[Federal Register Volume 67, Number 194 (Monday, October 7, 2002)]
[Proposed Rules]
[Pages 62417-62425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25338]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124667-02]
RIN 1545-BA78


Disclosure of Relative Values of Optional Forms of Benefit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that would 
consolidate the content requirements applicable to explanations of 
qualified joint and survivor annuities and qualified preretirement 
survivor annuities payable under certain retirement plans, and would 
specify requirements for disclosing the relative value of optional 
forms of benefit that are payable from certain retirement plans in lieu 
of a qualified joint and survivor annuity. These regulations would 
affect retirement plan sponsors and administrators, and participants in 
and beneficiaries of retirement plans. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written comments, requests to speak and outlines of oral 
comments to be discussed at the public hearing scheduled for January 
14, 2003, at 10 a.m., must be received by January 2, 2003.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-124667-02), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered to: 
CC:ITA:RU (REG-124667-02), room 5226, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the Internet

[[Page 62418]]

by submitting comments directly to the IRS Internet site at: 
www.irs.gov/regs. The public hearing will be held in room 4718 of the 
Internal Revenue Building, 1111 Constitution Avenue NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S. 
F. Marshall, 202-622-6090; concerning submissions and the hearing, and/
or to be placed on the building access list to attend the hearing, Guy 
Traynor, 202-622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington, 
DC 20224. Comments on the collections of information should be received 
by December 6, 2002. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the IRS, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collections of information in this proposed regulation are in 
Sec.  1.417(a)(3)-1. This information is required by the IRS to comply 
with the requirements of section 417(a)(3) regarding explanations that 
must be provided to participants in a qualified plan prior to a waiver 
of a qualified joint and survivor annuity (QJSA) or a qualified 
preretirement survivor annuity (QPSA). This information will be used by 
participants and spouses of participants to determine whether to waive 
a QJSA or QPSA, and by the IRS to confirm that the plan complies with 
applicable qualification requirements to avoid adverse tax 
consequences. The collections of information are mandatory. The 
respondents are nonprofit institutions.
    Estimated total annual reporting burden: 375,000 hours.
    The estimated annual burden per respondent varies from .01 to .99 
hours, depending on individual circumstances, with an estimated average 
of .5 hours.
    Estimated number of respondents: 750,000.
    The estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 417(a)(3) of the Internal Revenue Code of 1986 (Code).
    A qualified retirement plan to which section 401(a)(11) applies 
must pay a vested participant's retirement benefit under the plan in 
the form of a qualified joint and survivor annuity (QJSA), except as 
provided in section 417. Section 401(a)(11) applies to defined benefit 
plans, money purchase pension plans, and certain other defined 
contribution plans. A QJSA is defined in section 417(b) as an annuity 
for the life of the participant with a survivor annuity for the life of 
the spouse (if the participant is married) that is not less than 50 
percent of (and is not greater than 100 percent of) the amount of the 
annuity that is payable during the joint lives of the participant and 
the spouse. Under section 417(b)(2), a QJSA for a married participant 
generally must be the actuarial equivalent of the single life annuity 
benefit payable for the life of the participant. However, a plan is 
permitted to subsidize the QJSA for a married participant. If the plan 
fully subsidizes the QJSA for a married participant so that failure to 
waive the QJSA would not result in reduced payments over the life of 
the participant compared to the single life annuity benefit, then the 
plan need not provide an election to waive the QJSA. See section 
417(a)(5).
    For a married participant, the QJSA must be at least as valuable as 
any other optional form of benefit payable under the plan at the same 
time. See Sec.  1.401(a)-20, Q&A-16. Further, the anti-forfeiture rules 
of section 411(a) prohibit a participant's benefit under a defined 
benefit plan from being satisfied through payment that is actuarially 
less valuable than the value of the participant's accrued benefit 
expressed in the form of an annual benefit commencing at normal 
retirement age. These determinations must be made using reasonable 
actuarial assumptions. However, see Sec.  1.417(e)-1(d) for actuarial 
assumptions required for use in certain present value calculations.
    If a plan provides a subsidy for one optional form of benefit 
(i.e., the payments under an optional form of benefit have an actuarial 
present value that is greater than the actuarial present value of the 
accrued benefit), there is no requirement to extend a similar subsidy 
(or any subsidy) to every other optional form of benefit. Thus, for 
example, a participant might be entitled to receive a single-sum 
distribution upon early retirement that does not reflect any early 
retirement subsidy in lieu of a QJSA that reflects a substantial early 
retirement subsidy. As a further example, a participant might be 
entitled to receive a single-sum distribution at normal retirement age 
in lieu of a QJSA that is subsidized as described in section 417(a)(5).
    Section 417(a) provides rules under which a participant (with 
spousal consent) may waive payment of the participant's benefit in the 
form of a QJSA. Section 417(a)(3) provides that a plan must provide to 
each participant, within a reasonable period before the annuity 
starting date (and consistent with such regulations as the Secretary 
may prescribe) a written explanation of the terms and conditions of the 
QJSA, the participant's right to make, and the effect of, an election 
to waive the QJSA form of benefit, the rights of the participant's 
spouse, and the right to revoke (and the effect of the revocation of) 
an election to waive the QJSA form of benefit.
    Section 205 of the Employee Retirement Income Security Act of 1974 
(ERISA), Public Law 93-406 (88 Stat. 829) as subsequently amended, 
provides parallel rules to the rules of sections 401(a)(11) and 417 of 
the Internal Revenue Code. In particular, section 205(a)(3) of ERISA 
provides a parallel rule to section 417(a)(3) of the Code. Treasury 
regulations issued under section 417(a)(3) of the Code apply as

