AICPA Comments on FAB 2006-03 •
Prop. Regs. Address Application of Secs. 2036
and 2039 to Certain Annuities • IRS Releases Draft Form 1120-F and Schedule M-3 (box)

Alistair M. Nevius, J.D.

AICPA Activities

AICPA Comments on FAB 2006-03

The AICPA has submitted comments to the Department of Labor (DOL) regarding Field Assistance Bulletin (FAB) 2006-03.
 
The Pension Protection Act of 2006 (PPA ’06) Section 508(a) revised ERISA’s periodic pension benefit statement requirements. Under prior law, ERISA Sections 105(a) and 502(c)(1) required a qualified retirement plan administrator to furnish a benefit statement to any participant or beneficiary who requests such statement in writing. The benefit statement must indicate, on the basis of the latest available information, the participant’s or beneficiary’s total accrued benefit and the participant’s or beneficiary’s vested accrued benefit, or indicate the earliest date on which the accrued benefit will become vested. A participant or beneficiary is not to receive more than one benefit statement during any 12-month period. If the required statement is not timely provided, the participant or the beneficiary may bring a civil action to recover from the administrator $100 a day or other relief that a court deems appropriate.

Section 508(a) changes the benefit statement requirements to make them dependent—in part—on the plan type and the individual to whom the statement is provided. Section 508(a) requires that the benefit statement (1) be based on the latest available information; (2) include the total benefits accrued or the vested accrued benefit, or indicate the earliest date on which the accrued benefit will become vested; and (3) include an explanation of any permitted disparity or floor-offset arrangement that may be applied in determining accrued benefits under the plan.

With respect to vested benefits, the Secretary of Labor is required to provide that the requirements are met if, at least annually, the plan updates the information on vested benefits in the benefit statement or provides in a separate statement the information necessary to enable participants and beneficiaries to determine their vested benefits.

On December 20, 2006, the DOL issued FAB 2006-03 to provide guidance concerning “good faith compliance” with these new rules pending the issuance of regulations. In FAB 2006-03, the DOL states that furnishing pension benefit statement information not later than 45 days following the end of the period (calendar quarter or calendar year) will constitute good-faith compliance with the requirement to furnish a pension benefit statement in accordance with ERISA Sections 105(a)(1)(A)(i) and (ii).

The Section 508(a) requirements are different for defined-contribution plans and defined-benefit plans. The AICPA’s comments were limited to the reporting requirements for defined-contribution plans.

In its comments, the AICPA strongly recommended the removal of the 45-day requirement, given the time constraints and procedures required for administrators and plan sponsors to properly gather the data necessary to prepare participant statements for plans that do not receive the plan sponsor’s contribution until the tax return’s extended due date. In its place, the AICPA recommended that the extended due date of the Form 5500 be used as the benchmark in any future guidance issued by the DOL for participant reporting for plans utilizing accrued contributions and the accrual or modified accrual method of financial statement accounting.

For cash-basis participant-directed accounts, the AICPA recommended that participant statements be provided quarterly. It also suggested that the quarterly statement be deemed to satisfy the statutory requirement as long as it is accompanied by a statement that explains the restrictions and limitations on investments, the importance of diversification, how to contact the Social Security Administration, and the DOL’s website.

The AICPA also urged the DOL to treat participants in the pooled portion of a hybrid plan in the same manner as plans that offer only trustee-directed investments—one annual statement or periodic statements. The AICPA further recommended that the date for providing participant statements be the extended due date of the Form 5500.

The AICPA requested that the DOL allow plan sponsors at least a one-year period after the model statements have been published to implement these changes in their reporting systems. Further, it encouraged the DOL to allow a longer grace period for the 2007 plan year without penalty for plan sponsors who made a good-faith attempt to disclose but delivered participant disclosures or statements late during the 2007 plan year.

Regulations

Prop. Regs. Address Application of Secs. 2036 and 2039 to Certain Annuities

Sec. 2036 provides for the inclusion in a decedent’s estate of certain transfers the decedent made during his or her lifetime in which the decedent retained certain rights in the property. Sec. 2039 provides for the inclusion in a decedent’s estate of the value of any annuity receivable by a beneficiary by reason of surviving the decedent if such annuity was payable to the decedent. These provisions may overlap in the case of certain tax planning techniques a decedent executed during his or her lifetime that were still in place at the time of the decedent’s death. The determination of value for estate tax purposes can vary significantly depending on whether a decedent’s estate applies Sec. 2036 or Sec. 2039 in these cases. The IRS has issued proposed regulations under Secs. 2036 and 2039 to provide for the uniform application of Sec. 2036 in these cases (REG-119097-05 (6/6/07)).

The proposed regulations provide that, if a decedent transfers property during life to a trust and retains the right to an annuity, unitrust, or other income payment from, or retains the use of an asset in, the trust for the decedent’s life, the decedent has retained the right to income from all or a specific portion of the property under Sec. 2036. These transfers involve transfers to a charitable remainder trust (CRT) or a grantor retained (annuity/unitrust/income) trust (GRT). The portion of the trust corpus includible in the decedent’s gross estate is that portion of the trust corpus, valued as of the decedent’s death, necessary to yield that annual payment using the appropriate Sec. 7520 interest rate. The proposed regulations provide both rules and ex-amples for calculating the amount of the trust to be included in a decedent’s gross estate under Sec. 2036 in such a case.

The IRS acknowledges that while both Sec. 2036 and Sec. 2039 may be applicable to a CRT or GRT, it believes it is appropriate to provide a regulatory rule under which only one of these sections is to be applied in the future, in the interest of ensuring similar tax treatment for similarly situated taxpayers. The IRS gives two reasons for the choice of Sec. 2036. First, Sec. 2039 appears to have been intended to address annuities purchased by or on behalf of the decedent and annuities provided by the decedent’s employer. Second, the interests retained by grantors in a CRT or GRT are more similar to the interests addressed under Sec. 2036 than to those most clearly addressed under Sec. 2039.