In Notice 2007-7, the IRS issued guidance on several retirement plan provisions under the Pension Protection Act of 2006. (See GFRH&H Legal Bulletin dated August 2006 for information about the Act.)
Faster vesting schedule. The faster vesting schedule that already applies to 401(k) plan matching contributions is extended to other employer contributions under defined contribution plans (e.g., profit sharing or money purchase plan contributions), effective for plan years after December 31, 2006. The new schedule can be either three-year cliff vesting or six-year graded vesting. A plan may continue to use the old schedule for pre-2007 contributions.
Hardship withdrawals. 401(k) or 403(b) plans may now allow a participant to receive a hardship withdrawal on account of a medical, tuition or funeral expense for any beneficiary designated by the participant under the plan -- even if not the participant's spouse or legal dependent. Similarly, deferred compensation plans, including 457(b) plans, may allow an unforeseeable emergency withdrawal on account of medical, funeral or other expenses of a beneficiary other than a spouse or dependent.
Distribution notice. A qualified retirement plan may give a distribution notice to a participant as many as 180 days before the benefit commencement date (instead of 90 days beforehand under old rules). The notice must now explain the consequences of a participant's failure to postpone distribution. Until new IRS regulations become effective, plans can satisfy this requirement by adding safe harbor language included in Notice 2007-7 to their existing distribution notice.
Nonspouse beneficiary rollovers. 401(k), 403(b) and governmental 457(b) plans may permit a nonspouse beneficiary to make a direct rollover of an eligible death benefit to an individual retirement account ("IRA"). A rollover allows the beneficiary to avoid tax on the death benefit distribution. Unlike direct rollovers by participants or spouse beneficiaries, a plan is not required to offer direct rollovers for nonspouse beneficiaries. If a plan does offer this option, it must do so in a nondiscriminatory manner. Direct rollovers for nonspouse beneficiaries are not subject to the notice and 20% withholding rules that apply to participant and spouse rollovers.
Defined benefit plan lump sum payments. The Pension Protection Act changed the assumptions used to calculate whether a lump sum distribution from a defined benefit plan satisfies the maximum benefit limit. The effective date of this change was retroactive to as early as January 1, 2006 for some plans. Thus, some defined benefit plans paid lump sums during 2006 that were within the benefit limit when paid, but exceed the limit as changed by the Act. In Notice 2007-7, the IRS gives plans several options for correcting excessive distributions.
Other provisions. Notice 2007-7 also provides guidance on the ability of an individual who is over age 70 1/2 to make an IRA contribution to charity during 2006 or 2007, instead of receiving a required minimum distribution that would be taxable. Finally, the Notice includes guidance on two provisions applicable to governmental retirement plans. One exempts certain public safety employees from the 10% early distribution tax for distributions upon separation from service after age 50 (for all others, the exemption applies at age 55). The second allows certain public safety employees to avoid tax on up to $3,000 of retirement plan distributions per year used to pay for retiree medical or long-term care premiums.
If you have any questions about the Act or need more information, the members of the Gordon Feinblatt Employee Benefits Group are ready to help you.