[[Page 62419]]

well for purposes of section 205(a)(3) of ERISA.
    Regulations governing the requirements for waiver of a QJSA were 
published in the Federal Register on August 19, 1988 (TD 8219; 53 FR 
31837). Section 1.401(a)-20, Q&A-36, provides rules for the explanation 
that must be provided under section 417(a)(3) as a prerequisite to 
waiver of a QJSA. Section 1.401(a)-20, Q&A-36, requires that such a 
written explanation must contain a general description of the 
eligibility conditions and other material features of the optional 
forms of benefit and sufficient additional information to explain the 
relative values of the optional forms of benefit available under the 
plan (e.g., the extent to which optional forms are subsidized relative 
to the normal form of benefit or the interest rates used to calculate 
the optional forms). In addition, Sec.  1.401(a)-20, Q&A-36, provides 
that the written explanation must comply with the requirements set 
forth in Sec.  1.401(a)-11(c)(3). Section 1.401(a)-11(c)(3) was issued 
prior to the enactment of section 417, and provides rules relating to 
written explanations that were required prior to a participant's 
election of a preretirement survivor annuity or election to waive a 
joint and survivor annuity. Section 1.401(a)-11(c)(3)(i)(C) provides 
that such a written explanation must contain a general explanation of 
the relative financial effect of these elections on a participant's 
annuity.
    In addition, under section 411 and Sec.  1.411(a)-11(c), so long as 
a benefit is immediately distributable (within the meaning of Sec.  
1.411(a)-11(c)(4)), a participant must be informed of his or her right 
to defer that distribution. This requirement is independent of the 
section 417 requirements addressed in these proposed regulations.
    Concerns have been expressed that, in certain cases, the 
information provided to participants under section 417(a)(3) regarding 
the available distribution forms does not adequately enable them to 
compare those distribution forms without professional advice. In 
particular, participants who are eligible for both subsidized annuity 
distributions and unsubsidized single-sum distributions may be 
receiving notices that do not adequately explain the value of the 
subsidy that is foregone if the single-sum distribution is elected. In 
such a case, merely disclosing the amount of the single-sum 
distribution and the amount of annuity payments may not adequately 
enable those participants to make an informed comparison of the 
relative values of those distribution forms, even if the interest rate 
used to derive the single sum is disclosed. Furthermore, questions have 
been raised as to how the relative values of optional forms of benefit 
are required to be expressed under current regulations. Accordingly, 
these proposed regulations are being issued to propose disclosure 
requirements that would enable participants to compare the relative 
values of the available distribution forms using more readily 
understandable information.

Explanation of Provisions

    The proposed regulations would consolidate the content requirements 
applicable to explanations of QJSAs and QPSAs under section 417(a)(3), 
and would specify rules for disclosing the relative value of optional 
forms of benefit as part of the QJSA explanation. Similar to the 
requirements in the current regulations, the required explanation must 
contain, with respect to each of the optional forms of benefit 
presently available to the participant, a description of the optional 
form of benefit, a description of the eligibility conditions for the 
optional form of benefit, a description of the financial effect of 
electing the optional form of benefit, a description of the relative 
value of the optional form of benefit, and a description of any other 
material features of the optional form of benefit. Further, as under 
the current regulations, the QJSA explanation would be permitted to be 
made either by providing the participant with information specific to 
the participant, or by providing the participant with generally 
applicable information and offering the participant the opportunity to 
request additional information specifically applicable to the 
participant with respect to any optional forms of benefit available to 
the participant. The proposed regulations would clarify that a defined 
contribution plan is not required to provide a description of the 
relative values of optional forms of benefit compared to the value of 
the QJSA.
    The proposed regulations would provide additional guidance 
regarding the required description of the relative values of optional 
forms of benefit compared to the value of the QJSA and the content of 
the required disclosure of relative values. Under the proposed 
regulations, the description of the relative value of an optional form 
of benefit compared to the value of the QJSA 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. In order to 
make this comparison, the benefit under one or both optional forms of 
benefit must be converted, taking into account the time value of money 
and life expectancies, so that both are expressed in the same form. The 
proposed regulations give several examples of techniques that may be 
used for this comparison: expressing the actuarial present value of the 
optional form of benefit as a percentage or factor of the actuarial 
present value of the QJSA; 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 of benefit; or stating the 
actuarial present value of both the QJSA and the optional form of 
benefit. For purposes of providing a description of the relative value 
of an optional form of benefit compared to the value of the QJSA (and 
also for purposes of comparing the financial effect of the distribution 
forms available to a participant), a plan would be permitted to provide 
reasonable estimates (e.g., estimates based on data as of an earlier 
date than the annuity starting date or an estimate of the spouse's 
age). If estimates are used, the participant has a right to a more 
precise calculation upon request.
    Since disclosing the relative value of every optional form of 
benefit regardless of the degree of subsidy may be too burdensome, and 
may provide participants with information that appears more precise 
than is warranted based on the inexact nature of the actuarial 
assumptions used, the proposed regulations would provide some ways to 
simplify this disclosure of relative values of optional forms of 
benefit. One way in which this disclosure would be simplified is 
through a banding rule under which two or more optional forms of 
benefit that have approximately the same value could be grouped for 
purposes of disclosing relative value. Under these proposed 
regulations, two or more optional forms of benefit would be treated as 
having approximately the same value if those optional forms of benefit 
vary in relative value in comparison to the value of the QJSA by 5 
percentage points or less when the relative value comparison is made by 
expressing the actuarial present value of each of those optional forms 
of benefit as a percentage of the actuarial present value of the QJSA. 
For such a group of optional forms of benefit, the requirement relating 
to disclosing the relative value of each optional form of benefit 
compared to the value of the QJSA could be satisfied by disclosing the 
relative value of any one of the

