411(d)(6)

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pdxdsm
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270832
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411(d)(6)
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2014-04-16 17:59:08
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Protected Benefits
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  1. 8:49, What benefits are protected by Code Section 411(d)(6)?
    Code Section 411(d)(6) prohibits plan amendments that have the effect of decreasing accrued benefits. The elimination of certain benefits (or features) is treated as an impermissible cutback of accrued benefits under Code Section 411(d)(6). Protected benefits include the following:

    1. Accrued benefits;

    2. Early retirement benefits and retirement-type subsidies; and

    3. Optional forms of benefit.

    [Treas. Reg. §§ 1.411(d)-3, 1.411(d)-4, Q&A 1(a)]
  2. 8:50, What plan provisions are taken into account in determining whether there is a reduction in a participant's accrued benefit?
    For purposes of determining whether a participant's accrued benefit is decreased, all of the amendments to the provisions of a plan affecting, directly or indirectly, the calculation of accrued benefits are taken into account. Plan provisions indirectly affecting the calculation of accrued benefits include, for example, provisions relating to years of service and compensation.

    In addition, two or more amendments with the same effective date are treated as one amendment and combined to determine the net effect on the accrued benefit. If there are multiple amendments within a three-year period, they will be looked at together to determine if they have the effect of reducing or eliminating protected accrued benefits.

    [Treas. Reg. § 1.411(d)-3(2)]
  3. 8:51, Can an amendment be made to the plan by only changing the plan in operation without changing plan provisions?
    No. In Frommert v. Conkright [433 F.3d 254 (2d Cir. 2006)], the Second Circuit court found no merit in Xerox's claim that an amendment may be made by plan administrators by simply changing the operation of the plan, but held that the change implemented in a summary plan description (SPD) was sufficient.
  4. 8:52, Can an employer place a greater restriction or condition on a participant’s right to a protected benefit through amendment?
    No. In accordance with Central Laborers' Pension Fund v. Heinz [541 U.S. 739 (2004)], an employer may not impose a greater restriction or condition on a participant's rights to protected benefits that have already accrued.

    Under Revenue Procedure 2005-23, the IRS imposed a requirement that all plans that were in violation of the Supreme Court's decision in Central Laborers' Pension Fundwere required to be amended and comply in operation. Revenue Procedure 2005-76 extended the time by which a plan must be in compliance to January 1, 2007.

    [Treas. Reg. § 1.411(d)-(3)(a)(3)]
  5. 8:53, What plan features are not considered Section 411(d)(6) protected benefits?
    The regulations cite the following as benefits that are not Section 411(d)(6) protected benefits and accordingly are not subject to the anti-cutback prohibition:

    1. Ancillary life insurance protection;

    2. Accident or health insurance benefits;

    3. Social Security supplements;

    4. Loans;

    5. The right to make after-tax employee contributions;

    6. The right to direct investments;

    7. The right to a particular form of investment;

    8. Allocation dates for earnings and forfeitures; and

    9. Administrative procedures relating to benefit distribution.

    [Treas. Reg. § 1.411(d)-4, Q&A 1(d)]
  6. 8:54, Do defined benefit plans have any special protected benefits?
    The defined benefit feature of a guaranteed benefit unaffected by investment loss is a Section 411(d)(6) protected benefit. [Treas. Reg. § 1.411(d)-4, Q&A 3(a)(2)] Transfers of nondistributable benefits from a defined benefit plan to a defined contribution plan violate the anti-cutback rules if the defined contribution plan's terms expose the transferred benefits to risk of loss not present in the defined benefit plan.
  7. 8:55, To what extent are early retirement subsidies protected benefits?
    Early retirement benefits and retirement-type subsidies are protected benefits that cannot be eliminated or cut back by plan amendment to the extent they have accrued, but applies only to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy. [I.R.C. § 411(d)(6)(B); Treas. Reg. § 1.411(d)-4]

    In Lindsay v. Thiokol Corp. [20 Employee Benefits Cas. (BNA) 2793 (10th Cir. 1997)], the company amended its defined benefit plan to eliminate early retirement subsidies prospectively. Accrued benefits were preserved. Several employees who took early retirement received less than they would have before the amendment eliminating the subsidy. The prospective elimination of the subsidy was upheld.

    In Revenue Ruling 85-6 [1985-1 C.B. 133], the IRS stated that the exception to the prohibition against reduction of benefits is not applicable to a terminated plan, that is, the plan must provide the early retirement benefit whether or not the participant has satisfied the conditions for the subsidy upon plan termination.

