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[Federal Register: January 28, 2005 (Volume 70, Number 18)]
[Proposed Rules]
[Page 4058-4061]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja05-40]

=======================================================================
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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-152914-04]
RIN 1545-BD97


Revised Regulations Concerning Disclosure of Relative Values of
Optional Forms of Benefit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that would revise
final regulations that were issued on

[[Page 4059]]

December 17, 2003, under section 417(a)(3) of the Internal Revenue Code
concerning content requirements applicable to explanations of qualified
joint and survivor annuities and qualified preretirement survivor
annuities payable under certain retirement plans. These regulations
affect plan sponsors and administrators, and participants in and
beneficiaries of, certain retirement plans.

DATES: Written and electronic comments and requests for a public
hearing must be received by April 28, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-152914-04), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
152914-04), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the IRS
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG-152914-04).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Bruce
Perlin at (202) 622-6090 (not a toll-free number); concerning
submissions or hearing requests, Lanita Van Dyke, (202) 622-7180 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed
rulemaking have been previously reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control number 1545-0928.
    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 417(a) provides rules under which a participant (with
spousal consent) may waive payment of the participant's benefit in the
form of qualified joint and survivor annuity (QJSA). Specifically,
section 417(a)(3) provides that a plan must provide to each
participant, within a reasonable period before the annuity starting
date, a written explanation that includes the following information:
(1) The terms and conditions of the QJSA; (2) the participant's right
to make an election to waive the QJSA form of benefit; (3) the effect
of such an election; (4) the rights of the participant's spouse; and
(5) the right to revoke an election to waive the QJSA form of benefit.
    Section 205 of the Employee Retirement Income Security Act of 1974
(ERISA), Public Law 93-406 (88 Stat. 829) as subsequently amended,
provides rules that are parallel to the rules of sections 401(a)(11)
and 417 of the Internal Revenue Code. In particular, section 205(c)(3)
of ERISA provides a rule parallel to the rule of section 417(a)(3) of
the Code.
    Section 1.401(a)-20, which provides rules governing the
requirements for a waiver of the QJSA, was published in the Federal
Register on August 19, 1988 (TD 8219) (53 FR 31837). Section 1.401(a)-
20, Q & A-36, as published in 1988, set forth requirements for the
explanation that must be provided under section 417(a)(3) as a
prerequisite to waiver of a QJSA. Under those requirements, such a
written explanation must contain a general description of the
eligibility conditions and other material features of the optional
forms of benefit and sufficient additional information to explain the
relative values of the optional forms of benefit available under the
plan (e.g., the extent to which optional forms are subsidized relative
to the normal form of benefit or the interest rates used to calculate
the optional forms). In addition, Sec.  1.401(a)-20, Q & A-36, as
published in 1988, provided that the written explanation must comply
with the requirements set forth in Sec.  1.401(a)-11(c)(3). Section
1.401(a)-11(c)(3) was issued prior to the enactment of section 417, and
provides rules relating to written explanations that were required
prior to a participant's election of a preretirement survivor annuity
or election to waive a joint and survivor annuity. Section 1.401(a)-
11(c)(3)(i)(C) provides that such a written explanation must contain a
general explanation of the relative financial effect of these elections
on a participant's annuity.
    For 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. See Sec.  1.401(a)-20, Q & A-16. Further, the anti-forfeiture
rules of section 411(a) prohibit a participant's benefit under a
defined benefit plan from being satisfied through payment of a form of
benefit that is actuarially less valuable than the value of the
participant's accrued benefit expressed in the form of an annual
benefit commencing at normal retirement age. These determinations must
be made using reasonable actuarial assumptions. However, see section
417(e)(3) and Sec.  1.417(e)-1(d) for actuarial assumptions required
for use in certain present value calculations.
    Final regulations under section 417(a)(3) 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 Sec.  1.417(a)(3)-1 (68 FR 70141). The 2003
regulations are generally effective for QJSA explanations provided with
respect to annuity starting dates beginning on or after October 1,
2004.
    The 2003 regulations were issued in response to concerns that, in
certain cases, the information provided to participants under section
417(a)(3) regarding available distribution forms pursuant to Sec.
1.401(a)-20, Q & A-36, does not adequately enable them to compare those
distribution forms without professional advice. In particular,
participants who are eligible for early retirement benefits in the form
of both subsidized annuity distributions and unsubsidized single-sum
distributions may be receiving explanations that do not adequately
disclose 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 2003
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 requested that the effective date of the
2003 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 noted that
recently proposed regulations under section 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

