Guest Article

(From the October 13, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Proposed Regulations on "Notice of Consequences of Failing to Defer Receipt of Distribution"

Proposed to be effective for plan years beginning after 2009, IRS has outlined the disclosures required under IRC § 411(a)(11) to advise participants of the "consequences of failing to defer receipt of distribution." The requirements will expand the information now required under the Notice 2007-7 safe harbor, although inclusion by cross-reference will be allowed if certain requirements are met. 73 F R 59575 (October 9, 2008).

Overview of PPA Changes to Timing and Content of Distribution Notices

The Pension Protection Act of 2006 (PPA) made changes to the content and timing of distribution notices, and to the election period for waiver of the qualified joint and survivor annuity (QJSA).

Content of IRC § 411(a)(11) Notice

IRC § 411(a)(11) prohibits a qualified plan from distributing a participant's benefit without consent while it is immediately distributable (e.g., prior to the later of normal retirement age or age 62) if the present value of the non-forfeitable accrued benefit exceeds $5,000. Current Treasury Regulations provide that, in order for consent to be valid, the participant must be informed of the right, if any, to defer distribution. Treas. Reg. § 1.411(a)-11(c)(2). PPA directed the Secretary of the Treasury to modify these regulations to also require a description of the "consequences of failing to defer receipt." This additional notice requirement is effective for notices provided in plan years beginning after December 31, 2006. PPA provides that plans will be considered to be in compliance if they make a "reasonable attempt" to comply with the new requirement until the regulations are modified.

In early 2007, the Treasury Department issued Notice 2007-7 that outlined a safe harbor for describing the "consequences of failing to defer receipt" of distribution. To satisfy the safe harbor a plan needs to provide the portion of the summary plan description that contains any special rules that might materially impact a participant's decision to defer, and a defined benefit plan needs to indicate how much larger the benefit will be if distribution is deferred (and may use the financial effect and comparison of relative value under Treas. Reg. § 1.417(a)(3)-1(d)(2)(i) based solely on the normal form of benefit), while a defined contribution plan needs to indicate the investment options and fees available under the plan if distribution is deferred.

Timing of Notices

Prior to PPA, the notices under IRC §411(a)(11) -- as well as those under IRC § 402(f) (regarding rollover eligibility and the tax treatment of distributions) and IRC § 417 (regarding distribution in the form of a QJSA and the consent needed to waive that form) -- were required to be provided no more than 90 days prior to the annuity starting date. PPA amended IRC § 417(a)(6)(a) to extend the election period for waiver of the QJSA from the 90-day period ending on the annuity starting date to the 180-day period ending on the annuity starting date. It also required the Treasury Department to make changes to the regulations under IRC §§ 402(f), 411(a)(11) and 417 to similarly extend the period for distribution of the various notices from 90- to 180-days prior to the annuity starting date (or distribution date, as applicable). These changes are effective for notices provided in plan years beginning after December 31, 2006.

Proposed Treasury Regulations

Proposed Treasury Regulation § 1.411(a)-11 would clarify and expand the information required to be provided regarding the "failure to defer receipt of distribution." It would require a description of:

Generally, the required information will need to be provided together in a single notice. However, the Proposed Regulations provide that a notice will comply if it includes a cross-reference to where the required information may be found -- as long as it includes a statement of how the referenced information may be obtained without charge, and explains why the referenced information is relevant to a decision whether to defer.

Effective Date

The Treasury Regulations are proposed to be effective for notices provided (and election periods beginning) in plan years beginning on or after January 1, 2010. However, in no event will they become effective earlier than the first day of the plan year beginning 90 days after the publication of final regulations.

Until the Proposed Regulations under IRC § 411(a)(11) become effective, plans that comply with either the Proposed Treasury Regulations, the safe harbor under Notice 2007-7, or which make a "reasonable attempt" to comply with the requirement to describe the "consequences of failing to defer receipt of distribution," will be treated as complying.

A public hearing is scheduled for Friday, February 20, 2009, on the Proposed Treasury Regulations. Written or electronic comments and requests to speak must be received by January 7, 2009. Comments on the collection of information are due December 8, 2008.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.