Latest IRS "Grab-Bag" Guidance
Addresses PPA'06 Provisions Related
to Distributions

Internal Revenue Service (IRS) Notice 2008-30 uses a question-and-answer format to provide guidance with respect to certain distribution-related provisions of the Pension Protection Act of 2006 (PPA'06) that become effective in 2008. The Notice includes guidance on rollovers to Roth individual retirement accounts (IRAs), the Qualified Optional Survivor Annuity (QOSA) and interest assumptions for lump-sum distributions. Although the payment of gap-period earnings on distributions of excess deferrals is not directly related to PPA'06, the Notice also provides guidance on those payments.¹

QUALIFIED OPTIONAL SURVIVOR ANNUITY

Background

Plans that are required to provide married participants with a Qualified Joint and Survivor Annuity (QJSA) must now (or soon) also offer them a Qualified Optional Survivor Annuity (QOSA). Generally required for defined benefit plans and money purchase plans, the QOSA will provide a different level of survivor benefits.

The amount of the survivor annuity under the QOSA depends on the level of the annuity benefit the plan provides under its designated QJSA. If the QJSA provides a survivor annuity that is less than 75 percent of the annuity payable to the participant, the QOSA must provide a survivor annuity of 75 percent. If the survivor benefit under the QJSA is greater than or equal to 75 percent, the QOSA must provide a survivor annuity of 50 percent of the amount payable to the participant.

Guidance in Notice 2008-30

Highlights of the guidance in Notice 2008-30 include:

• The QOSA must be the actuarial equivalent of the plan's single life annuity payable at the annuity starting date, but is not required to be actuarially equivalent to the QJSA.
• Spousal consent is not required for the retiring employee to reject the QJSA and elect the QOSA, if the QOSA is the actuarial equivalent of the QJSA. However, if the QOSA has an actuarial value that is less than the QJSA, the spouse must properly consent to the election of the QOSA.
• Plans already providing an optional joint and survivor annuity that meets the requirements of a QOSA do not have to amend their rules or revise their administrative procedures or disclosure materials to formally designate the optional form as the QOSA.
• The QOSA is only required as a retirement option. Plans do not have to offer an alternative to the Qualified Preretirement Survivor Annuity based on the QOSA.
• The requirement to provide a QOSA is generally effective for retirements in plan years beginning after December 31, 2007 with a delayed effective date for plans maintained pursuant to a collective bargaining agreement (CBA).² Generally, plan amendments are not required until the last day of the 2009 plan year.
• The QOSA must be available to participants who retire after the QOSA requirement is effective even if they elect a retroactive annuity starting date that is prior to the effective date.

DETERMINATION OF PRESENT VALUE FOR LUMP-SUM DISTRIBUTIONS

Background

Current regulations require that a plan's QJSA be at least as valuable as any optional form of payment, but provide an exception for certain options, such as lump sums, that have a higher actuarial value because they must be determined using the interest rate and mortality assumption specified in IRC §417(e). However, since PPA'06 changed the "applicable interest rate" and "applicable mortality table" under IRC §417(e), this exception would no longer apply to benefit forms calculated using the pre-PPA '06 interest rate and mortality table.

The change in the §417(e) factors generally takes effect starting with the 2008 plan year.

Guidance in Notice 2008-30

Notice 2008-30 clarifies that plans may temporarily choose to continue determining the present value on a "greater of" basis using the pre-PPA'06 and post-PPA'06 applicable interest rate and applicable mortality table without violating the at-least-as-valuable requirement.

This transition relief is available through the end of the PPA'06 amendment period or, if earlier, the date the amendment is adopted, and applies only to the first amendment that implements the post-PPA'06 applicable interest rate and/or applicable mortality assumption with respect to the provision. For this purpose, amendments adopted on or before June 30, 2008 are disregarded.

ROLLOVERS TO ROTH IRAS

Background

Previously, Roth IRAs could accept rollovers only from other Roth IRAs, non-Roth IRAs (e.g., traditional or SIMPLE IRAs) or a designated Roth account. PPA'06 revised the rules so that individuals who can contribute to Roth IRAs can now roll over eligible rollover distributions from any eligible retirement plan to them. An eligible retirement plan includes plans qualified under sections 401(a) or 403(b) of the Internal Revenue Code (IRC).

Guidance in Notice 2008-30

Key guidance includes:

• The rollover may be made directly from the plan to the Roth IRA or distributed to the participant, who can then roll over the distribution within 60 days.
• The 10 percent early distribution tax will not apply to rollovers from one of the newly eligible plans provided the taxable amount rolled over to the Roth IRA remains in the IRA for at least five years. However, the rollover amount must be included in the individual's gross income for the year.
• For tax years beginning before January 1, 2010, participants or beneficiaries with "modified adjusted gross income" of more than $100,000 are not permitted to make rollovers from eligible retirement plans to a Roth IRA.
• Plans that make eligible rollover distributions must permit participants and their eligible spouses to elect to roll them over to a Roth IRA. (This will require an amendment to the plans' rollover sections.) The plan may, but is not required, to permit rollovers by non-spouse beneficiaries. Rollovers on behalf of non-spouse beneficiaries must be made by a direct trustee-to-trustee transfer to an "inherited" Roth §401(k).
• The administrator of the qualified plan is not responsible for determining whether the participant or beneficiary is eligible to rollover a distribution to a Roth IRA. This may be the case even if the plan sponsor has paid the individual more than $100,000 in the year of the distribution and, therefore, knows that he or she is not eligible.

GAP-PERIOD EARNINGS

Background

Final §401(k) regulations issued in April 2007 required that distributions of excess deferrals include earnings on those excess deferrals for the period from the end of the prior year to seven days prior to the distribution. This "gap-period earnings" requirement applies to both pre-tax excess deferrals and excess deferrals that are designated Roth contributions and is effective for taxable years beginning on or after January 1, 2007.

Guidance in Notice 2008-30

Guidance in Notice 2008-30 provides that:

• Section 401(k) plans submitted to IRS for a determination letter in Cycle B or C must be amended to provide for payment of the gap-period earnings. Plans that were submitted before the guidance was issued will be asked to amend the plan in order to receive a determination letter.
• An interim amendment providing for gap-period earnings must be adopted no later than the last day of the first plan year beginning on or after January 1, 2009.

        

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on PPA'06 and related regulations and guidance. The Segal Company can be retained for actuarial calculations, assistance with plan design, participant communications and to work with plan sponsors and their attorneys on compliance.

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1	Notice 2008-30, which was released on March 5, 2008, is available on the IRS Web site: http://www.irs.gov/pub/irs-drop/n-08-30.pdf. (Click on the following text to return to Compliance Alert.)
2	The QOSA requirement is effective for the 2008 plan year, if all of the CBAs that were in effect on August 17, 2006 terminated by the end of 2007, otherwise it will be effective for the 2009 plan year. (Click on the following text to return to Compliance Alert.)

Compliance Alert, The Segal Company's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice. A separate Web page lists back issues of Compliance Alert.




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