Relative Value Regs Postponed?

[Guest HarveyC]

Has anyone heard that these regs have been postponed to be effective for annuity starting dates in early 2006 instead of 10/1/2004? I've been told by an attorney that this is the case but can not find anything concrete online or otherwise.

[Guest merlin]

Announcement 2004-58

[Belgarath]

Here's the text of 2004-58.

The Department of the Treasury and the Internal Revenue Service announce a delay in the effective date of § 1.417(a)(3)-1 of the Income Tax Regulations with respect to qualified joint and survivor (QJSA) explanations relating to certain optional forms of benefit. However, the current effective date of the regulations is retained with respect to QJSA explanations relating to single sum or other optional forms of benefit subject to § 417(e)(3) of the Internal Revenue Code that are less valuable than the QJSA.

Section 1.417(a)(3)-1 requires the disclosure, as part of a QJSA explanation, of the relative value and financial effect of optional forms of benefit available to participants in retirement plans qualified under § 401(a) of the Internal Revenue Code. This announcement also addresses certain questions that have arisen under these regulations.

Extension of Effective Date

Final regulations under § 417(a)(3) of the Code regarding disclosure of the relative value and financial effect of optional forms of benefit as part of QJSA explanations provided to participants receiving qualified retirement plan distributions were published in the Federal Register on December 17, 2003. See § 1.417(a)(3)- 1 of the regulations, 68 FR 70141. The final regulations are generally effective for QJSA explanations provided with respect to annuity starting dates beginning on or after October 1, 2004.

The regulations were issued in response to concerns that, in certain cases, the information provided to participants under § 417(a)(3) regarding available distribution forms does not adequately enable them to compare those distribution forms without professional advice. In particular, participants who are eligible for both subsidized annuity distributions and unsubsidized single-sum distributions may be receiving explanations that do not adequately explain the value of the subsidy that is foregone if the single-sum distribution is elected. In such a case, merely disclosing the amount of the single-sum distribution and the amount of the annuity payments would not adequately enable a participant to make an informed comparison of the relative values of those distribution forms. The regulations address this problem, as well as the problem of disclosure in other cases where there are significant differences in value among optional forms, and also clarify the rules regarding the disclosure of the financial effect of benefit payments.

A number of commentators have requested that the effective date of the regulations be postponed. Among the reasons cited is the need in some plans for sponsors to complete an extensive review and analysis of optional forms of benefit in order to prepare proper comparisons of the relative values of those optional forms to the QJSA. They have noted that recently proposed regulations under § 411(d)(6) would permit elimination of certain optional forms of benefit and that many plan sponsors can be expected to engage in a thorough review of all of the optional forms of benefit under their plans following publication of the those regulations in final form. See § 1.411(d)-3 of the regulations, 69 FR 13769 (March 24, 2004). These commentators have argued that it would be inefficient for plans to be required to incur the costs of two such extensive analyses in succession, rather than a single analysis of optional forms that might serve to some extent for purposes of both the relative value regulations and the § 411(d)(6) regulations.

After careful consideration of these comments, Treasury and the IRS are postponing the effective date of the final regulations under § 1.417(a)(3)-1 for certain QJSA explanations. The regulations will generally be effective for QJSA explanations provided with respect to annuity starting dates beginning on or after February 1, 2006. In the interim, plans that do not comply with § 1.417(a)(3)-1 will be required to comply with prior guidance regarding disclosure of relative value and financial effect. See §§ 1.401(a)-11©(3) and 1.401(a)-20, Q&A-36 as they appeared in the April 1, 2003, edition of the Code of Federal Regulations.

Notwithstanding this extension, the existing effective date under § 1.417(a)(3)-1 of the regulations is retained for explanations with respect to any optional form of benefit that is subject to the requirements of § 417(e)(3) of the Code (e.g., single sums, distributions in the form of partial single sums in combination with annuities, or installment payment options) if the actuarial present value of that optional form is less than the actuarial present value (as determined under § 417(e)(3)) of the QJSA. Thus, for example, a QJSA explanation provided with respect to an annuity starting date beginning on or after October 1, 2004, must comply with § 1.417(a)(3)-1 to the extent that the plan provides for payment to that participant in the form of a single sum that is less valuable than the QJSA.