[[Page 62420]]

optional forms in the group compared to the value of the QJSA, and 
disclosing that the other optional forms of benefit in the group are of 
approximately the same value. If a single-sum distribution is included 
in such a group of optional forms of benefit, the single-sum 
distribution must be the distribution form that is used for purposes of 
this comparison. The relative value of all optional forms of benefit 
that have an actuarial present value that is at least 95% of the 
actuarial present value of the QJSA may be described by stating that 
those optional forms of benefit are of approximately equal value to the 
value of the QJSA. Thus, these rules would permit a plan that provides 
no subsidized forms of benefit to state the comparison of relative 
values simply by stating that all distribution forms are approximately 
equal in value to the QJSA.
    Another way in which this disclosure may be simplified is through 
the use of representative values: if, under the banding rule, two or 
more optional forms of benefit are grouped, a representative relative 
value for all of the grouped options could be used as the approximate 
relative value for all of the grouped options, in lieu of using the 
relative value of one of the optional forms of benefit in the group. 
For this purpose, a representative relative value is any relative value 
that is not less than the relative value of the member of the group of 
optional forms of benefit with the lowest relative value and is not 
greater than the relative value of the member of that group with the 
highest relative value when measured on a consistent basis. For 
example, if three optional forms have relative values of 87.5%, 89%, 
and 91% of the value of the QJSA, all three optional forms can be 
treated as having a relative value of approximately 90% of the value of 
the QJSA.
    The proposed regulations would also permit the disclosure of the 
financial effect and relative value of optional forms of benefit to be 
made in the form of generally applicable information rather than 
information specific to the participant, provided that information 
specific to the participant regarding the optional form of benefit must 
be furnished at the participant's request. Thus, under the proposed 
regulations, in lieu of providing a QJSA explanation that describes 
each optional form that is presently available to the participant, the 
generalized QJSA explanation need only reflect the generally available 
optional forms of benefits, along with a reference to where a 
participant can obtain the information for any other optional forms of 
benefits (such as optional forms from prior benefit structures for 
limited groups of employees) that are presently available to the 
participant.
    With respect to the generally available optional forms of benefits, 
in lieu of providing a statement of financial effect and relative value 
comparison that is specific to the participant, the generalized QJSA 
explanation is permitted to include a chart or other comparable device 
showing a series of examples of financial effects and relative value 
comparisons for hypothetical participants. The examples in the chart 
should reflect a representative range of ages for the hypothetical 
participants and use reasonable assumptions for the age of the 
hypothetical participant's spouse and any other variable that affects 
the financial effect, or relative value, of the optional form of 
benefit. The chart must be accompanied by a general statement 
describing the effect of significant variations between the assumed 
ages or other variables on the financial effect of electing the 
optional form of benefit and the comparison of the relative value of 
the optional form of benefit to the value of the QJSA. A generalized 
QJSA explanation that includes this chart must also include the amount 
payable to the participant under the normal form of benefit, either at 
normal retirement age, or payable immediately. In addition, this chart 
must be accompanied by a statement that includes an offer to provide, 
upon the participant's request, a statement of financial effect along 
with a comparison of relative values that is specific to the 
participant for one or more presently available optional forms of 
benefit, and a description of how a participant may obtain this 
additional information. Thus, with respect to those optional forms of 
benefit for which additional information is requested, the participant 
must receive a QJSA explanation specific to the participant that is 
based on the participant's actual age and benefit.
    The proposed regulations would provide rules governing the 
actuarial assumptions to be used in comparing the value of an optional 
form of benefit to the QJSA. If an optional form of benefit is subject 
to the requirements of section 417(e)(3) and Sec.  1.417(e)-1(d) (e.g., 
a single-sum distribution), any comparison of the value of the optional 
form of benefit to the value of the QJSA must be made using the 
applicable mortality table and the applicable interest rate as defined 
in Sec.  1.417(e)-1(d)(2) and (3) (or, at the option of the plan, 
another reasonable interest rate and reasonable mortality table used 
under the plan to calculate the amount payable under the optional form 
of benefit). All other optional forms of benefit payable to the 
participant must be compared with the QJSA using a single set of 
interest rates and mortality tables that are reasonable and that are 
applied uniformly for this purpose with respect to all such other 
optional forms payable to the participant. The uniform interest and 
mortality assumptions should be used regardless of whether those 
assumptions are actually used to determine the amount of benefit 
payments under any particular optional form.
    The proposed regulations would also require disclosure of 
information to help a participant understand the significance of a 
disclosure of the relative value of an optional form of benefit. Under 
the proposed regulations, the notice would be required to provide an 
explanation of the concept of relative value. Specifically, the notice 
would be required to explain that the relative value comparison is 
intended to allow the participant to compare the total value of 
distributions paid in different forms, that the relative value 
comparison is made by converting the value of the optional forms of 
benefit currently available to a common form (such as the QJSA or 
single-sum distribution), and that this conversion uses interest and 
life expectancy assumptions.
    Under the proposed regulations, a required numerical comparison of 
the value of the optional form of benefit to the value of the QJSA 
under the plan generally would be required to disclose the interest 
rate that is used to develop a required numerical comparison. However, 
if all optional forms of benefit are permitted to be treated as having 
approximately the same value after application of the banding rule 
described above, then the plan would not be required to disclose the 
interest rate used to develop a required numerical comparison to the 
QJSA for optional form of benefit that is not subject to the 
requirements of section 417(e)(3). In addition, the proposed 
regulations would require the plan to provide a general statement that 
all numerical comparisons of relative value provided are based on 
average life expectancies, and that the relative value of payments 
ultimately made under an annuity optional form of benefit will depend 
on actual longevity.
    Under the proposed regulations, both the QPSA explanation and the 
QJSA explanation must be written in a manner calculated to be 
understood by the average participant. A plan may wish to provide 
additional information beyond the minimum information that

