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Guest Article

Deloitte

(From the April 3, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Final Changes to Relative Value Disclosure Regulations


The IRS on March 24, 2006, issued final modifications to the relative value disclosure regulations promulgated in 2003. 71 FR 14798 (March 24, 2006). The final regulations "close the loop" on the partial delayed effective date for the relative value disclosure rules, and make a series of other changes to those rules. As promised, the final modifications generally require reasonable, good faith compliance with the relative value disclosure regulations for qualified joint and survivor annuity (QJSA) explanations provided before January 1, 2007. This good faith standard does not apply with respect to certain optional forms of benefits -- most notably lump sums -- that are less valuable than the QJSA. For these optional forms the relative value disclosure regulations are effective for annuity starting dates on or after October 1, 2004.

Background

The IRS issued final relative value disclosure regulations in December 2003 (the "2003 final regulations"). Among other things the 2003 final regulations require QJSA explanations to include a description of the relative value of each optional form of benefit compared to the value of the plan's QJSA, and require qualified pre-retirement survivor annuity (QPSA) explanations to include a description of the financial effect of a QPSA election on the participant's benefit. The 2003 final regulations originally were set to apply to QJSA explanations provided with respect to annuity starting dates beginning on or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004.

In the spring of 2004 various benefits groups -- including The ERISA Industry Committee and the American Benefits Council -- petitioned IRS for a delay in the compliance deadline for QJSA explanations. These groups argued a delay was necessary because the 2003 final regulations "require employers to evaluate and make decisions and changes regarding a number of significant and complex matters affecting plan recordkeeping, participant communications, and plan design." They also argued the 2003 final regulations should be delayed until the IRS finalizes regulations pursuant to IRC § 411(d)(6), which might enable plan sponsors to reduce their disclosure burden by eliminating some optional forms of benefit. The IRS issued these regulations in final form on August 12, 2005, but simultaneously issued proposed regulations that would enhance the final regulations. These additional proposed regulations still have not been issued in final form.

The IRS on June 30, 2004 issued Announcement 2004-58 to provide a partial delay in the compliance deadline for the 2003 final regulations. Specifically, QJSA explanations provided with respect to annuity starting dates before February 1, 2006 generally do not have to comply with the updated disclosure requirements. However, the original deadline for QJSA explanations with annuity starting dates on or after October 1, 2004 applies with respect to any optional forms of benefit subject to IRC § 417(e)(3) (e.g., single sums, distributions in the form of partial single sums in combination with annuities, or installment payment options) that are less valuable than the QJSA.

Then, in January 2005, the IRS issued proposed regulations (the "2005 proposed regulations") that would modify the 2003 final regulations to incorporate the partial delayed effective date and make other changes. Because the IRS failed to finalize the 2005 proposed regulations before the February 1, 2006 compliance deadline, the IRS earlier this year announced its intentions to provide limited relief with respect to this deadline. The final modifications (the "2006 final regulations") incorporate this limited relief and make a series of other changes to the 2003 final regulations.

Summary of 2006 Final Regulations

The 2006 final regulations retain a number of provisions from the 2005 proposed regulations without changes. For example, like the 2005 proposed regulations, the 2006 final regulations include a special rule enabling plans to use the February 1, 2006 compliance deadline even if there are minor differences between the value of an optional form subject to IRC § 417(e)(3) and the QJSA for a married participant that are caused by using the life annuity rather than the QJSA to calculate the amount of the optional form. Under the special rule, for purposes of the effective date provisions only, the actuarial present value of an optional form subject to IRC § 417(e)(3) is treated as not being less than the actuarial present value of the QJSA if:

  1. Using the applicable interest rate and applicable mortality table under Treas. Reg. Sec. 1.417(e)-1(d)(2) and (3), the actuarial present value of that optional form is not less than the actuarial present value of the QJSA for an unmarried participant; and
  2. Using reasonable actuarial assumptions, the actuarial present value of the QJSA for an unmarried participant is not less than the actuarial present value of the QJSA for a married participant.

Also like the 2005 proposed regulations, the 2006 final regulations clarify that plans using the generalized notice method of disclosure can use reasonable estimates to determine the amount of the normal form of benefit available to a participant. But this applies only if the plan follows the requirements applicable to reasonable estimates used in disclosing participant-specific information, such as offering a more precise calculation upon request and revising previously offered information consistent with the more precise information. Additionally, the 2006 final regulations clarify that a QJSA explanation does not fail to satisfy the requirements for QJSA explanations using generally applicable information merely because the QJSA explanation contains an item of participant-specific information in place of the corresponding generally applicable information.

