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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.
While the IRS and Treasury have recently given defined benefit plans a break on their Code Sec. 411 accrual requirements, some practitioners feel that the agencies could go further in these efforts. Testifying at an October 15, 2008 IRS public hearing, experts pushed for expansion of the relief granted in Rev. Rul. 2008-7 (CCH Pension Plan Guide ¶19,948Z-220 ) to merging plans with different accrual formulas and later expanded upon in the proposed regulations that were the subject of the hearing (CCH Pension Plan Guide ¶20,262L ). Christine Mahoney, of Mercer, Robert Newman, on behalf of the ERISA Industry Committee, and Donald Segal, on behalf of JP Morgan Chase & Co., all advocated use of the “greater of the two” accrual formulas instead of the standing rule requiring aggregation of different formulas, regardless of the type of formula used or its basis.
Code Sec. 411(b)(1) provides plan sponsors three options to ensure that a defined benefit plan has adequate accruals to meet its eventual distribution needs. One option involves 3 percent of the employee’s expected benefits upon retirement (the 3-percent rule). The next restricts the rate for accruing benefits at retirement age to 133-1/3 percent of the accrual rate normally allowed (the 133-1/3 percent rule). The final method requires the sponsor to accrue amounts equal to the amount to which the participant would be entitled if he or she separated from the employer (the fractional rule).
In February 2008, the IRS released Rev. Rul. 2008-7, that provided relief to defined benefit plans by indicating that combined plans will not be disqualified for plan years beginning before January 1, 2009, solely because the plan provides benefits based on the greater of two or more different formulas. This was in contrast to the existing rule under Reg. §1.411(b)-1(a)(1) requiring plans with different accrual formulas to aggregate their accruals before determining if they met the accrual requirement under one of the three specified methods.
In June, the Service released proposed regulations extending this relief with several caveats. The combined plan is restricted to using the 1331/3 percent rule to demonstrate adequate accruals, where each plan in turn meets the 133-1/3 percent rule requirements. Additionally, each of the pre-existing plans must use a different basis for determining benefits.
Mahoney noted several changes her firm would like to see in the proposed regulations. She recommended that the IRS and Treasury open up the opportunity to use other accrual formulas besides the 133-1/3-percent rule for the “greater of the two” relief. Mahoney asserted that these other formulas were not abusive because they did not encourage backloading, in which the participant contributes more in the later years of participation rather than steadily throughout the entire savings term.
In response, Treasury Office of Tax Policy Associate Benefits Tax Counsel William Bortz posited that, even if a formula may not be abusive or encourage backloading, the IRS’s restrictions avoid uneven contributions in general. He stated, “Why shouldn’t we be concerned about good policy related to even accruals? Volatile accruals are not in participants’ interests. They find them unpredictable and difficult to understand. It’s hard to explain, it’s not very logical, and it’s not very good policy to have uneven rates of accrual. It’s a by-product of all the intermixing of multiple formulas.”
Newman retorted that the purpose of Code Sec. 411(b)(1) was truly to prevent backloading, not to avoid inconsistency in a participant’s contributions. In fact, he stated that there was a proposal during the time ERISA was being formulated to prevent frontloading by employee participants on their defined benefit plans. However, he reported that this rule was eventually taken out of the legislation.
Mahoney also argued that forced segregation of formulas using the same basis subverts the relief the regulations intended to offer. As an alternative, Mahoney pushed for the ability to use the “greater-of” rule, regardless of basis. She emphasized that, in situations such as a merger or acquisition, there is often no intent to abuse the “greater-of” rule by back-loading benefits. Rather, the plan sponsors are simply trying to ensure that equally situated employee-participants receive equal benefits. Newman added that, aside from a couple of examples, the agencies’ guidance has not specified exactly what separate basis for purposes of the “greater-of” rule means. As a result, he reasoned, even some front-loading plans could potentially fall within the backloading anti-abuse rules.
In concluding remarks, Segal agreed, stating, “we believe the different basis requirement is unnecessary...However, if you retain the different basis requirement, when you issue final regulations, additional clarity is needed. Whether or not the basis is adequately different is not clear under proposed regulations.”
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