[[Page 62421]]

would be required under these proposed regulations, in order to help an 
employee to evaluate the form of benefit that would be most desirable 
under the employee's individual circumstances. For example, the plan 
may wish to add further explanation of the effects of ill health or 
other factors influencing expected longevity on the desirability of 
electing annuity forms of distribution.
    The proposed regulations contain rules regarding the method for 
providing the QJSA explanation and the QPSA explanation. Under the 
proposed regulations, these explanations must be written explanations. 
First class mail to the last known address of the party is an 
acceptable delivery method for a section 417(a)(3) explanation. 
Likewise, hand delivery is acceptable. However, the posting of the 
explanation is not considered provision of the section 417(a)(3) 
explanation.
    These proposed regulations do not address the extent to which the 
QJSA explanation or the QPSA explanation can be provided through 
electronic media. The IRS and the Treasury Department are considering 
the extent to which the QJSA explanation and the QPSA explanation, as 
well as other notices under the various Internal Revenue Code 
requirements relating to qualified retirement plans, can be provided 
electronically, taking into account the effect of the Electronic 
Signatures in Global and National Commerce Act (ESIGN), Public Law 106-
229, 114 Stat. 464 (2000). The IRS and the Treasury Department 
anticipate issuing proposed regulations regarding these issues, and 
invite comments on these issues.

Proposed Effective Date

    The regulations are proposed to be applicable to QJSA explanations 
with respect to distributions with annuity starting dates on or after 
January 1, 2004, and to QPSA explanations provided on or after January 
1, 2004.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that qualified 
retirement plans of small businesses typically commence distribution of 
benefits to few, if any, plan participants in any given year and, 
similarly, only offer elections to waive a QPSA to few, if any, 
participants in any given year. Thus, the collection of information in 
these regulations will only have a minimal economic impact on most 
small entities. Therefore, an analysis under the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) 
of the Code, this notice of proposed rulemaking will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to written comments (preferably a signed 
original and eight (8) copies) that are submitted timely to the IRS. 
Alternatively, taxpayers may submit comments electronically to the IRS 
Internet site at http://www.irs.gov/regs. All comments will be 
available for public inspection and copying. The IRS and Treasury 
request comments on the clarity of the proposed rules and how they may 
be made easier to understand or to implement.
    A public hearing has been scheduled for January 14, 2002, at 10 
a.m. in room 4718 of the Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. All visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts at the Constitution Avenue 
entrance. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by 
January 2, 2002. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Linda S. F. 
Marshall of the Office of the Division Counsel/Associate Chief Counsel 
(Tax Exempt and Government Entities). However, other personnel from the 
IRS and Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1986

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Paragraph (c)(3) of Sec.  1.401(a)-11 is revised to read as 
follows:


Sec.  1.401(a)-11  Qualified joint and survivor annuities.

* * * * *
    (c) * * *
    (3) Information to be provided by plan. For rules regarding the 
information required to be provided with respect to the election to 
waive a QJSA or a QPSA, see Sec.  1.417(a)(3)-1.
* * * * *
    Par. 3. A-36 of Sec.  1.401(a)-20 is revised to read as follows:


Sec.  1.401(a)-20  Requirements of qualified joint and survivor annuity 
and qualified preretirement survivor annuity.

* * * * *
    A-36. For rules regarding the explanation of QPSAs and QJSAs 
required under section 417(a)(3), see Sec.  1.417(a)(3)-1.
* * * * *
    Par. 4. Section 1.417(a)(3)-1 is added to read as follows:


Sec.  1.417(a)(3)-1  Required explanation of qualified joint and 
survivor annuity and qualified preretirement survivor annuity.

    (a) Written explanation requirement--(1) General rule. A plan meets 
the survivor annuity requirements of section 401(a)(11) only if the 
plan meets the requirements of section 417(a)(3) and this section 
regarding the written explanation required to be provided a participant 
with respect to a QJSA or a QPSA. A written explanation required to be 
provided to a participant with respect to either a QJSA or a QPSA under 
section 417(a)(3) and this section is referred to in this section as a 
section 417(a)(3) explanation. See Sec.  1.401(a)-20, Q&A-37, for 
exceptions to the written explanation requirement in the case of a 
fully subsidized QPSA or QJSA, and Sec.  1.401(a)-20, Q&A-38, for the

[[Page 62422]]

