SunGard Relius

The IRS has issued final regulations regarding the requirements for a plan’s explanation to a participant of the qualified joint and survivor annuity (QJSA) and of the qualified pre-retirement survivor annuity (QPSA). The final regulations apply to QJSA explanations for distributions with annuity starting dates on or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004. The regulations update regulations issued in 1988. The regulations substantially follow the proposed regulations issued in October 2002. The regulatory changes primarily affect defined benefit plans, in particular those that offer subsidized optional forms of benefits.

Code Section 417(a)(3) requires a plan subject to the joint and survivor annuity rules to provide each participant with a written explanation of the terms and conditions of the QJSA, the right to waive the QJSA form of benefit and the effect of a waiver, the rights of the participant’s spouse and the right to revoke (and the effect of revocation of) an election to waive the QJSA. The plan must provide a similar explanation with respect to the QPSA. The regulations respond to concerns that the information provided to participants regarding the available distribution forms does not adequately enable participants to compare distribution forms without professional advice. In particular, participants eligible for both subsidized annuity distributions and unsubsidized single-sum distributions may be receiving notices that do not adequately explain the value of the subsidy the participant foregoes if the participant elects a lump sum distribution. For example, a defined benefit plan participant might be entitled to receive a single-sum distribution upon early retirement (that does not reflect any early retirement subsidy) in lieu of a QJSA (that reflects a substantial early retirement subsidy). Merely disclosing the amount of the single-sum distribution and the amount of the annuity payments, or merely stating that the single sum distribution does not include the subsidy included in the annuity payments may not adequately enable participants to make an informed comparison of the relative values of those distribution forms.

The final regulations provide disclosure requirements that would enable participants to compare the relative values of available distribution forms using more readily understandable information. The regulations require the QJSA explanation to provide a meaningful comparison of the relative value of an optional form of benefit compared to the value of the QJSA, by requiring the explanation to convert the benefit under one or both optional forms of benefit, taking into account the time value of money, so that both optional forms are expressed in the same form. For example, the comparison may state the actuarial present value of both the QJSA and the optional form of benefit.

The requirement to describe the relative value of optional forms of benefit compared to the value of the QJSA described in the preceding paragraph applies ONLY to defined benefit plans. For a defined contribution plan (that is subject to the joint and survivor rules), the QJSA explanation must include a statement that the plan will provide the QJSA annuity by purchasing an annuity contract from an insurance company with the participant’s account balance. If the description of the financial effect of the annuity purchase uses estimates rather than assuring an insurer is able to provide the amount disclosed to the participant, the written explanation must disclose this fact.

The final regulations would permit delivery of the explanation by first class mail or by hand delivery, but not by posting the explanation. The regulations do not provide any model language to include in a QJSA notice. The regulations do not address the extent to which the plan may use electronic media to deliver the QJSA or the QPSA explanation. The IRS continues to study this issue and intends to issue future guidance. Treas. Reg. Section 1.417(a)(3)-1.

Comment: The final regulations should not require any change in the SunGard Corbel defined contribution QJSA notice forms (in the Relius Documents software or in the Pension Library forms). Defined benefit QJSA notice forms may have to provide additional language depending on the optional forms of benefit the plan offers. The delayed applicability date should allow plans sufficient time to modify their notice forms as necessary. SunGard Corbel is reviewing the regulations to assess their impact on defined benefit forms, and will issue a further update regarding this issue.