The law provides that a participant must consent to a distribution prior to the later of normal retirement age under the plan or age 62. Benefit notices must apprise a participant of the right to defer distribution in accordance with the law and the terms of the plan. The Pension Protection Act (PPA) requires that notices in plan years beginning after 2006 must also inform a participant of the consequences of failing to defer payment. In Notice 2007-7, the Internal Revenue Service has stated that, in the case of a defined contribution plan, the description should indicate the investment options (including fees) that will be available if the participant defers distribution. In the case of a defined benefit plan, the notice should provide a description of how much larger benefits will be if distribution is deferred; this can be based solely on the normal form of benefit. In both cases, the notice should include any portion of the summary plan description that contains any special rules that may affect the decision to defer. Until regulations are issued, inclusion of the foregoing information will constitute reasonable compliance.
We would be happy to update your plans’ benefit notices to meet the new requirements and/or review the notices to make sure all other requirements are being met.
BENEFIT STATEMENTS– DEFINED CONTRIBUTION PLANS
It is now required that benefit statements be provided quarterly under plans in which participants have the right to direct investments and at least annually under other defined contribution plans. In addition, these statements must contain specific information. The Department of Labor is to issue a model statement by August 18, 2007. Plans providing for participantdirected investments must, however, comply with the new requirements for the first quarterly statement in plan years beginning after 2006. (Collectively bargained plans may have a later effective date.) The Department of Labor has indicated that a statement furnished not later than 45 days following the end of the quarter (or year) will constitute good faith compliance with the quarterly (or annual) requirement.
The benefit statement must
- include vesting information and the value of each investment;
- explain any limitations or restrictions on investment direction imposed under the plan (but need not include those imposed by the funds or securities laws) and the importance of a diversified portfolio;
- refer the participant to the Department of Labor Web site (www.dol.gov/ebsa/investing.html) for information regarding investment and diversification; and
- if applicable, provide an explanation regarding any permitted disparity.
In a recent Field Assistance Bulletin, the Department of Labor has set forth model language with respect to the importance of diversifi cation that will constitute good-faith compliance. Statements may be provided electronically if certain requirements are met. If participants have continuous access to benefit statement information through a secure Web site, such access will constitute good-faith compliance with the new requirements, provided participants and beneficiaries receive a notice prior to the date the first statement is due under the new requirements and annually thereafter explaining the availability of, and how to access, the benefit statement information.
The notice must also inform the participants of the right to request and receive, free of charge, a paper version of the benefit statement information. In many cases, a plan’s third-party administrator and recordkeeper prepares and issues the benefit statements. Employers should contact the third-party administrator to ensure that these requirements will be met for the first quarterly statement in 2007. We, of course, would be happy to assist with drafting the necessary additional information and the required notice if benefit statement information will be available on a continuous basis through a secure Web site.
BENEFIT STATEMENTS – DEFINED BENEFIT PLANS
Under the PPA, defined benefit plans must either automatically provide a benefit statement at least once every three years or provide an annual notice of the availability of a benefit statement to each vested participant who is employed by the employer at the time the statement or notice is furnished. The current requirement to provide a benefit statement to a participant or benefi ciary upon written request (but not more than once a year) continues to apply. In addition, the statements must contain specifi c information. These statements may also be provided electronically or continuously through a secure Web site as set forth above with respect to defined contribution plans.
The Department of Labor is required to issue a model statement by August 18, 2007. In addition, the Department of Labor has indicated that the first three-year statement would not be due until the 2009 plan year. Given this, many employers may wish to wait for the model statement; however, any statement provided before the model statement is issued will need to be revised to meet the new requirements. Again, we would be happy to assist you with updating benefit statements to meet the PPA requirements.