definition of a fully subsidized QPSA or QJSA.
    (2) Time for providing section 417(a)(3) explanation--(i) QJSA 
explanation. See Sec.  1.417(e)-1(b)(3)(ii) for rules governing the 
timing of the QJSA explanation.
    (ii) QPSA explanation. See Sec.  1.401(a)-20, Q&A-35, for rules 
governing the timing of the QPSA explanation.
    (3) Required method for providing section 417(a)(3) explanation. A 
section 417(a)(3) explanation must be a written explanation. First 
class mail to the last known address of the participant is an 
acceptable delivery method for a section 417(a)(3) explanation. 
Likewise, hand delivery is acceptable. However, the posting of the 
explanation is not considered provision of the section 417(a)(3) 
explanation.
    (4) Understandability. A section 417(a)(3) explanation must be 
written in a manner calculated to be understood by the average 
participant.
    (b) Required content of section 417(a)(3) explanation--(1) Content 
of QPSA explanation. The QPSA explanation must contain a general 
description of the QPSA, the circumstances under which it will be paid 
if elected, the availability of the election of the QPSA, and, except 
as provided in paragraph (d)(3) of this section, a description of the 
financial effect of the election of the QPSA on the participant's 
benefits (i.e., an estimate of the reduction to the participant's 
estimated normal retirement benefit that would result from an election 
of the QPSA).
    (2) Content of QJSA explanation. The QJSA explanation must satisfy 
either paragraph (c) or paragraph (d) of this section. Under paragraph 
(c) of this section, the QJSA explanation must contain certain specific 
information relating to the benefits available under the plan to the 
particular participant. Alternatively, under paragraph (d) of this 
section, the QJSA explanation can contain generally applicable 
information in lieu of specific participant information, provided that 
the participant has the right to request additional information 
regarding the participant's benefits under the plan.
    (c) Participant-specific information required to be provided--(1) 
In general. A QJSA explanation satisfies this paragraph (c) if it 
provides the following information with respect to each of the optional 
forms of benefit presently available to the participant--
    (i) A description of the optional form of benefit;
    (ii) A description of the eligibility conditions for the optional 
form of benefit;
    (iii) A description of the financial effect of electing the 
optional form of benefit (i.e., the amount payable under the form of 
benefit);
    (iv) In the case of a defined benefit plan, a description of the 
relative value of the optional form of benefit compared to the value of 
the QJSA, in the manner described in paragraph (c)(2) of this section; 
and
    (v) A description of any other material features of the optional 
form of benefit.
    (2) Requirement for numerical comparison of relative values--(i) In 
general. The description of the relative value of an optional form of 
benefit compared to the value of the QJSA under paragraph (c)(1)(iv) of 
this section must be expressed to the participant 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. Thus, in 
performing the calculations necessary to make this comparison, the 
benefits under one or both optional forms of benefit must be converted, 
taking into account the time value of money and life expectancies, so 
that the values of both optional forms of benefit are expressed in the 
same form. For example, such a comparison may be expressed to the 
participant using any of the following techniques--
    (A) Expressing the actuarial present value of the optional form of 
benefit as a percentage or factor of the actuarial present value of the 
QJSA;
    (B) Stating the amount of the annuity that is the actuarial 
equivalent of the optional form of benefit and that is payable at the 
same time and under the same conditions as the QJSA; or
    (C) Stating the actuarial present value of both the optional form 
of benefit and the QJSA.
    (ii) Simplified presentations permitted--(A) Grouping of certain 
optional forms. Two or more optional forms of benefit that have 
approximately the same value may be grouped for purposes of a required 
numerical comparison described in this paragraph (c)(2). For this 
purpose, two or more optional forms of benefit have approximately the 
same value if those optional forms of benefit vary in relative value in 
comparison to the value of the QJSA by 5 percentage points or less when 
the relative value comparison is made by expressing the actuarial 
present value of each of those optional forms of benefit as a 
percentage of the actuarial present value of the QJSA. For such a group 
of optional forms of benefit, the requirement relating to disclosing 
the relative value of each optional form of benefit compared to the 
value of the QJSA can be satisfied by disclosing the relative value of 
any one of the optional forms in the group compared to the value of the 
QJSA, and disclosing that the other optional forms of benefit in the 
group are of approximately the same value. If a single-sum distribution 
is included in such a group of optional forms of benefit, the single-
sum distribution must be the distribution form that is used for 
purposes of this comparison. In addition, the relative value of all 
optional forms of benefit that have an actuarial present value that is 
at least 95% of the actuarial present value of the QJSA is permitted to 
be described by stating that those optional forms of benefit are 
approximately equal in value to the QJSA, or that all of those forms of 
benefit and the QJSA are approximately equal in value.
    (B) Representative relative value for grouped optional forms. If, 
in accordance with paragraph (c)(2)(ii)(A) of this section, two or more 
optional forms of benefits are grouped, the relative values for all of 
the optional forms of benefit in the group can be stated using a 
representative relative value as the approximate relative value for the 
entire group. For this purpose, a representative relative value is any 
relative value that is not less than the relative value of the member 
of the group of optional forms of benefit with the lowest relative 
value and is not greater than the relative value of the member of that 
group with the highest relative value when measured on a consistent 
basis. For example, if three optional forms have relative values of 
87.5%, 89%, and 91% of the value of the QJSA, all three optional forms 
can be treated as having a relative value of approximately 90% of the 
value of the QJSA. As required under paragraph (c)(2)(ii)(A) of this 
section, if a single-sum distribution is included in the group of 
optional forms of benefit, the 90% relative factor of the value of the 
QJSA must be disclosed as the approximate relative value of the single 
sum, and the other forms can be described as having the same 
approximate value as the single sum.
    (iii) Actuarial assumptions used to determine relative values. For 
the purpose of providing a numerical comparison of the value of an 
optional form of benefit to the value of the immediately commencing 
QJSA, the following rules apply--
    (A) If an optional form of benefit is subject to the requirements 
of section 417(e)(3) and Sec.  1.417(e)-1(d), any comparison of the 
value of the optional form of benefit to the value of the QJSA must be 
made using the applicable

[[Page 62423]]

