The Internal Revenue Service made the decision not to provide transitional relief under Section 829 of the Pension Protection Act for years prior to 2006 regarding nonspouse beneficiary rollovers, an Internal Revenue Service official said March 9.

Marjorie Hoffman, special counsel to the assistant chief counsel for Employee Benefits, told the Federal Bar Association's Washington, D.C., annual tax law conference, that IRS “made the decision not to provide transitional relief” for years before 2006 related to this provision. “We didn't see room for it,” she said, referring to Notice 2007-7, Miscellaneous Pension Protection Act Changes (7 PBD, 1/11/07; 34 BPR 105, 1/16/07).

Section 829 of the PPA allows nonspouse beneficiaries to roll over to an individual retirement account, or other plan structured for that purpose, amounts inherited as a designated beneficiary. She said this section is “generating the most interest,” among the PPA distribution issues.

Referring to Notice 2007-7, regarding whether plan distributions that are rolled over to a nonspouse beneficiary's IRA can be paid over the lifetime of the beneficiary if the decedent's plan does not allow it, Hoffman said lifetime payments are available after Dec. 31, 2006, to the beneficiaries if the amounts are distributed from a qualified plan to the IRA during either the year of the plan participant's death or the year immediately after their death.

Sens. Gordon H. Smith (R-Ore.) and John F. Kerry (D-Mass.) asked Feb. 14 for further clarifications and a transition rule to Notice 2007-7 (32 BPR, 2/16/07; 34 BPR 406, 2/20/07). They said the PPA provision generally allows the IRA balance to then be withdrawn over five years or the beneficiary's life expectancy.

The senators asked for a transition rule that ensures that the distributions of certain nonspouse beneficiaries of participants who died in 2003, 2004, and 2005, are eligible under an end-of-the-year-after-death rule in the notice.

Other Distribution Rules.

Addressing other distribution rules in what she referred to as a “grab bag” of issues addressed in Notice 2007-7, Hoffman said PPA Sec. 826, relating to Section 401(k) and Section 403(b) plans treating beneficiaries the same as participants for hardship distributions for medical, tuition, or funeral expenses, are “deemed” to be a hardship.

She emphasized that these deemed hardships are an “unconditional right after death of the beneficiary.”

Regarding PPA Section 1102, relating to the notice and consent period for distributions, Hoffman said that requires a “reasonable” attempt to comply before qualifying for the safe harbor provision.

Automatic Enrollment.

Following his review of the provisions of the PPA regarding automatic enrollment and default investments to the conference, employee benefits attorney Kent Mason of Washington, D.C.-based Davis & Harman LLP, asked Hoffman to define a “uniform election” and whether a company could have different default percentage rates for different employee groups.

The PPA provides that each employee eligible to participate in the arrangement would be treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation, provided such percentage is applied “uniformly.”

Since the PPA provides a safe harbor in conjunction with the automatic enrollment provisions, Hoffman said she “would worry” about using different percentage rates for different employee groups.

Wrestling With Cash Balance Plans' Whipsaw Issue.

Whipsaw is an “issue we are wrestling with,” Hoffman said, referring to cash balance plans. She said IRS will be coming out with regulations to address this issue, although no timeline was identified for doing so.

Whipsaw, used for calculating lump-sum retirement payments, occurs if the interest rate used to project an account balance to normal retirement age is higher than the rate used to determine the present value of the annuity beginning at normal retirement age, Kent said. In such situations the value of the lump-sum payment, i.e., the present value of the annuity, will be greater than the employee's account balance, he said.

By Michael W. Wyand