5500 Preparer's Manual for 2012 Plan Years
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The IRS has issued proposed regulations that would provide an additional limited exception to the anti-cutback rules of Code Sec. 411(d)(6) to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied. The proposed regulations would apply to plan amendments that are adopted and effective after August 31, 2012.
Conditions for amending plan
Under Code Sec. 436(d)(2), a single-employer defined benefit plan must provide that, during any period in which the plan sponsor is a debtor in bankruptcy, the plan may not make any "prohibited payment." Code Sec. 436(d)(5) defines a "prohibited payment" as: (1) generally, any payment, in excess of the monthly amount paid under a single life annuity; (2) any payment for the purchase of an irrevocable commitment from an insurer to pay benefits; and (3) any other payment specified by regulations.
The proposed regulations would permit a single-employer plan that is covered under ERISA §4021 to be amended to eliminate an optional form of benefit that includes a "prohibited payment," provided that four conditions are satisfied on the later of the date the amendment is adopted or effective. The four conditions are as follows.
First, the enrolled actuary of the plan has certified that the plan’s adjusted funding target attainment percentage for the plan year that contains the applicable amendment date is less than 100%.
Second, the plan is not permitted to pay any prohibited payment, due to application of the requirements of Code Sec. 436(d)(2) and ERISA §206(g)(3)(B), because the plan sponsor is a debtor in a bankruptcy case (that is, a case under title 11, United States Code, or under similar Federal or State law).
Third, the court overseeing the bankruptcy case has issued an order, after notice to each affected party and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan or an involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed).
Fourth, the PBGC has issued a determination that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed) and that the plan is not sufficient for guaranteed benefits.
Under the proposed regulations, a judicial determination must be made, after notice to each affected party (including each plan participant, each employee organization representing plan participants, and the PBGC) and a hearing, that the amendment is necessary to avoid termination of the plan in a distress or involuntary termination before the plan sponsor emerges from bankruptcy. The primary purpose of this notice and hearing requirement is to afford plan participants who may be affected the opportunity to be heard on whether the amendment is necessary to avoid plan termination.
A public hearing will be held on the proposed regulations. Written or electronic comments must be received by August 20, 2012.
Source: 77 FR 37349, June 21, 2012.
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