mortality table and the applicable interest rate as defined in Sec.  
1.417(e)-1(d)(2) and (3) (or, at the option of the plan, another 
reasonable interest rate and reasonable mortality table used under the 
plan to calculate the amount payable under the optional form of 
benefit); and
    (B) All other optional forms of benefit payable to the participant 
must be compared with the QJSA using a single set of interest and 
mortality assumptions that are reasonable and that are applied 
uniformly with respect to all such optional forms payable to the 
participant (regardless of whether those assumptions are actually used 
under the plan for purposes of determining benefit payments).
    (iv) Required disclosure of assumptions--(A) Explanation of concept 
of relative value. The notice must provide an explanation of the 
concept of relative value, communicating that the relative value 
comparison is intended to allow the participant to compare the total 
value of distributions paid in different forms, that the relative value 
comparison is made by converting the value of the optional forms of 
benefit presently available to a common form (such as the QJSA or a 
single-sum distribution), and that this conversion uses interest and 
life expectancy assumptions. The explanation of relative value must 
include a general statement that all comparisons provided are based on 
average life expectancies, and that the relative value of payments 
ultimately made under an annuity optional form of benefit will depend 
on actual longevity.
    (B) Disclosure of interest assumptions. A required numerical 
comparison of the value of the optional form of benefit to the value of 
the QJSA under the plan is required to disclose the interest rate that 
is used to develop the comparison. If all optional forms of benefit are 
permitted to be grouped under paragraph (c)(2)(ii)(A) of this section, 
then the requirement of this paragraph (c)(2)(iv)(B) does not apply for 
any optional form of benefit not subject to the requirements of section 
417(e)(3) and Sec.  1.417(e)-1(d)(3).
    (3) Permitted estimates of financial effect and relative value--(i) 
General rule. For purposes of providing a description of the financial 
effect of the distribution forms available to a participant as required 
under paragraph (c)(1)(iii) of this section, and for purposes of 
providing a description of the relative value of an optional form of 
benefit compared to the value of the QJSA for a participant as required 
under paragraph (c)(1)(iv) of this section, the plan is permitted to 
provide reasonable estimates (e.g., estimates based on data as of an 
earlier date than the annuity starting date, a reasonable assumption 
for the age of the participant's spouse, or, in the case of a defined 
contribution plan, reasonable estimates of amounts that would be 
payable under a purchased annuity contract), including reasonable 
estimates of the applicable interest rate under section 417(e)(3).
    (ii) Right to more precise calculation. If a QJSA notice uses a 
reasonable estimate under paragraph (c)(3)(i) of this section, the QJSA 
explanation must identify the estimate and explain that the plan will, 
upon the request of the participant, provide a more precise calculation 
and the plan must provide the participant with a more precise 
calculation if so requested. Thus, for example, if a plan provides an 
estimate of the amount of the QJSA that is based on a reasonable 
assumption concerning the age of the participant's spouse, the 
participant can request a calculation that takes into account the 
actual age of the spouse, as provided by the participant.
    (iii) Revision of prior information. If a more precise calculation 
described in paragraph (c)(3)(ii) of this section materially changes 
the relative value of an optional form compared to the value of the 
QJSA, the revised relative value of that optional form must be 
disclosed, regardless of whether the financial effect of selecting the 
optional form is affected by the more precise calculation.
    (4) Special rules for disclosure of financial effect for defined 
contribution plans. For a written explanation provided by a defined 
contribution plan, a description of financial effect required by 
paragraph (c)(1)(iii) of this section with respect to an annuity form 
of benefit must include a statement that the annuity will be provided 
by purchasing an annuity contract from an insurance company with the 
participant's account balance under the plan. If the description of the 
financial effect of the optional form of benefit is provided using 
estimates rather than by assuring that an insurer is able to provide 
the amount disclosed to the participant, the written explanation must 
also disclose this fact.
    (d) Substitution of generally applicable information for 
participant information in the section 417(a)(3) explanation--(1) Forms 
of benefit available. In lieu of providing the information required 
under paragraphs (c)(1)(i) through (v) of this section for each 
optional form of benefit presently available to the participant as 
described in paragraph (c) of this section, the QJSA explanation may 
contain the information required under paragraphs (c)(1)(i) through (v) 
of this section for the QJSA and each other optional form of benefit 
generally available under the plan, along with a reference to where a 
participant may readily obtain the information required under 
paragraphs (c)(1)(i) through (v) of this section for any other optional 
forms of benefit that are presently available to the participant.
    (2) Financial effect and comparison of relative values--(i) General 
rule. In lieu of providing a statement of the financial effect of 
electing an optional form of benefit as required under paragraph 
(c)(1)(iii) of this section, or a comparison of relative values as 
required under paragraph (c)(1)(iv) of this section, based on the 
actual age and benefit of the participant, the QJSA explanation is 
permitted to include a chart (or other comparable device) showing the 
financial effect and relative value of optional forms of benefit in a 
series of examples specifying the amount of the optional form of 
benefit payable to a hypothetical participant at a representative range 
of ages and the comparison of relative values at those same 
representative ages. Each example in this chart must show the financial 
effect of electing the optional form of benefit pursuant to the rules 
of paragraph (c)(1)(iii) of this section, and a comparison of the 
relative value of the optional form of benefit to the value of the QJSA 
pursuant to the rules of paragraph (c)(2) of this section, using 
reasonable assumptions for the age of the hypothetical participant's 
spouse and any other variables that affect the financial effect, or 
relative value, of the optional form of benefit. The requirement to 
show the financial effect of electing an optional form can be satisfied 
through the use of other methods (e.g., expressing the amount of the 
optional form as a percentage or a factor of the amount payable under 
the normal form of benefit), provided that the method provides 
sufficient information so that a participant can determine the amount 
of benefits payable in the optional form. The chart or other comparable 
device must be accompanied by the disclosures described in paragraph 
(c)(2)(iv) of this section explaining the concept of relative value and 
disclosing certain interest assumptions. In addition, the chart or 
other comparable device must be accompanied by a general statement 
describing the effect of significant variations between the assumed 
ages or other variables on the financial effect of electing the 
optional form of benefit and the comparison of the relative value of

