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Editor's note: These regulations reflect the corrections made by the IRS at 67 Fed. Reg. 75899 (Dec. 10, 2002).

Proposed Regulations

Disclosure of Relative Values of Optional Forms of Benefit


DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124667-02]
RIN 1545-BA78

Disclosure of Relative Values of Optional Forms of Benefit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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

SUMMARY: This document contains proposed regulations that would
consolidate the content requirements applicable to explanations of
qualified joint and survivor annuities and qualified preretirement
survivor annuities payable under certain retirement plans, and would
specify requirements for disclosing the relative value of optional
forms of benefit that are payable from certain retirement plans in lieu
of a qualified joint and survivor annuity. These regulations would
affect retirement plan sponsors and administrators, and participants in
and beneficiaries of retirement plans. This document also provides
notice of a public hearing on these proposed regulations.

DATES: Written comments, requests to speak and outlines of oral
comments to be discussed at the public hearing scheduled for January
14, 2003, at 10 a.m., must be received by January 2, 2003.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-124667-02), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered to:
CC:ITA:RU (REG-124667-02), room 5226, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet

[[Page 62418]]

by submitting comments directly to the IRS Internet site at:
http://www.irs.gov/regs. The public hearing will be held in room 4718 of the
Internal Revenue Building, 1111 Constitution Avenue NW., Washington,
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S.
F. Marshall, 202-622-6090; concerning submissions and the hearing, and/
or to be placed on the building access list to attend the hearing, Guy
Traynor, 202-622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington,
DC 20224. Comments on the collections of information should be received
by December 6, 2002. Comments are specifically requested concerning:

    Whether the proposed collections of information are necessary for
the proper performance of the functions of the IRS, including whether
the information will have practical utility;

    The accuracy of the estimated burden associated with the proposed
collection of information (see below);

    How the quality, utility, and clarity of the information to be
collected may be enhanced;

    How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and

    Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.

    The collections of information in this proposed regulation are in
Sec.  1.417(a)(3)-1. This information is required by the IRS to comply
with the requirements of section 417(a)(3) regarding explanations that
must be provided to participants in a qualified plan prior to a waiver
of a qualified joint and survivor annuity (QJSA) or a qualified
preretirement survivor annuity (QPSA). This information will be used by
participants and spouses of participants to determine whether to waive
a QJSA or QPSA, and by the IRS to confirm that the plan complies with
applicable qualification requirements to avoid adverse tax
consequences. The collections of information are mandatory. The
respondents are nonprofit institutions.

    Estimated total annual reporting burden: 375,000 hours.

    The estimated annual burden per respondent varies from .01 to .99
hours, depending on individual circumstances, with an estimated average
of .5 hours.

    Estimated number of respondents: 750,000.

    The estimated annual frequency of responses: On occasion.

    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

    This document contains proposed amendments to 26 CFR part 1 under
section 417(a)(3) of the Internal Revenue Code of 1986 (Code).

    A qualified retirement plan to which section 401(a)(11) applies
must pay a vested participant's retirement benefit under the plan in
the form of a qualified joint and survivor annuity (QJSA), except as
provided in section 417. Section 401(a)(11) applies to defined benefit
plans, money purchase pension plans, and certain other defined
contribution plans. A QJSA is defined in section 417(b) as an annuity
for the life of the participant with a survivor annuity for the life of
the spouse (if the participant is married) that is not less than 50
percent of (and is not greater than 100 percent of) the amount of the
annuity that is payable during the joint lives of the participant and
the spouse. Under section 417(b)(2), a QJSA for a married participant
generally must be the actuarial equivalent of the single life annuity
benefit payable for the life of the participant. However, a plan is
permitted to subsidize the QJSA for a married participant. If the plan
fully subsidizes the QJSA for a married participant so that failure to
waive the QJSA would not result in reduced payments over the life of
the participant compared to the single life annuity benefit, then the
plan need not provide an election to waive the QJSA. See section
417(a)(5).

    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 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 Sec.  1.417(e)-1(d) for actuarial
assumptions required for use in certain present value calculations.

    If a plan provides a subsidy for one optional form of benefit
(i.e., the payments under an optional form of benefit have an actuarial
present value that is greater than the actuarial present value of the
accrued benefit), there is no requirement to extend a similar subsidy
(or any subsidy) to every other optional form of benefit. Thus, for
example, a participant might be entitled to receive a single-sum
distribution upon early retirement that does not reflect any early
retirement subsidy in lieu of a QJSA that reflects a substantial early
retirement subsidy. As a further example, a participant might be
entitled to receive a single-sum distribution at normal retirement age
in lieu of a QJSA that is subsidized as described in section 417(a)(5).

    Section 417(a) provides rules under which a participant (with
spousal consent) may waive payment of the participant's benefit in the
form of a QJSA. Section 417(a)(3) provides that a plan must provide to
each participant, within a reasonable period before the annuity
starting date (and consistent with such regulations as the Secretary
may prescribe) a written explanation of the terms and conditions of the
QJSA, the participant's right to make, and the effect of, an election
to waive the QJSA form of benefit, the rights of the participant's
spouse, and the right to revoke (and the effect of the revocation of)
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 parallel rules to the rules of sections 401(a)(11) and 417 of
the Internal Revenue Code. In particular, section 205(a)(3) of ERISA
provides a parallel rule to section 417(a)(3) of the Code. Treasury
regulations issued under section 417(a)(3) of the Code apply as

[[Page 62419]]

well for purposes of section 205(a)(3) of ERISA.