    ERISA requires advance written notice of an amendment to a pension plan that would significantly reduce the rate of future benefit accrual. [ERISA § 204(h)] Under prior regulations, an amendment that did not affect the annual benefit beginning at normal retirement age was not considered to affect the rate of future benefit accrual. According to this approach under prior law, an amendment affecting early retirement benefits would not require advance notice. [Treas. Reg. § 1.411(d)-6. But see Normann v. Amphenol Corp., 956 F. Supp. 158 (N.D.N.Y. 1997)]

    Effective with the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), amendments that affect early retirement benefits and retirement-type subsidies are considered to reduce the rate of future benefit accrual and do require an ERISA Section 204(h) notice. [I.R.C. § 4980F(f)(3)]
  8. 8:56, Can an early retirement benefit be greater than the normal retirement benefit?
    No. By definition the normal retirement benefit must be at least as great as any benefit paid prior to normal retirement age. [I.R.C. § 411(a)(9)] The normal retirement benefit for this purpose is the form of an annual benefit commencing at normal retirement age. [I.R.C. § 411(a)(7)(A)(i)]
  9. 8:57, Are cost-of-living adjustments protected benefits?
    In Hickey v. Chicago Truck Drivers, Helpers and Warehouse Workers Union [980 F.2d 1080 (7th Cir. 1992)], the court held that the elimination of a cost-of-living adjustment (COLA) provision violated the anti-cutback requirements of Code Section 411(d)(6). The COLA had been eliminated in connection with plan termination. The issue as to whether the termination of the plan qualified as an amendment to the plan was, unfortunately, not addressed.
  10. 8:58, Are Code Section 411(d)(6) benefits preserved when plan assets and liabilities are transferred to another plan?
    Yes. If plan assets and liabilities are transferred to another plan through a merger or consolidation (see chapter 28), each participant must be entitled to receive benefits that are at least equal to the benefits to which the participant would have been entitled if the plan had been terminated before the merger. [I.R.C. § 401(a)(12) ; Treas. Reg. §§ 1.401(a)-12, 1.414(l)-1] Code Section 411(d)(6) protected benefits cannot be eliminated by plan merger.
  11. 8:59, Can an employee waive a Code Section 411(d)(6) protected benefit?
    No. A Code Section 411(d)(6) protected benefit cannot be eliminated, even with the consent of the employee.
  12. 8:60, Are there any instances when accrued benefits can be reduced?
    Yes. A plan amendment that has the effect of reducing accrued benefits is permissible in the following instances:

    1. The amendment was necessary as a condition of qualification, and the qualification requirement could not be satisfied by any other means.

    2. The plan has three or more joint and survivor annuity payment options. In this case any option other than the ones with the largest and smallest survivor percentages can be eliminated.

    3. The plan terminates. In this case the plan can substitute cash for in-kind distributions in certain instances.

    4. The amendment eliminates the involuntary cash-out provision or reduces the threshold amount below the statutory level.

    5. The amendment eliminates provisions requiring execution on an account used to secure a loan in default.

    6. The amendment changes the timing on payment of benefits, but payment is available within two months of the original payment date.

    [Treas. Reg. § 1.411(d)-4, Q&A 2(b)]
  13. 8:61, Can a defined benefit plan eliminate certain optional forms of distribution?
    Yes, subject to certain rules. Treasury Regulations Section 1.411(d)-3 allows a plan to reduce or eliminate early retirement benefits, retirement-type subsidies, and optional forms of benefit that create significant burdens or complexities for the plan and plan participants, unless such amendment adversely affects the rights of any participant in more than a de minimis manner.
  14. 8:62, What rules must be followed for a plan to reduce an optional form of benefit?
    Any plan amendment eliminating optional forms of benefits must satisfy either the “redundancy” rules of paragraph (c) of Treasury Regulations Section 1.411(d)-3 or the “core option” rules of paragraph (d). However, all such amendments must also comply with the “burdensome” and “ de minimis” rules of paragraph (e). In addition, a plan amendment that increases a payment amount is not considered as an elimination of an optional form of benefit (e.g., changing a 90 percent QJSA to a 91 percent QJSA). Each is described below.
  15. 8:63, What are the redundancy rules?
    • Plan amendments comply with the redundancy rules of these proposed regulations if they meet a three-prong test:
    • 1. They eliminate optional forms of benefits that are redundant with retained options;

    2. They eliminate optional forms of benefits that have annuity starting dates at least 90 days (equal to the number of days in the maximum QJSA explanation period) after the amendment adoption date; and

