DOL issues interim rule on lifetime income disclosure
TAX ALERT |
On Aug. 18, 2020, the U.S. Department of Labor (DOL) issued an interim final regulation (Interim Rule) on lifetime income illustrations that defined contribution plans must provide at least annually in participant benefit statements. The Interim Rule implements a provision of the SECURE Act.
Most defined contribution plans, like 401(k) plans, provide benefit statements showing only the participant’s lump sum amount. The Interim Rule requires plans to also show participants the amount of estimated monthly payments they could receive both as if the benefit were paid in a stream of payments over the participant’s life expectancy and a stream of payments over the life expectancy of a participant and spouse.
Interestingly, the plan must provide the stream of payments over the life expectancy of a participant and a spouse by assuming that the participant is married (even if the participant is not actually married) and that the participant’s spouse is the same age as the participant (regardless of a spouse’s actual age). The marital status assumption is a requirement of the SECURE Act.
This disclosure must be provided even where the plan does not provide any form of payment other than a lump sum. Special rules apply to plans that provide for lifetime distributions through annuity contracts.
Limitation on liability
The Interim Rule provides a limitation on liability for plan fiduciaries, plan sponsors and to other persons in the event that the estimated lifetime monthly amounts turn out to be inaccurate, as long as the plan uses the assumptions and interest rates provided in the Interim Rule.
The benefit statement must include the value of a participant’s account balance as of the last day of the statement period; the account balance expressed as a lifetime income stream payable in equal monthly payments for the life of the participant (a single life annuity); and expressed as a lifetime income stream payable in equal monthly payments for the joint lives of the participant and spouse as a qualified joint and 100% survivor annuity (QJSA).
The Interim Rule offers an example of what this disclosure might look like:
|Account Balance as of [DATE]||Monthly Payment at 67 (Single Life Annuity)||Monthly Payment at 67 (Qualified Joint and 100%Survivor Annuity)|
|$125,000||$645/month for life of participant.||
$533/month for life of participant.$533/month for life of participant’s surviving spouse.
Relevant actuarial factors
The plan is required to consider the following relevant factors when converting a participant’s account balance into a lifetime income stream: the benefit commencement date (age 67 or the participants actual age if older), the participant’s age at benefit commencement, the appropriate interest rate, and the expected mortality of the participant and the hypothetical spouse. Each of these assumptions is discussed in detail in the Interim Rule.
The Interim Rule also includes model language and a model statement for use in explaining and disclosing the lifetime benefits.
The effective date of the Interim Rule is 12 months after it is published in the Federal Register. The DOL is accepting comments on a number of issues raised by the Interim Rule.
What the Interim Rule does
1. For plan sponsors, the Interim Rule provides the plan sponsor with the following:
a. A uniform method for calculating the plan participants’ potential lifetime income stream,
b. A model benefit supplemental statement format—the plan sponsor does not have to create its own,
c. Fiduciary relief to plan sponsors that use the model benefit supplemental statement format or incorporate the model language inserts into a more customized statement, and
d. Allow the sponsor to make a clear statement that the projections are not a guarantee.
2. For plan participants, the projection provides valuable—perhaps eye opening—information about what the future purchasing power (i.e. lifetime income stream) that their defined contribution account balance may provide in the future.
Considerations for plan sponsors and plan administrators
Defined contribution plans typically do not perform the type of actuarial calculation contemplated by the Interim Rule. Under the Interim Rule, the calculation must be based on each participant’s actual age and account balance; however, using the hypothetical spouse discussed above.
For this reason, it will not be enough for plans to provide simple examples of hypothetical participants based on hypothetical actuarial factors.
The Interim Rule will likely increase the amount and type of information to be gathered, the actuarial factors appropriate for each individual person, and the increased use of third party administrators to calculate the monthly amounts. Existing systems will have to be recalibrated to produce the new benefit statements. There could be significant one-time and on-going costs.
It is not clear whether the 12 month period following the Interim Rule’s publication in the Federal Register will be adequate to get all this done.