March 15, 2007 Deadline for Correcting Excess Lump Sum Distributions in 2006
In general, for defined benefit plans, lump sum distributions must be converted into a single life annuity for purposes of applying the maximum dollar limitation on the annual benefit payable under the plan. For 2006, this limit is the lesser of $175,000 or 100 percent of the participant's highest average compensation during a consecutive three-year period of plan participation. The Pension Protection Act ("PPA"), which was enacted Aug. 17, 2006, changed the interest rate for converting a single lump sum to a straight life annuity to a rate of not less than the greatest of (1) 5.5 percent, (2) the plan's interest rate, or (3) a rate that results in a benefit of not more than 105 percent of the benefit that would be provided if the interest rate for determining minimum lump sum payments were used. Because this change was made retroactive to Jan. 1, 2006, lump sum payments made before the PPA was enacted may be greater than the annual limit and must be corrected.
In Notice 2007-7, the IRS provided a special correction method available through March 15, 2007 for correcting excess distributions made on or after Jan. 1, 2006 and prior to Sept. 1, 2006. In general, the excess distribution is not required to be returned to the plan, provided that the plan issues two Forms 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.). The first Form 1099-R should include only the amount that would have been payable had the benefit been adjusted using the PPA interest rate assumptions. The second Form 1099-R should include the excess amount that was distributed and code "E" in box 7 to identify it as an excess distribution. Participants who received the excess distributions would have to be notified that the excess amounts are not eligible for rollover and are taxable in the year distributed.
If the special correction method described above is not followed or does not apply, the excess distributions may be corrected under the IRS' Employee Plans Compliance Resolution System ("EPCRS"), which would require the plan to take reasonable steps to have the excess amounts returned to the plan.
April 16, 2007 Reporting Deadline for Underfunded Plans
Section 4010 of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA"), requires annual reporting of financial and actuarial information to the Pension Benefit Guaranty Corporation ("PBGC") relating to certain underfunded defined benefit plans and their sponsors. The deadline for this reporting requirement is based upon the fiscal year of the contributing sponsor and the members of its controlled group. For those filers with controlled group members that have different fiscal years, the fiscal year is presumed to be the calendar year. The reporting deadline based upon a calendar year is April 16, 2007.
You, and the members of your controlled group, are subject to this reporting requirement when either:
- Your defined benefit pension plans and the plans sponsored by your controlled group have unfunded vested benefits exceeding $50 million, or
- You, or a member of your controlled group, failed to make a contribution to the plan, required under ERISA and the Internal Revenue Code, and the unpaid balance of such contribution, including interest, exceeds $1 million, or
- You, or a member of your controlled group, has been granted one or more "minimum funding waivers" totaling in excess of $1 million, and a portion of it was still outstanding at the end of your fiscal year. (Note: the deadline for applying for such waivers for the 2006 plan year is March 15, 2007 for a calendar year plan.)