    Regulations governing the requirements for waiver of a QJSA were
published in the Federal Register on August 19, 1988 (TD 8219; 53 FR
31837). Section 1.401(a)-20, Q&A-36, provides rules for the explanation
that must be provided under section 417(a)(3) as a prerequisite to
waiver of a QJSA. Section 1.401(a)-20, Q&A-36, requires that 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, provides
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.

    In addition, under section 411 and Sec.  1.411(a)-11(c), so long as
a benefit is immediately distributable (within the meaning of Sec.
1.411(a)-11(c)(4)), a participant must be informed of his or her right
to defer that distribution. This requirement is independent of the
section 417 requirements addressed in these proposed regulations.

    Concerns have been expressed that, in certain cases, the
information provided to participants under section 417(a)(3) regarding
the 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 notices 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 annuity payments may not adequately
enable those participants to make an informed comparison of the
relative values of those distribution forms, even if the interest rate
used to derive the single sum is disclosed. Furthermore, questions have
been raised as to how the relative values of optional forms of benefit
are required to be expressed under current regulations. Accordingly,
these proposed regulations are being issued to propose disclosure
requirements that would enable participants to compare the relative
values of the available distribution forms using more readily
understandable information.

Explanation of Provisions

    The proposed regulations would consolidate the content requirements
applicable to explanations of QJSAs and QPSAs under section 417(a)(3),
and would specify rules for disclosing the relative value of optional
forms of benefit as part of the QJSA explanation. Similar to the
requirements in the current regulations, the required explanation must
contain, with respect to each of the optional forms of benefit
presently available to the participant, a description of the optional
form of benefit, a description of the eligibility conditions for the
optional form of benefit, a description of the financial effect of
electing the optional form of benefit, a description of the relative
value of the optional form of benefit, and a description of any other
material features of the optional form of benefit. Further, as under
the current regulations, the QJSA explanation would be permitted to be
made either by providing the participant with information specific to
the participant, or by providing the participant with generally
applicable information and offering the participant the opportunity to
request additional information specifically applicable to the
participant with respect to any optional forms of benefit available to
the participant. The proposed regulations would clarify that a defined
contribution plan is not required to provide a description of the
relative values of optional forms of benefit compared to the value of
the QJSA.

    The proposed regulations would provide additional guidance
regarding the required description of the relative values of optional
forms of benefit compared to the value of the QJSA and the content of
the required disclosure of relative values. Under the proposed
regulations, the description of the relative value of an optional form
of benefit compared to the value of the QJSA must be expressed in a
manner that provides a meaningful comparison of the relative economic
values of the two forms of benefit without the participant having to
make calculations using interest or mortality assumptions. In order to
make this comparison, the benefit under one or both optional forms of
benefit must be converted, taking into account the time value of money
and life expectancies, so that both are expressed in the same form. The
proposed regulations give several examples of techniques that may be
used for this comparison: expressing the actuarial present value of the
optional form of benefit as a percentage or factor of the actuarial
present value of the QJSA; stating the amount of an annuity payable at
the same time and under the same conditions as the QJSA that is the
actuarial equivalent of the optional form of benefit; or stating the
actuarial present value of both the QJSA and the optional form of
benefit. For purposes of providing a description of the relative value
of an optional form of benefit compared to the value of the QJSA (and
also for purposes of comparing the financial effect of the distribution
forms available to a participant), a plan would be permitted to provide
reasonable estimates (e.g., estimates based on data as of an earlier
date than the annuity starting date or an estimate of the spouse's
age). If estimates are used, the participant has a right to a more
precise calculation upon request.

    Since disclosing the relative value of every optional form of
benefit regardless of the degree of subsidy may be too burdensome, and
may provide participants with information that appears more precise
than is warranted based on the inexact nature of the actuarial
assumptions used, the proposed regulations would provide some ways to
simplify this disclosure of relative values of optional forms of
benefit. One way in which this disclosure would be simplified is
through a banding rule under which two or more optional forms of
benefit that have approximately the same value could be grouped for
purposes of disclosing relative value. Under these proposed
regulations, two or more optional forms of benefit would be treated as
having approximately the same value if those optional forms of benefit
vary in relative value in comparison to the value of the QJSA by 5
percentage points or less when the relative value comparison is made by
expressing the actuarial present value of each of those optional forms
of benefit as a percentage of the actuarial present value of the QJSA.
For such a group of optional forms of benefit, the requirement relating
to disclosing the relative value of each optional form of benefit
compared to the value of the QJSA could be satisfied by disclosing the
relative value of any one of the

[[Page 62420]]

optional forms in the group compared to the value of the QJSA, and
disclosing that the other optional forms of benefit in the group are of
approximately the same value. If a single-sum distribution is included
in such a group of optional forms of benefit, the single-sum
distribution must be the distribution form that is used for purposes of
this comparison. The relative value of all optional forms of benefit
that have an actuarial present value that is at least 95% of the
actuarial present value of the QJSA may be described by stating that
those optional forms of benefit are of approximately equal value to the
value of the QJSA. Thus, these rules would permit a plan that provides
no subsidized forms of benefit to state the comparison of relative
values simply by stating that all distribution forms are approximately
equal in value to the QJSA.

