The Internal Revenue Service (“IRS”) has issued Notice 2008–30, which provides guidance regarding distribution- related provisions of the Pension Protection Act of 2006 (“PPA”) that become effective in 2008. In question and answer format, Notice 2008–30 addresses the following:
- rollovers from eligible retirement plans to Roth IRAs;
- additional survivor annuity options;
- interest rate and mortality assumptions for lump sum distributions; and
- gap-period earnings and the distribution of excess elective deferrals.
Notice 2008–30 (the “Notice”) is the most significant guidance from the IRS relating to the PPA since Notice 2007–7, which primarily addressed the distribution provisions of the PPA effective in 2007 or earlier. See our January 2007 edition for a discussion of Notice 2007–7. The following article describes the guidance provided in the Notice.
Rollovers to Roth IRAs
Prior to the PPA, Internal Revenue Code (“Code”) section 408A provided that a Roth individual retirement account (“Roth IRA”) could only accept a rollover contribution from another Roth IRA, a nonRoth IRA (i.e., a traditional IRA or SIMPLE IRA) or from a designed Roth account in a 401(k) plan. The PPA expanded the definition of qualified rollover contribution in Code section 408A to include rollovers from other eligible retirement plans effective for distributions made after December 31, 2007.
In the Notice, the IRS clarifies that distributions from a qualified plan, a 403(b) tax-sheltered annuity, or a governmental 457(b) deferred compensation plan can be rolled over into a Roth IRA. However, for taxable years beginning before January 1, 2010, an individual can not make a qualified rollover contribution from an eligible retirement plan (other than a Roth IRA) if the individual has modified adjustment gross income exceeding $100,000, or is married and files a separate return. The IRS also clarifies that plan administrators are not responsible for determining an individual’s eligibility to rollover his or her account to a Roth IRA.
Under the Notice, taxpayers may elect a direct rollover or may receive a distribution from the eligible retirement plan and then contribute to the Roth IRA within 60 days. Withholding is required unless the rollover is direct, though voluntary withholding by agreement is allowed.
The Notice also provides that a plan is not required to permit a nonspouse beneficiary to rollover his or her account to a Roth IRA, but that if it does the rollover must be a direct rollover. We note that while Notice 2007–7 provides that a plan is not required to offer the direct rollover of distributions to nonspouse beneficiaries, pending legislation clarifying portions of the PPA may make nonspouse beneficiary rollovers mandatory. If this comes to pass, the mandatory status may be extended to direct rollovers to Roth IRAs. Finally, the Notice provides that distributions of rolled over amounts from the Roth IRA within 5 years are subject to the 10% premature distribution tax as if the distribution was includible in gross income. Section 1107 of the PPA permits a plan sponsor to delay adopting a plan amendment pursuant to this provision until the last day of the first plan year beginning on or after January 1, 2009 (December 31, 2009 for calendar year plans).
Qualified Optional Survivor Annuity
Defined benefit plans and certain defined contribution plans (i.e. money purchase pension plans) generally must provide that accrued benefits are payable in the form of a qualified joint and survivor annuity (“QJSA”). Code section 417(b) defines a QJSA as an annuity for the life of the participant with a survivor annuity for the life of the participant’s spouse that is not less than 50% and not more than 100% of the amount of the annuity payable during the joint lives of the participant and the spouse. The PPA amended Code section 417 to require these plans to offer participants a specified optional form of benefit as an alternative to the QJSA. Specifically, for a participant who waives a QJSA, a plan must provide the participant the opportunity to elect a qualified optional survivor annuity (“QOSA”) and must provide a written explanation to participants of the terms and conditions of the QOSA. The PPA defines the QOSA as an annuity for the life of a participant with a survivor annuity for the life of the participant’s spouse that is equal to a specified “applicable percentage” of the amount of the annuity that is payable during the joint lives of the participant and the spouse, and that is the actuarial equivalent of a single life annuity for the life of the participant. The specified “applicable percentage” of the QOSA depends on the level of the spouse survivor annuity provided under the plan’s QJSA. If the QJSA provides a spouse survivor annuity that is less than 75%, the QOSA must provide a spouse survivor annuity of 75%. If the QJSA spouse survivor annuity is greater than or equal to 75%, the QOSA must provide a spouse survivor annuity of 50%. Section 1107 of the PPA permits a plan sponsor to delay adopting a plan amendment pursuant to this provision until the last day of the first plan year beginning on or after January 1, 2009 (December 31, 2009 for calendar year plans).
The Notice clarifies that if a plan, both before and after the effective date of these changes, provides a spouse survivor annuity percentage that is equal to the spouse survivor annuity required to be provided under the QOSA, it need not be amended so that the optional joint and survivor annuity is designated as a QOSA and its administrative procedures need not be revised. The Notice also clarifies that the QOSA only needs to be the actuarially equivalent of the single life annuity for the life of the participant and that therefore, if a plan provides a QJSA that is more valuable than the plan’s single life annuity, the QOSA need not be the actuarially equivalent of the plan’s more valuable QJSA.
