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CCH® PENSION AND BENEFITS — 10/22/08

IRS issues rules for notices on consequences of not deferring receipt of immediately distributable benefits

The IRS has issued proposed regulations clarifying the content of notices to plan participants of the consequences of failing to defer cash-out distributions. The proposed rules would also expand the time period during which an election to waive or revoke a joint and survivor annuity may be made.

Notice of consequences of failing to defer distributions

Currently, under ERISA and the Code, the consent of a plan participant is required before any nonforfeitable accrued benefit over $5,000 may be distributed. Notice to the participant is required, informing him of the right, if any, to defer such an immediate cash-out distribution.

Under changes mandated by the Pension Protection Act of 2006 (PPA; P.L. 109-280), the notice of the right to defer an immediate distribution must also describe the consequences of failing to defer the immediate distribution. Although the PPA provision intended that this requirement apply to years beginning after December 31, 2006, under Notice 2007-7 (CCH Pension Plan Guide ¶17,135R ) a plan will not be treated as failing to meet the new notice requirements if the plan administrator makes a reasonable attempt at compliance for all notices provided prior to 90 days after the issuance of final regulations on the new notice requirements.

The proposed regulations provide that the notice, advising the participant of the right to defer receipt of a distribution and the consequences of failing to defer such receipt, must describe the federal tax implications of failing to defer. In the case of a defined benefit plan, a statement is also required which shows the amount payable to the participant under the normal form of benefit both upon immediate commencement and when the benefit is no longer immediately distributable (that is, the later of age 62 or attainment of normal retirement age).

Under the existing regulations, plans are permitted to provide an explanation of the relative value of optional forms of benefit compared to the value of a qualified joint and survivor annuity (QJSA). The proposed regulations would permit the statement of the amount payable to not be based on the participant’s marital status, to the extent the plan is permitted under the aforementioned regulation to use a QJSA explanation that does not vary based on whether the participant is married or not.

In the case of a defined contribution (DC) plan, the proposed regulations would require the information in the notice to include a statement that some currently available investment options in the plan may not be generally available on similar terms outside the plan. The notice would also be required to include a statement that fees and expenses outside the plan may be different from fees and expenses that apply to the participant’s account. The proposed regulations further require the inclusion of other information which could materially affect a participant’s decision on whether to defer receipt of the distribution, such as a description of the eligibility requirements for retiree health benefits if such benefits are limited to participants who have an undistributed benefit under the employer’s retirement plan.

Expansion of applicable election and notice periods

Generally, qualified plans are required to provide the accrued benefit payable to a vested participant in the form of a QJSA. Any election to waive the QJSA benefit, or revoke the waiver, must be made within the applicable election period. The PPA expanded the applicable election period from 90 days to 180 days. Consequently, the proposed regulations would expand the definition of an applicable election period, and the time period for the issuance of certain notices, to 180 days prior to the annuity starting date or, in certain cases, the date of distribution.

Effective dates

The proposed regulations would become effective for notices provided, and election periods beginning, on or after the first day of the first plan year beginning January 1, 2010, but in no event earlier than the first day of the first plan year beginning 90 days after publication of final regulations.

With respect to the proposed regulations relating to the expanded applicable election period and the expanded period for notices, plans may rely on these proposed regulations for notices provided, and election periods beginning, during the period beginning on the first day of the first plan year beginning on or after January 1, 2007 and ending on the effective date of final regulations.

Comments requested by January 7, 2009

Written comments on the proposed regulations should be submitted by January 7, 2009 to CC:PA:LPD:PR (REG–107318–08), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington DC 20044, or electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–107318–08).

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