    Another way in which this disclosure may be simplified is through
the use of representative values: if, under the banding rule, two or
more optional forms of benefit are grouped, a representative relative
value for all of the grouped options could be used as the approximate
relative value for all of the grouped options, in lieu of using the
relative value of one of the optional forms of benefit in the group.
For this purpose, a representative relative value is any relative value
that is not less than the relative value of the member of the group of
optional forms of benefit with the lowest relative value and is not
greater than the relative value of the member of that group with the
highest relative value when measured on a consistent basis. For
example, if three optional forms have relative values of 87.5%, 89%,
and 91% of the value of the QJSA, all three optional forms can be
treated as having a relative value of approximately 90% of the value of
the QJSA.

    The proposed regulations would also permit the disclosure of the
financial effect and relative value of optional forms of benefit to be
made in the form of generally applicable information rather than
information specific to the participant, provided that information
specific to the participant regarding the optional form of benefit must
be furnished at the participant's request. Thus, under the proposed
regulations, in lieu of providing a QJSA explanation that describes
each optional form that is presently available to the participant, the
generalized QJSA explanation need only reflect the generally available
optional forms of benefits, along with a reference to where a
participant can obtain the information for any other optional forms of
benefits (such as optional forms from prior benefit structures for
limited groups of employees) that are presently available to the
participant.

    With respect to the generally available optional forms of benefits,
in lieu of providing a statement of financial effect and relative value
comparison that is specific to the participant, the generalized QJSA
explanation is permitted to include a chart or other comparable device
showing a series of examples of financial effects and relative value
comparisons for hypothetical participants. The examples in the chart
should reflect a representative range of ages for the hypothetical
participants and use reasonable assumptions for the age of the
hypothetical participant's spouse and any other variable that affects
the financial effect, or relative value, of the optional form of
benefit. The chart must be accompanied by a general statement
describing the effect of significant variations between the assumed
ages or other variables on the financial effect of electing the
optional form of benefit and the comparison of the relative value of
the optional form of benefit to the value of the QJSA. A generalized
QJSA explanation that includes this chart must also include the amount
payable to the participant under the normal form of benefit, either at
normal retirement age, or payable immediately. In addition, this chart
must be accompanied by a statement that includes an offer to provide,
upon the participant's request, a statement of financial effect along
with a comparison of relative values that is specific to the
participant for one or more presently available optional forms of
benefit, and a description of how a participant may obtain this
additional information. Thus, with respect to those optional forms of
benefit for which additional information is requested, the participant
must receive a QJSA explanation specific to the participant that is
based on the participant's actual age and benefit.

    The proposed regulations would provide rules governing the
actuarial assumptions to be used in comparing the value of an optional
form of benefit to the QJSA. If an optional form of benefit is subject
to the requirements of section 417(e)(3) and Sec.  1.417(e)-1(d) (e.g.,
a single-sum distribution), any comparison of the value of the optional
form of benefit to the value of the QJSA must be made using the
applicable mortality table and the applicable interest rate as defined
in Sec.  1.417(e)-1(d)(2) and (3) (or, at the option of the plan,
another reasonable interest rate and reasonable mortality table used
under the plan to calculate the amount payable under the optional form
of benefit). All other optional forms of benefit payable to the
participant must be compared with the QJSA using a single set of
interest rates and mortality tables that are reasonable and that are
applied uniformly for this purpose with respect to all such other
optional forms payable to the participant. The uniform interest and
mortality assumptions should be used regardless of whether those
assumptions are actually used to determine the amount of benefit
payments under any particular optional form.

    The proposed regulations would also require disclosure of
information to help a participant understand the significance of a
disclosure of the relative value of an optional form of benefit. Under
the proposed regulations, the notice would be required to provide an
explanation of the concept of relative value. Specifically, the notice
would be required to explain that the relative value comparison is
intended to allow the participant to compare the total value of
distributions paid in different forms, that the relative value
comparison is made by converting the value of the optional forms of
benefit currently available to a common form (such as the QJSA or
single-sum distribution), and that this conversion uses interest and
life expectancy assumptions.

    Under the proposed regulations, a required numerical comparison of
the value of the optional form of benefit to the value of the QJSA
under the plan generally would be required to disclose the interest
rate that is used to develop a required numerical comparison. However,
if all optional forms of benefit are permitted to be treated as having
approximately the same value after application of the banding rule
described above, then the plan would not be required to disclose the
interest rate used to develop a required numerical comparison to the
QJSA for optional form of benefit that is not subject to the
requirements of section 417(e)(3). In addition, the proposed
regulations would require the plan to provide a general statement that
all numerical comparisons of relative value provided are based on
average life expectancies, and that the relative value of payments
ultimately made under an annuity optional form of benefit will depend
on actual longevity.

    Under the proposed regulations, both the QPSA explanation and the
QJSA explanation must be written in a manner calculated to be
understood by the average participant. A plan may wish to provide
additional information beyond the minimum information that

[[Page 62421]]

would be required under these proposed regulations, in order to help an
employee to evaluate the form of benefit that would be most desirable
under the employee's individual circumstances. For example, the plan
may wish to add further explanation of the effects of ill health or
other factors influencing expected longevity on the desirability of
electing annuity forms of distribution.

    The proposed regulations contain rules regarding the method for
providing the QJSA explanation and the QPSA explanation. Under the
proposed regulations, these explanations must be written explanations.
First class mail to the last known address of the party is an
acceptable delivery method for a section 417(a)(3) explanation.
Likewise, hand delivery is acceptable. However, the posting of the
explanation is not considered provision of the section 417(a)(3)
explanation.

