. Under REA, if a participant who is not 100 percent vested incurs a break in service of fewer than 5 years and subsequenty returns to service, a service after becoming re-empoyed must be added to the prebreak service in determining the vested portion of the participant s prebreak benefit derived from empoyer contributions. Service Credit for Maternity and Paternity Leave Under prior aw, quaified retirement pans had to credit workers on maternity or paternity eave with up to 501 hours of set vice when the empoyee was being paid during that eave. Consequenty, ony these empoyees coud prevent a break in service whie on maternity or paternity eave. Under REA, for purposes o! determining whether a break in service has occurred, x1 ERISA section 203(b)(3)(C ) and IRC section JI (a)(6)(c). 21 Department of Labor Reguations, section 2530.2OOb-2(a)(2). 40 Socia Security Buetin, May 19851Vo. 48, No. 5

workers who are absent for maternity or paternity eave wi be deemed to have competed up to 501 hours of service, whether or not they are paid during this absence and whether or not the eave is approved. Empoyees can quaify for this credit if they are out of work for pregnancy, the birth of a chid, the adoption of a chid (but not foster care), or chidcare during the period immediatey foowing birth or adoption. Workers wi get credit for the number of hours they woud normay have worked had they not been absent, or, if the number is unknown, 8 hours for each norma workday during the period of absence up to a maximum of 501 hours. The credit wi appy in the year the absence begins ony if needed to prevent a break in service for that year. Otherwise, the hours wi be appied in the foowing year, up to the number needed to prevent a break in service. Couped with the iberaized rues requiring 5 consecutive break-in-service years before previous service can be ignored, this new treatment of maternity and paternity eave wi permit parents to stay home without osing service credits unti a chid is od enough to go to schoo. REA provides that these credit hours count ony in determining how the pension pan must treat service before or after a break in service for vesting and participation purposes. The maternity or paternity credits need not be used in cacuating benefit accruas. As a condition of providing the credit, empoyers may require workers to certify that the eave was taken for one of the permitted purposes. Workers may aso be required to suppy information regarding their norma working hours, if needed. New Survivor Benefits for Spouses Under ERISA, protection for spouses of participants in quaified defined benefit and defined contribution pans is afforded in the form of both a postretirement and preretirement benefit. REA makes significant changes in ERISA s provisions for survivor benefits for spouses. These changes were designed primariy to improve pension protection for surviving spouses of present and former empoyees with any vested benefit. The changes require pension pans to offer survivor benefits in many situations where none previousy had been mandatory. Postretirement spouse benefit. Under prior aw, a quaified retirement pan that provided for the payment of benefits in the form of a ife annuity had to provide for the payment of benefits in the form of a quaified joint and survivor annuity uness the participant eected not to receive such a benefit.22 ERISA defines a quaified joint and survivor annuity as an annuity payabe for the ife of the participant with a survivor 22 ERkSA section 205 and IRC section 401(a)(). annuity for the ife of the participant s spouse that is at east 50 percent and not more than 100 percent of the annuity payabe during the joint ives of the participant and spouse and which is at east the actuaria equivaent #of a singe ife annuity for the ife of the participant.23 This postretirement spouse sbenefit was payabe in the event of the participant s death after retirement as we as in active service after the attainment of norma retirement age. For quaified retirement pans, the norma retirement age is the earier of: (1) the age specified by the pan, or (2) the ater of (a) the time the pan participant attains age 65 or (b) the tenth anniversary of the date the participant commences participation in the pan.24 As under prior aw, REA continues to require pension pans to provide the quaified joint and survivor annuity. If an eection to waive the postretirement survivor benefit is to be made, however, REA requires both the participant and the spouse to sign a waiver form. The spouse s signature must be either witnessed by a pan representative or notarized. Empoyers must provide a period of at east 90 days ending on the annuity starting date to waive the spouse coverage. The decision to waive this coverage may aso be revoked during the eection period. Empoyers generay have to notify their empoyees of this option. The notice must be a written expanation to each participant that states: the terms and conditions of the quaified joint and survivor annuity, the right of the participant to waive the survivor annuity and the effect of that eection, the right of the participant s spouse to refuse to consent to a waiver of a survivor annuity, and the right