Show Me the (Monthly) Money!

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Seyfarth Synopsis: On Tuesday, August 18, 2020, the Department of Labor’s Employee Benefits Security Administration (EBSA) released an interim final rule related to a new disclosure that will need to be provided as a part of defined contribution plan benefit statements. The new disclosure will show the participant’s plan benefit as a monthly amount calculated as if the total plan account balance was used to provide certain lifetime income streams. The interim final rule and accompanying fact sheet describe how to calculate the amounts to be provided under this new disclosure, along with model language to be given to participants to explain the calculations and explain the fact that the calculations are merely estimates and not guarantees.

Benefits under defined contribution plans are normally expressed as a lump-sum account balance. While the DOL in 2013 issued an advance notice of proposed rulemaking that considered requiring account balance plans to include lifetime income illustrations on benefit statements, the DOL never actually proposed such a rule. However, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), enacted at the end of 2019, amended ERISA to require plan administrators of defined contribution plans to include a “lifetime income disclosure” on at least one benefit statement each year. This disclosure requires information showing a participant’s plan benefit in the form of single life and joint and survivor income streams. Congress’s goal was to help participants better understand how their lump-sum plan savings could convert into a lifetime monthly income stream. The DOL’s interim final rule contains assumptions that must be used for calculating the monthly amounts to be disclosed and explanatory model language.

Under the new rule, plan administrators will show monthly income estimates under two scenarios: first, as a single life income stream (such as with a single life annuity); and second, as an income stream that includes a survivor benefit (such as with a joint and survivor annuity). The rule includes several prescribed assumptions to be used to convert the lump-sum account balance into the lifetime income streams. Specifically, for purposes of the calculation, payments are assumed to begin on the last day of the benefit statement period and the participant is assumed to be age 67 on the date payments begin, unless the participant is actually older than age 67. Additionally, for calculating the income stream with a survivor benefit, the participant’s assumed spouse is assumed to be the same age as the participant and the survivor benefit is calculated as 100% of the participant’s benefit (i.e., a 100% QJSA). The interest rate to be used for the calculation is the 10-year constant maturity Treasury rate, and the mortality table to be used is the table described in section 417(e)(3) of the Internal Revenue Code (i.e., the table used for calculating the minimum present value of an accrued benefit under a defined benefit plan). The new disclosure must include an explanation of what these lifetime income illustrations mean and what assumptions were used. The interim final rule includes model language for these explanations.

The interim final rule provides some flexibility for calculating the amounts for the new disclosure for plans that offer distribution annuities through an insurance company. In that situation, the amounts required to be disclosed may be calculated using the terms of the insurance contract, and the rule provides special model explanatory language to be used under this alternate disclosure method. The interim final rule also provides special disclosure rules for a plan that allows a participant to purchase, or make continuing contributions towards the purchase of, a deferred annuity from an insurance company.

The new disclosure must be provided to plan participants at least annually.

To assuage plan fiduciaries concerns regarding the potential for liability caused by these disclosures, the interim final rule provides that plan administrators, fiduciaries, and sponsors will not be liable under Title I of ERISA solely for providing the information on the lifetime income amounts if the assumptions described in the interim final rule are used to calculate such amounts and either the language used in the disclosure matches the model language provided in the interim final rule, or is substantially similar in all material respects to that model language.

The interim final rule will be effective 12 months after publication in the Federal Register, but the EBSA intends to issue a superseding final rule within 12 months. Thus, while sponsors and fiduciaries should start preparing for this new disclosure requirement, final determinations should wait for the EBSA to issue its final rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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