Labor Logic

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John D. Finerty, Jr.

Few areas of the law are more heavily regulated, and as a result more complex, than benefits law. For example, employers that administer or maintain pension plans are required to comply with ERISA and the tax code, but are also governed by regulations issued by the Internal Revenue Service, the Pension Benefit Guaranty Corporation, the U.S. Department of Labor and the Treasury Department.

One recent measure issued by the Treasury Department, however, is aimed at making pension plan explanations easier for participants to understand. The high points of these new regulations take effect on July 1 and October 1, 2004.

The New "Relative Value" Regulations

All defined benefit pension plans, and many defined contribution plans, allow participants to choose among many different options when electing to take distributions.

For example, there are qualified joint and survivor annuities, lump sum distributions and installment payments. It is often difficult, however, for participants to understand the relative value of these distribution options; some options are expressed as dollars per month for life, dollars per month for a fixed number of years or a lump sum dollar amount.

The new "Relative Value" regulations issued by the Treasury Department require plan administrators to provide detailed information about these distribution options to help employees make better decisions on how they want their pension money paid out.

The Relative Value regulations require employers with pension plans to review and revise their distribution procedures. In some cases, the plan documents may need to be amended prior to the effective date of the regulations. The Relative Value regulations apply to annuity distribution after October 1, 2004. The regulations also make new explanations for qualified pre-retirement survivor annuity effective July 1, 2004.

Which Plans Must Comply?

All qualified retirement plans that are required to offer a "qualified joint and survivor annuity" form of distribution or a "qualified pre-retirement survivor annuity" are required to comply with the Relative Value regulations. This includes all pension benefit plans (also known as "defined benefit" plans), but it may also include defined contribution plans, if such plans offer annuity forms of benefit.

In addition, some plans that would not ordinarily fall under these regulations may provide grandfathered benefits that are subject to the new distribution regulations.

Accordingly, employers who have any qualified retirement plans that provide for annuity forms of distribution should review their plans and procedures.

In some cases, the onset of these regulations may provide an opportunity to review the forms of distribution a plan offers and scale back plans with a cumbersome number of options. In general, defined contribution plans can remove all but their lump sum distribution options. Although new IRS guidance is anticipated, defined benefit plans are currently limited in their ability to eliminate forms of distribution, so proceed with caution if you or your client administer a defined benefit plan.

Plan Document Changes May be Required

The Relative Value regulations require plans to provide a numerical comparison of the optional forms of distribution. The regulations do not dictate that all distribution forms must be expressed in a particular form, such as present value (commonly the "lump sum" value) or life annuity (a required form of benefit under defined benefit plans).

The plan administrator, for example, could express the value of each distribution in terms of the lump sum present value. Thus, the value of a lump sum benefit, an installment benefit, a life annuity and a joint and survivor annuity would all be expressed as a lump sum present value dollar amount, even if the amounts are paid out over time. The idea is that participants would be allowed to compare apples to apples, so to speak.

In some cases, defined benefit plans specify the notice procedures associated with annuity forms of benefit in the plan document (as well as certain conversion rates and assumptions). If a plan document’s distribution explanation procedures are based on the old regulations, which is likely, the plan document will need to be amended. Technically, failure to amend the plan for these changes could result in plan disqualification.

Opportunity to Review QJSA Compliance

In addition, a review of the plans QJSA explanation provisions provides an opportunity to review the manner in which the plan calculates QJSA benefits. For example, the law requires that the QJSA form of distribution be at least as valuable as the most valuable form of distribution. However, in practice, some plans have fixed QJSA conversion calculations that would currently result in a QJSA distribution relative value that is not at least as valuable as some other form of distribution.

For more information or for assistance in reviewing or amending an employee benefit plan, please contact John D. Finerty, Jr. at [email protected] or (414) 225-8269 or Martin P. Tierney at [email protected] or (414) 270-2707.