    3. They satisfy the requirements of paragraph (e) in that they are “burdensome and of a de minimis value.”

    [Treas. Reg. § 1.411(d)-3(c)(1)]

    Under the regulations, an optional form of benefit that is being eliminated is “redundant” with a retained optional form if:

    1. The retained optional form is available to the participant;

    2. The retained optional form is in the same “family”;

    3. There are no materially greater restrictions for the participant on the retained optional form; and

    4. If it is a “core option,” then the eliminated optional form and the retained optional form are identical, not considering actuarial factors, annuity starting dates, pop-up provisions, and cash refund features. [Treas. Reg. § 1.411(d)-3(c)(3)]

    [Treas. Reg. § 1.411(d)-3(c)(2)]

    The regulations define six “families” of optional forms of benefit and indicate that any optional form of distribution that is not in this closed list represents its own family. Therefore, as long as one optional form of benefit from within the family is retained, then other optional forms of benefit from within the family may be eliminated by a plan amendment. The six families are:

    1. A 50 percent to 100 percent joint and survivor annuity (regardless of term certain provisions, pop-up provisions, or cash refund features);

    2. A 1 percent to 49 percent joint and survivor annuity;

    3. A 1-year to 10-year certain and life annuity;

    4. An 11-year or higher term certain and life annuity;

    5. A 1-year to 10-year installment payment; and

    6. An 11-year or higher term installment payment.

    [Treas. Reg. § 1.411(d)-3(c)(4)]

    • Additionally, there are rules on eliminating options that have Social Security leveling, return of employer contributions, and retroactive annuity date features. If an optional form of benefit that is being eliminated includes either a Social Security leveling feature or a refund of employee contributions feature, the retained optional form of benefit must also include that feature, and, to the extent that the optional form of benefit that is being eliminated does not include a Social Security leveling feature or a refund of employee contributions feature, the retained optional form of benefit must not include that feature. For purposes of applying this paragraph (c), to the extent an optional form of benefit that is being eliminated does not include a retroactive annuity starting date feature, the retained optional form of benefit must not include the feature. [Treas. Reg. § 1.411(d)-3(c)(5)]
    •  
    • Example. The MD defined benefit plan allows distributions at any time after age 55. At each potential annuity starting date, a participant can elect a straight life annuity or any number of actuarially equivalent forms of benefits, including a straight life annuity with a COLA and a joint and survivor benefit with any continuation percentage from 1 percent to 100 percent and the ability to name any beneficiary. The plan is amended (adopted September 2, 2004 to be effective January 1, 2005) to delete all continuation percentages in the J&S option other than 25 percent, 50 percent, 75 percent, and 100 percent.

    There are four “families” of optional forms of benefits before the amendment: (1) a straight life annuity; (2) a straight life annuity with COLA; (3) all joint and survivor annuities with a continuation percentage of 0 percent to 49 percent; and (4) all joint and survivor annuities with a continuation percentage of 50 percent to 100 percent. The amendment affects only the third and fourth families.

    The amendment is allowed because it satisfies the three requirements under paragraph (c) of Treasury Regulations Section 1.411(d)-3 :

    1. The retained 25 percent J&S annuity is redundant with all other options in the third family and the retained 50 percent, 75 percent, and 100 percent J&S annuities are each redundant with all other options in the fourth family. In addition, neither the eliminated options nor the retained options include Social Security leveling, return of employee contributions, or retroactive annuity starting date features. Furthermore, the amendment does not eliminate any of the core options, including the most valuable option for a participant with a short life expectancy;

    2. The amendment is not effective with respect to annuity starting dates that are less than 90 days from the date of the amendment; and

    3. Since the retained optional forms of benefit are available on the same annuity starting date and have the same actuarial present value as the optional forms that are being eliminated, then the amendment does not need to comply with the “burdensome” and “de minimis” requirements of paragraph (e).
  16. 8:64, What are the core option rules?
    Plan amendments eliminating noncore optional forms of benefits where other “core” forms are offered comply with these regulations if they meet a different three-prong test:

    1. If after the amendment, each of the “core” options is still available to the participant with respect to benefits accrued both before and after the amendment;

    2. If the plan amendment does not eliminate an optional form of benefit with an annuity starting date that is less than four years after the amendment adoption date; and

    3. If they satisfy the requirements of paragraph (e) in that they are “burdensome and of a de minimis value.”

    [Treas. Reg. § 1.411(d)-3(d)(1)]