[[Page 62424]]

the optional form of benefit to the value of the QJSA.
    (ii) Actual benefit must be disclosed. The generalized notice 
described in this paragraph (d)(2) will satisfy the requirements of 
paragraph (b)(2) of this section only if the notice includes either the 
amount payable to the participant under the normal form of benefit or 
the amount payable to the participant under the normal form of benefit 
adjusted for immediate commencement. For this purpose, the normal form 
of benefit is the form under which payments due to the participant 
under the plan are expressed under the plan, prior to adjustments for 
form of benefit. For example, assuming that a plan's benefit accrual 
formula is expressed as a straight life annuity, the generalized notice 
must provide the amount of either the straight life annuity commencing 
at normal retirement age or the straight life annuity commencing 
immediately.
    (iii) Ability to request additional information. The generalized 
notice described in this paragraph (d)(2) must be accompanied by a 
statement that includes an offer to provide, upon the participant's 
request, a statement of financial effect and a comparison of relative 
values that is specific to the participant for any presently available 
optional form of benefit, and a description of how a participant may 
obtain this additional information.
    (3) Financial effect of QPSA election. In lieu of providing a 
specific description of the financial effect of the QPSA election, the 
QPSA explanation may provide a general description of the financial 
effect of the election. Thus, for example, the description can be in 
the form of a chart showing the reduction to a hypothetical 
participant's normal retirement benefit at a representative range of 
participant ages as a result of the QPSA election (using a reasonable 
assumption for the age of the hypothetical participant's spouse 
relative to the age of the hypothetical participant). In addition, this 
chart must be accompanied by a statement that includes an offer to 
provide, upon the participant's request, an estimate of the reduction 
to the participant's estimated normal retirement benefit, and a 
description of how a participant may obtain this additional 
information.
    (4) Additional information required to be furnished at the 
participant's request--(i) Explanation of QJSA. If, as permitted under 
paragraphs (d)(1) and (2) of this section, the content of a QJSA 
explanation does not include all the items described in paragraph (c) 
of this section, then, upon a timely request from the participant for 
any of the information required under paragraphs (c)(1)(i) through (v) 
of this section for one or more presently available optional forms 
(including a request for all optional forms presently available to the 
participant), the plan must furnish the information required under 
paragraphs (c)(1)(i) through (v) of this section with respect to those 
optional forms. Thus, with respect to those optional forms of benefit, 
the participant must receive a QJSA explanation specific to the 
participant that is based on the participant's actual age and benefit. 
In addition, the plan must comply with paragraph (c)(3)(iii) of this 
section.
    (ii) Explanation of QPSA. If, as permitted under paragraph (d)(3) 
of this section, the content of a QPSA explanation does not include all 
the items described in paragraph (b)(1) of this section, then, upon a 
timely request from the participant for an estimate of the reduction to 
the participant's estimated normal retirement benefit that would result 
from a QPSA election, the plan must furnish such an estimate.
    (e) Examples. The following examples illustrate the application of 
this section. Solely for purposes of these examples, the applicable 
interest rate that applies to any distribution that is subject to the 
rules of section 417(e)(3) is assumed to be 5\1/2\%, and the applicable 
mortality table under section 417(e)(3) and Sec.  1.417(e)-1(d)(2) is 
assumed to be the table that applies as of January 1, 2003. In 
addition, solely for purposes of these examples, assume that a plan 
which determines actuarial equivalence using 6% interest and the 
applicable mortality table under section 417(e)(3) and Sec.  1.417(e)-
1(d)(2) that applies as of January 1, 1995, is using reasonable 
actuarial assumptions. The examples are as follows:

    Example 1. (i) Participant M participates in Plan A, a qualified 
defined benefit plan. Under Plan A, the QJSA is a joint and 100% 
survivor annuity, which is actuarially equivalent to the single life 
annuity determined using 6% interest and the section 417(e)(3) 
applicable mortality table that applies as of January 1, 1995. On 
January 1, 2004, M will terminate employment at age 55. When M 
terminates employment, M will be eligible to elect an unreduced 
early retirement benefit, payable as either a life annuity or the 
QJSA. M will also be eligible to elect a single-sum distribution 
equal to the actuarial present value of the single life annuity 
payable at normal retirement age (age 65), determined using the 
applicable mortality table and the applicable interest rate under 
section 417(e)(3).
    (ii) Participant M is provided with a QJSA explanation that 
describes the single life annuity, the QJSA, and single-sum 
distribution option under the plan, and any eligibility conditions 
associated with these options. The explanation indicates that, if 
Participant M commenced benefits at age 55 and had a spouse age 55, 
the monthly benefit under an immediately commencing single life 
annuity is $3,000, the monthly benefit under the QJSA is estimated 
to be 89.96% of the monthly benefit under the immediately commencing 
single life annuity or $2,699, and the single sum is estimated to be 
74.7645 times the monthly benefit under the immediately commencing 
single life annuity or $224,293.
    (iii) The QJSA explanation indicates that the single life 
annuity and the QJSA are of approximately the same value, but that 
the single-sum option is equivalent in value to a QJSA of $1,215. 
(This amount is 45% of the value of the QJSA at age 55 ($1,215 
divided by 89.96% of $3,000 equals 45%).) The explanation states 
that the relative value comparison converts the value of the single 
life annuity and the single-sum options to the value of each if paid 
in the form of the QJSA and that this conversion uses interest and 
life expectancy assumptions. The explanation specifies that the 
calculations relating to the single-sum distribution were prepared 
using 5.5% interest and average life expectancy, that the other 
calculations were prepared using a 6% interest rate and that the 
relative value of actual annuity payments for an individual can vary 
depending on how long the individual and spouse live. The 
explanation notes that the calculation of the QJSA assumed that the 
spouse was age 55, that the amount of the QJSA will depend on the 
actual age of the spouse (for example, annuity payments will be 
significantly lower if the spouse is significantly younger than the 
participant), and that the amount of the single-sum payment will 
depend on the interest rates that apply when the participant 
actually takes a distribution. The explanation also includes an 
offer to provide a more precise calculation to the participant 
taking into account the spouse's actual age.
    (iv) Participant M requests a more precise calculation of the 
financial effect of choosing a QJSA, taking into the actual age of 
Participant M's spouse. Based on the fact that M's spouse is age 50, 
Plan A determines that the monthly payments under the QJSA are 
87.62% of the monthly payments under the single life annuity, or 
$2,628.60 per month, and provides this information to M. Plan A is 
not required to provide an updated calculation of the relative value 
of the single sum because the value of single sum continues to be 
45% of the value of the QJSA.
    Example 2. (i) The facts are the same as in Example 1, except 
that under Plan A, the single-sum distribution is determined as the 
actuarial present value of the immediately commencing single life 
annuity. In addition, Plan A provides a joint and 75% survivor 
annuity that is reduced from the single life annuity and that is the 
QJSA under Plan A. For purposes of determining the amount of the 
QJSA, the reduction is only half of the reduction that would 
normally apply under the actuarial assumptions specified in Plan A 
for determining actuarial equivalence of optional forms.
    (ii) In lieu of providing information specific to Participant M 
in the QJSA notice as set forth in paragraph (c) of this section, 
Plan A satisfies the QJSA explanation

