Source: http://www.irs.gov/irb/2004-02_IRB/ar06.html
Timestamp: 2013-05-18 14:00:16
Document Index: 744750496

Matched Legal Cases: ['ART 1', 'art 1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§602', '§602']

Internal Revenue Bulletin - January 12, 2004 - T.D. 9099 Internal Revenue Bulletin: 2004-2 January 12, 2004 T.D. 9099 Disclosure of Relative Values of Optional Forms of Benefit Table of Contents
Paperwork Reduction Act Background Explanation of Provisions Effective Date Special Analysis Adoption of Amendments to the Regulations PART 1 — INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1986
This document contains final regulations that consolidate the content requirements applicable to explanations of qualified
joint and survivor annuities and qualified preretirement survivor annuities payable under certain retirement plans, and specify
requirements for disclosing the relative value of optional forms of benefit that are payable from certain retirement plans
in lieu of a qualified joint and survivor annuity. These regulations affect plan sponsors and administrators, and participants
in and beneficiaries of, certain retirement plans.
Applicability Date: These final regulations are applicable to QJSA explanations with respect to distributions with annuity starting dates on
or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004.
FOR FURTHER INFORMATION CONTACT: John T. Ricotta at (202) 622-6060 (not a toll-free number).
Paperwork Reduction Act The collection of information (requirement to disclose information) contained in these final regulations has been reviewed
and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control number 1545-0928. Responses to this collection of information are mandatory.
The estimated annual burden per respondent varies from .01 to .99 hours, depending on individual circumstances, with an estimated
average of .5 hours.
Background This document contains amendments to 26 CFR part 1 under section 417(a)(3) of the Internal Revenue Code of 1986 (Code).
A qualified retirement plan to which section 401(a)(11) applies must pay a vested participant's retirement benefit under the
plan in the form of a qualified joint and survivor annuity (QJSA), except as provided in section 417. Section 401(a)(11)
applies to defined benefit plans, money purchase pension plans, and certain other defined contribution plans. A QJSA is defined
in section 417(b) as an annuity for the life of the participant with a survivor annuity for the life of the spouse (if the
participant is married) that is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity
that is payable during the joint lives of the participant and the spouse. Under section 417(b)(2), a QJSA for a married participant
generally must be the actuarial equivalent of the single life annuity benefit payable for the life of the participant. However,
a plan is permitted to subsidize the QJSA for a married participant. If the plan fully subsidizes the QJSA for a married
particip ant so that failure to waive the QJSA would not result in reduced payments over the life of the participant compared
to the single life annuity benefit, then the plan need not provide an election to waive the QJSA. See section 417(a)(5).
For a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan
at the same time. See §1.401(a)-20, Q&A-16. Further, the anti-forfeiture rules of section 411(a) prohibit a participant's
benefit under a defined benefit plan from being satisfied through payment of a form of benefit that is actuarially less valuable
than the value of the participant's accrued benefit expressed in the form of an annual benefit commencing at normal retirement
age. These determinations must be made using reasonable actuarial assumptions. However, see §1.417(e)-1(d) for actuarial
assumptions required for use in certain present value calculations.
If a plan provides a subsidy for one optional form of benefit (i.e., the payments under an optional form of benefit have an actuarial present value that is greater than the actuarial present
value of the accrued benefit), there is no requirement to extend a similar subsidy (or any subsidy) to every other optional
form of benefit. Thus, for example, a 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.
As a further example, a participant might be entitled to receive a single-sum distribution at normal retirement age in lieu
of a QJSA that is subsidized as described in section 417(a)(5).
Section 417(a) provides rules under which a participant (with spousal consent) may waive payment of the participant's benefit
in the form of a QJSA. Section 417(a)(3) provides that a plan must provide to each participant, within a reasonable period
before the annuity starting date (and consistent with such regulations as the Secretary may prescribe), a written explanation
of the terms and conditions of the QJSA, the participant's right to make, and the effect of, an election to waive the QJSA
form of benefit, the rights of the participant's spouse, and the right to revoke (and the effect of the revocation of) an
election to waive the QJSA form of benefit.
Section 205 of the Employee Retirement Income Security Act of 1974 (ERISA), Public Law 93-406 (88 Stat. 829) as subsequently
amended, provides rules that are parallel to the rules of sections 401(a)(11) and 417 of the Internal Revenue Code. In particular,
section 205(c)(3) of ERISA provides a rule parallel to the rule of section 417(a)(3) of the Code.
Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretative jurisdiction
over the ERISA provisions that are parallel to the Code provisions addressed in these regulations. Therefore, these regulations
apply for purposes of section 205(c)(3) of ERISA, as well as for section 417(a)(3) of the Code.
Regulations governing the requirements for waiver of a QJSA were published in the Federal Register on August 19, 1988 (T.D. 8219, 1988-2 CB. 48 [53 FR 31837]). Section 1.401(a)-20, Q&A-36, provides rules for the explanation
that must be provided under section 417(a)(3) as a prerequisite to waiver of a QJSA. Section 1.401(a)-20, Q&A-36, requires
that such a written explanation contain a general description of the eligibility conditions and other material features of
the optional forms of benefit and sufficient additional information to explain the relative values of the optional forms of
benefit available under the plan (e.g., the extent to which optional forms are subsidized relative to the normal form of benefit or the interest rates used to calculate
the optional forms). In addition, §1.401(a)-20, Q&A-36, provides that the written explanation must comply with the requirements
set forth in §1.401(a)-11(c)(3). Section 1.401( a)-11(c)(3) was issued prior to the enactment of section 417, and provides
rules relating to written explanations that were required prior to a participant's election of a preretirement survivor annuity
or election to waive a joint and survivor annuity. Section 1.401(a)-11(c)(3)(i)(C) provides that such a written explanation
must contain a general explanation of the relative financial effect of these elections on a participant's annuity.