to revoke the eection and the effect of revocation. The empoyer (pan sponsor) need not pay for the additiona cost of these benefits; costs can be passed on to participants through actuaria reductions or other ways to be determined by the Treasury Department. However, if the empoyer pays for the fu cost of a postretirement quaified joint and survivor annuity, the pan sponsor does not have to give participants the right to waive it. Preretirement spouse benefit. Under prior aw, if a quaified retirement pan provided for the payment of benefits before norma retirement age in the form of a ife annuity, each participant was permitted to eect to have a benefit in the form of a ife annuity payabe to the participant s spouse in the event that the participant dies in active service and coud have retired with an immediate pension (after attaining the eariest retirement age but before attaining the norma retirement age). This survivor benefit was not required to be paid, 23 ERISA section 205(g)(3) and IRC section 401(a)( )(G)(iii). 24 ERISA section 3(24) and IRC section 41 (a)(8). Socia Security Buetin, May 19851Vo. 48, No. 5

however, without an affirmative eection by the participant. Generay, the new aw requires a quaified pension pans to automaticay provide the preretirement survivor annuity beginning when the empoyee woud have been eigibe to receive retirement benefits.25 Athough a pan may permit benefits to start earier, the benefit payments may not be deayed without the spouse s consent beyond the month in which the participant woud have reached the eariest retirement age. A spouse who wishes a ater starting date may eect to deay commencement of benefits up to the participant s norma retirement date. REA provides that the consent of a participant s spouse is required for an eection to decine both the quaified joint and survivor annuity and quaified preretirement survivor annuity. The appicabe eection period for the quaified preretirement survivor annuity begins on the first day of the pan year in which the participant attains age 35 and ends on the participant s date of death. A participant must be provided with a notice of his or her right to decine a quaified preretirement survivor annuity during the 3-year period preceding the eection period. As with the postretirement benefit, the cost of the preretirement survivor annuity may be assumed by the empoyer or passed on to covered participants-either through increased empoyer costs or reduced benefits for married participants. If the cost is assumed by the empoyer, the empoyer does not have to provide for empoyee eections. The new aw specifies the minimum benefit amounts to be paid under a quaified preretirement survivor annuity. These amounts are cacuated differenty depending on whether the pan is a defined benefit or defined contribution pan. For defined benefit pans, the preretirement survivor annuity paid to the spouse of a participant who dies after reaching the eariest retirement age under the pan must not be ess than the actuaria equivaent of the amount payabe to a survivor under a quaified joint and survivor annuity if the participant had retired a day before death. Surviving spouses of participants who die on or before they attain the eariest retirement age under the pan must get at east as much as the pan woud have paid had the participant separated from service on the date of death, survived to the eariest retirement age, retired at that time with a joint and survivor benefit, then died the next day. 25 REA makes an exception to the rue for money purchase pans adopted as part of an empoyee stock option pan, and profit sharing and stock bonus pans, if: (a) the pan provides that the vested account baance wi be paid to the surviving spouse; (b) the participant does not eect payments in the form of a ife annuity; and (c) the pan is not a transferee of a pan required to provide automatic survivor benefits. IRC section 40(a)( )(B) as amended by section 203(a) of REA. For defined contribution pans, the preretirement survivor annuity must be actuariay equivaent to at east 50 percent of the participant s entire account baance as of the date of death. Under the new aw, both the postretirement spouse benefit (joint and survivor annuity) and preretirement spouse benefit wi be automaticay provided for vested workers with at east an hour of service or paid eave after August 23, 1984, uness both spouses agree to waive those benefits within specified eection periods. This provision took effect on January 1, 1985. Former empoyees. Under REA, pans are required to offer survivor benefits to iving former empoyees with deferred vested benefits who had not started receiving benefits before August 23, 1984. The two categories of vested workers who wi gain additiona survivor protection are (1) those who have 10 years of service with at east an hour of service under the pan that took pace after December 3 1, 1975, and (2) those who competed at east an hour of service after ERISA was enacted on September 1, 1974, and separated from service before January 1, 1976. Persons in the first category may now eect a preretirement survivor annuity. Those in the second category may eect a joint and survivor annuity. Either of