The IRS released Notice 2007-7 this week. This Notice provides guidance with respect to changes made by the Pension Protection Act of 2006 (“PPA”) to various rules relating to distributions from retirement plans and certain IRAs. Even though immediate amendments are not required, plan administrators and their service providers should be aware of these changes and their effect on plan administration. In summary, the Notice provides for the following:
- Lump sum distributions from pension plans – Lump sum distributions from pension plans must be converted to equivalent annuities in order to apply the 415 limits on the amount of benefit. The PPA changes the interest rate assumption that must be used for this conversion effective for plan years beginning after December 31, 2005. The notice provides three methods for correcting any excess distributions that may have been made during 2006.
- Hardship distributions – Beginning August 17, 2006 defined contribution plans, including 401(k) plans, 403(b) plans, governmental 457(b) plans and plans governed by 409A, that permit hardship distributions may treat a participant’s beneficiary under the plan as a spouse or dependent for purposes of determining whether the participant has incurred a hardship or unforeseeable financial emergency. For example, under 401(k) plans and 403(b) plans, if all other hardship requirements are satisfied, distributions may be made due to medical, tuition and funeral expenses of a participant’s beneficiary. For this purpose, the beneficiary must be the individual named under the plan who has an unconditional right to part or all of the participant’s account balance upon the participant’s death.
- Rollovers – After December 31, 2006, in lieu of an actual distribution to a non-spouse beneficiary, a plan may allow the beneficiary to elect a direct rollover to an IRA. The notice provides guidance on making the direct rollover, including how the IRA should be established and the minimum distributions that must be made from the IRA.
- Faster vesting of nonelective employer contributions – Nonelective employer contributions made for plan years beginning after December 31, 2006 must vest no less rapidly than under either a 3-year cliff schedule or a graded 2 to 6-year schedule. A plan may retain a separate vesting schedule for contributions made for plan years before 2007.
- Distribution notices – The PPA made certain changes to the notice requirements relating to distributions, including allowing a notice to be provided as much as 180 days before the annuity starting date and requiring the description of a participant’s right to defer a distribution to include a description of the consequences of failing to defer receipt of a distribution. The change to the 180-day period affects both the special tax notice (rollover notice) and the qualified joint and survivor annuity notice. The changes apply to notices issued during plan years beginning after December 31, 2006, regardless of the applicable annuity starting date, and plan administrators must make reasonable efforts to comply until the applicable regulations are amended.
Finally, the notice addresses charitable contributions, which may be made in 2006 and 2007 directly from an IRA by individuals who have reached age 70½, and early distributions to public safety employees as well as distributions to pay for accident or health insurance for public safety officers.