In addition, under section 411 and §1.411(a)-11(c), so long as a benefit is immediately distributable (within the meaning
of §1.411(a)-11(c)(4)), a participant must be informed of his or her right to defer that distribution. This requirement is
independent of the section 417 requirements addressed in these regulations.
Concerns have been expressed that, in certain cases, the information provided to participants under section 417(a)(3) regarding
the available distribution forms does not adequately enable them to compare those distribution forms without professional
advice. In particular, participants who are 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 that is foregone if the single-sum
distribution is elected. In such a case, merely disclosing the amount of the single-sum distribution and the amount of annuity
payments, or merely stating that the single sum distribution does not include the subsidy that is included in the annuity
payments, may not adequately enable those participants to make an informed comparison of the relative values of those distribution
forms, even if the interest rate used to derive the single sum is disclosed. Furthermore, questions have been raised as to
how the r elative values of optional forms of benefit are required to be expressed under current regulations.
Accordingly, proposed regulations (REG-124667-02, 2002-2 C.B. 791 [67 FR 62417]) were published in the Federal Register on October 7, 2002, that would consolidate the content requirements applicable to explanations of qualified joint and survivor
annuities and qualified preretirement survivor annuities payable under certain retirement plans, and provide disclosure requirements
that would enable participants to compare the relative values of the available distribution forms using more readily understandable
After consideration of the comments received concerning the proposed regulations, these final regulations adopt provisions
of the proposed regulations with certain modifications, the most significant of which are highlighted below.
Explanation of Provisions These regulations provide guidance regarding the required description of the relative values of optional forms of benefit
compared to the value of the QJSA and the content of the required disclosure of relative values. Commentators generally approved
of the increased disclosure that would result from the approach in the proposed regulations, and these final regulations are
substantially similar to the proposed regulations. As under the proposed regulations, the description of the relative value of an optional form of benefit compared to the value
of the QJSA must be expressed in a manner that provides a meaningful comparison of the relative economic values of the two
forms of benefit without the participant having to make calculations using interest or mortality assumptions. In order to
provide this comparison, the benefit under one or both optional forms of benefit must be converted, taking into account the
time value of money and life expectancies, so that both are expressed in the same form. While one commentator requested that
the regulations only permit comparisons to be made on the basis of present value, the regulations do not take this approach.
Instead, the final regulations retain the examples of techniques that may be used for this comparison that were included
in the proposed regulation: expressing the actuarial present value of the optional form of benefit as a percentage or factor
of the actuarial presen t value of the QJSA; stating the amount of an annuity payable at the same time and under the same
conditions as the QJSA that is the actuarial equivalent of the optional form of benefit; or stating the actuarial present
value of both the QJSA and the optional form of benefit. However, a specific example has been added illustrating the use
of the actuarial present value to express relative value.
The comparisons required under the proposed regulations depended on which form of benefit constitutes the QJSA for the participant.
One commentator noted that this would result in a different comparison for married and unmarried participants, creating an
unnecessary burden for plan sponsors in situations where the benefit options are identical for married and unmarried participants.
Furthermore, if the plan sponsor did not know whether a participant is married, the plan would need to provide comparisons
that covered both possibilities. In response to the comment, the final regulations permit a plan to use a uniform basis of
comparison of relative value (i.e., either the QJSA for married participants or the QJSA for unmarried participants) for both married and unmarried participants,
if the benefit options are the same for married and unmarried participants. Thus, in a plan in which the applicable QJSA
form for unmarried participants is a straight life annuity and the applicable QJSA form for married participants is a 50%
joint and contingent annuity (and each of these forms of distribution are available to all participants on the same terms),
the plan may choose to compare the relative value of the plan's optional forms of benefit to the value of the straight life
annuity with respect to the required disclosure for all participants or the plan may choose to compare the relative value
of the plan's optional forms of benefit to the value of the 50% joint and contingent annuity with respect to the required
disclosure for all participants.
Since disclosing the relative value of every optional form of benefit regardless of the degree of subsidy may be too burdensome,
and may provide participants with information that appears more precise than is warranted based on the inexact nature of the
actuarial assumptions used, the final regulations follow the proposed regulation in providing for certain simplifications
in the disclosure. Under one simplification, two or more optional forms of benefit that have approximately the same value
could be grouped for purposes of disclosing relative value. Under the proposed regulations, two or more optional forms of
benefit were treated as having approximately the same value if those optional forms of benefit varied in relative value in
comparison to the value of the QJSA by 5 percentage points or less when the relative value comparison is made by expressing
the actuarial present value of each of those optional forms of benefit as a percentage of the actuarial present value of the
QJSA.
Several commentators recommended changes in this 5 percentage point band. One commentator suggested that a band of 7.5 percentage
points be used to simplify compliance and ease the administrative burden to plans. The commentator said that a band of 7.5
percentage points would allow a plan to treat unsubsidized optional forms of benefit for virtually all retiring participants
as having approximately equal value. By contrast, another commentator favored a maximum band of 3 percentage points in order
for participants to receive adequate disclosure about significant differences in value. The commentator said that a 5 percentage
point difference in value was significant enough to be brought to the participant's attention.
