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Special Update
Vol. 8 No. 6
Savitz
b e n e f i t s Advisory
www.savitz.com
For more than 35 years,
The Savitz Organization has
worked in partnership with
our clients to help maximize
the value of their employee
benefits programs by
providing comprehensive
actuarial, consulting and
outsourcing services.
Retirement Consulting
Group Benefits Consulting
Administrative Outsourcing
1845 Walnut Street
Philadelphia, PA 19103
215.587.0700
2406 Mount Vernon Road
Atlanta, GA 30338
770.392.1464
Savitz is one of the 20 largest employee
benefits and actuarial firms in the
country. We are proud to have been
named to the Philadelphia 100 list for
the second year in a row...
PHILADELPHIA
ATLANTA
Deadline Approaches for
New IRS Rules on Benefit Notices
Background
Defined benefit plans, money purchase pension plans and certain defined contribution
plans are required to pay benefits to married participants in the form of a Qualified
Joint and Survivor Annuity ("QJSA"), unless such form of benefit is waived by affected
participants with spousal consent. In order to make an informed benefit election,
participants must be provided with a written explanation of the QJSA, including, among
other things, information on the relative values of the optional forms of benefit
available under the plan.
Over the past several years, Congress and the IRS have expressed concern that,
without more specific guidance, participants are not able to compare the value of
various forms of distribution without professional advice. In particular, there was
concern that the information being provided to participants who are eligible for both
subsidized annuity options and unsubsidized single sum options did not adequately
explain the value of the subsidy that is foregone when a single sum is elected.
Consequently, the IRS published proposed regulations in 2002 in order to consolidate
the content requirements applicable to the QJSA explanation and to provide disclosure
requirements that would enable participants to compare the relative value of the
available forms of benefits using understandable information. These regulations were
finalized on December 17, 2003, and they are applicable to QJSA explanations with
respect to distributions with annuity starting dates on or after October 1, 2004, and to
Qualified Preretirement Survivor Annuity ("QPSA") explanations provided on or after July
1, 2004.
Final Regulations - Content of QJSA Notice
The final regulations require that the QJSA written explanation must include a
description of:
• the optional forms of benefit available to the participant;
• the eligibility requirements for each optional form of benefit;
• the financial effect of electing each optional form of benefit;
• for defined benefit plans only, a description of the concept of relative value and
the relative value of each optional form of benefit payment compared to the value
of the QJSA; and
• any other significant feature of each optional form of benefit.
The regulations provide that the explanation must be sufficient to enable the
participant to make a meaningful comparison of the values of the optional forms of
benefit without making calculations that involve interest rates or mortality
assumptions.
Relative Value Disclosures
The final regulations require plans to provide participants with information in a manner
that will enable them to compare the optional forms of benefit in a meaningful way.
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Savitz Benefits Advisory
To accomplish this, plans will need to convert each optional form of benefit taking into account the time value of money and life
expectancies, so that all optional benefit forms and the QJSA are expressed in the same form. Reasonable actuarial assumptions
must be used, but, except in the case of a single sum payment, a plan's actuarial assumptions need not be used. A plan must
disclose the actual interest rate assumption used in determining these relative values if a numerical comparison to the QJSA is
provided. Otherwise, the participant must be advised that the actuarial assumptions will be provided upon request.
Upon converting the optional forms of benefit, the relative value of each must be presented in a uniform format according to one
of the following methods:
• expressing the actuarial present value of each optional form of benefit as a percentage or factor of the actuarial present
value of the QJSA;
• stating the amount of each optional form of benefit as an annuity that is payable at the same time and under the same
conditions as the QJSA; or
• stating the actuarial present value of both the optional forms of benefit and the QJSA.
If the QJSA and single life annuities are available to all participants regardless of marital status, a plan can provide the
comparison based on a single life annuity even if the participant is married, or based on a QJSA even if the participant is single.
Further, the regulations permit grouping of two or more optional forms of benefit that have approximately the same value (i.e.,
within a 5% corridor of the value of the QJSA).
Form of Disclosures
Plans may provide this information by use of a generalized notice or a participant-specific notice. A generalized notice may use a
chart to illustrate the financial effect and relative value of optional forms of benefit. If a generalized notice is used, it must
provide the specific amount payable to the participant under the plan's normal form of payment. The notice must also advise the
participant of the right to request a participant-specific statement of the financial effect, and a comparison of relative values of
each available optional form of benefit, taking into account such factors as the participant's age and years of service.
Final Regulations - Content of QPSA Notice
If a plan requires participants to pay for the QPSA coverage or it permits participants to appoint a QPSA beneficiary other than a
surviving spouse, then the plan must provide a written QPSA notice to participants and their beneficiaries during the time period
specified in the Internal Revenue Code.
The final regulations require that the QPSA written explanation must include:
• a general overview of the QPSA;
• the circumstances under which the QPSA would be paid, if elected;
• the availability of the QPSA election; and
• the financial effect of the election of the QPSA, (i.e., an estimate of the reduction in the benefit if the QPSA is elected).
The financial effect of the election can be provided through either an individual statement or a chart of hypothetical benefits at
representative ages, provided that the participant is given the opportunity to request an individual statement.
Action to Take
Plan sponsors who have outsourced their administrative services to The Savitz Organization do not need to take any action at this
time because we are making the appropriate revisions to our procedures, forms and notices so that your plans will be in full
compliance when the final regulations take effect.
Other Plan sponsors should take the following steps now to prepare for these new requirements;
• discuss with your actuary how the required relative value comparisons will be presented;
• establish procedures with your actuary to calculate relative values for all available optional forms of benefit and determine
whether any optional forms can be grouped; and
• revise the applicable notices to comply with the new regulations.
Written by Kathleen Dugan, Asst. Compliance Director
The Savitz Organization, Inc.
For archived copies of past
Advisories, visit us on the web at
www.savitz.com
1845 Walnut Street
14th Floor
Philadelphia, PA 19103
215.587.0700
2406 Mount Vernon Road
Suite 100
Atlanta, GA 30338
770.392.1464