What Notice and Consent Requirements Apply?
Other than benefits which are subject to the plan's involuntary distribution rules, a plan must provide a written notice to the participant prior to distributing any benefits that satisfies the following requirements: (1) explains benefit options; (2) provides information about the right to delay distribution until at least the normal retirement age; and (3) explains rollover rights. Notice must be provided 30 to 180 days before the distribution commences, PPA 2006 §1102. If the value of a participant's vested benefit is less than the cash-out limit (generally $5,000), consent to the distribution is not required and a limited notice obligation applies – e.g., participant has no right to delay distribution until his attainment of the plan's normal retirement age.
A. Explanation of Optional Forms of Payment – notice must specify the various forms of benefit available and the relative values of each optional form of benefit, Treas. Reg. §1.411(a)-11(c)(2).
1. Where QJSA rules do not apply, typically the benefit forms available are a lump sum payment and installment payments or just the lump sum.
2. Where QJSA rules apply, the notice must: (1) describe the QJSA; (2) describe the participant's right to waive the QJSA and elect a different benefit form; (3) the relative values of the optional forms of benefit compared to the QJSA; (4) the financial effect of electing the optional form of benefit; and (5) any other material features of the optional from of benefit [this must include (i) the amounts and timing of payments to the participant under the benefit form during the participant's lifetime; and (ii) the amounts and timing of payments after the death of the participant]. IRC §417(a)(3)(A); Treas. Reg. § 1.401(a)-20, Q&A 36 and Treas. Reg. §1.417(a)(3)-1.
a) If the plan is a DB plan, the notice must also specify (1) which optional forms are subsidized (i.e., more actuarially valuable than the normal form of benefit); (2) the interest rates used to calculate the optional forms of benefit; and (3) the spouse's consent rights regarding any waiver of the QJSA.
b) QJSA explanation may be specific to the participant or general in nature and offer the participant the opportunity to request additional information that is more specific to the participant.
c) The description of relative value 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. The QJSA and optional form must be expressed in the same form, taking into account the time value of money and life expectancies, such as the following: (i) stating the actuarial present value of the optional form as a percentage or factor of the actuarial present value of the QJSA; (ii) 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; or (iii) stating the actuarial present value of the both the QJSA and the optional form.
3. QPSA explanation – A participant must be given an explanation of the QPSA and an opportunity to waive it in favor of another beneficiary. The explanation must include: (i) a general description of the QPSA and its availability for election; (ii) the circumstances under which the QPSA will be paid if elected; (iii) the financial effect of the election of the QPSA (i.e., an estimate of the reduction of the participant's normal retirement benefit that would result if the QPSA is elected), Treas. Reg. Sec. 1.417(a)(3)-1(b)(1). If the plan reduces the normal retirement benefit because of a QPSA election, the "financial effect" explanation may be provided through a general description (e.g., through a chart showing the reduction at representative ages) and a statement that the participant may request an estimate of the reduction to the participant's normal retirement benefit, Treas. Reg. §1.417(a)(3)-1(d)(3).
a) QPSA explanation must be provided during the period that begins with the plan year in which the participant attains age 32 and ends with the plan year in which the participant attains age 35, IRC §417(a)(3)(B)(ii). If an employee becomes a participant after this period, the QPSA explanation must be provided no later than one year after his initial participation date.
b) A participant may waive the QPSA in favor of another beneficiary at any time after the first day of the plan year in which the participant attains age 35, IRC §417(a)(6)(B).
4. Right to Delay Distribution Until Normal Retirement Age – If a participant has not yet reached the plan's normal retirement age, the notice to the participant must state that he or she has the right to delay distribution, Treas. Reg. §1.411(a)-11(c)(2). Effective for plan years after December 31, 2007, the notice must also explain the consequences of failing to delay the receipt of benefits. [Notice 2007-7, Q&A 31, IRC §411(a)(11)] No such notice must be provided if the participant has already attained the plan's normal retirement age.
5. Rollover Notice, IRC §402(f) Notice: If the participant's distribution is or has the option to elect a form of distribution that is an "eligible rollover distribution" under IRC §402(c) (see below), the written notice must: (a) explain the rollover option; (b) the tax consequences of not making the rollover (i.e., mandatory withholding); and (c) any special income tax elections available. (sample notice provided in Notice 2002-3)
a) Rollover notice must be provided at least 30 days before the distribution, Treas. Reg. §1.402(f)-1, Q&A-2.
b) $100 penalty – A $100 penalty applies if a plan fails to provide the direct rollover notice, subject to a $50,000 maximum for all such failures in a calendar year, IRC §6652(i).
c) Rollover notice is not required if the total distribution is less than $200, Treas. Reg. §1.401(a)(31)-1, Q&A-11. [Note: Rollover notice is required for involuntary cash out distributions less than $5,000.]
B. Consent Requirement – If a participant's vested benefit is greater than the cash-out limit, no benefits may be distributed until the participant has consented to the distribution in writing. Treas. Reg. §1.411(a)-11(c)(3).
1. If the plan is subject to the QJSA rules, the spouse's written consent is required if the participant elects a distribution form other than the QJSA. Any such consent must be provided within the "applicable election period" – this is the 90-day period ending on the "annuity starting date" (the first day of the first period for which a plan benefit is paid), Treas. Reg. §1.401(a)-20, A-10(b). A plan may extend the applicable election period to up to 180 days, PPA of 2006.
2. Spousal consent to a QJSA waiver must acknowledge the effect of the participant's election and be witnessed by a notary public or a plan representative, IRC §417(a)(2)(A) (consent may be provided electronically, thereby obviating need for witnessing).
a) Exceptions to spousal consent requirement, IRC §417, Treas. Reg. §1.401(a)-20, Q&A-27: (i) no spouse; or (ii) spouse cannot be located. No consent is required if a court order establishes that the spouse is separated from the participant or that the spouse has abandoned the participant. If the spouse is not legally competent, the spouse's legal guardian may consent on behalf of the spouse, even if the guardian is the participant.
b) Spousal consent is not necessary if the QJSA is elected.
3. A participant must formally waive the QJSA to receive a different benefit form, even if the participant is not married.
4. If plan is subject to QPSA rules, the spouse's consent to the designation of another beneficiary must be in writing, acknowledge the effect of the participant's election, and be witnessed by either a notary public or plan representative, IRC §417(a)(2)(A). QJSA spousal consent rules regarding the circumstances under which consent will not be required also apply to QPSA waivers.
5. A participant's consent must be voluntary. Such consent will not be considered to be voluntary if there is a significant detriment to the participant's decision to delay payment (Treas. Reg. §1.411(a)-11(c)(2)), e.g., where less profitable investment options are made available than when the participant was an employee; where the plan requires a participant to wait until normal retirement age for the next opportunity to elect distribution if the participant fails to elect a distribution at the time of termination; and where the plan places limits on certain distribution options that do not apply to active participants.
6. A participant's consent/distribution election must be made no earlier than 180 days before the distribution commencement date, Treas. Reg. §1.411(a)-11(c)(2)(ii) and §1.417(e)-1(b)(3).
7. A participant must have a minimum of 30 days to make an election. This is because the distribution notice must be provided no earlier than 30 days before the distribution commencement date.
8. If a participant's annuity benefit has a retroactive annuity starting date, the distribution commencement date is the date of the first actual payment under the annuity, Treas. Reg. §1.417(e)-1(b)(3)(vi).
C. Electronic media may be used to provide the above notices and to accept elections or consent provided the requirements of Treas. Reg. Sec. 1.401(a)-21 have been met.