Compliance December 27, 2006

IRS Calls for Comment on PPA In-Service Payout Provision

December 27, 2006 (PLANSPONSOR.com) - Federal regulators have turned to the public for comment on how to formulate guidance on "phased retirement" in-service plan distributions as provided for by the Pension Protection Act (PPA).
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In Notice 2007-8, the US Treasury Department and the Internal Revenue Service (IRS) requested the input about Section 401(a)(36), which was added by the PPA’s Section 905(b).

According to the PPA, for plan years beginning after December 31, 2006, “a pension plan does not fail to qualify under §401(a) solely because the plan provides that a distribution may be made to an employee who has attained age 62 and who has not separated from employment at the time of the distribution,” the notice stated.

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The regulators are asking for comments on a series of issues relating to Section 401(a)(36), including:

  • whether an in-service distribution to a participant who is at least age 62, but not yet the normal retirement age, should be capped at the actuarial equivalent of the normal retirement age benefit;
  • how to characterize subsidized benefits that are distributed to a participant who has attained age 62, but still is in-service and younger than normal retirement age, for purposes of Section 411; and
  • whether final regulations permitting in-service distributions at age 62, under a bona fide phased retirement program, still are needed given the ability of plans to permit such distributions under the newly enacted section.

Regulators first proposed the idea of a phased retirement in November 2004 with suggested  regulations that would allow a qualified pension plan to make in-service distributions before normal retirement age under a bona fide phased retirement program (See IRS Puts Out “Phased Retirement” Proposal ).


The latest IRS notice said written comments are due by April 16, 2007, and should be sent to: CC:PA:LPD:DRU (Notice 2007-8), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044.

Comments may be hand delivered between the hours of 8 a.m. and 5 p.m., Monday through Friday, to the courier’s desk at IRS Building and marked: Attn: CC:PA:LPD:DRU (Notice 2007-8), 1111 Constitution Avenue, NW, Washington D.C. Comments also may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007-8).

Text of the latest notice is  here .  More information about the tax implications of PPA’s new provisions is  here .

Opinions December 26, 2006

IMHO: Deal or No Deal?

Deals like the one announced on Friday by The 401(k) Company, Nationwide, and Schwab are the kind of thing that gives plan sponsors heartburn.
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Not that one in particular, I should hasten to add—one could have the same queasiness about the recent Great-West/US Bank deal (see  Great-West Sweeps Up More 401(k) Business ), the sale of Southeastern Employee Benefit Services (see  First Charter Lets Go of Recordkeeping Unit ), or just about any structural change at a 401(k) recordkeeper.

The reasons for that angst are obvious, I would suspect.   Change—even change for the better—is frequently disruptive to the human psyche.   Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it.   And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

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There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; even when that change is the product of a desperate quest driven by a truly awful service relationship.   But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation.   Particularly because, IMHO, that kind of change calls for at least a passing review of what the change means to the plan.   

Some changes are less impactful than others on the plan’s daily administration, of course.   Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so.   Change that requires communication to participants is anathema to most plan sponsors (and trust me, when a local provider engages in a big financial transaction, the media will cover it, and participants WILL ask).  

On the other hand, changes that are merely structural in nature can be a big yawn—and changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as you might think (though not as common as the post-announcement press releases would have you believe, either).     

Regardless of whether the change appears to be good, bad, or inconsequential on its face, you need to ask—and get an answer to—the question “What does this mean to us?”  

And the question only you can answer—”What are you going to do about it?”

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