These final regulations generally retain the 5 percentage point banding rule of the proposed regulations. This rule aims
to minimize the compliance burdens for plans to the extent consistent with providing participants with information on differences
in value that are material in light of the inexact nature of the actuarial assumptions used.
The proposed regulations also would have allowed a plan to treat all of its forms of benefit as approximately equal in value
if the actuarial present value of all of those forms is not less than 95% of the actuarial present value of the QJSA. The
final regulations permit a plan that is comparing the relative value of each optional form to the value of the QJSA for a
married participant to treat each presently available optional form of benefit that has an actuarial present value of at least
95% of the actuarial present value of the QJSA as having approximately the same value as the QJSA. In addition, in the case
of a plan that is comparing the relative value of each optional form to the value of the single life annuity, if all of the
optional forms of benefit presently available have actuarial present values that are at least 95%, but not greater than 102.5%,
of the actuarial present value of the presently available single life annuity, the plan is permitted to treat all the presently
available forms of distribution as approximately equal in value.
Some commentators recommended that participants have the right to know what actuarial assumptions were used in the plan's
estimates of relative value. The final regulations require that this information be made available upon request if it is
not provided in the notice.
Several commentators raised questions concerning whether the methods used in disclosing relative value of a plan's optional
forms of benefit in accordance with these regulations affect the application of the requirement at §1.401(a)-20, Q&A-16, that
the QJSA for married participants be at least as valuable as any other optional form of benefit under the plan. While this
issue is not addressed in these final regulations, there is no requirement, or implication, that the same actuarial assumptions
used by a plan for purposes of disclosing relative value in accordance with these regulations must be applied for purposes
of the requirement in §1.401(a)-20, Q&A-16, that the QJSA for married participants be at least as valuable as any other optional
form of benefit under the plan.
One commentator requested that these regulations address the use of electronic media to deliver the QJSA explanation or the
QPSA explanation. The IRS and the Treasury Department are considering the extent to which the QJSA explanation and the QPSA
explanation, as well as other notices under the various Internal Revenue Code requirements relating to qualified retirement
plans, can be provided electronically, taking into account the effect of the Electronic Signatures in Global and National
Commerce Act (ESIGN), Public Law 106-229, 114 Stat. 464 (2000). The IRS and the Treasury Department have invited comments
on these issues, and anticipate issuing further guidance regarding electronic notices.
Commentators raised a number of other issues, including issues that relate to basic QJSA rules that are not addressed in these
regulations and a request for the final regulations to include model language that can be included in a QJSA notice. These
regulations do not include model language for several reasons, including the wide variety of distribution alternatives found
in plans (including the variety of actuarial assumptions used to calculate optional forms of benefit), the variations in the
average participant in the plan for purposes of understandability, as well as inclusion in the regulations of several detailed
examples showing how the information can be provided in order to disclose relative value.
Effective Date These final regulations are applicable to QJSA explanations with respect to distributions with to annuity starting dates on
or after October 1, 2004, and to QPSA explanations provided on or after July 1, 2004. In the case of a retroactive annuity
starting date under section 417(a)(7), when required under §1.417(e)-1(b)(3)(vi), the date of commencement of payments based
on the retroactive annuity starting date is substituted for the annuity starting date for purposes of this effective date.
is based upon the fact that qualified retirement plans of small businesses typically commence distribution of benefits to
few, if any, plan participants in any given year and, similarly, only offer elections to waive a QPSA to few, if any, participants
in any given year. Thus, the collection of information in these regulations will only have a minimal economic impact on most
small entities. Therefore, an analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant
to s ection 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel
§1.401(a)-11 Qualified joint and survivor annuities. * * * * * (c) * * *
(3) Information to be provided by plan. For rules regarding the information required to be provided with respect to the election to waive a QJSA or a QPSA, see
§1.417(a)(3)-1.
* * * * * Par. 3. A-36 of §1.401(a)-20 is revised to read as follows:
§1.401(a)-20 Requirements of qualified joint and survivor annuity and qualified preretirement survivor annuity. * * * * * A-36. For rules regarding the explanation of QPSAs and QJSAs required under section 417(a)(3), see §1.417(a)(3)-1.
* * * * * Par. 4. Section 1.417(a)(3)-1 is added to read as follows:
§1.417(a)(3)-1 Required explanation of qualified joint and survivor annuity and qualified preretirement survivor annuity. (a) Written explanation requirement—(1) General rule. A plan meets the survivor annuity requirements of section 401(a)(11) only if the plan meets the requirements of section
417(a)(3) and this section regarding the written explanation required to be provided a participant with respect to a QJSA
or a QPSA. A written explanation required to be provided to a participant with respect to either a QJSA or a QPSA under section
417(a)(3) and this section is referred to in this section as a section 417(a)(3) explanation. See §1.401(a)-20, Q&A-37, for
exceptions to the written explanation requirement in the case of a fully subsidized QPSA or QJSA, and §1.401(a)-20, Q&A-38,
for the definition of a fully subsidized QPSA or QJSA.
(3) Required method for providing section 417(a)(3) explanation. A section 417(a)(3) explanation must be a written explanation. First class mail to the last known address of the participant
is an acceptable delivery method for a section 417(a)(3) explanation. Likewise, hand delivery is acceptable. However, the
posting of the explanation is not considered provision of the section 417(a)(3) explanation.
(b) Required content of section 417(a)(3) explanation—(1) Content of QPSA explanation. The QPSA explanation must contain a general description of the QPSA, the circumstances under which it will be paid if elected,
the availability of the election of the QPSA, and, except as provided in paragraph (d)(3) of this section, a description of
the financial effect of the election of the QPSA on the participant's benefits (i.e., an estimate of the reduction to the participant's estimated normal retirement benefit that would result from an election
of the QPSA).
