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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.
The IRS has clarified that the notice that must be provided to participants and beneficiaries in underfunded plans subject to funding-based restrictions on lump-sum payments need not be furnished to parties in pay status who would not be eligible for lump-sum payments whether or not the plan was subject to the benefit restriction.
Participant notice of limits on distributions and benefit accruals
The plan administrator of a single-employer defined benefit plan must provide written notice to plan participants and beneficiaries within 30 days of the plan becoming subject to the limits on unpredictable contingent event benefits and accelerated benefit distributions under Code Sec. 436 and ERISA §206(g). The notice must also be provided for a plan that is experiencing a severe funding shortfall and subject to the limits on benefit accruals.
The notice must be provided within 30 days after the valuation date for the plan year in which the adjusted funding target attainment percentage for the plan year is less than 60 percent, or, if earlier, the date the percentage is deemed to be less than 60 percent.
$1,000 civil penalty. The DOL may impose a civil penalty of up to $1,000 per day for each failure by a person to provide the required notice.
Final rules provide procedural framework for assessment of penalties for failure to provide notice. Final rules issued by EBSA, effective March 3, 2009, set forth rules for the computation of the maximum penalty amount, identify circumstances under which a penalty may be assessed, establish procedural rules for service and filing, and provide plan administrators with a mechanism by which to contest a penalty assessment and request an administrative hearing. The final regulations stress that the penalty is a personal liability of the plan administrator that may not be transferred to the plan as a reasonable expense of plan administration. However, the final rules authorize the DOL to waive or reduce the penalty assessment upon a showing by the plan administrator, in a written reasonable cause statement, of compliance or mitigating circumstances regarding the degree or willfulness of noncompliance.
Notice to parties not in pay status
The final regulations did not address the application of the required ERISA §101(j) notice to participants and beneficiaries who are not directly or indirectly affected by the funding based limitations. Absent specific guidance, issues have been raised, such as whether plans subject to a limitation on lump-sum payments would need to provide the notice to participants in pay status who would be unable to elect a lump-sum distribution, even if the plans were not subject to the funding based restriction. This concern has assumed particular urgency among plans that, following certification of their adjusted funding target attainment percentage by October 1, 2009, are subject to benefit restrictions and need to provide the required notice in order to avoid penalties.
The IRS acknowledges that relieving plans of the need to provide the notice to participants and beneficiaries to whom a limitation would not be applicable would reduce plan costs and administrative burdens, as well as mitigate potential participant confusion. Therefore, the IRS has clarified that ERISA §101(j) does not require notice of benefit restrictions affecting the availability of lump-sum payments to be provided to participants and beneficiaries in pay status who would not be able to elect a lump-sum payment, irrespective of the imposition of a funding based restriction.
CCH Note: The Treasury Department was authorized by the Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458) to prescribe rules (in consultation with the Labor Department) governing the ERISA-required notice of funding based limitations on distributions. The instant guidance has been issued pursuant to this authority. In addition, the IRS has further indicated that it will set forth (and presumably expound upon) the relief in upcoming guidance.
Source: IRS Employee Plans News, Special Edition, October 2009.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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