- Plan amendments comply with the redundancy rules of these proposed regulations if they meet a three-prong test:
- 1. They eliminate optional forms of benefits that are redundant with retained options;
2. They eliminate optional forms of benefits that have annuity starting dates at least 90 days (equal to the number of days in the maximum QJSA explanation period) after the amendment adoption date; and
3. They satisfy the requirements of paragraph (e) in that they are “burdensome and of a de minimis value.”
[Treas. Reg. § 1.411(d)-3(c)(1)]
Under the regulations, an optional form of benefit that is being eliminated is “redundant” with a retained optional form if:
1. The retained optional form is available to the participant;
2. The retained optional form is in the same “family”;
3. There are no materially greater restrictions for the participant on the retained optional form; and
4. If it is a “core option,” then the eliminated optional form and the retained optional form are identical, not considering actuarial factors, annuity starting dates, pop-up provisions, and cash refund features. [Treas. Reg. § 1.411(d)-3(c)(3)]
[Treas. Reg. § 1.411(d)-3(c)(2)]
The regulations define six “families” of optional forms of benefit and indicate that any optional form of distribution that is not in this closed list represents its own family. Therefore, as long as one optional form of benefit from within the family is retained, then other optional forms of benefit from within the family may be eliminated by a plan amendment. The six families are:
1. A 50 percent to 100 percent joint and survivor annuity (regardless of term certain provisions, pop-up provisions, or cash refund features);
2. A 1 percent to 49 percent joint and survivor annuity;
3. A 1-year to 10-year certain and life annuity;
4. An 11-year or higher term certain and life annuity;
5. A 1-year to 10-year installment payment; and
6. An 11-year or higher term installment payment.
[Treas. Reg. § 1.411(d)-3(c)(4)]
- Additionally, there are rules on eliminating options that have Social Security leveling, return of employer contributions, and retroactive annuity date features. If an optional form of benefit that is being eliminated includes either a Social Security leveling feature or a refund of employee contributions feature, the retained optional form of benefit must also include that feature, and, to the extent that the optional form of benefit that is being eliminated does not include a Social Security leveling feature or a refund of employee contributions feature, the retained optional form of benefit must not include that feature. For purposes of applying this paragraph (c), to the extent an optional form of benefit that is being eliminated does not include a retroactive annuity starting date feature, the retained optional form of benefit must not include the feature. [Treas. Reg. § 1.411(d)-3(c)(5)]
- Example. The MD defined benefit plan allows distributions at any time after age 55. At each potential annuity starting date, a participant can elect a straight life annuity or any number of actuarially equivalent forms of benefits, including a straight life annuity with a COLA and a joint and survivor benefit with any continuation percentage from 1 percent to 100 percent and the ability to name any beneficiary. The plan is amended (adopted September 2, 2004 to be effective January 1, 2005) to delete all continuation percentages in the J&S option other than 25 percent, 50 percent, 75 percent, and 100 percent.
There are four “families” of optional forms of benefits before the amendment: (1) a straight life annuity; (2) a straight life annuity with COLA; (3) all joint and survivor annuities with a continuation percentage of 0 percent to 49 percent; and (4) all joint and survivor annuities with a continuation percentage of 50 percent to 100 percent. The amendment affects only the third and fourth families.
The amendment is allowed because it satisfies the three requirements under paragraph (c) of Treasury Regulations Section 1.411(d)-3 :
1. The retained 25 percent J&S annuity is redundant with all other options in the third family and the retained 50 percent, 75 percent, and 100 percent J&S annuities are each redundant with all other options in the fourth family. In addition, neither the eliminated options nor the retained options include Social Security leveling, return of employee contributions, or retroactive annuity starting date features. Furthermore, the amendment does not eliminate any of the core options, including the most valuable option for a participant with a short life expectancy;
2. The amendment is not effective with respect to annuity starting dates that are less than 90 days from the date of the amendment; and
3. Since the retained optional forms of benefit are available on the same annuity starting date and have the same actuarial present value as the optional forms that are being eliminated, then the amendment does not need to comply with the “burdensome” and “de minimis” requirements of paragraph (e).