New Regulations Require Distribution Packages To Provide More Information To Participants
Effective for distributions expected to be paid or to begin on or after October 1, 2004, plan sponsors of defined benefit plans (including cash balance plans) must provide a participant or beneficiary with a comparison of the amount of benefit payment under the available optional forms of benefit and the payment under the qualified joint and survivor annuity (QJSA). The Treasury Department added this requirement in final regulations in response to concerns that participants are not given enough information to make educated decisions about how to take their retirement benefits. Defined contribution pension plan sponsors (i.e., those with money purchase pension plans or target benefit plans, but not most profit sharing or 401(k) plans), on the other hand, must provide a statement in their distribution packages clarifying that, if a participant selects an annuity, it will be purchased from an insurance company with his or her account balance.
The QJSA Rules in a Nutshell.
Generally, a participant in a pension plan must receive his or her retirement distribution in the form of a QJSA (that is, in the form of payments over the participant’s lifetime and the lifetime of his or her spouse). A participant who wants the benefit paid in an alternate form may so elect if the plan permits, but must obtain spousal consent to the alternate form. In order to permit this decision to be made in an informed fashion, a plan must provide the participant and spouse with a written explanation of the terms and conditions of the QJSA, the participant’s right to elect to waive and the effect of a waiver of the QJSA, the rights of the spouse, and the right to revoke and the effect of a revocation of the waiver of the QJSA form of payment. These rules do not apply to profit sharing plans or 401(k) plans unless annuity options are available to participants or the plans include transfers or mergers from pension plans.What the New Regulations Do.
The new regulations require that certain financial information be added to this disclosure for defined benefit plans. In particular, the new regulations:- require a meaningful comparison between the economic value of the QJSA and the other alternate forms. If an alternate form’s value is at least 95% of the QJSA value, the disclosure can state that the values are approximately the same. Similarly, if two or more forms’ values are within 5 percentage points of each other, they can be described as having approximately equal values.
In certain instances, the comparison may be made to the single life annuity rather than the QJSA. If that is so, the plan may declare that the relative value of the optional forms are approximately equal to the single life annuity if their value is at least 95% and no more than 102.5% of the single life annuity.
- require the use of reasonable actuarial assumptions for the comparison that are applied uniformly.
- require the disclosure of the actuarial assumptions used and an explanation of what is meant by the phrase," relative value."
Rather than giving comparisons based on the participant’s specific benefit, the regulations permit a generalized option. Under this option, the plan still must provide the amount of the participant’s benefit under the normal form payable either at retirement or immediately. However, instead of the comparable payment under the QJSA and other benefit options, the plan may include a chart or other illustrative device that demonstrates the relative value of the QJSA and the other optional forms of benefit for a representative range of ages. The participant must be able to get the information based on his actual benefit on request.
What You Need to Do:
If you sponsor a defined benefit plan or defined contribution pension plan, you should coordinate with your service providers to ensure that distribution packages for payments that will begin on or after October 1, 2004, are in compliance with the new regulations.If you have any questions about this Alert, the rules regarding what must be provided in distribution packages, or anything else relating to your benefits programs, please contact us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
