| Test Your Human Resources Knowledge | ||
|
| Labor Law Journal Submissions | ||
|
| Labor Arbitrators' Awards and Biographies | ||
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.
from Spencer’s Benefits Reports: In comments submitted on May 11 to the Internal Revenue Service, the American Benefits Council responded to Notice 2007-14, in which the IRS requested comments on the types of benefits that may be provided by defined benefit plans. In the notice, the IRS stated that it is considering issuing guidance under IRC Secs. 401(a) and 411 to clarify the types of benefits that are permitted to be provided under a defined benefit plan.
In its comments, the Council initially urges the Treasury Department and the IRS “to exercise care in drafting new rules to ensure that the vast majority of plans are not affected or otherwise disrupted. The Council is particularly concerned about the implications any rulemaking may have for (a) early retirement window benefits and (b) plant shutdown and other similar unpredictable contingent-event benefits. The Council is not aware of any statistical data on the prevalence of these types of benefits but it is clear that early retirement window benefits and plant shutdown-type benefits are not uncommon, particularly in plans maintained in certain business sectors such as manufacturing. These types of benefits are most common in collectively bargained plans but also appear in other plans.”
Notice 2007-14 suggested that the IRS is concerned with benefits that could exceed the accrued benefits otherwise payable under a plan. In response, the Council states, “Benefits that exceed the otherwise payable accrued benefit are an important design element in the context of voluntary early retirement window programs as well as a well-established and traditional element of defined benefit plans. It would be incredibly disruptive if new guidance cast doubt on their ongoing permissibility and the Council urges the Service to preserve flexibility in window design.
“Voluntary early retirement programs have proven to be an important tool to plan sponsors as natural changes in the economy have resulted in the need for work-force reductions (such as the result of company mergers or changes in technology). Voluntary programs have benefited many thousands of union-represented employees as well as salaried employees over the years, and have helped fund retirements on more financially secure terms than would otherwise have been the case. Further, voluntary early retirement offers help both affected companies and their employees to achieve needed or desired work-force reductions without having to resort to involuntary means. Involuntary programs are generally less favorable to employees from an economic perspective (especially if delivered on an immediate taxable basis), and increase the risk of litigation between employees and their employers.”
The Council goes on to state, “Existing rules provide reasonable flexibility for designing effective voluntary early retirement programs. A program can include a so-called Social Security supplement (consistent with Section 1.411(a)-7(c)(4)(ii)), provide a subsidized (or further subsidized) early retirement benefit, and/or offer enhanced benefits (such as by adding service to a service-based design, additional dollars, or a formulaic amount that is service-based or otherwise not discriminatory). There are currently sufficient protections against discriminatory designs, both in terms of age discrimination and in terms of nondiscrimination in favor of highly compensated employees. Moreover, there are limits on the use of serial windows so that windows are the exception rather than the norm. Taken as a whole, we see little, if any, need for reform in this area and the Council urges the Service not to disrupt reasonable early retirement window practices.”
According to the Council, “Plant shutdown and other similar unpredictable contingent event benefits are also an important part of traditional defined benefit plans. Ordinarily, these benefits are restricted to participants who both (a) satisfy certain age and/or service conditions and (b) have an involuntary termination of employment. The involuntary termination of employment typically must be by reason of a plant shutdown, division elimination, or position elimination, although it may be payable simply be reason of any involuntary termination of employment after meeting age and service conditions. Plant shutdown and other similar benefits provide important protection against sudden loss of employment and can provide a valuable bridge to normal retirement.”
Notice 2007-14 suggested that the IRS is concerned about the extent to which employers exercise discretion in determining whether a participant is eligible for a contingent-event benefit, presumably raising a question under the definitely determinable requirement. In response to this concern, the Council states, “As a threshold matter, we note that determining whether an employee is eligible for a contingent-event benefit is generally a fiduciary act. It is not an act governed by unfettered employer discretion. Moreover, determining whether an employee is eligible for a contingent-event benefit is not qualitatively different than any of the many discretionary determinations that must be made in administering any employee benefit plan including, for example, determining whether a participant is a member of an eligible employee class and whether an employee has had a severance from employment. The sole question under the definitely determinable requirement should be whether an employee can reasonably determine whether they are eligible for the benefit. For these reasons, the Council urges the Service to reject the imposition of restrictive standards for contingent-event benefits. Similarly, we urge the Service to preserve the use of all contingent-event benefits that are reasonably related to involuntary severance from employment.”
Finally, the Council notes “the extreme importance of any final guidance stemming from the notice being applied prospectively and excluding from its coverage any defined benefit plan benefits that have already been approved for implementation (even if the plan amendment has not been executed). In this regard, for example, it would prove extremely disruptive to have to adjust to changes in design rules after a voluntary early retirement program has been designed and approved, and totally unworkable for programs already in the implementation stage. Designs are often collectively bargained. Changing the rules after bargaining has occurred will not just affect the pension design, but may implicate other bargained matters (relative to benefits, work-force practices, etc.). Further, designs are often determined and announced in advance of the event that will trigger the need for work-force reductions (such as under merger circumstances). Consequently, it would be impractical to apply restrictions that have already been approved for implementation, and would be even more unworkable for any program already implemented.”
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
Visit our News Library to read more news stories.
©2005-2024 CCH Incorporated or its affiliates
