The Pension Protection Act of 2006 added or revised a number of notice requirements under the Internal Revenue Code and ERISA. One notice that initially received little attention is a requirement that participants in defined benefit and defined contribution plans (including 401(k) plans) be given notice before they receive a distribution from the plan of the right to defer distribution. The Pension Protection Act provision requiring the notice of the right to defer distribution (Section 1102(b)) is brief and provides little guidance on what information should be included in the notice or when the notice requirement was effective.
The Internal Revenue Service has issued guidance (Notice 2007-7) clarifying that this notice requirement is effective January 1, 2007 for calendar year plans. For fiscal year plans, the requirement is effective on the first day of the fiscal year beginning after January 1, 2007. This IRS guidance provides a safe harbor for describing the right to defer that, until regulations are issued, plans will satisfy content requirements if the notice is written in a manner reasonably calculated to be understood by the average participant and includes the following information:
(a) in the case of a defined benefit plan, a description of how much larger benefits will be if the commencement of distributions is deferred; (b) in the case of a defined contribution plan, a description indicating the investment options available under the plan (including fees) that will be available if distributions are deferred; and (c) the portion of the summary plan description that contains any special rules that might materially affect a participant’s decision to defer. For purposes of clause (a), a plan administrator can use a description that includes the financial effect of deferring distributions, as described in [Treas. Reg.] § 1.417(a)(3)-1(d)(2)(i), based solely on the normal form of benefit.
Employers who rely on third parties to handle applications for distributions from a retirement plan should contact those providers to determine how to implement the notice requirements. Employers who handle applications for distribution in-house will need to supplement the material that is provided to the participant before a plan makes a distribution. Employers may wish to contact legal counsel for review of draft notices and to discuss this and other notice requirements under the Pension Protection Act.
Notice 2007-7 is available at the IRS web site (http://www.irs.gov/pub/irs-drop/n-07-07.pdf). Please contact the attorney with whom you work if there is anything we can do to assist you with the notices.
Originally appeared in Dorsey's Benefits and Compensation Update