    The “core” options, as defined in paragraph (g), are generally:

    1. A straight life annuity;

    2. A 75 percent joint and survivor annuity (or alternatively, the plan may offer both a joint and 50 percent survivor annuity and a joint and 100 percent survivor annuity);

    3. A 10-year certain and life annuity; and

    4. The most valuable benefit option for a participant with a short life expectancy.

    Item #4 above generally means the optional form of benefit, for each annuity starting date, that is reasonably expected to result in payments that have the largest actuarial present value in the case of a participant who dies shortly after the annuity starting date, taking into account payments due to the participant both prior to the participant's death and also any payments due after the participant's death. The plan can assume that the participant's spouse is the same age as the participant, and that a most valuable option (MVO) for any age beyond age 70 ½ is the MVO payable at age 70 ½, and that a MVO for any age earlier than age 55 is the MVO payable at age 55.

    There are three safe harbors for plans to use in defining “the most valuable option for a participant with a short life expectancy”:

    1. If a single-sum distribution option is available that is more valuable than any of the optional forms being eliminated by the plan amendment, then the plan can treat that single-sum distribution as the MVO for all participants;

    2. If the plan does not have a single-sum distribution option, then a 75 percent joint and survivor option can be treated as the MVO as long as it is available at all annuity starting dates; and

    3. If the plan offers neither a single-sum distribution nor a 75 percent joint and survivor option, then a 15-year certain and life annuity option may be treated as the MVO as long as it is available at all annuity starting dates.

    [Treas. Reg. § 1.411(d)-3(g)(5)]

    In order to utilize this method to eliminate certain optional forms of benefit, the following criteria must be satisfied:

    1. The eliminated forms of benefit must be retained for those participants with annuity starting dates within four years of the amendment date;

    2. No optional form may be eliminated if it provides for a lump sum of at least 25 percent of the participant's total present value of accrued benefit;

    3. Core forms must have essentially the same annuity commencement dates (i.e., within six months of each other);

    4. The core forms must not be less valuable than the eliminated forms of benefit by more than a de minimis amount, or the amendment must have a delayed effective date equal to the amount of time it would take for the eliminated form of benefit to be subsumed by the retained form of benefit;

    5. No further changes may occur to the core benefit options for at least seven years from the amendment date;

    6. If the eliminated form of benefit contains either a Social Security leveling feature or a refund of employee contributions feature, at least one of the core forms must have this feature as well. And if the eliminated form does not contain either a Social Security leveling feature or a refund of employee contributions feature, each of the core options must be available without that feature; and

    7. If the form of benefit being eliminated does not contain a retroactive annuity starting date feature, each of the core forms must also not contain this feature.

    Example. The Preserve All defined benefit plan offers all participants the following actuarially equivalent standard distribution options: a straight life annuity; a 50 percent, 75 percent, or 100 percent J&S annuity; or a 5-year, 10-year, and 15-year certain and life annuity. Each annuity payable to a participant under age 65 is available with or without a Social Security leveling feature where the participant selects an assumed age of Social Security benefit commencement between 62 and 67. The employer, who has sponsored this plan for over 30 years, has merged over 20 plans into this plan, many of which have preserved optional forms only for those affected participants (such as certain insurance carrier annuity options and single-sum distributions). Specifically, in the one merger, lump sums available to those participants at the date of the merger were frozen, and as of April 1, 2005, each such single-sum distribution option applies to less than 25 percent of the acquired participants' accrued benefits. As a result of its merger practices of preserving the nonstandard optional forms of benefits only for the participant's premerger service, as of April 1, 2005, there are a large number of optional forms of benefit, which are not members of a “family,” but which do not provide any early retirement subsidies to any participant because any subsidies have been subsumed by the actuarially reduced accrued benefit. On April 1, 2005, the plan is amended, effective with annuity starting dates on or after May 1, 2009, to eliminate all of the nonstandard options, including the single-sum options for the XYZ acquired participants.