[[Page 4060]]

review of all of the optional forms of benefit under their plans
following publication of the those regulations in final form. See Sec.
1.411(d)-3, 69 FR 13769 (March 24, 2004). These commentators 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 section
411(d)(6) regulations. After consideration of these comments, Treasury
and the IRS issued Announcement 2004-58 (2004-29 I.R.B. 66), which
postponed the effective date of the 2003 regulations under Sec.
1.417(a)(3)-1 for certain QJSA explanations.
    Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR
47713), the Secretary of the Treasury has interpretive jurisdiction
over ERISA provisions that are parallel to the Code provisions
addressed in these regulations. Therefore, these proposed regulations
would apply for purposes of the parallel rules in section 205(c)(3) of
ERISA, as well as for section 417(a)(3) of the Code.

Explanation of Provisions

    Consistent with Announcement 2004-58, these proposed regulations
would modify the 2003 regulations to provide that the 2003 regulations
are generally 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 Sec.  1.417(a)(3)-1 would be
required to comply with the 1988 regulations regarding disclosure of
relative value and financial effect.
    However, the existing effective date under Sec.  1.417(a)(3)-1 of
the 2003 regulations is retained for explanations with respect to any
optional form of benefit that is subject to the requirements of section
417(e)(3) (e.g., single sums, social security level income options,
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 section 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 Sec.
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 does not reflect an early
retirement subsidy available under the QJSA. Where the existing
effective date is retained, the plan must disclose the relative value
of the QJSA for the participant even if the plan provides a disclosure
of relative values that is not tailored to the participant's marital
status. Accordingly, if a plan provides a relative value disclosure
based on the single life annuity (the QJSA for a single participant) to
a married participant, the plan must also include a comparison of the
value of the QJSA to the value of the single life annuity.
    The proposed regulations include a special rule that would enable a
plan to use the delayed effective date rule even if there are minor
differences between the value of an optional form and the value of the
QJSA for a married participant that are caused by the calculation of
the amount of the optional form of benefit based on the life annuity
rather than on the QJSA. Under this special rule, solely for purposes
of the effective date provisions, the actuarial present value of an
optional form is treated as not being less than the actuarial present
value of the QJSA if the following two conditions are met. First, using
the applicable interest rate and applicable mortality table under
Sec. 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. Second, 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.
    These proposed regulations would also modify the 2003 regulations
in several other respects. First, for purposes of disclosing the normal
form of benefit as part of a disclosure made in the form of generally
applicable information, reasonable estimates of the type permitted to
be used to disclose participant-specific information may be used to
determine the normal form of benefit, but 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). Second, a QJSA
explanation does not fail to satisfy the requirements for QJSA
explanations made in the form of disclosures of generally applicable
information merely because the QJSA explanation contains an item of
participant-specific information in place of the corresponding
generally applicable information.
    In addition, the proposed regulations would modify Sec.  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. Under that
clarification, a plan would not fail to satisfy the requirements of
Sec.  1.401(a)-20, Q&A-16, merely because the amount payable under an
optional form of benefit that is subject to the minimum present value
requirement of section 417(e)(3) is calculated using the applicable
interest rate (and, for periods when required, the applicable mortality
table) under section 417(e)(3).

Dates of Applicability

    The changes to Sec.  1.401(a)-20, A-36, and Sec.  1.417(a)(3)-1 are
proposed to apply as if they had been included in TD 9099 (68 FR
70141). The change to Sec.  1.401(a)-20, Q&A-16, is proposed to apply
as if it had been included in TD 8219 (53 FR 31837). Taxpayers may rely
on these proposed regulations for guidance pending the issuance of
final regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments
(preferably a signed original and eight (8) copies) that are submitted
timely to the IRS. In addition to the other requests for comments set
forth in this document, the IRS and Treasury also request comments on
the clarity of the proposed rule and how it may be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if one is requested.