(2) Content of QJSA explanation. The QJSA explanation must satisfy either paragraph (c) or paragraph (d) of this section. Under paragraph (c) of this section,
the QJSA explanation must contain certain specific information relating to the benefits available under the plan to the particular
participant. Alternatively, under paragraph (d) of this section, the QJSA explanation can contain generally applicable information
in lieu of specific participant information, provided that the participant has the right to request additional information
regarding the participant's benefits under the plan.
(c) Participant-specific information required to be provided—(1) In general. A QJSA explanation satisfies this paragraph (c) if it provides the following information with respect to each of the optional
forms of benefit presently available to the participant (i.e., optional forms of benefit with an annuity starting date for which the QJSA explanation applies)—
(iii) A description of the financial effect of electing the optional form of benefit (i.e., the amount payable under the form of benefit to the participant during the participant's lifetime and the amount payable
after the death of the participant);
(iv) In the case of a defined benefit plan, a description of the relative value of the optional form of benefit compared to
the value of the QJSA, in the manner described in paragraph (c)(2) of this section; and
(2) Requirement for numerical comparison of relative values—(i) In general. The description of the relative value of an optional form of benefit compared to the value of the QJSA under paragraph (c)(1)(iv)
of this section must be expressed to the participant in a manner that provides a meaningful comparison of the relative economic
values of the two forms of benefit without the participant having to make calculations using interest or mortality assumptions.
Thus, in performing the calculations necessary to make this comparison, the benefits under one or both optional forms of
benefit must be converted, taking into account the time value of money and life expectancies, so that the values of both optional
forms of benefit are expressed in the same form. For example, such a comparison may be expressed to the participant using
any of the following techniques—
(A) Expressing the actuarial present value of the optional form of benefit as a percentage or factor of the actuarial present
value of the QJSA;
(B) Stating the amount of the annuity that is the actuarial equivalent of the optional form of benefit and that is payable
at the same time and under the same conditions as the QJSA; or
(ii) Use of one form for both married and unmarried individuals—(A) In general. Under the rules of this paragraph (c)(2)(ii), in lieu of providing different QJSA explanations for married and unmarried
individuals, the plan may provide a QJSA explanation to an individual that does not vary based on the participant's marital
status. Except as specifically provided in paragraph (c)(3)(iii) of this section, any reference in this section to comparing
the relative value of an optional form of benefit to the value of the QJSA may be satisfied using the substitution permitted
under paragraph (c)(2)(ii)(B) or (C) of this section.
(B) Substitution of single life annuity for married individual. For a married participant, in lieu of comparing the value of each optional form of benefit presently available to the participant
to the value of the QJSA, the plan can compare the value of each optional form of benefit (including the QJSA) to the value
of a QJSA for an unmarried participant (i.e., a single life annuity), but only if that same single life annuity is available to that married participant.
(C) Substitution of joint and survivor annuity for unmarried individual. For an unmarried participant, in lieu of comparing the value of each optional form of benefit presently available to the
participant to the value of the QJSA for that individual (which is a single life annuity), the plan can compare the value
of each optional form of benefit (including the single life annuity) to the value of the joint and survivor annuity that is
the QJSA for a married participant, but only if that same joint and survivor annuity is available to that unmarried participant.
(iii) Simplified presentations permitted—(A) Grouping of certain optional forms. Two or more optional forms of benefit that have approximately the same value may be grouped for purposes of a required numerical
comparison described in this paragraph (c)(2). For this purpose, two or more optional forms of benefit have approximately
the same value if none of those optional forms of benefit vary in relative value in comparison to the value of the QJSA by
more than 5 percentage points when the relative value comparison is made by expressing the actuarial present value of each
of those optional forms of benefit as a percentage of the actuarial present value of the QJSA. For such a group of optional
forms of benefit, the requirement relating to disclosing the relative value of each optional form of benefit compared to the
value of the QJSA can be satisfied by disclosing the relative value of any one of the optional forms in the group compared
to the value of t he QJSA, and disclosing that the other optional forms of benefit in the group are of approximately the same
value. If a single-sum distribution is included in such a group of optional forms of benefit, the single-sum distribution
must be the distribution form that is used for purposes of this comparison.
(B) Representative relative value for grouped optional forms. If, in accordance with paragraph (c)(2)(iii)(A) of this section, two or more optional forms of benefits are grouped, the
relative values for all of the optional forms of benefit in the group can be stated using a representative relative value
as the approximate relative value for the entire group. For this purpose, a representative relative value is any relative
value that is not less than the relative value of the member of the group of optional forms of benefit with the lowest relative
value and is not greater than the relative value of the member of that group with the highest relative value when measured
on a consistent basis. For example, if three grouped optional forms have relative values of 87.5%, 89%, and 91% of the value
of the QJSA, all three optional forms can be treated as having a relative value of approximately 90% of the value of the QJSA.
As required under paragraph (c)(2)(iii)(A) of this section, if a single-sum distribution is included in the group of optional
forms of benefit, the 90% relative factor of the value of the QJSA must be disclosed as the approximate relative value of
the single sum, and the other forms can be described as having the same approximate value as the single sum.
(C) Special rules. If the plan is comparing the value of each optional form to the value of the QJSA for a married participant, this paragraph
(c)(2)(iii)(C) provides a grouping rule that is in addition to the grouping rules of paragraph (c)(2)(iii)(A) of this section.