    The amendment is permissible for three reasons:

    1. The only single-sum distributions that are eliminated are less than 25 percent of the affected participant's total accrued benefit on the date of elimination (May 1, 2009) and furthermore, the amendment retains core options, including the MVO for a participant with a short life expectancy (here, the 100 percent J&S annuity; note the retained single-sum distribution options are NOT the most valuable options for a participant with a short life expectancy because only a portion of the accrued benefit is payable as a single sum), and at least one of the retained core options contains the Social Security leveling, refund of employee contribution, and/or retroactive annuity starting date features of the eliminated options;

    2. The amendment is not effective with respect to annuity starting dates that are less than four years after the amendment is adopted; and

    3. Since the retained optional forms of benefit are available on the same annuity starting dates and have the same actuarial present value as the optional forms that are being eliminated, the amendment does not need to comply with the “burdensome” and “de minimis” requirements of paragraph (e).
  17. 8:65, What are the rules for determining whether optional forms of benefits are burdensome and affect participants in no more than a de minimis manner?
    Paragraph (e) of Treasury Regulations Section 1.411(d)-3 discusses the additional necessary requirements for all plan amendments that either eliminate optional forms of benefits that are redundant (as described in paragraph (c)) or that eliminate noncore optional forms of benefit where “core” options are offered (as described in paragraph (d)).

    Plan amendments that comply with these regulations can eliminate only those optional forms of benefit that:

    1. Create significant burdens or complexities for the plan and its participants; and

    2. Do not adversely affect the rights of any participant in a more than de minimis manner.

    [Treas. Reg. § 1.411(d)-3(e)(1)]

    As to the significant burdens, there is a facts and circumstances analysis. If the plan amendment eliminates an early retirement benefit, relevant factors include the complexity and burdensomeness of the annuity starting dates and whether the amendment results in a reduction in the number of categories of early retirement benefits. On the other hand, if the plan amendment eliminates a retirement-type subsidy or if it changes the actuarial factors, the relevant factors include the complexity and burdensomeness of the actuarial factors and whether the amendment results in a reduction in the number of categories of retirement-type subsidies or other actuarial factors. However, in a plan amendment that, in effect, either eliminates an annuity starting date and replaces it with another annuity starting date, or eliminates one set of actuarial factors and replaces it with another set of actuarial factors, but which does not reduce the number of categories of optional forms of benefits, then the plan amendment did not really relieve the burdensomeness and complexity of the plan and therefore does not comply with these proposed regulations. Additionally, a plan amendment that adds burdensomeness and complexity to a plan so that a future amendment can eliminate other optional forms of benefits will violate these proposed regulations.

    [Treas. Reg. § 1.411(d)-3(e)(2)]

    As to the de minimis effect, the retained optional forms of benefit for each participant must:

    1. Have substantially the same annuity commencement date as the optional form being eliminated (i.e., within six months of each other); and

    2. Either have no more than a “ de minimis difference in the actuarial present value” than that of the optional form being eliminated or have a “delayed effective date.”

    [Treas. Reg. § 1.411(d)-3(e)(3)]

    The regulations define “ de minimis difference in actuarial present value” as not more than the greater of: 2 percent of the present value of the retirement-type subsidy under the eliminated optional form of benefit prior to the amendment, or 1 percent of the greater of the participant's Section 415(c)(5) compensation for the prior plan year or the participant's average compensation for his or her highest three years. [Treas. Reg. § 1.411(d)-3(e)(5)]

    The regulations define delayed effective date as an expected transition period (limited to those participants who continue to accrue benefits under the plan through the end of the expected transition period) that begins when the amendment is adopted and ends when it is reasonable to expect that the form being eliminated would be subsumed by another optional form of benefit (based on reasonable actuarial assumptions, about the future, that are likely to result in the longest period of time until the optional form of benefit would be subsumed and after taking into account expected future accruals). [Treas. Reg. § 1.411(d)-3(e)(6)]
  18. 8:66, Are future accruals in a defined benefit plan a protected benefit?
    No. A plan's benefit formula can be changed at any time. If the change results in a significant reduction in future benefit accruals or eliminates or significantly reduces an early retirement benefit or retirement-type subsidy, the amendment will not be allowed unless, after adoption of the amendment and within a reasonable time before the amendment's effective date, the plan administrator provides a written notice setting forth the plan amendment and its effect (written in a manner to be understood by the average plan participant), as well as its effective date, to each plan participant, each alternate payee under an applicable qualified domestic relations order (see chapter 23), and each employee organization representing plan participants. [ERISA § 204(h)]
  19. 8:67, What is an amendment that affects the rate of future benefit accrual for purposes of ERISA Section 204(h)?
    An amendment to a defined benefit plan affects the rate of future benefit accrual only if it is reasonably expected to change the amount of the future annual benefit beginning at normal retirement age in the plan's normal form of payment (generally a straight life annuity) or that eliminates or reduces an early retirement benefit or retirement-type subsidy. The rate of future benefit accrual is determined without regard to optional forms of benefit, ancillary benefits, or other rights or features. [ I.R.C. § 4980F(f)(3) ; ERISA § 204(h) ; Treas. Reg. § 54.4980F, Q&A 6]
  20. 8:68, What plan provisions are taken into account in determining whether there has been a reduction in the rate of future benefit accrual?
    All plan provisions that may affect the rate of future accrual of benefits must be taken into account in determining whether an amendment provides for a significant reduction in the rate of future benefit accrual. Such provisions include the dollar amount or percentage of compensation on which benefit accruals are based; in the case of a plan using permitted disparity under Code Section 401(l), the amount of disparity between the excess benefit percentage or excess contribution percentage and the base benefit percentage or base contribution percentage (all as defined in Code Section 401(l)); the definition of service or compensation taken into account in determining an employee's benefit accrual; the method of determining average compensation for calculating benefit accruals; the definition of normal retirement age in a defined benefit plan; the exclusion of current participants from future participation; benefit offset provisions; and minimum benefit provisions. Plan provisions that may affect early retirement benefits or retirement-type subsidies include the right to receive payment of benefits after severance from employment and before normal retirement age and actuarial factors used in determining optional forms for distribution of retirement benefits.