    These proposed regulations do not address the extent to which the
QJSA explanation or the QPSA explanation can be provided through
electronic media. The IRS and the Treasury Department are considering
the extent to which the QJSA explanation and the QPSA explanation, as
well as other notices under the various Internal Revenue Code
requirements relating to qualified retirement plans, can be provided
electronically, taking into account the effect of the Electronic
Signatures in Global and National Commerce Act (ESIGN), Public Law 106-
229, 114 Stat. 464 (2000). The IRS and the Treasury Department
anticipate issuing proposed regulations regarding these issues, and
invite comments on these issues.

Proposed Effective Date

    The regulations are proposed to be applicable to QJSA explanations
with respect to distributions with annuity starting dates on or after
January 1, 2004, and to QPSA explanations provided on or after January
1, 2004.

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 is hereby
certified that the collection of information in these regulations will
not have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that qualified
retirement plans of small businesses typically commence distribution of
benefits to few, if any, plan participants in any given year and,
similarly, only offer elections to waive a QPSA to few, if any,
participants in any given year. Thus, the collection of information in
these regulations will only have a minimal economic impact on most
small entities. Therefore, an analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required. 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 written comments (preferably a signed
original and eight (8) copies) that are submitted timely to the IRS.
Alternatively, taxpayers may submit comments electronically to the IRS
Internet site at http://www.irs.gov/regs. All comments will be
available for public inspection and copying. The IRS and Treasury
request comments on the clarity of the proposed rules and how they may
be made easier to understand or to implement.

    A public hearing has been scheduled for January 14, 2002, at 10
a.m. in room 4718 of the Internal Revenue Building, 1111 Constitution
Avenue NW., Washington, DC. All visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 30 minutes before the hearing starts at the Constitution Avenue
entrance. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.

    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time to
be devoted to each topic (signed original and eight (8) copies) by
January 2, 2002. A period of 10 minutes will be allotted to each person
for making comments. An agenda showing the scheduling of the speakers
will be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is 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. Paragraph (c)(3) of Sec.  1.401(a)-11 is revised to read as
follows:

Sec.  1.401(a)-11  Qualified joint and survivor annuities.

* * * * *

    (c) * * *

    (3) Information to be provided by plan. For rules regarding the
information required to be provided with respect to the election to
waive a QJSA or a QPSA, see Sec.  1.417(a)(3)-1.
* * * * *

    Par. 3. A-36 of Sec.  1.401(a)-20 is revised to read as follows:

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

* * * * *

    A-36. For rules regarding the explanation of QPSAs and QJSAs
required under section 417(a)(3), see Sec.  1.417(a)(3)-1.
* * * * *

    Par. 4. Section 1.417(a)(3)-1 is added to read as follows:

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

    (a) Written explanation requirement--(1) General rule. A plan meets
the survivor annuity requirements of section 401(a)(11) only if the
plan meets the requirements of section 417(a)(3) and this section
regarding the written explanation required to be provided a participant
with respect to a QJSA or a QPSA. A written explanation required to be
provided to a participant with respect to either a QJSA or a QPSA under
section 417(a)(3) and this section is referred to in this section as a
section 417(a)(3) explanation. See Sec.  1.401(a)-20, Q&A-37, for
exceptions to the written explanation requirement in the case of a
fully subsidized QPSA or QJSA, and Sec.  1.401(a)-20, Q&A-38, for the

[[Page 62422]]

definition of a fully subsidized QPSA or QJSA.

    (2) Time for providing section 417(a)(3) explanation--(i) QJSA
explanation. See Sec.  1.417(e)-1(b)(3)(ii) for rules governing the
timing of the QJSA explanation.

    (ii) QPSA explanation. See Sec.  1.401(a)-20, Q&A-35, for rules
governing the timing of the QPSA explanation.

    (3) Required method for providing section 417(a)(3) explanation. A
section 417(a)(3) explanation must be a written explanation. First
class mail to the last known address of the participant is an
acceptable delivery method for a section 417(a)(3) explanation.
Likewise, hand delivery is acceptable. However, the posting of the
explanation is not considered provision of the section 417(a)(3)
explanation.

    (4) Understandability. A section 417(a)(3) explanation must be
written in a manner calculated to be understood by the average
participant.

    (b) Required content of section 417(a)(3) explanation--(1) Content
of QPSA explanation. The QPSA explanation must contain a general
description of the QPSA, the circumstances under which it will be paid
if elected, the availability of the election of the QPSA, and, except
as provided in paragraph (d)(3) of this section, a description of the
financial effect of the election of the QPSA on the participant's
benefits (i.e., an estimate of the reduction to the participant's
estimated normal retirement benefit that would result from an election
of the QPSA).

    (2) Content of QJSA explanation. The QJSA explanation must satisfy
either paragraph (c) or paragraph (d) of this section. Under paragraph
(c) of this section, the QJSA explanation must contain certain specific
information relating to the benefits available under the plan to the
particular participant. Alternatively, under paragraph (d) of this
section, the QJSA explanation can contain generally applicable
information in lieu of specific participant information, provided that
the participant has the right to request additional information
regarding the participant's benefits under the plan.