Under this special rule, the relative value of all optional forms of benefit that have an actuarial present value that is
at least 95% of the actuarial present value of the QJSA for a married participant is permitted to be described by stating
that those optional forms of benefit are approximately equal in value to the QJSA, or that all of those forms of benefit and
the QJSA are approximately equal in value. In addition, if a plan is comparing the value of optional forms of benefit to the
value of the single life annuity and all optional forms of benefit have actuarial present values that are at least 95%, but
not greater than 102.5%, of the actuarial present value of the single life annuity, the plan is permitted t o describe the
relative value of all optional forms of benefit by stating that all the optional forms of benefit are approximately equal
in value, or that all of those forms of benefit and the single life annuity are approximately equal in value.
(iv) Actuarial assumptions used to determine relative values. For the purpose of providing a numerical comparison of the value of an optional form of benefit to the value of the immediately
commencing QJSA under this paragraph (c)(2), the following rules apply—
(A) If an optional form of benefit is subject to the requirements of section 417(e)(3) and §1.417(e)-1(d), any comparison
of the value of the optional form of benefit to the value of the QJSA must be made using the applicable mortality table and
the applicable interest rate as defined in §1.417(e)-1(d)(2) and (3) (or, at the option of the plan, another reasonable interest
rate and reasonable mortality table used under the plan to calculate the amount payable under the optional form of benefit);
(B) All other optional forms of benefit payable to the participant must be compared with the QJSA using a single set of interest
and mortality assumptions that are reasonable and that are applied uniformly with respect to all such optional forms payable
to the participant (regardless of whether those assumptions are actually used under the plan for purposes of determining benefit
(v) Required disclosure of assumptions—(A) Explanation of concept of relative value. The notice must provide an explanation of the concept of relative value, communicating that the relative value comparison
is intended to allow the participant to compare the total value of distributions paid in different forms, that the relative
value comparison is made by converting the value of the optional forms of benefit presently available to a common form (such
as the QJSA or a single-sum distribution), and that this conversion uses interest and life expectancy assumptions. The explanation
of relative value must include a general statement that all comparisons provided are based on average life expectancies, and
that the relative value of payments ultimately made under an annuity optional form of benefit will depend on actual longevity.
(B) Disclosure of assumptions. A required numerical comparison of the value of the optional form of benefit to the value of the QJSA under this paragraph
(c)(2) is required to include a disclosure of the interest rate that is used to develop the comparison. If all optional forms
of benefit are permitted to be grouped under paragraph (c)(2)(iii)(A) of this section, then the requirement of this paragraph
(c)(2)(v)(B) does not apply for any optional form of benefit not subject to the requirements of section 417(e)(3) and §1.417(e)-1(d)(3).
(C) Offer to provide actuarial assumptions. If the plan does not disclose the actuarial assumptions used to calculate the numerical comparison required under paragraph
(c)(2) of this section, then, the notice must be accompanied by a statement that includes an offer to provide, upon the participant's
request, the actuarial assumptions used to calculate the relative value of optional forms of benefit under the plan.
(3) Permitted estimates of financial effect and relative value—(i) General rule. For purposes of providing a description of the financial effect of the distribution forms available to a participant as
required under paragraph (c)(1)(iii) of this section, and for purposes of providing a description of the relative value of
an optional form of benefit compared to the value of the QJSA for a participant as required under paragraph (c)(1)(iv) of
this section, the plan is permitted to provide reasonable estimates (e.g., estimates based on data as of an earlier date than the annuity starting date, a reasonable assumption for the age of the
participant's spouse, or, in the case of a defined contribution plan, reasonable estimates of amounts that would be payable
under a purchased annuity contract), including reasonable estimates of the applicable interest rate under section 417(e)(3).
(ii) Right to more precise calculation. If a QJSA notice uses a reasonable estimate under paragraph (c)(3)(i) of this section, the QJSA explanation must identify
the estimate and explain that the plan will, upon the request of the participant, provide a more precise calculation and the
plan must provide the participant with a more precise calculation if so requested. Thus, for example, if a plan provides
an estimate of the amount of the QJSA that is based on a reasonable assumption concerning the age of the participant's spouse,
the participant can request a calculation that takes into account the actual age of the spouse, as provided by the participant.
(iii) Revision of prior information. If a more precise calculation described in paragraph (c)(3)(ii) of this section materially changes the relative value of
an optional form compared to the value of the QJSA, the revised relative value of that optional form must be disclosed, regardless
of whether the financial effect of selecting the optional form is affected by the more precise calculation. For example,
if a participant provides a plan with the age of the participant's spouse and that information materially changes the relative
value of an optional form of benefit (such as a single sum) compared to the value of the QJSA, then the revised relative value
of the optional form of benefit and the value of the QJSA must be disclosed, regardless of whether the amount of the payment
under that optional form of benefit is affected by the more precise calculation.
(4) Special rules for disclosure of financial effect for defined contribution plans. For a written explanation provided by a defined contribution plan, a description of financial effect required by paragraph
(c)(1)(iii) of this section with respect to an annuity form of benefit must include a statement that the annuity will be provided
by purchasing an annuity contract from an insurance company with the participant's account balance under the plan. If the
description of the financial effect of the optional form of benefit is provided using estimates rather than by assuring that
an insurer is able to provide the amount disclosed to the participant, the written explanation must also disclose this fact.