    Plan provisions that do not affect the rate of future accrual of benefits are not taken into account in determining whether there has been a reduction in the rate of future benefit accrual. For example, vesting schedules and optional forms of benefit are not taken into account. [Treas. Reg. § 54.4980F, Q&A 7]
  21. 8:69, What is the basic principle used in determining whether an amendment provides for a significant reduction in the rate of future benefit accrual for purposes of ERISA Section 204(h)?
    An amendment to a defined benefit plan reduces the rate of future benefit accrual only if it is reasonably expected to reduce the amount of the future annual benefit commencing at normal retirement age for benefits accruing for a year. For this purpose, the annual benefit commencing at normal retirement age is the benefit payable in the normal form of the plan.

    The determination of a significant reduction in the rate of future benefit accrual is made based on reasonable expectations taking into account the relevant facts and circumstances at the time the amendment is adopted. This is done by comparing the amount of the annual benefit beginning at normal retirement age under the terms of the plan as amended with the amount of the annual benefit beginning at normal retirement age under the terms of the plan before amendment. [Treas. Reg. § 54.4980F, Q&A 6, 8]
  22. 8:70, Is an ERISA Section 204(h) notice required to be given to employees who have not yet become participants in the plan?
    No. Employees who have not yet become participants in a plan at the time an amendment to the plan is adopted are not taken into account in applying ERISA Section 204(h) with respect to the amendment. Thus, if an ERISA Section 204(h) notice is required with respect to an amendment, the plan administrator need not provide theERISA Section 204(h) notice to such employees. [Treas. Reg. § 54.4980F, Q&A 10]
  23. 8:71, If an ERISA Section 204(h) notice is required with respect to an amendment, must such notice be provided to participants whose rate of future benefit accrual is not reduced by the amendment?
    No. A plan administrator need not provide an ERISA Section 204(h) notice to any participant whose rate of future benefit accrual is reasonably expected not to be reduced by the amendment, nor to any alternate payee under an applicable qualified domestic relations order whose rate of future benefit accrual is reasonably expected not to be reduced by the amendment. A plan administrator need not provide an ERISA Section 204(h) notice to an employee organization unless the employee organization represents a participant to whom an ERISA Section 204(h) notice is required to be provided. [Treas. Reg. § 54.4980F, Q&A 10]
  24. 8:72, What information is the ERISA Section 204(h) notice required to contain?
    An ERISA Section 204(h) notice must include sufficient information to allow applicable individuals to understand the effect of the plan amendment, including the approximate magnitude of the expected reduction. If the effect of the amendment is different for different participants, the notice must either identify the general classes of participants to whom the reduction is expected to apply, or include sufficient information to allow each applicable individual receiving the notice to determine which reductions are expected to apply to that individual.

