Relative Value Information Required to Be Included in Certain QJSA Explanations As Early As November 3, 2005
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In December 2003, the Internal Revenue Service (the "IRS") issued regulations regarding the content of qualified joint and survivor annuity ("QJSA") and qualified pre-retirement survivor annuity ("QPSA") explanations. The regulations specify how the relative value of optional forms of distribution offered under defined benefit plans, money purchase pension plans, and certain other defined contribution plans subject to 401(a)(11) of the Internal Revenue Code (the "Code") must be expressed. These regulations are intended to provide participants with enough information to enable them to compare the values of the distribution forms available to them. (Please see our June 2004 Special Alert for complete details regarding the requirements for disclosing relative value information to participants.)
As a general rule, the regulations are effective for QJSA distributions with annuity starting dates on or after October 1, 2004 and for QPSA explanations provided on or after July 1, 2004. Because QJSA explanations must be provided to participants no later than 30 days and no more than 90 days prior to the annuity starting date, the revised QJSA explanations were originally required to be provided to participants as early as July 3, 2004.
On June 30, 2004, the IRS released Announcement 2004-58, which extended the effective date of the QJSA explanation portion of the relative value regulations to apply to QJSA distributions with annuity starting dates on or after February 1, 2006. This extension, however, does not apply to the explanations required for a QPSA or any optional distribution form subject to Section 417(e)(3) of the Code whose value is less than the QJSA offered by the Plan. The original effective date requirements in the regulations (July 1, 2004 for QPSA explanations and QJSA explanations for distributions with annuity starting dates on or after October 1, 2004) continue to apply to these forms of benefit payments. Optional forms of distribution that are subject to Section 417(e)(3) of the Code include single sums, distributions in the form of partial single sums in combination with annuities, installment payments, and Social Security leveling options.
Therefore, if an affected plan offers one or more of the forms of distribution subject to Section 417(e)(3), and the applicable form is less valuable than the QJSA offered by the plan, the QJSA explanation (including the required relative value information) must have been distributed to participants for any distribution with an annuity starting date beginning on or after October 1, 2004. All other QJSA explanations distributed by affected plans are subject to the revised effective date of February 1, 2006.
The February 1, 2006 effective date, however, is somewhat misleading. As stated above, QJSA explanations must be provided to participants no later than 30 days and no more than 90 days prior to the annuity starting date. As a result, the revised QJSA explanations may be required to be provided to participants as early as November 3, 2005 (90 days prior to February 1, 2006), and certainly must be provided no later than January 2, 2006 (30 days prior to February 1, 2006). Because the regulations generally require more information to be provided in QJSA explanations than in the past, affected plans may need to revise the QJSA explanations provided to participants on or after November 3, 2005 in order to incorporate the required relative value information. Contact our office if you would like our assistance in complying with the regulations.
Copyright © 2006 Trucker Huss. All rights reserved. This article is published as an information source for our clients and colleagues. The article is current as of the date shown above, is general in nature and is not the substitute for legal advice or opinion in a particular case. In response to new IRS rules of practice, we inform you that any federal tax information contained in this writing cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters in this writing.