(d) Substitution of generally applicable information for participant information in the section 417(a)(3) explanation—(1) Forms of benefit available. In lieu of providing the information required under paragraphs (c)(1)(i) through (v) of this section for each optional form
of benefit presently available to the participant as described in paragraph (c) of this section, the QJSA explanation may
contain the information required under paragraphs (c)(1)(i) through (v) of this section for the QJSA and each other optional
form of benefit generally available under the plan, along with a reference to where a participant may readily obtain the information
required under paragraphs (c)(1)(i) through (v) of this section for any other optional forms of benefit that are presently
available to the participant.
(2) Financial effect and comparison of relative values—(i) General rule. In lieu of providing a statement of the financial effect of electing an optional form of benefit as required under paragraph
(c)(1)(iii) of this section, or a comparison of relative values as required under paragraph (c)(1)(iv) of this section, based
on the actual age and benefit of the participant, the QJSA explanation is permitted to include a chart (or other comparable
device) showing the financial effect and relative value of optional forms of benefit in a series of examples specifying the
amount of the optional form of benefit payable to a hypothetical participant at a representative range of ages and the comparison
of relative values at those same representative ages. Each example in this chart must show the financial effect of electing
the optional form of benefit pursuant to the rules of paragraph (c)(1)(iii) of this section, and a comparison of the relative
value of the opt ional form of benefit to the value of the QJSA pursuant to the rules of paragraph (c)(2) of this section,
using reasonable assumptions for the age of the hypothetical participant's spouse and any other variables that affect the
financial effect, or relative value, of the optional form of benefit. The requirement to show the financial effect of electing
an optional form can be satisfied through the use of other methods (e.g., expressing the amount of the optional form as a percentage or a factor of the amount payable under the normal form of benefit),
provided that the method provides sufficient information so that a participant can determine the amount of benefits payable
in the optional form. The chart (or other comparable device) must be accompanied by the disclosures described in paragraph
(c)(2)(v) of this section explaining the concept of relative value and disclosing certain interest assumptions. In addition,
the chart (or other comparable device) must be accompanied by a general statement describing the effect of significant variations
between the assumed ages or other variables on the financial effect of electing the optional form of benefit and the comparison
of the relative value of the optional form of benefit to the value of the QJSA.
(ii) Actual benefit must be disclosed. The generalized notice described in this paragraph (d)(2) will satisfy the requirements of paragraph (b)(2) of this section
only if the notice includes either the amount payable to the participant under the normal form of benefit or the amount payable
to the participant under the normal form of benefit adjusted for immediate commencement. For this purpose, the normal form
of benefit is the form under which payments due to the participant under the plan are expressed under the plan, prior to adjustments
for form of benefit. For example, assuming that a plan's benefit accrual formula is expressed as a straight life annuity,
the generalized notice must provide the amount of either the straight life annuity commencing at normal retirement age or
the straight life annuity commencing immediately.
(iii) Ability to request additional information. The generalized notice described in this paragraph (d)(2) must be accompanied by a statement that includes an offer to provide,
upon the participant's request, a statement of financial effect and a comparison of relative values that is specific to the
participant for any presently available optional form of benefit, and a description of how a participant may obtain this additional
information. (3) Financial effect of QPSA election. In lieu of providing a specific description of the financial effect of the QPSA election, the QPSA explanation may provide
a general description of the financial effect of the election. Thus, for example, the description can be in the form of a
chart showing the reduction to a hypothetical participant's normal retirement benefit at a representative range of participant
ages as a result of the QPSA election (using a reasonable assumption for the age of the hypothetical participant's spouse
relative to the age of the hypothetical participant). In addition, this chart must be accompanied by a statement that includes
an offer to provide, upon the participant's request, an estimate of the reduction to the participant's estimated normal retirement
benefit, and a description of how a participant may obtain this additional information.
(4) Additional information required to be furnished at the participant's request— The generalized notice described in paragraph (d)(2) of this section must be accompanied by a statement that includes an
offer to provide, upon the participant's request, information described in this paragraph (d)(4)(i) and (ii), and a description
of how a participant may obtain this additional information.
(i) Explanation of QJSA. If, as permitted under paragraphs (d)(1) and (2) of this section, the content of a QJSA explanation does not include all
the items described in paragraph (c) of this section, then, upon a participant's request for any of the information required
under paragraphs (c)(1)(i) through (v) of this section for one or more presently available optional forms (including a request
for all optional forms presently available to the participant), the plan must furnish the information required under paragraphs
(c)(1)(i) through (v) of this section with respect to those optional forms. Thus, with respect to those optional forms of
benefit, the participant must receive a QJSA explanation specific to the participant that is based on the participant's actual
age and benefit. In addition, the plan must comply with paragraph (c)(3)(iii) of this section. Further, if as permitted
under paragraph (c)(2)(v)(B) of this section, the plan does not disclose the actuarial assumptions used to calculate the
numerical comparison required under paragraph (c)(2) of this section, then, upon request, the plan must provide the actuarial
assumptions used to calculate the relative value of optional forms of benefit under the plan.
(ii) Explanation of QPSA. If, as permitted under paragraph (d)(3) of this section, the content of a QPSA explanation does not include all the items
described in paragraph (b)(1) of this section, then, upon a participant's request, the plan must furnish an estimate of the
reduction to the participant's estimated normal retirement benefit that would result from a QPSA election.