    • The information must be written in a manner calculated to be understood by the average plan participant and to apprise the applicable individual of the significance of the notice. If the amendment reduces the rate of future benefit accrual, the notice must include a description of the benefit or allocation formula before the amendment, a description of the benefit or allocation formula under the plan as amended, and the effective date of the amendment. If the amendment reduces an early retirement benefit or retirement-type subsidy (other than as a result of an amendment reducing the rate of future benefit accrual), the notice must describe how the early retirement benefit or retirement-type subsidy is calculated from the accrued benefit before the amendment, how the early retirement benefit or retirement-type subsidy is calculated from the accrued benefit after the amendment, and the effective date of the amendment.
    •  
    • Example. The Changes, Inc., plan has a normal retirement age of 65 but provides for an unreduced normal retirement benefit at age 55. The plan is amended to provide an unreduced normal retirement benefit at age 60 for benefits accrued in the future, with an actuarial reduction to apply for benefits accrued in the future to the extent that the early retirement benefit begins before age 60. The ERISA Section 204(h) notice states that and specifies the factors that apply in calculating the actuarial reduction (e.g., a 5 percent per year reduction applies for early retirement before age 60).

    If the magnitude of the changes that result from the amendment are not reasonably apparent from the description provided by a narrative, additional narrative information may be required, as well as illustrative examples. Further narrative explanation of the effect of the difference between the old and new formulas or benefit calculation may be provided to make the approximate magnitude of the reduction apparent. In addition, if the magnitude of the reduction is still not reasonably apparent from the descriptions provided, the notice must include one or more illustrative examples showing the approximate magnitude of the reduction in the example. Thus, illustrative examples are required for a change from a traditional defined benefit formula to a cash balance formula or a change that results in a period of time during which there are no accruals (or minimal accruals) with regard to normal retirement benefits or an early retirement subsidy (a wear-away period).

    These examples must illustrate the ranges of the reductions by showing examples that bound the possibilities. In addition, the examples generally may be based on any reasonable assumptions (e.g., about the representative participant's age, years of service, and compensation; any interest rate and mortality table used in the illustrations; and salary scale assumptions used in the illustrations for amendments that alter the compensation taken into account under the plan), but the ERISA Section 204(h) notice must identify those assumptions. If a plan's benefit provisions, however, include a factor that varies over time (such as a variable interest rate), the determination of whether an amendment is reasonably expected to result in a wear-away period must be based on the value of the factor applicable under the plan at a time that is reasonably close to the date the ERISA Section 204(h) notice is provided, and any wear-away period that is solely a result of a future change in the variable factor may be disregarded. For example, to determine whether a wear-away occurs as a result of a Section 204(h) amendment that converts a defined benefit plan to a cash balance pension plan that will credit interest based on a variable interest factor specified in the plan, the future interest credits must be projected based on the interest rate applicable under the variable factor at the time the Section 204(h) notice is provided. [Treas. Reg. § 54.4980F, Q&A 11]
  25. 8:73,Will an ERISA Section 204(h) notice that contains false or misleading information be considered valid?
    No. A notice that includes materially false or misleading information (or omits information to cause the information provided to be misleading) does not constitute a validERISA Section 204(h) notice. Therefore, it will not be considered as having been provided and all associated penalties will apply (see Q 8:77). [Treas. Reg. § 54.4980F, Q&A 11]
  26. 8:74, Must the same ERISA Section 204(h) notice be provided to all applicable individuals?
    No. If an amendment by its terms affects different classes of participants differently (e.g., one new benefit formula will apply to Division A and another to Division B), the notice requirements apply separately with respect to each general class of participants. In addition, the notice must include sufficient information to enable a participant to identify his or her class.

    If an amendment affects different classes of applicable individuals differently, the plan administrator may provide a different ERISA Section 204(h) notice to each affected class. This notice may omit information that does not apply to the individuals to whom it is furnished, but it must identify the class or classes of applicable individuals to whom it is provided. [Treas. Reg. § 54.4980F, Q&A 11]
  27. 8:75, How can an ERISA Section 204(h) notice be provided?
    A plan administrator (including a person acting on behalf of the plan administrator, such as the employer or plan trustee) can use any method reasonably calculated to ensure actual receipt of the ERISA Section 204(h) notice. First-class mail to the last known address of the party is an acceptable delivery method. Hand delivery is also acceptable, as is electronic delivery. However, posting the notice is not considered to be actually providing the notice. The ERISA Section 204(h) notice can be combined with other notices required to be provided to the participants, such as a notice of intent to terminate under ERISA Title IV. [Treas. Reg. § 54.4980F, Q&A 13]

