IRS Proposes Annuity Disclosure Changes

October 7, 2002 ( - The Internal Revenue Service (IRS) has proposed that requirements for explanations given to participants about two types of annuities be consolidated and has proposed a disclosure of the value of certain option benefits.

In  REG-124667-02 , the IRS said that it wanted to bring together the participant explanation for qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA).

Current rules provide that participants must get:

  • a written explanation of the annuity
  • the right to waiving such annuity
  • an explanation of the effect of such a waiver
  • the right to revoke such election
  • an explanation of the spouse’s rights.

The IRS proposal requires that the explanations also include:

  • a written explanation to describe all available optional forms of benefits
  • eligibility conditions
  • the financial effect of electing the benefit, including the value relative to other forms
  • other material features.

The regulations are proposed to be applicable to QJSA explanations with annuity starting dates on or after January 1, 2004, and to QPSA explanations provided on or after that date. A public hearing is planned for January 14, 2003.

Defined benefit plans and some defined contribution plans are required to provide vested benefits as a QJSA that provides at least half the value of benefits to a spouse, and is worth at least as much as the actuarial equivalent of a single annuity or any optional form of benefit under the plan.

A QPSA entitles a surviving spouse at least the amount entitled under a QJSA if the participant dies before retiring.

The new regulations require plans to describe the relative value of optional forms of benefit to a QJSA as a “meaningful comparison” void of necessary additional calculations using interest or mortality assumptions, and such that the value of the optional benefit and QJSA are expressed in the same form.

Noting that disclosure of the relative value of every optional form of benefit may be burdensome, the proposed regulations provide a banding rule by which forms of benefit with actuarial values within five percentage points of one another can be grouped for purposes of disclosing their relative value.