WASHINGTON -- The IRS issued new regulations that simplify defined contribution plan mergers, allow transfers of money between plans and enable service providers to create entirely paperless, Internet-based plans.
The rules were effective Sept. 6.
One change is defined contribution plan sponsors can eliminate some forms of distributions of participant's accounts such as annuities and installments, and can more easily transfer assets from one defined contribution plan to another.
Attorneys and industry insiders predict that most defined contribution plan sponsors will eliminate all but lump-sum distributions in the 2001 plan year.
"This is definitely a significant step," said David Wray, president of The Profit Sharing/401(k) Council of America, Chicago.
Before now, Internal Revenue Service regulations required that plans continue all existing options for payment of defined contribution account balances when a participant terminated employment. This was especially burdensome in mergers and acquisitions.
Even if the two defined contribution plans used annuities, but had different types, they both had to be kept, Mr. Wray said.
Moreover, under the so-called "same desk rules," the IRS did not always permit plan sponsors to transfer money between defined contribution plans even within their own company.
Officials are working on similar help for defined benefit plan sponsors, although defined benefit plans are more complicated. For one thing, they have to include an annuity payment option.
"We have to protect the participants, but we should get rid of stuff that is not valuable," a Treasury Department official said.
Less than 0.5% of participants with annuity options available chose an annuity in 1997, according to the PSCA.
In a merger, the new rules will allow company B employees to step into the shoes of company A employees and into their benefit plans and let company B plans be terminated, said Anthony Da Silva, partner with KPMG LLP, New York.
Having a large array of payment options added extra fiduciary burdens for the plan sponsor, said Dennis Leybold, partner in Portland, Ore.-based law firm Stoel Rives LLP. For example, the plan sponsor has a fiduciary obligation to choose a good annuity program.
The new rules also will help with administering defined contribution plans on the Internet, said C. Frederick Reish, partner in Los Angeles-based law firm Reish & Luftman.
Under the old rules, 401(k) and other defined contribution plans could not be entirely paperless and web-based, he said. If a plan provided for an annuity payment option and the participant was married, in order for the participant to obtain a loan or distribution from the plan, the participant would have to get signed permission from his or her spouse that was either notarized or signed in front of a plan official, Mr. Reish explained. So far, this cannot be done online. Where there is only a lump sum option, there is no need for spouse's consent and therefore, the new rules allow service providers to offer truly paperless defined contribution plans, he said.