    EGTRRA specifically authorizes the IRS to provide regulations to allow delivery of the notice by using new technologies. [ ERISA § 204(h)(7)] In Private Letter Ruling 200407021, the IRS ruled that a plan sponsor's Microsoft PowerPoint presentation at employee meetings satisfied the written notice requirement of ERISA Section 204(h). Although a letter ruling may not be relied upon by other taxpayers, it does show that the IRS is willing to accept this form of delivery. Some key points in the approval were that the plan sponsor did make available printed copies of the presentation, multiple employee meetings were held, and the plan sponsor took appropriate steps to ensure that all affected parties received the Section 204(h) notice.
  28. 8:76, How can the timing-of-notice requirement be satisfied?
    An ERISA Section 204(h) notice must be provided within a reasonable time before the effective date of the amendment. In general, the notice must be provided at least 45 days before the effective date of any Section 204(h) amendment. In the case of a small plan or a multiemployer plan, however, the ERISA Section 204(h) notice must be provided at least 15 days before the effective date of any Section 204(h) amendment. A small plan is one that the plan administrator reasonably expects to have, on the effective date of the Section 204(h) amendment, fewer than 100 participants who have an accrued benefit under the plan.

    There is also an exception to the general timing rule for amendments made in connection with an acquisition or disposition of a business. In such case, the ERISA Section 204(h) notice must be provided at least 15 days before the effective date of the Section 204(h) amendment. In addition, if the amendment is made in connection with certain plan transfers, mergers, or consolidations and reduces only an early retirement benefit or retirement-type subsidy but does not significantly reduce the rate of future benefit accrual, the notice must be provided no later than 30 days after the effective date of the Section 204(h) amendment. [Treas. Reg. § 54.4980F, Q&A 9]
  29. 8:77, Are there any penalties for failure to provide the ERISA Section 204(h) notice?
    Yes. An excise tax equal to $100 per day per individual is applied to any failure to provide the ERISA Section 204(h) notice properly. There are limited exceptions to the application of the excise tax:

    • 1. The excise tax will not be imposed if the plan administrator was not aware of the failure and exercised reasonable diligence in trying to satisfy the notice requirements.
    • 2. The excise tax will not apply if the plan administrator exercised reasonable diligence in trying to satisfy the notice requirements and provides the ERISA Section 204(h) notice within 30 days of finding such failure.

    3. The Secretary has the authority to waive the excise tax in full or in part for any failure that was due to reasonable cause to the extent that the payment of the tax would be excessive or be otherwise inequitable relative to the failure involved.

    If the plan administrator exercised reasonable diligence in providing the ERISA Section 204(h) notice, the total excise tax imposed during the fiscal year of the plan sponsor will not exceed $500,000. [I.R.C. § 4980F]

    If the failure to provide the ERISA Section 204(h) notice is egregious, all applicable individuals will be entitled to receive the greater of the benefits under the old or new plan formula. An egregious failure is defined as:

    1. An intentional failure; or

    2. A failure, whether or not intentional, to provide most of the individuals with most of the information they are entitled to receive.

    [ERISA § 204(h)(6) ; Treas. Reg. § 54.4980F, Q&A 14]

    If the failure to provide the notice is not egregious, the amendment may become effective with respect to all individuals.
  30. 8:78, How does ERISA Section 204(h) apply to the sale of a business?
    Whether an ERISA Section 204(h) notice is required in connection with the sale of a business depends on whether a plan amendment that significantly reduces the rate of future benefit accrual or significantly reduces an early retirement benefit or retirement-type subsidy is adopted. [Treas. Reg. § 54.4980F, Q&A 16]
  31. 8:79, How are amendments to cease accruals and terminate a plan treated under ERISA Section 204(h)?
    • Amendments providing for the cessation of benefit accruals on a specified future date and for the termination of a plan are subject to ERISA Section 204(h). [Treas. Reg. § 54.4980F, Q&A 17]
    •  
    • Example. The GNM Construction Company adopts an amendment to its defined benefit plan that provides for the cessation of benefit accruals on December 31, 2012, and for the termination of the plan pursuant to ERISA Title IV as of a proposed termination date that is also December 31, 2012. As part of the notice of intent to terminate required under ERISA Title IV, the plan administrator gives the ERISA Section 204(h) notice of the amendment ceasing accruals to all affected participants; the notice states that benefit accruals will cease “on December 31, 2012.” Because of an oversight by the plan actuary, however, all the requirements of ERISA Title IV for a plan termination are not satisfied, and the plan cannot be terminated until a date that is later than December 31, 2012.

    Nonetheless, because the ERISA Section 204(h) notice was given stating that the plan was amended to cease accruals on December 31, 2012, the amendment to cease accruals is still effective on December 31, 2012. If the ERISA Section 204(h) notice had merely stated that benefit accruals would cease “on the termination date” or “on the proposed termination date,” the cessation of accruals would not be effective on December 31, 2012.

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