New Distribution Alternative Required Under Certain Qualified Plans
January 2008
Beginning in 2008, all plans that have annuity distribution provisions (other than pure term-certain annuities) must offer an annuity alternative that provides for a life annuity for the participant with a survivor annuity for the participant’s spouse equal to either (i) 75 percent of the benefit payable during the participant’s lifetime if the normal form of annuity is a qualified joint and less than 75 percent survivor annuity or (ii) 50 percent of the benefit payable during the participant’s lifetime if the normal form of annuity is a qualified joint and 75 percent or greater survivor annuity. Many plans do not offer such an annuity alternative if they offer an alternative to the normal form at all. In our view, this is a confusing and unnecessary statutory change and the new alternative survivor annuity will seldom be chosen. Nevertheless, the change is mandatory and takes effect for plan years beginning in 2008. This new requirement, imposed by the Pension Protection Act of 2006, will affect all money purchase pension plans, profit sharing plans that merged with money purchase pension plans, and defined benefit plans (including cash balance plans). If your plan is such a plan, you will need to provide a modified distribution form to terminated participants that includes the new alternative survivor annuity option. Please contact your benefits attorney if you need a new distribution form. The plan document is not required to be amended until 2009 to reflect this new rule. If you sponsor a plan that was prepared by Fredrikson & Byron, we will prepare and send the amendment at a later date.
As required by law, the value of the available annuity alternatives must be disclosed in the distribution form. Some clients have inquired how those values can be obtained short of obtaining annuity quotes from insurance companies. We have found a number of sources on the internet that will provide annuity quotes.
Other Changes
Section 415 Regulations. In April, the IRS issued new regulations under Section 415 of the Internal Revenue Code, which deal with annual limits on benefits and allocations in qualified plans. These regulations are effective for the first plan year beginning on or after July 1, 2007. Amendments to plan documents to reflect these regulations generally must be adopted no later than the time for filing the plan sponsor’s tax return for the 2008 tax year. If you sponsor a plan that was prepared by Fredrikson & Byron, we will be sending plan amendments for adoption in the new few months.
Non-Spouse Rollovers. The IRS advised us that the offering of non-spousal rollovers to beneficiaries upon the death of a participant will be mandatory, which is a change from the IRS’s previous position. It then apparently reversed its position. We think that most of our clients will want to allow non-spousal rollovers, regardless of what position the IRS ultimately takes. If you sponsor a plan that was prepared by Fredrikson & Byron, we will be sending plan amendments for adoption in the next few months (with the above-described amendment for compliance with the Section 415 regulations).
If you have any questions, please contact a member of our Compensation Planning & Employee Benefits Group.