Reasonable Estimates for Generalized Notice

The final regulations provide two methods for disclosing the relative value and financial effect of the optional forms of benefit presently available to a participant: the "participant-specific" method of § 1.417(a)(3)-1© and the "generalized notice" method of § 1.417(a)(3)-1(d). Under the participant-specific method, a plan must provide information on the relative value and financial effect of each optional form of benefit and is permitted to use reasonable estimates for this purpose (e.g., estimates based on data as of an earlier date, a reasonable assumption of the spouse's age, or reasonable estimates of the applicable interest rate under § 417(e)(3)).

Under the generalized notice method, a plan discloses the amount of the participant's benefit payable in the normal form of benefit and provides additional information that is not participant-specific (although participant-specific information must be provided upon request). The additional information may be disclosed in the form of a chart based on computations for hypothetical participants that shows the financial effect of generally available optional forms of benefit in units such as dollars per thousand, and the relative value of those optional forms. The disclosure of the amount of the individual participant's benefit in combination with the chart allows the individual to estimate the financial effect and relative value of the optional forms of benefit available to that individual.

In response to questions raised, this announcement clarifies that reasonable estimates may be used in determining the amount of the normal form of benefit available to a participant under the generalized notice method of disclosure. In addition, a plan may choose to base the chart or additional information described above in part on participant-specific data so long as the requirements of the generalized notice method are otherwise satisfied.

QJSA as Most Valuable Optional Form of Benefit

Section 1.401(a)-20, Q&A-16, provides that, in the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Section 417(e)(3) provides that specified mortality and interest rate assumptions apply in determining the minimum present value of certain optional forms of benefit, such as a single sum. Some commentators have expressed concern that, solely as a result of the use of the actuarial assumptions specified in § 417(e)(3), the value of a single-sum distribution may exceed the actuarial present value of a QJSA, especially at younger ages.

The Treasury and the Service intend to issue regulations, effective retroactively, clarifying the interaction between the QJSA requirements and the requirements of § 417(e)(3) to use specified actuarial assumptions. The regulations are expected to provide that a plan will not fail to satisfy the requirements of § 417 merely because the application of § 417(e)(3) causes an optional form of benefit to be more valuable than the QJSA.

[Guest HarveyC]

Thanks very much, guys!

Where did you find this announcement and how did you find out about it? Do you subscribe to an e-mail alert system from the IRS or some vendor? I'm trying to locate this announcement online to no avail. When I got wind of this yesterday, I've been searching high and low for something in writing and came up empty. Now, I'm currently doing a search for announcement 2000-58 but so far am not coming up with anything.

[Guest beckys]

I haven't found it on a free site yet either. We got a copy through a BNA subscription.

[Guest HarveyC]

We use CCH and haven't received notification of this and search of their site comes up empty. We used to use BNA...maybe we should switch back. Thanks.

[MGB]

There is an office at the IRS where releases are filed. (They must be filed prior to 4 pm Eastern. This was filed at 4:08 pm, but they probably begged and begged to allow it to be filed, given the timeframe coming into 7/1.)

All sorts of people within DC physically pick up the filings at that office, including BNA and other wire services. Because of the late filing (most do not expect a late filing), only those that were on top of it and expecting it kept looking for it. So, it did not get out fully yesterday as it would under normal conditions. Normally, with a filing during the day, everyone gets access about the same time through electronic services.

Also, some of us know people within the IRS and get it by email. These are not official lists, but are from working directly with them on related topics (or the regulation itself). For example, Bill Sweetnam sent the notice out late yesterday (after hours) to a large list of people because he knew we were all chomping at the bit pushing him for the relief.

[Guest HarveyC]

Thanks MGB (and all). This has been very enlightening.

[E as in ERISA]

Its now out on the IRS web. See today's Benefits Buzz. See document at http://benefitslink.com/IRS/ann2004-58.pdf .

[Guest merlin]

In addition to CCH, we subscribe to the Technical Answer Group. Their email announcement was delivered at 5:08 yesterday afternoon.

[JAY21]

In the small plan world an HCE might be hitting the 415 limit and if electing a lump sum optional form of benefit the L.S. value is based upon a single life annuity even if the normal form is a J&S. Do you think that the HCE would then need to get this notice that his/her lump sum benefit is financial less valuable than a J&S annuity ?

