News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® PENSION AND BENEFITS — 4/1/08

Proposed IRS regs amend notice requirements for benefit accrual reductions

The IRS has issued proposed regulations which would amend the requirements for providing notice to certain affected persons when a plan significantly reduces benefit accruals. The proposed regulations set forth timing rules for ERISA §204(h) notices for plan amendments reducing benefit accruals which are permitted to be effective before the applicable amendment date, and reflect other changes to notice requirements made by the Pension Protection Act of 2006 (PPA; P.L. 109-280).

Current notice rules for retroactive or future reductions in benefit accruals

ERISA §204(h) imposes an excise tax when a plan administrator fails to provide, within a reasonable time before the effective date, notice of a plan amendment which provides for a significant reduction in the rate of future benefit accrual, including the elimination or reduction of an early retirement benefit or retirement-type subsidy.

Rev. Proc. 94-42 (CCH Pension Plan Guide ¶17,299N-14) sets forth procedures under which a plan sponsor may obtain approval from the Secretary of the Treasury for a retroactive amendment which reduces accrued benefits.

Code Sec. 436, added by the PPA, permits single-employer plans with certain funding shortfalls to limit benefits and benefit accruals. When such an amendment is adopted, written notice must be given to plan participants and beneficiaries within 30 days after the plan becomes subject to this benefit limitation.

Code Sec. 432, also added by the PPA, permits multiemployer plans under certain circumstances to reduce previously accrued benefits. In such cases, notice of the plan amendment must be provided at least 30 days before the effective date of the reduction. Similarly, under ERISA §4244A, a multiemployer plan in reorganization is permitted to adopt a plan amendment which reduces or eliminates certain accrued benefits attributable to employer contributions. In such cases, notice must be provided at least 6 months before the first day of the plan year in which the amendment reducing benefits is adopted.

Under ERISA §4245 , insolvent multiemployer plans (those whose benefit payments for the year exceed the resource benefit level for the plan year) must suspend benefits to the extent necessary to reduce such payments to the greater of the resource benefit level or the level of basic benefits, and must provide notice to plan participants and beneficiaries of the suspension. Under ERISA §4281, certain multiemployer terminated plans, with nonforfeitable benefits exceeding the value of the plan assets, must amend the plan to reduce benefits in excess of nonforfeitable benefits arising from increases adopted within the prior 5 years, and must provide notice to the Pension Benefit Guaranty Corporation (PBGC) and plan participants and beneficiaries within 45 days after the amendment reducing benefits is adopted or the date of the first reduced benefit payment.

Clarifications added by proposed regulations

The proposed regulations:

• Clarify that a reduced single-sum distribution resulting from an amendment to a traditional defined benefit plan to substitute the prescribed actuarial assumptions under Code Sec. 417(e)(3) , as amended by PPA, for pre-PPA actuarial assumptions, would not require a Sec. 204(h) notice;
• Adds “contributing employers” to the list of persons to whom a 204(h) notice must be provided, for amendments adopted in plan years beginning after December 31, 2007;
• Generally states that the effective date of an amendment that is permitted to be adopted retroactively is the date the amendment is put into effect on an operational basis, so that a 204(h) notice must nevertheless generally be provided at least 45 days (or 15 days for multiemployer plans) before the date the amendment is effective; and
• Provides a special timing rule, reflecting Notice 2007-6 (CCH Pension Plan Guide ¶17,135Q ), stating that for any 204(h) notice that is required to be provided in connection with an amendment to an applicable defined benefit plan that is first effective before January 1, 2009, and that limits the amount of the distribution to the account balance, the notice will not fail to be timely if provided at least 30 days before the date the amendment is first effective. After 2008, the general 45-day timing rule would apply to such amendments.

Interaction with other notice requirements

In recognition that a variety of notice requirements exist for plan amendments which reduce or eliminate accrued benefits, and to eliminate the need for a plan to provide multiple notices with substantially the same function and information to affected persons, the proposed regulations would provide that if a plan provides one of these notices in accordance with the applicable standards for such notices, the plan will be treated as having complied with the 204(h) notice requirement.

Comments requested by June 19

Comments on the proposed regulations must be received by June 19, 2008, and should be directed to CC:PA:LPD:PR (REG–110136–07), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington DC, 20044, or sent via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG– 110136–07).