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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has issued guidance, in a question and answer format, on provisions of the Pension Protection Act of 2006 (PPA; P.L. 109-280) that deal with distributions from qualified retirement plans. The guidance covers a number of issues, including interest rate assumptions for lump-sum distributions, hardship distributions, rollovers to nonspousal beneficiaries, and notice and consent periods.
The IRS explains that modifications made by the PPA to Code Sec. 415(b)(2)(E)(i), which changed the interest rate assumption used to adjust certain lump-sum payments from defined benefit plans, apply to distributions made in plan years beginning after December 31, 2005. The changes do not apply, however, to a plan with a termination date that is on or before August 17, 2006. Plans may generally be amended retroactively to comply with these new provisions without violating the anti-cutback rule, if the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2009.
Hardship distributions of a participant's elective contributions can be made for various immediate and heavy financial needs incurred by the participant, and, with regard to some expenses, by the participant's spouse or dependents. The new guidance provides that, effective August 17, 2006, a 401(k) plan or 403(b) plan that permits hardship distributions of elective contributions for immediate and heavy financial needs may now treat the participant's primary beneficiary under the plan in the same way as the participant's spouse or dependents for purposes of determining if the participant is experiencing an immediate and heavy financial need, but only for expenses relating to medical, tuition, and funeral expenses. The primary beneficiary does not have to be a spouse or dependent. Other expenses listed in Reg. §1.401(k)-1(d)(3)(iii)(B), relating to a participant's principal residence, are not included in this latest guidance.
Pursuant to Code Sec. 402(c)(11), which was added by the PPA, a trustee-to-trustee transfer of a distribution from a qualified plan of a deceased participant to an IRA established to receive the distribution for a designated nonspouse beneficiary is generally excludable for tax purposes under Code Sec. 402(c), and the beneficiary's IRA is treated as an inherited IRA. The IRS is now clarifying that the IRA must be established in a way that identifies both the deceased participant and the purpose of the beneficiary's IRA, such as "Tom Smith as beneficiary of John Smith." Plans are not required to offer the direct rollover option to nonspouse beneficiaries, but if they do so, the IRS cautions, the rollovers must be offered on a nondiscriminatory basis. The IRS adds that, if the participant dies prior to his or her required beginning date, the required minimum distribution for purposes of determining the amount eligible for rollover for the nonspouse beneficiary is calculated under either the 5-year rule in Code Sec. 401(a)(9)(B)(ii) or the life expectancy rule found in Code Sec. 401(a)(9)(B)(iii). Either way, no amount is a required minimum distribution for the year the participant dies, the IRS states.
Under the PPA, faster vesting is required of employer nonelective defined contribution plan contributions, with minimum vesting requirements satisfied if a plan has either a three-year or two- to six-year vesting schedule. The IRS now states that plan can have one vesting schedule for employer nonelective contributions for plan years beginning after December 31, 2006, and another for other employer nonelective plan contributions if the plan separately accounts for contributions made under the vesting schedule in effect before the first day of the first plan year beginning after December 31, 2006, and if the vesting schedule satisfies the requirements of Code Sec. 411(a)(2)(B), as amended by the PPA.
Section 1102 of the PPA, which applies to plan years beginning after December 31, 2006, provides that notices relating to certain plan distributions may be provided to participants as much as 180 days before the annuity starting date. The notices must now include, along with a description of a participant's right to defer a distribution, a description of the consequences of failing to defer that distribution.
The IRS has provided a safe harbor for plan administrators, adoption of which will be considered to be a reasonable attempt to comply with the notice requirement. Pursuant to the safe harbor, plan administrators of defined benefit plans must now provide in the notices a description of how much larger benefits will be if the distribution commencement date is deferred. For defined contribution plans, a description must be provided that points out the investment options that will be available through the plan if distributions are deferred. In addition, under the safe harbor, all plan administrators must include a portion of the plan's summary plan description that contains any special rules that might affect a participant's decision to take a distribution.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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