    (c) Participant-specific information required to be provided--(1)
In general. A QJSA explanation satisfies this paragraph (c) if it
provides the following information with respect to each of the optional
forms of benefit presently available to the participant--

    (i) A description of the optional form of benefit;

    (ii) A description of the eligibility conditions for the optional
form of benefit;

    (iii) A description of the financial effect of electing the
optional form of benefit (i.e., the amount payable under the form of
benefit);

    (iv) In the case of a defined benefit plan, a description of the
relative value of the optional form of benefit compared to the value of
the QJSA, in the manner described in paragraph (c)(2) of this section;
and

    (v) A description of any other material features of the optional
form of benefit.

    (2) Requirement for numerical comparison of relative values--(i) In
general. The description of the relative value of an optional form of
benefit compared to the value of the QJSA under paragraph (c)(1)(iv) of
this section must be expressed to the participant in a manner that
provides a meaningful comparison of the relative economic values of the
two forms of benefit without the participant having to make
calculations using interest or mortality assumptions. Thus, in
performing the calculations necessary to make this comparison, the
benefits under one or both optional forms of benefit must be converted,
taking into account the time value of money and life expectancies, so
that the values of both optional forms of benefit are expressed in the
same form. For example, such a comparison may be expressed to the
participant using any of the following techniques--

    (A) Expressing the actuarial present value of the optional form of
benefit as a percentage or factor of the actuarial present value of the
QJSA;

    (B) Stating the amount of the annuity that is the actuarial
equivalent of the optional form of benefit and that is payable at the
same time and under the same conditions as the QJSA; or

    (C) Stating the actuarial present value of both the optional form
of benefit and the QJSA.

    (ii) Simplified presentations permitted--(A) Grouping of certain
optional forms. Two or more optional forms of benefit that have
approximately the same value may be grouped for purposes of a required
numerical comparison described in this paragraph (c)(2). For this
purpose, two or more optional forms of benefit have approximately the
same value if those optional forms of benefit vary in relative value in
comparison to the value of the QJSA by 5 percentage points or less when
the relative value comparison is made by expressing the actuarial
present value of each of those optional forms of benefit as a
percentage of the actuarial present value of the QJSA. For such a group
of optional forms of benefit, the requirement relating to disclosing
the relative value of each optional form of benefit compared to the
value of the QJSA can be satisfied by disclosing the relative value of
any one of the optional forms in the group compared to the value of the
QJSA, and disclosing that the other optional forms of benefit in the
group are of approximately the same value. If a single-sum distribution
is included in such a group of optional forms of benefit, the single-
sum distribution must be the distribution form that is used for
purposes of this comparison. In addition, the relative value of all
optional forms of benefit that have an actuarial present value that is
at least 95% of the actuarial present value of the QJSA is permitted to
be described by stating that those optional forms of benefit are
approximately equal in value to the QJSA, or that all of those forms of
benefit and the QJSA are approximately equal in value.

    (B) Representative relative value for grouped optional forms. If,
in accordance with paragraph (c)(2)(ii)(A) of this section, two or more
optional forms of benefits are grouped, the relative values for all of
the optional forms of benefit in the group can be stated using a
representative relative value as the approximate relative value for the
entire group. For this purpose, a representative relative value is any
relative value that is not less than the relative value of the member
of the group of optional forms of benefit with the lowest relative
value and is not greater than the relative value of the member of that
group with the highest relative value when measured on a consistent
basis. For example, if three optional forms have relative values of
87.5%, 89%, and 91% of the value of the QJSA, all three optional forms
can be treated as having a relative value of approximately 90% of the
value of the QJSA. As required under paragraph (c)(2)(ii)(A) of this
section, if a single-sum distribution is included in the group of
optional forms of benefit, the 90% relative factor of the value of the
QJSA must be disclosed as the approximate relative value of the single
sum, and the other forms can be described as having the same
approximate value as the single sum.

    (iii) Actuarial assumptions used to determine relative values. For
the purpose of providing a numerical comparison of the value of an
optional form of benefit to the value of the immediately commencing
QJSA, the following rules apply--

    (A) If an optional form of benefit is subject to the requirements
of section 417(e)(3) and Sec.  1.417(e)-1(d), any comparison of the
value of the optional form of benefit to the value of the QJSA must be
made using the applicable

[[Page 62423]]

mortality table and the applicable interest rate as defined in Sec.
1.417(e)-1(d)(2) and (3) (or, at the option of the plan, another
reasonable interest rate and reasonable mortality table used under the
plan to calculate the amount payable under the optional form of
benefit); and

    (B) All other optional forms of benefit payable to the participant
must be compared with the QJSA using a single set of interest and
mortality assumptions that are reasonable and that are applied
uniformly with respect to all such optional forms payable to the
participant (regardless of whether those assumptions are actually used
under the plan for purposes of determining benefit payments).

    (iv) Required disclosure of assumptions--(A) Explanation of concept
of relative value. The notice must provide an explanation of the
concept of relative value, communicating that the relative value
comparison is intended to allow the participant to compare the total
value of distributions paid in different forms, that the relative value
comparison is made by converting the value of the optional forms of
benefit presently available to a common form (such as the QJSA or a
single-sum distribution), and that this conversion uses interest and
life expectancy assumptions. The explanation of relative value must
include a general statement that all comparisons provided are based on
average life expectancies, and that the relative value of payments
ultimately made under an annuity optional form of benefit will depend
on actual longevity.

    (B) Disclosure of interest assumptions. A required numerical
comparison of the value of the optional form of benefit to the value of
the QJSA under the plan is required to disclose the interest rate that
is used to develop the comparison. If all optional forms of benefit are
permitted to be grouped under paragraph (c)(2)(ii)(A) of this section,
then the requirement of this paragraph (c)(2)(iv)(B) does not apply for
any optional form of benefit not subject to the requirements of section
417(e)(3) and Sec.  1.417(e)-1(d)(3).

