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Trust Examination Manual
US
Department of Labor
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).
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