[[Page 4061]]

Drafting Information

    The principal authors of these regulations are Bruce Perlin and
Linda S.F. Marshall of the Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1986

    Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.401(a)-20 is amended by:
    1. Adding a sentence to the end of Q&A-16.
    2. Adding a sentence to the end of Q&A-36.
    The additions read as follows:


Sec.  1.401(a)-20  Requirements of qualified joint and survivor annuity
and qualified preretirement survivor annuuity.

* * * * *
    A-16 * * * A plan does not fail to satisfy the requirements of this
Q&A-16 merely because the amount payable under an optional form of
benefit that is subject to the minimum present value requirement of
section 417(e)(3) is calculated using the applicable interest rate
(and, for periods when required, the applicable mortality table) under
section 417(e)(3).
* * * * *
    A-36 * * * However, the rules of Sec.  1.401(a)-20, Q&A-36, as it
appeared in 26 CFR Part 1 revised April 1, 2003, apply to the
explanation of a QJSA under section 417(a)(3) for an annuity starting
date prior to February 1, 2006.
* * * * *
    Par. 3. Section 1.417(a)(3)-1 is amended by:
    1. Removing the language ``paragraph (c)(3)(iii) of'' from
paragraph (c)(2)(ii)(A).
    2. Adding a sentence to the end of paragraph (d)(2)(ii).
    3. Adding paragraph (d)(5).
    4. Revising paragraph (f).
    The additions and revision read as follows:


Sec.  1.417(a)(3)-1  Required explanation of qualified joint and
survivor annuity and qualified preretirement survivor annuity.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Actual benefit must be disclosed. * * * Reasonable estimates
of the type described in paragraph (c)(3)(i) may be used to determine
the normal form of benefit for purposes of this paragraph (d)(2)(ii) if
the requirements of paragraphs (c)(3)(ii) and (iii) of this section are
satisfied with respect to those estimates.
* * * * *
    (5) Use of participant-specific information in generalized notice.
A QJSA explanation does not fail to satisfy the requirements of this
paragraph (d) merely because it contains an item of participant-
specific information in place of the corresponding generally applicable
information.
* * * * *
    (f) Effective date--(1) General effective date for QJSA
explanations. Except as provided in paragraph (f)(2) of this section,
this section applies to a QJSA explanation with respect to any
distribution with an annuity starting date that is on or after February
1, 2006.
    (2) Special effective date for certain QJSA explanations--(i)
Application to QJSA explanations with respect to certain optional forms
that are less valuable than the QJSA. This section also applies to a
QJSA explanation with respect to any distribution with an annuity
starting date that is on or after October 1, 2004, and before February
1, 2006, if the actuarial present value of any optional form of benefit
that is subject to the requirements of section 417(e)(3) (e.g., single
sums, distributions in the form of partial single sums in combination
with annuities, social security level income options, and installment
payment options) is less than the actuarial present value (as
determined under Sec.  1.417(e)-1(d)) of the QJSA. For purposes of this
paragraph (f)(2)(i), the actuarial present value of an optional form is
treated as not less than the actuarial present value of the QJSA if--
    (A) Using the applicable interest rate and applicable mortality
table under 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
    (B) 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.
    (ii) Requirement to disclose differences in value for certain
optional forms. A QJSA explanation with respect to any distribution
with an annuity starting date that is on or after October 1, 2004, and
before February 1, 2006, is only required to be provided under this
section with respect to--
    (A) An optional form of benefit that is subject to the requirements
of section 417(e)(3) and that has an actuarial present value that is
less than the actuarial present value of the QJSA (as described in
paragraph (f)(2)(i) of this section); and
    (B) The QJSA (determined without application of paragraph
(c)(2)(ii) of this section).
    (3) Annuity starting date. For purposes of paragraphs (f)(1) and
(2) of this section, in the case of a retroactive annuity starting date
under section 417(a)(7), as described in Sec.  1.417(e)-1(b)(3)(vi),
the date of commencement of the actual payments based on the
retroactive annuity starting date is substituted for the annuity
starting date.
    (4) Effective date for QPSA explanations. This section applies to
any QPSA explanation provided on or after July 1, 2004.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-1553 Filed 1-27-05; 8:45 am]

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