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February 1, 2007

More PPA Guidance

The IRS recently issued Notice 2007-7.  This guidance addresses a potpourri of Pension Protection Act of 2006 (PPA) matters.  The majority of the Notice relates to distribution issues, and also includes some guidance on the vesting requirements of defined contribution plans.  Following is a brief summary of the guidance.

  • Minimum Vesting Requirements.  According to this guidance, a defined contribution plan can include a bifurcated vesting schedule: one for pre-PPA money, and one for post-PPA money.  Specifically, the law changed the vesting schedule for nonelective contributions to retirement plans.  The post-PPA vesting schedule requires either a 3-year cliff, or a two-to-six year graded vesting schedule.  The vesting schedule permitted for pre-PPA money can be a 5-year cliff, or three-to-seven year graded schedule.  In order to have a bifurcated vesting schedule, the plan must be able to maintain separate accounts.
  • PPA Distribution Notices.  The timing for providing a variety of distribution notices was expanded by the PPA.  A distribution notice can be provided up to 180 days (previously, 90 days), but no less than 30 days, prior to the distribution date.   The guidance goes on to explain a phase-in period for the notice window for annuities starting in 2007.  The notice must include a description of the right, if any, to defer distribution, including an explanation of the consequences of not deferring. 
  • Rollovers.  The PPA allows a rollover from a qualified plan into an inherited IRA of a non-spouse beneficiary.  The guidance clarifies that the plan does not have to allow this option.
  • Hardship Distribution.  The law provides that a hardship distribution can be made to the primary beneficiary, even if the beneficiary is not the spouse or dependent.
  • IRA Distributions to a Charity.  The law allows a tax-favored distribution to a charity for individuals aged 70½ and above for the years 2006 and 2007.  The guidance clarifies that this does not apply to a SIMPLE or SEP.
  • Distributions for Public Safety Officers
    • Health or Long Term Care Insurance.  The law provides that a $3,000 distribution from a qualified plan for the purchase of health or long term care (LTC) insurance can be made to public safety officers.  For these purposes:
      • A public safety officer includes a law enforcement officer, a firefighter, a chaplain, or member of rescue squad or ambulance crew. 
      • An eligible governmental plan from which a distribution can be made includes an IRC §401(a), 403(a), 403(b), or a 457(b) plan. 

To be eligible for the distribution, the individual must have separated from service due to disability or normal retirement age, as defined by the plan from which the distribution will be made. 

The distribution can only be for qualified premium for health insurance or qualified LTC insurance contracts for the retired public safety officer, his/her spouse and dependents.  However, a distribution for health insurance is not available to a surviving spouse or surviving child.

To be eligible for the distribution, the premium must be for insurance; it is not available for a self-insured plan. 

The individual receiving the tax-favored distribution cannot take an IRC §213(d) or §162(l) deduction, on top of the exclusion. 

The retirement plan must include, as a plan provision, this distribution option, i.e., a plan is not required to include this distribution option. 

  • Penalty-free Early Withdrawals from Defined Benefit Plans.  A distribution from a government defined benefit plan can be made to a public safety officer after age 50, without being subject to the 10% early distribution penalty.  This guidance clarifies that the penalty relief is not available if a defined benefit account is rolled into an IRA.

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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