    (3) Permitted estimates of financial effect and relative value--(i)
General rule. For purposes of providing a description of the financial
effect of the distribution forms available to a participant as required
under paragraph (c)(1)(iii) of this section, and for purposes of
providing a description of the relative value of an optional form of
benefit compared to the value of the QJSA for a participant as required
under paragraph (c)(1)(iv) of this section, the plan is permitted to
provide reasonable estimates (e.g., estimates based on data as of an
earlier date than the annuity starting date, a reasonable assumption
for the age of the participant's spouse, or, in the case of a defined
contribution plan, reasonable estimates of amounts that would be
payable under a purchased annuity contract), including reasonable
estimates of the applicable interest rate under section 417(e)(3).

    (ii) Right to more precise calculation. If a QJSA notice uses a
reasonable estimate under paragraph (c)(3)(i) of this section, the QJSA
explanation must identify the estimate and explain that the plan will,
upon the request of the participant, provide a more precise calculation
and the plan must provide the participant with a more precise
calculation if so requested. Thus, for example, if a plan provides an
estimate of the amount of the QJSA that is based on a reasonable
assumption concerning the age of the participant's spouse, the
participant can request a calculation that takes into account the
actual age of the spouse, as provided by the participant.

    (iii) Revision of prior information. If a more precise calculation
described in paragraph (c)(3)(ii) of this section materially changes
the relative value of an optional form compared to the value of the
QJSA, the revised relative value of that optional form must be
disclosed, regardless of whether the financial effect of selecting the
optional form is affected by the more precise calculation.

    (4) Special rules for disclosure of financial effect for defined
contribution plans. For a written explanation provided by a defined
contribution plan, a description of financial effect required by
paragraph (c)(1)(iii) of this section with respect to an annuity form
of benefit must include a statement that the annuity will be provided
by purchasing an annuity contract from an insurance company with the
participant's account balance under the plan. If the description of the
financial effect of the optional form of benefit is provided using
estimates rather than by assuring that an insurer is able to provide
the amount disclosed to the participant, the written explanation must
also disclose this fact.

    (d) Substitution of generally applicable information for
participant information in the section 417(a)(3) explanation--(1) Forms
of benefit available. In lieu of providing the information required
under paragraphs (c)(1)(i) through (v) of this section for each
optional form of benefit presently available to the participant as
described in paragraph (c) of this section, the QJSA explanation may
contain the information required under paragraphs (c)(1)(i) through (v)
of this section for the QJSA and each other optional form of benefit
generally available under the plan, along with a reference to where a
participant may readily obtain the information required under
paragraphs (c)(1)(i) through (v) of this section for any other optional
forms of benefit that are presently available to the participant.

    (2) Financial effect and comparison of relative values--(i) General
rule. In lieu of providing a statement of the financial effect of
electing an optional form of benefit as required under paragraph
(c)(1)(iii) of this section, or a comparison of relative values as
required under paragraph (c)(1)(iv) of this section, based on the
actual age and benefit of the participant, the QJSA explanation is
permitted to include a chart (or other comparable device) showing the
financial effect and relative value of optional forms of benefit in a
series of examples specifying the amount of the optional form of
benefit payable to a hypothetical participant at a representative range
of ages and the comparison of relative values at those same
representative ages. Each example in this chart must show the financial
effect of electing the optional form of benefit pursuant to the rules
of paragraph (c)(1)(iii) of this section, and a comparison of the
relative value of the optional form of benefit to the value of the QJSA
pursuant to the rules of paragraph (c)(2) of this section, using
reasonable assumptions for the age of the hypothetical participant's
spouse and any other variables that affect the financial effect, or
relative value, of the optional form of benefit. The requirement to
show the financial effect of electing an optional form can be satisfied
through the use of other methods (e.g., expressing the amount of the
optional form as a percentage or a factor of the amount payable under
the normal form of benefit), provided that the method provides
sufficient information so that a participant can determine the amount
of benefits payable in the optional form. The chart or other comparable
device must be accompanied by the disclosures described in paragraph
(c)(2)(iv) of this section explaining the concept of relative value and
disclosing certain interest assumptions. In addition, the chart or
other comparable device must be accompanied by a general statement
describing the effect of significant variations between the assumed
ages or other variables on the financial effect of electing the
optional form of benefit and the comparison of the relative value of

[[Page 62424]]

the optional form of benefit to the value of the QJSA.

    (ii) Actual benefit must be disclosed. The generalized notice
described in this paragraph (d)(2) will satisfy the requirements of
paragraph (b)(2) of this section only if the notice includes either the
amount payable to the participant under the normal form of benefit or
the amount payable to the participant under the normal form of benefit
adjusted for immediate commencement. For this purpose, the normal form
of benefit is the form under which payments due to the participant
under the plan are expressed under the plan, prior to adjustments for
form of benefit. For example, assuming that a plan's benefit accrual
formula is expressed as a straight life annuity, the generalized notice
must provide the amount of either the straight life annuity commencing
at normal retirement age or the straight life annuity commencing
immediately.

    (iii) Ability to request additional information. The generalized
notice described in this paragraph (d)(2) must be accompanied by a
statement that includes an offer to provide, upon the participant's
request, a statement of financial effect and a comparison of relative
values that is specific to the participant for any presently available
optional form of benefit, and a description of how a participant may
obtain this additional information.

