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29 CFR Parts 2550 and 2578 Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

Final Rule

Employee Benefits Security Administration

29 CFR Parts 2550 and 2578
RIN 1210–AB16

Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

AGENCY: Employee Benefits Security Administration

ACTION: Interim final rule with request for comments.

SUMMARY: This document contains an interim final rule amending regulations under the Employee Retirement Income Security Act of 1974 (ERISA or the Act) that provide guidance and a fiduciary safe harbor for the distribution of benefits on behalf of participants or beneficiaries in terminated and abandoned individual account plans.
The Department is amending these regulations to reflect changes enacted as part of the Pension Protection Act of 2006, Public Law 109–280, to the Internal Revenue Code of 1986 (the Code), under which a distribution of a deceased plan participant’s benefit from an eligible retirement plan may be directly transferred to an individual
retirement plan established on behalf of the designated nonspouse beneficiary of such participant. Specifically, the amended regulations require as a condition of relief under the fiduciary safe harbor that benefits for a missing, designated nonspouse beneficiary be directly rolled over to an individual retirement plan that fully complies with
Code requirements. This interim final rule will affect fiduciaries, plan service providers, and participants and beneficiaries of individual account pension plans.

DATES: Effective and Applicability Dates: The amendments made by this rule are effective March 19, 2007. This interim final rule is applicable to distributions made on or after March 19, 2007.

Comment Date: Written comments must be received by April 2, 2007.

SUPPLEMENTARY INFORMATION:

A. Background

This interim final rule amends two regulations under ERISA that facilitate the termination of individual account plans, including abandoned individual account plans, and the distribution of benefits from such plans. The first regulation, codified at 29 CFR 2550.404a–3, provides plan fiduciaries of terminated plans and qualified termination administrators (QTAs) of abandoned plans with a fiduciary safe harbor for making distributions on behalf of participants or beneficiaries who fail to make an election regarding a form of benefit distribution, commonly referred to as missing participants or beneficiaries. The second regulation, codified at 29 CFR 2578.1, establishes a procedure for financial institutions holding the assets of an abandoned individual account plan to terminate the plan and distribute benefits to the plan’s participants or
beneficiaries, with limited liability.1 Appendices to these two regulations contain model notices for notifying participants or beneficiaries of the plan’s termination and distribution options. The safe harbor regulation provides that both a fiduciary and a QTA will be deemed to have satisfied ERISA’s prudence requirements under section
404(a) of the Act if the conditions of the safe harbor are met with respect to the distribution of benefits on behalf of missing participants from terminated individual account plans.2 In general, the regulation provides that a fiduciary or QTA qualifies for the safe harbor if a distribution is made to an individual retirement plan within the meaning of
section 7701(a)(37) of the Code. See§ 2550.404a–3(d)(1)(i). However in April 2006, when the Department published this safe harbor regulation, a distribution of benefits from an individual account plan to a nonspouse beneficiary was not considered an eligible rollover distribution under the provisions of section 402(c) of the Code and, therefore, could not be rolled over into an individual retirement plan.3 As a result, the safe harbor regulation mandated, among other requirements, the distribution of benefits on behalf of a missing nonspouse beneficiary to an account that was not an individual retirement plan. See § 2550.404a– 3(d)(1)(ii). Consequently, such distributions were subject to income tax and mandatory tax withholding in the year distributed into the account.4 The Pension Protection Act changed the characterization of certain distributions from tax exempt plans and trusts to permit such distributions to qualify for eligible rollover distribution treatment.5 Section 829 of the Pension Protection Act amended section 402(c) of the Code to permit the direct rollover of a deceased participant’s benefit from an eligible retirement plan to an
individual retirement plan established on behalf of a designated nonspouse beneficiary.6 These rollover distributions would not trigger immediate income tax consequences and mandatory tax withholding for the nonspouse beneficiary. In light of the Pension Protection Act’s changes to the Code allowing a rollover distribution on behalf of a nonspouse beneficiary into an inherited individual retirement plan with the resulting deferral of income tax consequences, the Department is amending the regulatory safe harbor for distributions from a terminated
individual account plan, including an abandoned plan, at 29 CFR 2550.404a– 3. These amendments require that a deceased participant’s benefit be directly rolled over to an inherited individual retirement plan established to receive the distribution on behalf of a missing, designated nonspouse beneficiary. These amendments eliminate the prior safe harbor condition that required a distribution on behalf of a missing nonspouse beneficiary to be
made only to an account other than an individual retirement plan. See§ 2550.404a–3(d)(1)(ii). Therefore, when these amendments become applicable, a distribution on behalf of a missing nonspouse beneficiary would satisfy this condition of the safe harbor only if directly rolled into an individual retirement plan that satisfies the
requirements of new section 402(c)(11) of the Code.7 Conforming changes are made to the content requirements of the mandated participant and beneficiary termination
notice and its model notice under the safe harbor. The amendments to 29 CFR 2578.1 also make conforming changes to the content of the required participant and beneficiary termination notice and model notice for abandoned plans. Concurrently with publication of this
rule, the Department is publishing proposed amendments to PTE 2006–06,8 which, when finalized, will clarify that the exemption provides relief to a QTA that designates itself or an affiliate as the provider of an inherited individual retirement plan for a missing, designated nonspouse beneficiary pursuant to the exemption’s conditions.
As noted in the preamble to the proposed amendments, however, the Department interprets PTE 2006–06 as currently available to the QTA for its self-selection as an inherited individual retirement plan provider subject to the conditions of the exemption.