The Notice also provides that spousal consent is not required for the participant to elect to receive a distribution in the form of a QOSA as long as the QOSA is actuarially equivalent to the plan’s QJSA, and that a plan is not required to offer participants a QOSA as an alternative to a qualified preretirement survivor annuity. It also provides that a plan can meet the QOSA written explanation requirement by treating it as an optional form of benefit available to participants under the plan and including it in its standard Code section 417 notice, and that it need not designate the optional form of benefit as a QOSA.
The Notice clarifies that the amendment saving provision of Section 1107 of the PPA does not provide relief from the requirements of Code section 411(d)(6). Thus, for example, an amendment that implements a QOSA (retroactive effective to January 1, 2008) may eliminate a distribution form or reduce or eliminate a subsidy with respect to a distribution form only to the extent such reduction or elimination is permitted under Code section 411(d)(6) and the applicable Treasury regulations.
The changes are effective for distributions with annuity starting dates in plan years beginning after December 31, 2007. However, in the case of a plan that is maintained pursuant to one or more collective bargaining agreements, the changes made by the PPA apply to distributions with annuity starting dates during plan years beginning on or after the earlier of:
- the later of January 1, 2008 or the date on which the last collective bargaining agreement terminates; or
- January 1, 2009.
For participants who elect a distribution with a retroactive annuity starting date, the Notice provides that the date of the first actual payment of the benefits based on the retroactive annuity starting date is substituted for the annuity starting date for purposes of applying these rules.
Interest Rates and Mortality Tables for Minimum Present Value Requirements
Code section 417(e)(3) provides rules for determining the present value of plan benefits for calculating plan cash-outs. Under these rules, the present value of plan benefits can not be less than the present value calculated by using the applicable mortality table and the applicable interest rate. For plan years beginning on or after January 1, 2008, the PPA changes these statutory assumptions by substituting interest rates and a mortality table used for plan funding for those currently used. Although effective for plan years beginning on or after January 1, 2008, Section 1107 of the PPA permits a plan sponsor to delay adopting a plan amendment until the last day of the first plan year beginning on or after January 1, 2009 (December 31, 2009 for calendar year plans).
The change in statutory assumptions may cause a reduction in a participant’s accrued benefits. Normally, a plan amendment that causes such a reduction is prohibited by Code section 411(d)(6) but, pursuant to relief afforded by Rev. Rul. 2007–67, an amendment that implements the new interest rate and mortality assumptions that results in a reduction in accrued benefits, will not be a prohibited cut-back in violation of Code section 411(d)(6).
The Notice provides guidance as to the timing of plan amendments made in accordance with these changes to the statutory assumptions. A QJSA for a married participant must be at least as valuable as any other form of benefit payable under the plan at the same time. The Notice provides that a plan does not fail to satisfy this QJSA requirement merely because the plan is amended so that the amount payable under an optional form of benefit that is subject to the minimum present value requirement is calculated as the more favorable to participants of:
- the amount calculated by using the pre-PPA mortality table and interest rate; or
- the amount calculated by using the post-PPA mortality table and interest rate.
If a plan is amended in this manner, but provides that benefits cease to be calculated by using the pre-PPA mortality table and interest rate after a specified period, the Notice also provides that the relief afforded by Rev. Rul. 2007–67 is still available. However, this relief only applies to the first plan amendment that implements the post-PPA interest or mortality tables. Any later amendment will not be treated as adopted pursuant to statutory provisions of the PPA.
Finally, the Notice provides that the relief afforded by Rev. Rul. 2007–67 is available for a plan amendment that replaces a plan reference to the pre-PPA required interest rate and mortality table with a reference to the post-PPA required interest rate and mortality table for benefit forms not subject to the Code section 417(e)(3) requirements, e.g. a term certain annuity.
The final regulations under Code section 402(g) provide that for tax years beginning on or after January 1, 2007, a distribution of excess deferrals generally must include gap-period earnings. Under the Notice, a plan submitted to the IRS in the B remedial amendment cycle (February 1, 2007 – January 31, 2008) or the C remedial amendment cycle (February 1, 2008 – January 31, 2009) is required to provide for the distribution of gap-period earnings. A plan sponsor of a plan submitted before March 24, 2008, that does not provide for the distribution of gap-period earnings will be asked to amend the plan to include the distribution of gapperiod earnings in order to receive a determination letter. Plans not in cycle B or C will not be required to adopt an interim plan amendment until the last day of the first plan year beginning on or after January 1, 2009 but, in operation, these plans must include gapperiod earnings in the distribution of excess deferrals attributable to tax years beginning on or after January 1, 2007.
Although plan amendments adopting the distribution-related provisions addressed in the Notice generally are not required until the end of the 2009 plan year (or later for collectively bargained plans), immediate changes must be made to plan administration. Please contact us if you have any questions regarding the Notice.