    (3) Financial effect of QPSA election. In lieu of providing a
specific description of the financial effect of the QPSA election, the
QPSA explanation may provide a general description of the financial
effect of the election. Thus, for example, the description can be in
the form of a chart showing the reduction to a hypothetical
participant's normal retirement benefit at a representative range of
participant ages as a result of the QPSA election (using a reasonable
assumption for the age of the hypothetical participant's spouse
relative to the age of the hypothetical participant). In addition, this
chart must be accompanied by a statement that includes an offer to
provide, upon the participant's request, an estimate of the reduction
to the participant's estimated normal retirement benefit, and a
description of how a participant may obtain this additional
information.

    (4) Additional information required to be furnished at the
participant's request--(i) Explanation of QJSA. If, as permitted under
paragraphs (d)(1) and (2) of this section, the content of a QJSA
explanation does not include all the items described in paragraph (c)
of this section, then, upon a timely request from the participant for
any of the information required under paragraphs (c)(1)(i) through (v)
of this section for one or more presently available optional forms
(including a request for all optional forms presently available to the
participant), the plan must furnish the information required under
paragraphs (c)(1)(i) through (v) of this section with respect to those
optional forms. Thus, with respect to those optional forms of benefit,
the participant must receive a QJSA explanation specific to the
participant that is based on the participant's actual age and benefit.
In addition, the plan must comply with paragraph (c)(3)(iii) of this
section.

    (ii) Explanation of QPSA. If, as permitted under paragraph (d)(3)
of this section, the content of a QPSA explanation does not include all
the items described in paragraph (b)(1) of this section, then, upon a
timely request from the participant for an estimate of the reduction to
the participant's estimated normal retirement benefit that would result
from a QPSA election, the plan must furnish such an estimate.

    (e) Examples. The following examples illustrate the application of
this section. Solely for purposes of these examples, the applicable
interest rate that applies to any distribution that is subject to the
rules of section 417(e)(3) is assumed to be 5\1/2\%, and the applicable
mortality table under section 417(e)(3) and Sec.  1.417(e)-1(d)(2) is
assumed to be the table that applies as of January 1, 2003. In
addition, solely for purposes of these examples, assume that a plan
which determines actuarial equivalence using 6% interest and the
applicable mortality table under section 417(e)(3) and Sec.  1.417(e)-
1(d)(2) that applies as of January 1, 1995, is using reasonable
actuarial assumptions. The examples are as follows:

    Example 1. (i) Participant M participates in Plan A, a qualified
defined benefit plan. Under Plan A, the QJSA is a joint and 100%
survivor annuity, which is actuarially equivalent to the single life
annuity determined using 6% interest and the section 417(e)(3)
applicable mortality table that applies as of January 1, 1995. On
January 1, 2004, M will terminate employment at age 55. When M
terminates employment, M will be eligible to elect an unreduced
early retirement benefit, payable as either a life annuity or the
QJSA. M will also be eligible to elect a single-sum distribution
equal to the actuarial present value of the single life annuity
payable at normal retirement age (age 65), determined using the
applicable mortality table and the applicable interest rate under
section 417(e)(3).

    (ii) Participant M is provided with a QJSA explanation that
describes the single life annuity, the QJSA, and single-sum
distribution option under the plan, and any eligibility conditions
associated with these options. The explanation indicates that, if
Participant M commenced benefits at age 55 and had a spouse age 55,
the monthly benefit under an immediately commencing single life
annuity is $3,000, the monthly benefit under the QJSA is estimated
to be 89.96% of the monthly benefit under the immediately commencing
single life annuity or $2,699, and the single sum is estimated to be
74.7645 times the monthly benefit under the immediately commencing
single life annuity or $224,293.

    (iii) The QJSA explanation indicates that the single life
annuity and the QJSA are of approximately the same value, but that
the single-sum option is equivalent in value to a QJSA of $1,215.
(This amount is 45% of the value of the QJSA at age 55 ($1,215
divided by 89.96% of $3,000 equals 45%).) The explanation states
that the relative value comparison converts the value of the single
life annuity and the single-sum options to the value of each if paid
in the form of the QJSA and that this conversion uses interest and
life expectancy assumptions. The explanation specifies that the
calculations relating to the single-sum distribution were prepared
using 5.5% interest and average life expectancy, that the other
calculations were prepared using a 6% interest rate and that the
relative value of actual annuity payments for an individual can vary
depending on how long the individual and spouse live. The
explanation notes that the calculation of the QJSA assumed that the
spouse was age 55, that the amount of the QJSA will depend on the
actual age of the spouse (for example, annuity payments will be
significantly lower if the spouse is significantly younger than the
participant), and that the amount of the single-sum payment will
depend on the interest rates that apply when the participant
actually takes a distribution. The explanation also includes an
offer to provide a more precise calculation to the participant
taking into account the spouse's actual age.

    (iv) Participant M requests a more precise calculation of the
financial effect of choosing a QJSA, taking into the actual age of
Participant M's spouse. Based on the fact that M's spouse is age 50,
Plan A determines that the monthly payments under the QJSA are
87.62% of the monthly payments under the single life annuity, or
$2,628.60 per month, and provides this information to M. Plan A is
not required to provide an updated calculation of the relative value
of the single sum because the value of single sum continues to be
45% of the value of the QJSA.

