New Notices and Disclosures for Plan Sponsors under the PPA
PENSION BENEFITS
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Regulations: Heinz and Utilization Test Included - Internal Revenue Service Updates and Expands the Employee Plans Compliance Resolution System
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Pension Protection Act Changes Currently, information on a participant's benefits and account balances is only required to be provided upon request. Under the PPA, benefit funding and plan account information must be distributed to participants at various specified times and with varying information depending on the type of plan involved.
This article will briefly outline these new information-related requirements and comment on some of the potential implications of the new requirements.
The Pension Protection Act ("PPA"), passed this August, institutes requirements for a number of new notices and disclosures from plan sponsors and administrators. Some of these changes will merely call for the delivery of already existing information, while others will require additional information to be compiled and distributed. Some of the information to be distributed may generate questions and inquiries not previously experienced by plan sponsors or administrators.
Defined Contribution Plans
Benefit Statements Since most plans that provide for participant directed investing already distribute plan account statements to participants at least quarterly, we do not anticipate any particular hardship on sponsors from this new requirement. Due to the specific information required to be provided, however, the forms of account statements being currently used will all undoubtedly need to be revised.
Changes will have to be made soon because most 401(k) plans are calendar year plans and, for those plans, the new quarterly statements will be due by March 31, 2007. There is some relief for multiemployer plans that provide for participant directed investments: those plans will not have to conform until 2008 at the earliest.
All other individual account plans (those that do not allow participant directed investments) such as profit sharing plans, ESOPs and money purchase pension plans (both single employer and multiemployer) will also have to distribute benefit statements, but for these plans it is an annual requirement.
The annual statement to participants must contain information about their account, including a statement as to the amount vested. The statement may instead provide information that would enable participants to calculate the extent to which their account is vested.
Additionally, and most interestingly, the statement must also specify the value of the different investments that comprise the participant's share of the plan. This requires the statement to show the participant how his or her account is allocated. Where all participants share in all the assets of the plan proportionately, this requirement should not entail a significant effort. It will of course provide disclosure of information not previously required and could generate comments or inquiries from participants who may, for the first time, become aware of the manner in which their plan accounts are being invested.
The annual benefit statement is effective for 2007 plan years and must be based on the latest valuation date. For calendar year plans, that will require a report sometime in 2007. For plans that value annually, the information will be based on the prior year-end valuation. If the plan is valued more frequently, the statements must be based on the valuation immediately preceding the distribution of the statement.
Defined Benefit Plans
Benefit Statements The general information required is the same as for defined contribution plans; the statement must identify the total accrued benefit and the vested percentage of the benefit. Additionally, if the plan provides for permitted disparity (e.g., the benefit formula integrates with Social Security) or is a floor offset arrangement, there must be an explanation of the benefit formula.
The effective date for the new benefit statement requirements for defined benefit plans is the plan year beginning in 2007. Collectively bargained plans will have a later date, not earlier than the 2008 plan year. We presume the three year cycle within which a benefit statement must be distributed will begin to run in 2007 for single employer plans. The Department of Labor is given the authority under the PPA to allow plans to disregard any year in which no benefits accrued to any participant in determining their three-year cycle. For example, in the case of a plan that is frozen and remains so for three years (or has remained so), the Department may determine that no statement need be distributed. A participant would still have to be provided with a benefit statement containing the latest accrued benefit information upon request.
Funding Notice The PPA requires a funding notice for all single employer defined benefit plans based on funding for plan years beginning in 2008. This new notice must generally be filed within 120 days of the end of each plan year; plans covering not more than 100 participants have until the due date of the Form 5500. The first notices under this new requirement will, accordingly, be due in 2009. The 120-day requirement is likely to put pressure on plan actuaries and others, as many plans ordinarily take more than three or four months to develop funding status data.
The funding notice must include plan participant census data, the plan's funding policy, asset allocation and information about any specific recent plan amendment.
Additional, but different, information is required for both single employer and multiemployer plans. For single employer plans, the additional information includes a statement of assets, liabilities, and the plan's "funding target attained percentage." This new funding notice will replace the Summary Annual Report.
Many plan participants in single employer plans will be receiving explicit funding status information for the first time early in 2009. Whether this will produce responses, inquiries or other reactions from participants remains to be seen. Our guess at this point is that if the funding status appears less than strong, those at or near retirement may be motivated to comment, in some form or other.
A likely source of comment on the new funding notice will come from contributing employers in multiemployer plans. Multiemployer plans are currently required to provide a funding notice under the Pension Funding Equity Act of 2004. These notices are being sent to participants and employers this year, for the first time. This is also the first time contributing employers have had a statutory right to receive information on the participants and funding status of the plans to which they contribute. The PPA funding notice is considerably broader than the current notice requirements. The notices for 2008 will have to contain information for three plan years, a statement of whether the plan is in certain funding danger zones (i.e., "endangered", "critical") and information on how the plan is "improving" or "rehabilitating" its funding status if it is in one of the danger zones.
As a result of the new funding notice requirements, employers and participants in multiemployer plans will have access to information, such as actuarial and financial reports, not previously required to be distributed. We would anticipate that the effect of all of these new disclosures and rights, particularly where a multiemployer plan's funding status appears less than stellar, will be heightened interest from and contact by and with contributing employers.
Under present law, single employer plan sponsors are required to provide a notice of the plan's funded status only if variable premiums are being paid to the PBGC. Multiemployer plans are already required to distribute a funding notice effective for plan years beginning in 2005. These notices are first being distributed this year, based on 2005 funding levels.
Form of Benefit Statement The model notice will not be published until sometime next year. Directed investment plan sponsors will probably be on their own until the model is published, since the first quarterly statement must be provided early in 2007, before the model notice is required to be published.
The benefit statements may be delivered electronically. We will need regulations to determine the scope of the electronic delivery permitted. The Committee Report suggests that current benefit statements could be provided continuously through a secure plan website, for those with access to the site.
As might be expected, the PPA requires that the benefit statement be presented in a manner "calculated to be understood by the average participant." By August of 2007, the Department of Labor is to provide a model form of benefit statement. The use of the model will be "optional." The model will contain information that plan sponsors would not otherwise consider including in the benefit statement, such as information on how to contact Social Security to obtain earnings data and estimates of social security benefits.
Summary Most plans, and certainly 401(k) plans administered by national vendors, have already been providing participants with periodic benefit statements. Although it is clearly one of the intentions of the PPA, we are not optimistic that the new information required about diversification is likely to energize large amounts of plan participants into different, or more considered, plan investing. In plans where statements have not been routinely provided, especially in plans that do not have participant directed investing, there is some likelihood that the new information will generate comments and questions from participants.
The PPA requirement for notice of a plan's funded status and other plan information may generate comments, particularly from employers participating in multiemployer plans. More complete and relevant disclosure for defined benefit plans is long overdue. The Summary Annual Report has provided little in the way of pertinent, useful information and its repeal is a step forward.
The mandatory and automatic benefit statement requirements under the PPA will call for the development of new forms, even where periodic benefit statements have been consistently provided by a plan sponsor or administrator. Unless there is a delay in the effective date, plans that provide for participant directed investments will have to gear up almost immediately to be able to deliver the first quarterly statement for 2007.
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.