Revised Regulations Concerning Disclosure of Relative Values of Optional Forms of Benefit, 4058-4061 [05-1553]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Proposed Rules]
[Pages 4058-4061]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-1553]


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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.

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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 https://www.irs.gov/regs or via the Federal eRulemaking 
Portal at https://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]
BILLING CODE 4830-01-P