[[Page 62425]]

requirement in accordance with paragraph (d)(2) of this section by 
providing M with a statement that M's monthly benefit under an 
immediately commencing single life annuity (which is the normal form 
of benefit under Plan A, adjusted for immediate commencement) is 
$3,000, along with the following chart showing the financial effect 
and the relative value of the optional forms of benefit compared to 
the QJSA for a hypothetical participant with a $1,000 benefit and a 
spouse who is three years younger than the participant. For each 
optional form generally available under the plan, the chart shows 
the financial effect and the relative value, using the grouping 
rules of paragraph (c)(2)(ii) of this section. Separate charts are 
provided for ages 55, 60, and 65.

------------------------------------------------------------------------
                                    Amount of
                                distribution per
        Optional form          $1,000 of immediate     Relative value
                               single life annuity
------------------------------------------------------------------------
Age 55 Commencement:
    Life Annuity............  $1,000 per month....  Approximately the
                                                     same value as the
                                                     OJSA.
    QJSA (joint and 75%       $956 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $886 per month......  Approximately the
     annuity.                                        same value as the
                                                     QJSA.
    Lump sum................  $165,959............  Approximately the
                                                     same value as the
                                                     QJSA.
Age 60 Commencement:
    Life Annuity............  $1,000 per month....  Approximately 94% of
                                                     the value of the
                                                     QJSA.
    QJSA (joint and 75%       $945 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $859 per month......  Approximately 94% of
     annuity.                                        the value of the
                                                     QJSA.
    Lump sum................  $151,691............  Approximately the
                                                     same value as the
                                                     QJSA.
Age 65 Commencement:
    Life Annuity............  $1,000 per month....  Approximately 93% of
                                                     the value of the
                                                     QJSA.
    QJSA (joint and 75%       $932 per month......  n/a.
     survivor annuity).
    Joint and 100% survivor   $828 per month......  Approximately 93% of
     annuity.                                        the value of the
                                                     QJSA.
    Lump sum................  $135,759............  Approximately 93% of
                                                     the value of the
                                                     QJSA.
------------------------------------------------------------------------

    (iii) The chart disclosing the financial effect and relative 
value of the optional forms specifies that the calculations were 
prepared assuming that the spouse is three years younger than the 
participant, that the calculations relating to the single-sum 
distribution were prepared using 5.5% interest and average life 
expectancy, that the other calculations were prepared using a 6% 
interest rate, and that the relative value of actual payments for an 
individual can vary depending on how long the individual and spouse 
live. The explanation states that the relative value comparison 
converts the QJSA, the single life annuity, the joint and 100% 
survivor annuity, and the single-sum options to an equivalent 
present value and that this conversion uses interest and life 
expectancy assumptions. The explanation notes that the calculation 
of the QJSA depends on the actual age of the spouse (for example, 
annuity payments will be significantly lower if the spouse is 
significantly younger than the participant), and that the amount of 
the single-sum payment will depend on the interest rates that apply 
when the participant actually takes a distribution. The explanation 
also includes an offer to provide a calculation specific to the 
participant upon request.
    (iv) Participant M requests information regarding the amounts 
payable under the QJSA, the joint and 100% survivor annuity, and the 
single sum.
    (v) Based on the information about the age of Participant M's 
spouse, Plan A determines that M's QJSA is $2,856.30 per month, the 
joint and 100% survivor annuity is $2,628.60 per month, and the 
single sum is $497,876. The actuarial present value of the QJSA 
(determined using the 5.5% interest and the section 417(e)(3) 
applicable mortality table, the actuarial assumptions required under 
section 417) is $525,091. Accordingly, the value of the single-sum 
distribution available to M at January 1, 2004, is 94.8% of the 
actuarial present value of the QJSA. In addition, the actuarial 
present value of the life annuity and the 100% joint and survivor 
annuity are 95.0% of the actuarial present value of the QJSA.
    (vi) Plan A provides M with a QJSA explanation that incorporates 
these more precise calculations of the financial effect and relative 
value of the optional forms for which M requested information.

    (f) Effective date. This section applies to QJSA explanations 
provided with respect to distributions with annuity starting dates on 
or after January 1, 2004, and to QPSA explanations provided on or after 
January 1, 2004.


Sec.  1.417(e)-1  [Amended]

    Par. 5. In Sec.  1.417(e)-1, paragraph (b)(2) is amended by 
removing the language ``Sec.  1.401(a)-20 Q&A-36'' and adding ``Sec.  
1.417(a)(3)-1'' in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-25338 Filed 10-4-02; 8:45 am]
BILLING CODE 4830-01-P