(let's assume actuarial equivalence for all purposes are the 417(e) rates so no difference there for various optional forms).

[MGB]

Yes. It doesn't make any difference what caused the difference in value.

[JAY21]

Thanks MGB.

[E as in ERISA]

So who gets the benefit of the extension? Would most DC plans? Aren't all forms generally considered equally valuable? Or does the employer really have to consider the particular participant (if he comes from a family with long life span, the QJSA might be more valuable)?

I assume it would be some DB plans - with a variety of options, some of which are less valuable -- that would generally be stuck with the 10/1 annuity starting date?

[MGB]

For example:

A DB plan allows the participant to elect any whole percentage for a QJSA between 50 and 100. That is 51 optional forms. Assume they are not actuarially equivalent, and are instead based on a simple algebraic formula (e.g., 95% of normal form, adjusted by some amount for differences in ages beyond some amount).

Rather than wanting to keep this arrangement (and needing to provide 51 relative values every time), the plan sponsor wants to eliminate 48 of these and retain the 50, 75 and 100% versions. They cannot do that until the proposed 411(d)(6) regs are final. The whole purpose of the delay is to accomodate situations like this.

[E as in ERISA]

But does this extension allow that? Isn't there a risk that some of them are less valuable than the QJSA, if the formula is 95% of normal form, etc. So the delay wouldn't apply?

But the delay does apply to DC plans -- even if they have only lump sum and QJSA -- if they are almost always considered equally valuable.

So is the effect the opposite of what is intended. Is it DB plans with lots of options that are more likely to have some less valuable options -- so they will have to comply with the 10/1 rules -- while most DC plans will be allowed the extension?

Or do I have it backwards?

[MGB]

The "less valuable" not allowing a delay only applies to optional forms subject to 417(e). Optional forms that are annuities for life (e.g., J&S, certain and life, life annuity) are not subject to 417(e).

In my example I didn't have anything subject to 417(e), so it doesn't make any difference if the relative value is less than or greater than the QJSA...I still get a delay.

[E as in ERISA]

Okay. I realized afterward that I was wrong in referring back to your example. But my basic question is whether it is more likely DB plans than DC plans that will likely be disqualified from the delay?

[MGB]

Yes.

The only way you can be disqualified and not get the delay is to have an option that is BOTH be subject to 417(e) and have that option less valuable than the QJSA. This will only happen with subsidized early retirement QJSA's under a DB plan where the lump sum does not include the early retirement subsidy.

Note that even for the same person, every other option is delayed. Only the lump sum (or other distribution subject to 417(e) like installments) comparison to the QJSA is effective this year.

Everyone else gets a delay.

[E as in ERISA]

THANKS!!

[Guest Steve C]

MGB,

A second scenario that misses out on the delay is a fully subsidized QJSA, where the benefit to the participant is not adjusted for survivor coverage. This is distinct from the early retirement subsidy.

I've seen this arise in a few plans that had wanted a J&S normal form. Instead of placing the survivor coverage in the normal form (which could have caused optional form values to be dependent on marital status), the QJSA is subsidized. The participant receives the same monthly benefit that he would have received under a straight life annuity normal form. At death there is a 50% continuation to the surviving spouse.

This meets the plan design objective and satisfies the requirement that the QJSA is the most valuable form, but results in a lump sum option that is less valuable than the QJSA.

- Steve

[Guest HarveyC]

Is "less valuable" determined in the mathematical sense (< 100%) or in the allowable sense under the new regs (< 95%). So, if the relative value of a lump sum option was 95% vs. the QJSA, is that considered approximately equivalent in value (and not less valuable) and so subject to the delay, or because it truly is less valuable do we have to add the new disclosure language (exempt from the delay) and (optionally) say that the lump sum option is approximately equivalent in value to the QJSA?

[Guest Steve C]

I believe the delay language is literally based on "value" rather than "approximate value," suggesting the mathematical test.

Of course, that would lead to an ironic result, where a plan might be forced to disclose a 96% lump sum as approximately equal in value to the QJSA.

- Steve

[Guest HarveyC]

I guess I shouldn't be surprised that the Announcement has ambiguities in it as the new Regulations did. Such is life.