<nobr>Mar 11, 2008</nobr>

IRS Provides Guidance on PPA Distribution Changes

Summary

The IRS in Notice 2008-30 provides guidance in the form of questions and answers concerning certain distribution-related provisions of the Pension Protection Act (PPA) that are effective in 2008. The notice also provides guidance on amending plans to require that distribution of excess deferrals include earnings from the end of the taxable year to the date of distribution ("gap-period" earnings).

The PPA sections addressed concern rollovers from eligible retirement plans to Roth IRAs, additional survivor annuity options, and interest rate assumptions for lump sum distributions.

Qualified Rollover Contributions to Roth IRAs

Prior to the PPA, a Roth IRA could only accept a rollover contribution from another Roth IRA, a traditional or SIMPLE IRA, or from a designated Roth account. IRS says that these rollover contributions to Roth IRAs are called "qualified rollover contributions," and a qualified rollover contribution from a non-Roth IRA to a Roth IRA is called a "conversion." The PPA expanded qualified rollover contributions to include rollovers from other eligible retirement plans, effective for distributions made after December 31, 2007.

The notice confirms that distributions from a qualified plan described in Internal Revenue Code section 401(a) can be rolled over to a Roth IRA through a direct rollover from the plan to the Roth IRA or an amount can be distributed from the plan and contributed (rolled over) to the Roth IRA within 60 days. IRS says the amount rolled over must be an eligible rollover distribution (as defined in IRC section 402(c)(4)) and, there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution. The new definition of qualified rollover contribution also includes distributions from annuity plans described in IRC section 403(a) and (b) and from eligible governmental plans under section 457(b).

For tax years beginning before January 1, 2010, an individual cannot make a qualified rollover contribution from an eligible retirement plan other than a Roth IRA if, for the year the eligible rollover distribution is made, the taxpayer has modified adjusted gross income exceeding $100,000 or is married and files a separate return.

The notice addresses other specific questions relating to whether any additional tax applies, election of a direct rollover, plan administrator responsibilities, withholding requirements, and whether beneficiaries can make qualified rollovers.

Additional Survivor Annuity Options

In this section, the IRS explains how the PPA (section 1004) amends IRC section 417 to require a plan that is subject to the requirements of joint and survivor annuity and pre-retirement survivor annuity under section 401(a)(11) to offer to participants a specified optional form of benefit as an alternative to the qualified joint and survivor annuity (QJSA). In particular, a plan that is subject to the joint and survivor annuity requirements must provide to a participant who waives the QJSA an opportunity to elect a qualified optional survivor annuity ("QOSA") during the applicable election period, and must provide a written explanation to participants of the terms and conditions of the QOSA.

PPA defines a QOSA as an annuity for the life of a participant with a survivor annuity for the life of the participant's spouse equal to a specified applicable percentage of the amount of the annuity payable during the joint lives of the participant and the spouse, and is the actuarial equivalent of a single life annuity for the life of the participant. A QOSA also includes a distribution option in a form having the effect of such an annuity.

Section 1107 of PPA permits a plan sponsor to delay adopting a plan amendment pursuant to the statutory provisions or regulations issued under PPA until the last day of the first plan year beginning on or after January 1, 2009. The deadline applies to both interim and discretionary amendments that are made pursuant to statutory provisions or any regulation issued under PPA. If section 1107 applies to a plan amendment, the plan does not fail to satisfy the requirements of section 411(d)(6) concerning accrued benefits by reason of the amendment except as provided by the Secretary of the Treasury. IRS says, however (see Q&A-14 of notice), that section 411(d)(6) relief does not apply to a plan amendment adopted pursuant to section 1004 of PPA.

The notice addresses specific questions concerning survivor annuity options including the level of spouse survivor annuity under QOSA, effective dates and plan amendment requirements, actuarial equivalence requirements between a QJSA and QOSA, spousal consent requirements for a QOSA, written explanation of terms and conditions, pre-retirement survivor annuity requirements, plan amendment rules, and effective dates.

Interest Rate Assumptions for Lump Sum Distributions

IRS confirms in the notice that plans that switch to the new PPA segment rates for lump sum calculations after the beginning of the 2008 plan year will not forfeit the PPA's anti-cutback relief so long as the plan sponsor adopts the transition approach by the adoption deadline. The relief, however, is limited to the first such amendment (other than amendments on or before June 30, 2008).

The notice also says that plans that provide optional forms of payment that are calculated as the greater of (i) the amount calculated under the pre-PPA mortality table and interest rate, or (ii) the amount calculated under the post-PPA mortality table and interest rate, will not violate the QJSA "most valuable form of payment" rule. This special treatment is available for transition periods through the PPA amendment deadline (generally the end of the 2009 plan year).

IRS also says that the PPA anti-cutback relief extends to plan amendments that substitute the new rates for the old, even if not required. The notice offers the example of substituting the new rates for prior rates in determining annuity option factors.

Gap-Period Earnings

Despite PPA's reversal eliminating gap period income for refunds of excesses due to failed ADP and ACP tests for post-2007 plan years and the pending technical correction that would do the same for refunds of excess deferrals, the final regulations under section 402(g) mandate the distribution of gap period income on section excess deferrals for post 2006 years. Under the notice, a delay for adopting interim amendments to implement the regulatory requirement is allowed so that the timing corresponds to the general PPA deadline at the end of the 2009 plan year. If not previously included, IRS will ask Cycle B and Cycle C filers to add the provision to receive a determination letter. Plans must comply with the gap-period earnings requirement for post 2006 years, despite the delayed amendment.

Questions or comments on the notice should be directed to Mike Chittenden, mchittenden@eric.org, of the ERIC staff.

Websites:

Notice 2008-30

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