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The Internal Revenue Service (IRS) has released final regulations permitting modification of the distribution options from defined contribution plans, effective September 6, 2000. These regulations modify the rules concerning optional forms of benefit, by permitting certain defined contribution plans to be amended to eliminate the qualified joint and survivor annuity (QJSA) as an optional form of benefit.

Elimination of Optional Forms

These final regulations provide that certain defined contribution plans will not violate the Internal Revenue Conde's anti-cutback rule under IRC 411(d)(6) if they are amended to eliminate or restrict the ability of a participant to receive payment of his accrued benefit (i.e., account balance) under a particular optional form of benefits. However, a money purchase pension plan or target benefit plan that is required to have an annuity form of benefit under IRC 417, may not eliminate this required benefit form.

The amendment may be implemented provided the alternative forms of payment available include payment in a single sum distribution at least as favorable as the options subject to elimination. Generally, the form of payment needs to make the amount payable under the plan commence as of the same date the distribution would have otherwise commenced prior to amendment.

The effective date for an amendment eliminating optional forms of distribution is delayed to a date 90 days after the affected participants receive a summary of material modifications (SMM) describing the terms of the amendment. If a is not distributed to plan participants, then the amendment may become effective on the first day of the second plan year in which the amendment is adopted. Thus, an amendment adopted during the 2001 plan year would become effective as of January 1, 2003 (assuming a calendar year plan).

Employers will want to use the new rules to eliminate overly complex and unnecessary optional forms of distribution in their forth-coming amendments and restatements to comply with recent GUST legislation.

GUST is the acronym for GATT, USERRA, SBJPA, TRA 1997 and the IRS Restructuring Act of 1998. Note that these recently enacted laws make numerous changes to the rules governing qualified retirement plans. Accordingly, most plans will need to be fully restated, not merely amended, to comply with GUST and therefore preserve tax-qualification.

In a corporate merger or acquisition, two plans may be merged and the distribution options in the acquired plan may be eliminated to the extent inconsistent with the plan sponsored by the acquiring company (providing the surviving plan included a lump sum payment). By eliminating the QJSAs, the summary plan description would be less onerous to administer.

Further, 401(k) plan sponsors may want to delete the QJSA requirement to avoid obtaining spousal consent for married participants effecting a lump sum plan distribution or direct rollover. Further, profit sharing plans and 401(k) plans would become easier to administer over the internet, since a distribution would only involve a participant's consent (and not his or her spouse's consent).

Elective Plan Transfers

The new regulations also permit a plan to provide that a participant may elect a voluntary plan-to-plan transfer of his or her entire account balance from one defined contribution plan to another without the need for a distributable event if (i) the transforer and transferee plans are of the same type, (ii) the transfer is made in connection with an asset or stock acquisition, merger or similar transaction the "same desk rule" would prohibit a distribution of benefits to employees who continue employment with the acquiring company and (iii) the transferor plan provided that the trasfer is conditioned upon a fully informed election by the participant to transfer the entire account. A fully informed election would appear to exist if the participant was advised of the optional forms of benefit that he or she is given up.

Amendments and Restatements

To comply with GUST, remedial amendment period for all non-governmental plans ends on the last day of the first plan year beginning in 2001, as set forth in Revenue Procedure 2000-27. For example, a calendar year plan must be amended by December 31, 2001, a plan with a plan year beginning May 1, 2001, must be amended by April 30, 2002.

However, Revenue Procedure 2000-20 provides that employers using, or intending to use, certain volume submitter plans will have until the later of the general remedial amendment period (i.e., the end of the 2001 plan year) or the last day of the 12th month beginning after the date the volume submitter practitioner gets approval for its volume submitter plan. Accordingly, it is likely that many plan sponsors using a volume submitter plan may have beyond the end of the 2001 plan year to submit their amended and restated plans to comply with GUST.

To that end, most plans will need to be restated and may be submitted at this time if they are volume submitter plans, except however for any plan using the ADP or ACP safe harbor rules and for profit sharing plans (including 401(k) plans) including an amendment to eliminate annuities as a form of distribution. That is, profit sharing plans, including 401(k) plans, where joint and survivor annuity rules are being eliminated as permitted by these recently issued 411(d) regulations may include these provisions, but they may not be submitted as a volume submitter plan and will therefore need to use IRS Form 5300 with a high user fee.

In any event, most employers prefer to have a full restatement prepared instead of an instrument of amendment, since it is easier to administer a plan from one complete plan document rather than from a plan with a variety of amendments attached. This is particularly true if new employees who are unfamiliar with the employer's plan are involved in plan administration. A full restatement reduces the likelihood of error in document interpretation and plan administration. Furthermore, most plans completely revise their summary plan descriptions in connection with the preparation of an amendment and restatement to incorprorate all amendments into a single document that coincides with the revised summary plan description.

Updating early in the process may require additional amendments due to prospective Internal Revenue Service guidance. Nevertheless, there is always the possibility of further IRS guidance or legislation, particularly for 401(k) plans. Although there is no way to quantify the impact of any required, subsequent changes due to future IRS guidance, any additional amendments are likely to be handled through the adoption of an approved model amendment.

The submission of an individual designed plan that is not a volume submitter plan is $700, not $125. However, if a determination letter is requested for a review of an individually designed plan of the average benefits test or the general non-discrimination test (i.e., cross-tested plan), then the IRS user fee is $1,250. Further, if a determination letter is requested for a review of the average benefits test or a general non-discrimination test for a volume submitter plan, then the user fee is $1,000.

Accordingly, practitioners need to consider whether and to what extent they wish to recommend an amendment to their client's plans. Further, practitioners need to consider whether such an amendment be included in the amendment and restatement of their client's plans for compliance with the GUST legislation.