29 CFR Part 2550
Employee benefit plans, Employee Retirement Income Security Act, Employee stock ownership plans, Exemptions, Fiduciaries, Investments, Investments foreign, Party in interest, Pensions, Pension and Welfare Benefit Programs Office, Prohibited transactions, Real estate, Securities, Surety bonds, Trusts and Trustees.

29 CFR Part 2578
Employee benefit plans, Pensions, Retirement.
For the reasons set forth in the preamble, the Department of Labor amends 29 CFR chapter XXV as follows:

Title 29—Labor
Subchapter F—Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974

PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

1. The authority citation for part 2550 continues to read as follows: Authority: 29 U.S.C. 1135; and Secretary of Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b–1 also issued under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR
1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c–1 also issued under 29 U.S.C. 1101. Sec. 2550.404c–1 also issued under 29 U.S.C. 1104. Sec. 2550.407c–3 also issued under 29 U.S.C. 1107. Sec. 2550.404a–2 also issued under 26 U.S.C. 401 note (sec. 657, Pub. L. 107–16, 115 Stat. 38). Sec. 2550.408b–1 also issued under 29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 Comp. 332, Sec. 2550.412–1 also issued under 29 U.S.C. 1112.

2. Amend § 2550.404a–3 by revising (d)(1)(ii), (d)(1)(iii)(C), (d)(2)(ii)(A), (d)(2)(iii), (d)(2)(iv), (d)(3), (e)(1)(iv), (e)(1)(v), (e)(1)(vi) to read as follows:

§ 2550.404a–3 Safe Harbor for Distributions from Terminated Individual Account Plans.
* * * * *
(d) * * *
(1) * * *
(ii) In the case of a distribution on behalf of a designated beneficiary (as defined by section 401(a)(9)(E) of the Code) who is not the surviving spouse of the deceased participant, to an inherited individual retirement plan (within the meaning of section 402(c)(11) of the Code) established to receive the distribution on behalf of the
nonspouse beneficiary; or
(iii) * * *
* * * * *
(C) An individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) offered by a financial institution other than the qualified termination administrator to the public at the time of the distribution.
(2) * * *
(ii) * * *
(A) Seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product by the individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section), and
* * * * *
(iii) All fees and expenses attendant to the transferee plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section), including investments of such plan, (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges), shall not exceed the fees and expenses charged by the provider of the plan or account for comparable plans or accounts established for reasons other than the receipt of a distribution under this section; and
(iv) The participant or beneficiary on whose behalf the fiduciary makes a distribution shall have the right to enforce the terms of the contractual agreement establishing the plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section), with regard to his or her transferred account balance, against the plan or account provider.
(3) Both the fiduciary’s selection of a transferee plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section) and the investment of funds would not result in a prohibited transaction under section 406 of the Act, unless such actions are exempted from the prohibited
transaction provisions by a prohibited transaction exemption issued pursuant to section 408(a) of the Act.
(e) * * *
(1) * * *
(iv) A statement explaining that, if a participant or beneficiary fails to make an election within 30 days from receipt of the notice, the plan will distribute the account balance of the participant or beneficiary to an individual retirement plan (i.e., individual retirement account or annuity described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) and the account balance will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity;
(v) A statement explaining what fees, if any, will be paid from the participant or beneficiary’s individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section), if such information is known at the time of the furnishing of this notice;
(vi) The name, address and phone number of the individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) provider, if such information is known at the time of the furnishing of this notice; and
* * * * *
BILLING CODE 4510–29–P

 

Subchapter G—Administration and Enforcement Under the Employee Retirement Income Security Act of 1974


PART 2578—RULES AND REGULATIONS FOR ABANDONED PLANS

3. The authority citation for part 2578.1 continues to read as follows: Authority: 29 U.S.C. 1135; 1104(a); 1103(d)(1).

4. Amend § 2578.1 by revising (d)(2)(vi)(A)(5)(ii), (d)(2)(vi)(A)(5)(iii), (d)(2)(vi)(A)(6), (d)(2)(vi)(A)(7), (d)(2)(vi)(A)(8) to read as follows:

§ 2578.1 Termination of Abandoned Individual Account Plans
* * * * *
(d) * * *
(2) * * *
(vi) * * *
(A) * * *
(5) * * *
(ii) To an inherited individual retirement plan described in§ 2550.404a–3(d)(1)(ii) of this chapter (in the case of a distribution on behalf of a distributee other than a participant or spouse),
(iii) In any case where the amount to be distributed meets the conditions in§ 2550.404a–3(d)(1)(iii), to an interestbearing federally insured bank account, the unclaimed property fund of the State of the last known address of the participant or beneficiary, or an individual retirement plan (described in§ 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this
chapter) or
* * * * *
(6) In the case of a distribution to an individual retirement plan (described in§ 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this chapter) a statement explaining that the account balance will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity;
(7) A statement of the fees, if any, that will be paid from the participant or beneficiary’s individual retirement plan (described in § 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this chapter) or other account (described in § 2550.404a– 3(d)(1)(iii)(A) of this chapter), if such information is known at the time of the furnishing of this notice;
(8) The name, address and phone number of the provider of the individual retirement plan (described in§ 2550.404a7–3(d)(1)(i) or (d)(1)(ii) of this chapter), qualified survivor annuity, or other account (described in§ 2550.404a–3(d)(1)(iii)(A) of this chapter), if such information is known at the time of the furnishing of this notice; and
* * * * *

Footnotes:
1 Under § 2578.1(d)(2)(vii)(B), a QTA is directed to make distributions in accordance with the safe harbor regulation.
2 71 FR 20830 n. 21.
3 See 26 CFR 1.402(c)–2, Q&A–12.
4 71 FR 20828 n.14.
5 Section 829 of the Pension Protection Act.
6 Section 829 of the Pension Protection Act requires that the individual retirement plan established on behalf of a nonspouse beneficiary must be treated as an inherited individual retirement plan within the meaning of Code§ 408(d)(3)(C) and must be subject to the applicable mandatory distribution requirements of Code§ 401(a)(9)(B).
7 See also I.R.S. Notice 2007–07 (January 10, 2007).
8 71 FR 20856 (April 21, 2006).

Last Updated 04/02/2008

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