    Example 2. (i) The facts are the same as in Example 1, except
that under Plan A, the single-sum distribution is determined as the
actuarial present value of the immediately commencing single life
annuity. In addition, Plan A provides a joint and 75% survivor
annuity that is reduced from the single life annuity and that is the
QJSA under Plan A. For purposes of determining the amount of the
QJSA, the reduction is only half of the reduction that would
normally apply under the actuarial assumptions specified in Plan A
for determining actuarial equivalence of optional forms.

    (ii) In lieu of providing information specific to Participant M
in the QJSA notice as set forth in paragraph (c) of this section,
Plan A satisfies the QJSA explanation

[[Page 62425]]

requirement in accordance with paragraph (d)(2) of this section by
providing M with a statement that M's monthly benefit under an
immediately commencing single life annuity (which is the normal form
of benefit under Plan A, adjusted for immediate commencement) is
$3,000, along with the following chart showing the financial effect
and the relative value of the optional forms of benefit compared to
the QJSA for a hypothetical participant with a $1,000 benefit and a
spouse who is three years younger than the participant. For each
optional form generally available under the plan, the chart shows
the financial effect and the relative value, using the grouping
rules of paragraph (c)(2)(ii) of this section. Separate charts are
provided for ages 55, 60, and 65.


Age 55 Commencement
------------------------------------------------------------------------
                                    Amount of
                                distribution per
        Optional form          $1,000 of immediate     Relative value
                               single life annuity
------------------------------------------------------------------------
    Life Annuity............  $1,000 per month....  Approximately the
                                                     same value as the
                                                     OJSA.
    QJSA (joint and 75%       $956 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $886 per month......  Approximately the
     annuity.                                        same value as the
                                                     QJSA.
    Lump sum................  $165,959............  Approximately the
                                                     same value as the
                                                     QJSA.
------------------------------------------------------------------------




Age 60 Commencement
------------------------------------------------------------------------
                                    Amount of
                                distribution per
        Optional form          $1,000 of immediate     Relative value
                               single life annuity
------------------------------------------------------------------------
    Life Annuity............  $1,000 per month....  Approximately 94% of
                                                     the value of the
                                                     QJSA.
    QJSA (joint and 75%       $945 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $859 per month......  Approximately 94% of
     annuity.                                        the value of the
                                                     QJSA.
    Lump sum................  $151,691............  Approximately the
                                                     same value as the
                                                     QJSA.
------------------------------------------------------------------------




Age 65 Commencement
------------------------------------------------------------------------
                                    Amount of
                                distribution per
        Optional form          $1,000 of immediate     Relative value
                               single life annuity
------------------------------------------------------------------------
    Life Annuity............  $1,000 per month....  Approximately 93% of
                                                     the value of the
                                                     QJSA.
    QJSA (joint and 75%       $932 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $828 per month......  Approximately 93% of
     annuity.                                        the value of the
                                                     QJSA.
    Lump sum................  $135,759............  Approximately 93% of
                                                     the value of the
                                                     QJSA.
------------------------------------------------------------------------

    (iii) The chart disclosing the financial effect and relative
value of the optional forms specifies that the calculations were
prepared assuming that the spouse is three years younger than the
participant, that the calculations relating to the single-sum
distribution were prepared using 5.5% interest and average life
expectancy, that the other calculations were prepared using a 6%
interest rate, and that the relative value of actual payments for an
individual can vary depending on how long the individual and spouse
live. The explanation states that the relative value comparison
converts the QJSA, the single life annuity, the joint and 100%
survivor annuity, and the single-sum options to an equivalent
present value and that this conversion uses interest and life
expectancy assumptions. The explanation notes that the calculation
of the QJSA depends on the actual age of the spouse (for example,
annuity payments will be significantly lower if the spouse is
significantly younger than the participant), and that the amount of
the single-sum payment will depend on the interest rates that apply
when the participant actually takes a distribution. The explanation
also includes an offer to provide a calculation specific to the
participant upon request.

    (iv) Participant M requests information regarding the amounts
payable under the QJSA, the joint and 100% survivor annuity, and the
single sum.

    (v) Based on the information about the age of Participant M's
spouse, Plan A determines that M's QJSA is $2,856.30 per month, the
joint and 100% survivor annuity is $2,628.60 per month, and the
single sum is $497,876. The actuarial present value of the QJSA
(determined using the 5.5% interest and the section 417(e)(3)
applicable mortality table, the actuarial assumptions required under
section 417) is $525,091. Accordingly, the value of the single-sum
distribution available to M at January 1, 2004, is 94.8% of the
actuarial present value of the QJSA. In addition, the actuarial
present value of the life annuity and the 100% joint and survivor
annuity are 95.0% of the actuarial present value of the QJSA.

    (vi) Plan A provides M with a QJSA explanation that incorporates
these more precise calculations of the financial effect and relative
value of the optional forms for which M requested information.

    (f) Effective date. This section applies to QJSA explanations
provided with respect to distributions with annuity starting dates on
or after January 1, 2004, and to QPSA explanations provided on or after
January 1, 2004.

Sec.  1.417(e)-1  [Amended]

    Par. 5. In Sec.  1.417(e)-1, paragraph (b)(2) is amended by
removing the language "Sec.  1.401(a)-20 Q&A-36" and adding "Sec.
1.417(a)(3)-1" in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-25338 Filed 10-4-02; 8:45 am]
BILLING CODE 4830-01-P

Source: 67 Fed. Reg. 62417-62425 (October 7, 2002)
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