Finally, the final 2006 regulations modify Treas. Reg. § 1.401(a)-20, Q & A 16, to clarify the interaction of the rule prohibiting a plan from providing an option to a married individual that is worth more than the QJSA with the requirement that certain optional forms of benefit be calculated using specified actuarial assumptions.

Key Differences Between the 2005 Proposed and 2006 Final Regulations

There are a number of key differences between the 2005 proposed regulations and 2006 final regulations as well. One notable change is the IRS's decision to exclude from the 2006 final regulations a list of examples of optional forms of benefit that the IRS believes are subject to the IRC § 417(e)(3) minimum present value requirements. The list was included in the 2005 proposed regulations to clarify which optional forms of benefit, if less valuable than the QJSA, are not eligible for the February 1, 2006 delayed compliance deadline.

The IRS decided to leave the list out of the 2006 final regulations after some commentators took exception to the IRS's decision to include a social security level income option on the list. The preamble to the 2006 final regulations defines a social security level income option as "the payment of a participant's benefit in the form of an annuity with larger payments in earlier years before an assumed social security commencement age to provide the participant with approximately level retirement income when the assumed social security payments are taken into account." In the end the IRS determined the IRC § 417(e)(3) regulations are the more appropriate place for this type of guidance. However, the preamble indicates the IRS continues to believe that social security level income options are subject to IRC § 417(e)(3), a point with which some commentators disagreed.

The 2006 final regulations also address a number of issues the 2005 proposed regulations did not mention. For example, the 2006 final regulations change the rules for when optional forms of benefit may be described as approximately equal in value to the QJSA. The 2003 final regulations provided that any optional form of benefit that is at least 95 percent as valuable as the QJSA for a married participant can be disclosed as approximately equal in value to the QJSA. Thus, even optional forms of benefit worth substantially more than the QJSA could be described as approximately equal in value. However, if plans use a single-life annuity as the QJSA, any optional form of benefit that is at least 95 percent, but not more than 102.5 percent, of the single-life annuity can be disclosed as approximately equal in value to the single-life annuity.

The 2006 final regulations modify these rules by providing any optional forms of benefit that are at least 95 percent, but not greater than 105 percent, of the actuarial present value of the QJSA, may be disclosed as approximately equal in value to the QJSA. This rule applies regardless of whether the comparison is being made to the QJSA for married participants or to the QJSA for single participants. This change does not have to be applied to QJSA explanations provided before January 1, 2007.

Also, the 2006 final regulations include a new rule permitting plans to provide a simplified presentation of financial effect and relative value when they offer a significant number of substantially similar optional forms of benefit. According to the preamble, "optional forms of benefit are substantially similar if those optional forms of benefit are identical except for a particular feature or features (with associated adjustment factors) and the feature or features vary linearly." The classic example is a plan that offers joint and survivor annuity options with survivor payments available in all whole number percentages between 50 percent and 100 percent. In this case, the 2006 final regulations permit plans to explain the relative value and financial effect of a representative range of examples of those optional forms of benefit. A range of examples is representative "only if it includes examples illustrating the relative value and financial effect of the optional forms of benefit that reflect each varying feature at both extremes of its linear range, plus at least one example illustrating the relative value and financial effect of the optional forms of benefit that reflects each varying feature at an intermediate point." More than one intermediate example might be needed to "illustrate a pattern of variation in relative value with respect to a varying feature."

Thus, for the plan offering joint and survivor annuity options with survivor payments available in all whole number percentages between 50 percent and 100 percent, a representative range of examples might include disclosing the relative value and financial effect with respect to the joint and 50 percent survivor annuity, the joint and 75 percent survivor annuity, and the joint and 100 percent survivor annuity.

Applicability Dates

Making sense of the effective dates for these relative value disclosure rules is almost as difficult as making sense of the rules themselves. As noted, in the case of lump sums and other optional forms of benefit subject to IRC § 417(e)(3) that are less valuable than the QJSA, the relative value disclosure requirements apply for QJSA explanations provided with respect to annuity starting dates on or after October 1, 2004. For all other optional forms of benefit, the relative value disclosure requirements (as modified by the 2006 final regulations) apply to a QJSA explanation with respect to any distribution with an annuity starting date that is on or after February 1, 2006. However, plans can meet this later deadline by making a reasonable, good faith effort to comply with respect to QJSA explanations provided before January 1, 2007. A reasonable, good faith effort "includes substantial compliance with the" 2003 final regulations.


DeloitteThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have 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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608 , Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.


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