• Notices Explaining Benefit Options Must Provide More Quantitative Information
  • May 4, 2004 | Author: Theresa E. Corona
  • Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Minneapolis Office
  • Defined benefit plans and certain defined contribution plans subject to the joint and survivor annuity rules (including money purchase pension plans) must provide participants with notices explaining available distribution options before a participant attains age 35 and before a participant's retirement benefits begin. In December 2003, the IRS issued final regulations clarifying the contents of these notices. While the requirement to issue such notices is not new, the final regulations call for a numerical comparison of the optional forms of benefit under the plan, which is not commonly done in current practice.

    Under the new regulations, the eligibility conditions for an optional form of benefit, the financial effect of an election of an optional form of benefit, and other relevant factors must be specifically disclosed. In comparing the optional forms of benefit for a pre-retirement survivor annuity, a notice must describe the reduction to the participant's normal retirement benefit that would result from selecting the pre-retirement survivor annuity. One of three methods must be used to numerically compare the different retirement benefit options under a defined benefit plan: (1) the actuarial present value of each optional form of benefit may be expressed as a percentage of the actuarial present value of the default benefit; (2) the amount of the annuity that is the actuarial equivalent of each optional form of benefit and that is payable at the same time and under the same conditions as the default benefit may be listed along with the amount of the annuity for the default option; or (3) the actuarial present value of each optional form of benefit and the default option may be provided. In all cases, the actuarial assumptions used to compare the benefit forms must be disclosed or available to a participant on request. For a defined contribution plan subject to the notice requirements, the notice must include language indicating that the annuity will be provided by purchasing an annuity contract.

    The notice requirements are flexible on some points. A plan may choose to show the comparison of benefit forms using an example of either a married participant or an unmarried participant. Rather than providing a participant with a comparison calculated specifically to show his or her benefit, a plan may prepare a chart explaining all of the different benefit forms for a hypothetical participant. Also, a plan with many optional forms of benefit may be able to group several of the benefit forms for purposes of the comparison if the benefit forms are nearly the same.

    The final regulations are effective for qualified pre-retirement survivor notices provided on or after July 1, 2004, and for qualified joint and survivor annuity notices provided on or after October 1, 2004. Because of the complexity of the calculations that must be performed, an actuary should be involved in drafting these notices for a plan subject to the requirements. Employers should contact their actuary or retirement plan counsel for more information about the requirements of these notices.