(e) Examples. The following examples illustrate the application of this section. Solely for purposes of these examples, the applicable
interest rate that applies to any distribution that is subject to the rules of section 417(e)(3) is assumed to be 5%, and
the applicable mortality table under section 417(e)(3) and §1.417(e)-1(d)(2) is assumed to be the table that applies as of
January 1, 2003. In addition, solely for purposes of these examples, assume that a plan which determines actuarial equivalence
using 6% interest and the applicable mortality table under section 417(e)(3) and §1.417(e)-1(d)(2) that applies as of January
1, 1995, is using reasonable actuarial assumptions. The examples are as follows:
Example 1. (i) Participant M participates in Plan A, a qualified defined benefit plan. Under Plan A, the QJSA is a joint and 100%
survivor annuity, which is actuarially equivalent to the single life annuity determined using 6% interest and the section
417(e)(3) applicable mortality table that applies as of January 1, 1995. On October 1, 2004, M will terminate employment
at age 55. When M terminates employment, M will be eligible to elect an unreduced early retirement benefit, payable as either
a single life annuity or the QJSA. M will also be eligible to elect a single-sum distribution equal to the actuarial present
value of the single life annuity payable at normal retirement age (age 65), determined using the applicable mortality table
and the applicable interest rate under section 417(e)(3).
(ii) Consistent with paragraph (c) of this section, Participant M is provided with a QJSA explanation that describes the single
life annuity, the QJSA, and single-sum distribution options under the plan, and any eligibility conditions associated with
these options. Participant M is married when the explanation is provided. The explanation indicates that, if Participant
M commenced benefits at age 55 and had a spouse age 55, the monthly benefit under an immediately commencing single life annuity
is $3,000, the monthly benefit under the QJSA is estimated to be 89.96% of the monthly benefit under the immediately commencing
single life annuity or $2,699, and the single sum is estimated to be 74.7645 times the monthly benefit under the immediately
commencing single life annuity or $224,293.
(iii) The QJSA explanation indicates that the single life annuity and the QJSA are of approximately the same value, but that
the single-sum option is equivalent in value to a monthly benefit under the QJSA of $1,215. (This amount is 45% of the value
of the QJSA at age 55 ($1,215 divided by 89.96% of $3,000 equals 45%).) The explanation states that the relative value comparison
converts the value of the single life annuity and the single-sum options to the value of each if paid in the form of the QJSA
and that this conversion uses interest and life expectancy assumptions. The explanation specifies that the calculations relating
to the single-sum distribution were prepared using 5.5% interest and average life expectancy, that the other calculations
were prepared using a 6% interest rate and that the relative value of actual annuity payments for an individual can vary depending
on how long the individual and spouse live. The explanation notes that the calculation of the QJSA assumed that the spouse
was age 55, that the amount of the QJSA will depend on the actual age of the spouse (for example, annuity payments will be
significantly lower if the spouse is significantly younger than the participant), and that the amount of the single-sum payment
will depend on the interest rates that apply when the participant actually takes a distribution. The explanation also includes
an offer to provide a more precise calculation to the participant taking into account the spouse's actual age.
(iv) In accordance with paragraph (c)(3)(ii) of this section, Participant M requests a more precise calculation of the financial
effect of choosing a QJSA taking into account that Participant M's spouse is 50 years of age. Using the actual age of Participant
M's spouse, Plan A determines that the monthly payments under the QJSA are 87.62% of the monthly payments under the single
life annuity, or $2,628.60 per month, and provides this information to M. Plan A is not required to provide an updated calculation
of the relative value of the single sum because the value of single sum continues to be 45% of the value of the QJSA.
Example 2. (i) The facts are the same as in Example 1, except that the comparison of the relative values of optional forms of benefit to the value of the QJSA is not expressed
as a percentage of the actuarial present value of the QJSA, but instead is expressed by disclosing the actuarial present values
of the optional forms and the QJSA. In addition, the Plan uses the applicable interest rate and the applicable mortality
table under section 417(e)(3) for all comparison purposes.
(ii) Accordingly, the QJSA explanation indicates that the QJSA has an actuarial present value of $498,089, while the single-sum
payment has an actuarial present value of $224,293 (i.e., the amount of the single sum is $224,293) and that the single life annuity is approximately equal in value to the QJSA.
The explanation states that the relative value comparison converts the value of single life annuity and the QJSA into an
amount payable in the form of the single-sum option (even though a single-sum distribution in that amount is not available
under the plan) and that this conversion uses interest and life expectancy assumptions. The explanation specifies that the
calculations were prepared using 5.5% interest and average life expectancy, and that the relative value of actual annuity
payments for an individual can vary depending on how long the individual and spouse live. The explanation notes that the
calculation of the QJSA assumed that the spouse was age 55, that the amount of the QJSA will depend on the actual age of
the spouse (for example, annuity payments will be significantly lower if the spouse is significantly younger than the participant),
and that the amount of the single-sum payment will depend on the interest rates that apply when the participant actually takes
a distribution. The explanation also includes an offer to provide a more precise calculation to the participant taking into
account the spouse's actual age.
Example 3. (i) The facts are the same as in Example 1, except that, in lieu of providing information specific to Participant M in the QJSA notice as set forth in paragraph (c)
of this section, Plan A satisfies the QJSA explanation requirement in accordance with paragraph (d)(2) of this section by
providing M with a statement that M's monthly benefit under an immediately commencing single life annuity (which is the normal
form of benefit under Plan A, adjusted for immediate commencement) is $3,000, along with the following chart. The chart shows
the financial effect of electing each optional form of benefit for a hypothetical participant with a $1,000 benefit and a
spouse who is the same age as the participant. Instead of showing the relative value of these optional forms of benefit compared
to the value of the QJSA, the chart shows the relative value of these optional forms of benefit compared to the value of the
single life annuity. Separate charts are pro vided for ages 55, 60, and 65 as follows:
QJSA (Joint and 100% survivor annuity)
approximately the same value as the Life Annuity
approximately 45% of the value of the Life Annuity
approximately 66% of the value of the Life Annuity
(ii) In accordance with paragraph (d)(4)(i) of this section, when Participant M requests specific information regarding the
amounts payable under the QJSA, the joint and 100% survivor annuity, and the single-sum distribution and provides the age
of M's spouse, Plan A determines that M's QJSA is $2,628.60 per month and the single-sum distribution is $224,293. The actuarial
present value of the QJSA (determined using the 5.5% interest and the section 417(e)(3) applicable mortality table) is $498,896
and the actuarial present value of the single life annuity is $497,876. Accordingly, the specific information discloses that
the single-sum distribution has a value that is 45% of the value of the single life annuity available to M on October 1, 2004.