the eections may be made by a former empoyee anytime between August 23, 1984, and the earier of the annuity starting date or the date of the participant s death. One-year marriage rue. Under prior aw, to be eigibe to eect a pre- or post-retirement survivor annuity a participant had to be married for a -year period ending on the annuity starting date.26 REA aows a pan to require that a participant be married at east 1 year before the earier of the date of death or the starting date of the annuity for the new survivor benefit rues to appy. However, for a participant who marries within 1 year before the annuity starting date and has been married to that spouse for at east 1 year ending on the date of the participant s death, the participant and spouse wi be treated as having been married throughout the -year period ending on the participant s annuity starting date. In the absence of a contrary order in a quaified domestic reations decree, the spouse to whom the participant was married for 1 year before the annuity starting date is entited to the survivor annuity even if the spouse and participant are no onger married when the participant dies. Repea of the 2-year nonaccidenta rue. The new aw repeas ERISA s 2-year nonaccidenta death rue.27 Thus, a quaified retirement pan can no onger provide that an eection or revocation of a joint and survivor annuity is not effective because the participant died within 2 years of making the eection or revocation and the death was not due to an accident. 26 ERSA section 205(d) and IRC section 40(a)( )(D). 2 ERISA section 205(f) and IRC section 40(a)( )(F). 42 Socia Security Buetin, May 1985/Vo. 48, No. 5

Quaified Domestic Reations Orders Under ERISA, benefits paid by quaified retirement pans are subject to prohibitions against assignment or aienation.28 These rues precuding the transferring of pan benefits are often referred to as spendthrift provisions. ERISA aso contains express provisions superseding or preempting State aws regarding pension pans.2 As a resut, a pension pan that does not incude the required spendthrift provisions is not quaified under the IRC, and State aws permitting an assignment or transfer of benefits are generay preempted by ERISA. Recenty, courts have disagreed 3o over whether ERSA s preemption and spendthrift provisions were intended to prevent the appication of State domestic reations aws permitting the division of vested pension benefits for the purpose of meeting famiy support obigations (for exampe, aimony, separate maintenance, and chid support obigations). Before REA was enacted, the Interna Revenue Service (IRS) had rued that the spendthrift provisions were not vioated when a pan trustee compied with a court order requiring the distribution of benefits of a participant in pay status to the participant s spouse or chidren to meet the participant s aimony or chid support obigation.31 The IRS had taken no position when the participant s benefits were not in pay status. The new egisation carifies ERSA s spendthrift provisions by providing new rues for the treatment of certain domestic reations orders. In addition, REA creates an exception to the ERISA preemption provision with respect to these orders. REA provides that distributions ordered under a quaified domestic reation order wi not be subject to the spendthrift provisions of ERISA and that the pan must pay for them. A domestic reations order is any judgment, decree, or order (incuding the approva of property settement agreements) that reates to chid support, aimony payments, or marita property rights of a spouse or chid of the participant made pursuant to State domestic reations aw. To be quaified, the order must ist the amount or percentage of benefits payabe to the spouse and/or chid payee, or the manner in which this amount is to be determined, and the number of payments or the period for which the payments are required. The order wi not 28 ERISA section 206(d)() and IRC section 40(a)(3). 29 ERISA section 5 14. See, for exampe, Stone v. Stone, 633 F2d 740 (9th Cir. 1980), wherein the court hed that ERISA was not intended to preempt community property aws and that a court order requiring a division of retirement benefits did not vioate the anti-assignment provisions. In Francis v. United Technoogy Corp., 458 F. Supp. 84 (N.D. Ca. 1978), however, the court hed that ERSA s preemption provision prevents the appication of State community property aw permitting attachments of pan benefits for famiy support purposes. 