Optional Forms of Payment Disclosure Change Delayed
Rev. 07/09/04, E-mail Alert 2004-14

The IRS has announced that the effective date for the new rules requiring the disclosure of optional forms of payment has been extended. This postponement is the result of the final anti-cutback regulations (411(d)(6)) permitting the elimination of certain optional forms of plan benefits.

In late 2003, the IRS released complex regulations that require defined benefit plans (and defined contribution plans providing “subsidized” annuities—defined below) to provide participants with detailed information on the “relative value” of the available forms of distribution as compared with the joint and survivor annuity form. Originally, these requirements were to go into effect July 1, 2004, with respect to Qualified Pre-Retirement Survivor Annuity notices (QPSA) and as of October 1, 2004, with respect to the Qualified Joint and Survivor Annuity notices (QJSA). Depending on when in the allowable 30-90 day notice period the notice was actually provided, the QJSA effective date could have been as early as July 1, 2004 and as late as September 1, 2004. On June 30 th the IRS granted a last minute reprieve that generally applies the updated notice requirements to distributions that will commence after January 31, 2006.

The new notice requirements have only a minor impact on Defined Contribution plan forms because the participant’s account balance is normally used to purchase an annuity from a third party insurer and therefore there are no subsidy issues.

The driving force that urged the IRS to issue the new relative value disclosure rules was Sen. Tom Harkin (D-IA). His major concern was that certain defined benefit plans provide a subsidized annuity benefit and an unsubsidized lump sum benefit. Subsidization occurs when the plan does not reduce the monthly benefit despite the potential longer period of payout under the annuity form. It was believed, that without better disclosure of the values of the benefit forms, a participant would not be aware of or understand that the subsidized annuity has an increased value and would choose the less beneficial lump sum instead. The IRS regulations went beyond the Senator’s original concerns and imposed additional disclosure requirements.

The effective date of the relative value regulations was delayed to allow for better coordination with the forthcoming Section 411(d)(6) final regulations, which will allow plans to eliminate certain forms of benefits without causing an impermissible cut-backs in benefits. Retirement plan administrators complained that without this delay, they would be obliged to provide detailed information on benefit forms that might be subsequently eliminated pursuant to the 411(d)(6) regulations. Sen. Harkin indicated that he was in favor of the delay assuming his concerns regarding lump-sum payments were addressed, and these provisions still go into effect as of July 1 and October 1, 2004, respectively.

We have made available to our 401k Portal ® clients new QPSA and QJSA notices for use with their defined benefit plans and those defined contribution plans that are subject to the QJSA rules. There are only minor changes to the defined contribution forms because the annuity benefits provided by these plans will be purchased from an insurance company and they are generally not subsidized. The defined benefit forms have been modified to include information concerning the subsidized annuity issue and to provide for inclusion of more personalized benefit information.

We will monitor developments and provide updates as to any additional guidance on relative values and the impact of the final anti-cutback regulations when they are released.

Treasury/IRS Delay Effective Date of Disclosure Rules