In accordance with paragraph (c)(2)(iii)(C) of this section, the QJSA notice provides that the QJSA is of approximately the
same value as the single life annuity.
Example 4. (i) The facts are the same as in Example 1, except that under Plan A, the single-sum distribution is determined as the actuarial present value of the immediately commencing
single life annuity. In addition, Plan A provides a joint and 75% survivor annuity that is reduced from the single life annuity
and that is the QJSA under Plan A. For purposes of determining the amount of the QJSA, if the participant is married the
reduction is only half of the reduction that would normally apply under the actuarial assumptions specified in Plan A for
determining actuarial equivalence of optional forms.
(ii) In lieu of providing information specific to Participant M in the QJSA notice as set forth in paragraph (c) of this section,
Plan A satisfies the QJSA explanation requirement in accordance with paragraph (d)(2) of this section by providing M with
a statement that M's monthly benefit under an immediately commencing single life annuity (which is the normal form of benefit
under Plan A, adjusted for immediate commencement) is $3,000, along with the following chart showing the financial effect
and the relative value of the optional forms of benefit compared to the QJSA for a hypothetical participant with a $1,000
benefit and a spouse who is three years younger than the participant. For each optional form generally available under the
plan, the chart shows the financial effect and the relative value, using the grouping rules of paragraph (c)(2)(ii) of this
section. Separate charts are provided for ages 55, 60, and 65, as follows:
approximately the same value as the QJSA
QJSA (joint and 75% survivor annuity for a participant who is married)
approximately 94% of the value of the QJSA
Amount of distribution per $1,000 of immediate single life annuity Relative Value
approximately 93% of the value of the QJSA
(iii) The chart disclosing the financial effect and relative value of the optional forms specifies that the calculations were
prepared assuming that the spouse is three years younger than the participant, that the calculations relating to the single-sum
distribution were prepared using 5.5% interest and average life expectancy, that the other calculations were prepared using
a 6% interest rate, and that the relative value of actual payments for an individual can vary depending on how long the individual
and spouse live. The explanation states that the relative value comparison converts the single life annuity, the joint and
100% survivor annuity, and the single-sum options to value of each if paid in the form of the QJSA and that this conversion
uses interest and life expectancy assumptions. The explanation notes that the calculation of the QJSA depends on the actual
age of the spouse (for example, annuity payments will be significantly lower if the spouse is significantly younger than the
participant), and that the amount of the single-sum payment will depend on the interest rates that apply when the participant
actually takes a distribution. The explanation also includes an offer to provide a calculation specific to the participant
upon request, and an offer to provide mortality tables used in preparing calculations upon request.
(iv) In accordance with paragraph (d)(4)(i) of this section, Participant M requests specific information regarding the amounts
payable under the QJSA, the joint and 100% survivor annuity, and the single sum.
(v) Based on the information about the age of Participant M’s spouse, Plan A determines that M’s QJSA is $2,856.30 per month,
the joint and 100% survivor annuity is $2,628.60 per month, and the single sum is $497,876. The actuarial present value of
the QJSA (determined using the 5.5% interest and the section 417(e)(3) applicable mortality table, the actuarial assumptions
required under section 417) is $525,091. Accordingly, the value of the single-sum distribution available to M on October
1, 2004, is 94.8% of the actuarial present value of the QJSA. In addition, the actuarial present value of the life annuity
and the 100% joint and survivor annuity are 95.0% of the actuarial present value of the QJSA.
(vi) Plan A provides M with a QJSA explanation that incorporates these more precise calculations of the financial effect and
relative value of the optional forms for which M requested information.
(f) Effective date. This section applies to QJSA explanations with respect to distributions with annuity starting dates on or after October
1, 2004, and to QPSA explanations provided on or after July 1, 2004. In the case of a retroactive annuity starting date under
section 417(a)(7), when required under §1.417(e)-1(b)(3)(vi), the date of commencement of the actual payments based on the
retroactive annuity starting date is substituted for the annuity starting date for this purpose.
§1.417(e)-1 [Amended] Par. 5. In §1.417(e)-1, paragraph (b)(2) is amended by removing the language “§1.401(a)-20 Q&A-36” and adding “§1.417(a)(3)-1”
Par. 7. In §602.101, paragraph (b) is amended by adding an entry for “1.417(a)(3)-1” in numerical order to the table to read
§602.101 OMB Control numbers. * * * * * (b) * * *
Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved December 3, 2003.
Gregory Jenner, Deputy Assistant Secretary (Tax Policy). Note
(Filed by the Office of the Federal Register on December 16, 2003, 8:45 a.m., and published in the issue of the Federal Register
for December 17, 2003, 68 F.R. 70141)
The principal authors of these regulations are Linda S. F. Marshall and John T. Ricotta of the Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in their