31 Rev. Ru. 80-27 (1980) I C.B. 8. be a quaified order if it requires the pan to provide any type of payment or form of benefit or option not otherwise provided under the pan, requires the pan to increase benefits, or requires payment to someone when such payments are aready required to be paid to someone ese under a previousy existing quaified domestic reations order. The order may require payments to begin to a spouse or dependent ony after the date on which the participant attains the eariest retirement age. The vaue of the payee s benefits need not take into account the vaue of any empoyer subsidy for eary retirement. The pan administrator must estabish reasonabe procedures in writing for determining the quaified status of domestic-reations orders and for administering payments under these orders. The participant and those individuas entited to benefits must be prompty notified of receipt of the order and the pan s procedures for deaing with it. Whie the determination is being made as to whether the order is quaified, the pan administrator must segregate, either in a separate account in the pan or in an escrow account, the amounts that woud be payabe if the order is truy payabe. Expanded Protection of Benefit Accruas ERISA requires that a participant in a defined benefit pension pan accrue or earn the norma retirement benefit provided by the pan at certain minimum rates.j2 These accrua rues are designed to imit backoading of benefit accruas. Under a backoaded accrua schedue, a arger portion of the benefit is earned each year in ater years of service. Accordingy, under a pan with backoaded accruas, an empoyee who separates from service before reaching retirement age earns a disproportionatey ower share of the benefit. ERISA aso provides that a quaified retirement pan generay may not be amended in a manner that decreases the benefits of any participant accrued prior to the amendment.33 Before REA was enacted, uncertainty existed over whether this anti-cutback rue prohibited the eimination of pan subsidies or options that indirecty affect the accrued benefits. REA carifies and expands the anti-cutback rue by treating a pan amendment as reducing accrued benefits when the amendment has the effect of either eiminating or reducing an eary retirement benefit or a retirementtype subsidy, or eiminating an optiona form of benefit. Retirement-type subsidies wi be defined by Treasury reguations but the Senate Finance Committee report on REA indicates that they are not intended to incude disabiity or medica suppements, death bene- 32 ERSAsection204(b)()and IRC section4i(b)(). 33 ERSA section 204(g) and IRC section 41 (d)(6). Socia Security Buetin, May 19851Vo. 48, No. 5 43

fits, or pant shutdown benefits. The report aso indicated that a subsidy that continues after retirement age woud be considered a retirement-type subsidy. Rights to the so-caed window benefits, which provide specia subsidies ony to empoyees who retire within a specified window period of time, woud not be retained by those who do not retire during that period. REA aso prohibits pans from retroactivey eiminating benefit options or subsidized benefits that represent a vauabe right for the worker or beneficiary, uness a simiar benefit with a comparabe subsidy is offered or there is an exception in the reguations to be issued by the Treasury. For exampe, eiminating an option under a pan for taking a ump sum benefit as opposed to a ife annuity woud not be permissibe because it is vauabe to a person with a short ife expectancy. This section of REA appies to amendments made after Juy 30, 1984. However, the new anti-cutback rues wi not appy to amendments adopted before Apri 1, 1985, for situations invoving coective bargaining agreements expiring in the ast 5 months of 1984, if new agreements were initiated in 1984. Restrictions on Mandatory Cash-Outs of Annuities The new aw increases the doar imit for quaified retirement pans that provide for the cash-out or payment of benefits in a ump sum without the consent of the participant. Under the new aw, a participant may not be required to take a ump sum cash payment in excess of $3,500 (up from $1,750) in canceation of his or her rights under the pan. Notice of Forfeiture of Benefits Under prior aw, a pension pan administrator was required on an annua basis to furnish the participant with a statement indicating the participant s tota accrued benefit and nonforfeitabe accrued benefit, if the participant requested such a statement.34 In addition, the pan administrator was to give the statement to a pan participant who separated from service, was entited to vested benefits under the pan, and did not receive benefits from the pan during the year. REA adds to these notice requirements by providing that pan administrators must aso notify the participant of benefits that are forfeitabe if the participant dies before a particuar date. Notice of Roover Treatment Under present aw, taxes are deferred on certain pension pan distributions if the distributions are roed over within 60 days after receipt to another quaified pan or an Individua Retirement Account.35 Under prior aw, pans were not required to notify participants of their right to make a roover. Under REA, pan administrators must give a written expanation of how certain pan distributions can quaify for roover treatment and how they wi be treated for tax purposes. If appicabe, the expanation must aso incude a description of capita gains treatment and other tax rues that appy to ump sum distributions. REA imposes penaties of up to $5,000 for each caendar year during which the pan administrator fais to provide the required notice. Study by the Genera Accounting Office REA requires the Genera Accounting Office to issue a report on the effect of the pension rues on women by January 1, 1990. 34 ERISA section 105 and IRC section 6057. 35 IRC sections 402(a)(5) and 408(d)(3). 44 Socia Security Buetin, May 1985/Vo. 48, No. 5