On June 30, 2004, the Treasury Department and the IRS issued Announcement 2004-58 stating that there will be a delay until February 1, 2006 in the effective date for recently issued Treasury Regulations that set forth information required to be explained to pension plan participants regarding certain optional forms of benefit offered by the plan - the so-called "relative value" disclosure regulations. However, if the optional forms of benefit include a lump sum (or certain other forms of benefit) that has an actuarial equivalent present value that is less than that of the qualified joint and survivor annuity (QJSA), the effective date remains unchanged and applies to annuity starting dates beginning on or after October 1, 2004. In the Announcement, the IRS specifically indicated that participants who are eligible for a subsidized early retirement annuity - or a lump sum payment that does not include the subsidy - should not have to pay for professional advice to find out the value of the subsidy that is lost if the participant elects the lump sum.
Background - QJSA Notice
Pursuant to IRC § 417(a)(1), defined benefit plans, including cash balance plans, and certain defined contribution plans under which the QJSA is the normal form of benefit, must allow participants to waive the QJSA and instead elect an optional form of benefit (if available) during the applicable election period. Under these plans, the normal form of benefit is a QJSA, unless the participant (and spouse, if applicable) elect a different form of benefit. For a married participant, the QJSA is an annuity for the life of the participant with a survivor annuity for the surviving spouse which is at least 50% of the value of the annuity while both are alive. For an unmarried participant, the QJSA is deemed to be a single life annuity. Further, the plan must provide each participant with a written "QJSA Notice," which includes an explanation of the terms and conditions of the QJSA annuity, the participant's right to elect to waive this form of benefit and the right to revoke this waiver election within a certain period.
IRC § 417 Final Regulations.
On December 17, 2003, the IRS issued final regulations under IRC §417 (the "Final Regulations") that impact on the notice and disclosure obligations relating to optional forms of benefits under these plans. The Final Regulations were designed to address concerns that participants did not have adequate information on the then-existing rules to enable them to compare the various forms of distribution without seeking professional advice. The Final Regulations have increased the notice and disclosure obligation so that plan sponsors must provide participants with sufficient information to adequately assess the financial impact of choosing an optional form of benefit other than the QJSA. This revised QJSA Notice must provide written notification and disclosure of the relative values of the alternative forms of benefits, and must describe the financial effect of electing an alternative form of benefit, as compared to the normal form of benefit, i.e., the QJSA, within the 30 day to 90 day period before the annuity starting date. Specifically, the revised QJSA Notice is to now include:
The Final Regulations provide two methods under the QJSA Notice for plan sponsors to disclose the financial effect and the relative value of the optional forms of benefits provided to participants. The relative value comparison must be described to the participant in a manner that allows for a meaningful comparison of the relative economic values of the available forms of benefit without the participant needing to make calculations based on interest or mortality assumptions.
Participant-Specific Notice Method. Under the participant-specific notice method, the plan sponsor must disclose the value of each optional form of benefit based only on the participant's actual data, e.g., date of birth, years of service beneficiary's date of birth. If some of the actual data is not known, the plan sponsor may use reasonable estimates, such as estimates based on data as of an earlier date, a reasonable assumption of a spouse's age, etc. This notice must also indicate that the participant has the right to request a more precise calculation based on more accurate data.
Generalized Notice Method. Under the generalized notice method, the plan sponsor must disclose the amount of the participant's benefits payable in the normal form of benefit, e.g., the QJSA, and then provide additional information which is not participant-specific. For example, this additional information can include a chart (or similar device) showing the financial effect and relative value of optional forms of benefit for hypothetical participants at reasonable representative age ranges. This notice must also indicate that the participant may request from the plan sponsor participant-specific information on the optional forms of benefit.
The actuarial assumptions, e.g., interest rate and mortality, utilized in developing the relative value of the optional forms of benefit must be reasonable and, generally, uniformly applied for all such forms of benefit. However, as the actual assumptions need not be identical in all circumstances, participants may well see a significant difference in the value of some or all of the forms of benefit. Because participants are privy to certain information (such as the health of the participant and/or spouse, other sources of income, existing savings and additional retirement income), participants will not necessarily select the optional form of benefit with the highest "relative value" as determined by the plan sponsor.
Effective Date. The Final Regulations are generally effective for QJSA disclosure for annuity starting dates beginning on or after October 1, 2004. Because this disclosure has to be provided between 30 days and 90 days in advance of the annuity starting date, absent Announcement 2004-58, the new form of disclosure would have had to be provided to affected participants as early as July 1, 2004.
Announcement 2004-58 and New Effective Date. The new effective date under Announcement 2004-58 - applicable where a QJSA is the normal form of benefit - will allow plan sponsors to delay providing the "relative value" notice with respect to annuity starting dates on or after February 1, 2006. However, Announcement 2004-58 provides that the delay does not apply to the extent a plan offers a lump sum payment that is less valuable than the QJSA offered by the plan - that is, such plans would still have to issue the relative value notice in accordance with Final Regulations for annuities with starting dates on or after October 1, 2004.
Steven M. Margolis is Counsel in the ERISA Practice Group of the Tax Department of Weil, Gotshal & Manges LLP in the New York City office.