PPA Pension Protection Act Tax Issues

IRS issues proposed regs reflecting PPA changes and guidance for notice of retroactively effective plan amendments

Mike Habib, EA


Prop Reg § 1.411(d)-3(a)(1); Prop Reg § 54.4980F-1, Q&A 8(d); Prop Reg § 54.4980F-1, Q&A 9(f); Prop Reg § 54.4980F-1, Q&A 9(g); Prop Reg § 54.4980F-1, Q&A 11(a)(7); Prop Reg § 54.4980F-1, Q&A 18(a)(4); Prop Reg § 54.4980F-1, Q&A 18(a)(5); Prop Reg § 54.4980F-1, Q&A 18(b)(3); Preamble to Prop Regs 3/20/2008)

IRS has issued proposed guidance setting out when notice of a plan amendment that significantly reduces future benefit accruals must be sent to affected parties. The proposed regulations would amend previously issued Question and Answer-format regs on Code Sec. 4980F, and would largely provide guidance for changes made to Code Sec. 4980F by the Pension Protection Act of 2006 (“PPA,” P.L. 109-280). The proposed regs would also establish timing rules for providing a section 204(h) notice for retroactive plan amendments, and would attempt to harmonize various other Code and ERISA notice requirements with those of Code Sec. 4980F.

Typically, the anti-cutback rules of the Code (Code Sec. 411(d)(6)) and ERISA (ERISA § 204(g)) protect the accrued benefit of a participant in a defined benefit plan by providing that this benefit cannot be reduced by plan amendment, except under very limited circumstances. Further, before a plan amendment providing for a significant reduction in future benefit accruals can take effect, Code Sec. 4980F generally requires that notice of the amendment be sent to the affected parties at least 45 days before the amendment’s effective date.

ERISA § 204(h) contains parallel rules to Code Sec. 4980F, and the notice required to be sent to affected parties is called the “section 204(h) notice.”

Other Code and ERISA notice requirements. Code Sec. 436 provides rules for limiting benefits and benefit accruals for single-employer plans with certain funding shortfalls. ERISA § 101(j) generally requires the plan administrator to provide written notice to plan participants and beneficiaries within 30 days after the plan becomes subject to this benefit limit.

ERISA § 4244A provides that a multiemployer plan in reorganization may adopt an amendment reducing or eliminating certain accrued benefits attributable to employer contributions. However, an amendment reducing or eliminating benefits may not be made unless notice is provided to plan participants, beneficiaries, and other affected persons at least 6 months before the first day of the plan year in which the amendment reducing benefits is adopted.

Similarly, ERISA § 4245 requires the suspension of benefits under insolvent multiemployer plans if the benefit payments exceed the plan’s resource benefit level for the plan year. Again, plans subject to benefit suspensions must notify plan participants and beneficiaries that certain non-basic benefit payments will be suspended.

ERISA § 4281 provides rules requiring a terminated multiemployer plan to reduce benefits if the value of nonforfeitable benefits exceeds the value of the plan’s assets. If benefits are to be reduced, the plan sponsor must notify PBGC, the plan participants, and the beneficiaries of the amendment reducing benefits. The notice must be provided no later than the earlier of (i) 45 days after the amendment is adopted, or (ii) the date of the first reduced benefit payment. To eliminate the need for a plan to provide multiple notices with substantially the same function and information to affected persons, the proposed regulations would provide that if a plan issues one of the above notices and meets the applicable standards for such notices, the plan would be treated as having complied with the requirement to provide a section 204(h) notice. (Prop Reg § 54.4980F-1, Q&A 9(g)(3); Preamble to Prop Regs 3/20/2008)

Pension Protection Act notice requirements. Section 502(c) of the PPA amended Code Sec. 4980F(e)(1) (and ERISA § 204(h)) to add as a recipient of a section 204(h) notice any employer that has an obligation to contribute to the plan. This new disclosure requirement is effective for plan years beginning after December 31, 2007.

The proposed regs would reflect this requirement by adding contributing employers to the list of parties to receive 204(h) notice, and would provide a definition of contributing employer. (Prop Reg § 54.4980F-1, Q&A 1(a); Prop Reg § 54.4980F-1, Q&A 10(a); Preamble to Prop Regs 3/20/2008)

Commercial airlines. Section 402 of the PPA provides special funding rules for plans maintained by commercial passenger airlines or by airline caterers. These funding rules generally allow the airlines and airline caterers to restrict benefit accruals. If a plan amendment is adopted to comply with these special funding rules, any notice required under Code Sec. 4980F (or ERISA § 204(h) ) must be provided within 15 days of the amendment’s effective date. The proposed regs would clarify that, consistent with the Joint Committee on Taxation’s Technical Explanation to section 402 of the PPA, the section 204(h) notice must be provided at least 15 days before the plan amendment’s effective date. (Prop Reg § 54.4980F-1, Q&A 9(f) ; Preamble to Prop Regs 3/20/2008)

Minimum present value rules. Code Sec. 417(e)(3) provides that, in determining the present value of a participant’s accrued benefit for distribution, the present value of the benefit cannot be less than the present value determined using the applicable mortality table and the applicable interest rate. Section 302(b) of the PPA provided new actuarial assumptions for calculating the minimum present value of a participant’s accrued benefit. Rev Rul 2007-67, 2007-48 IRB 1047, which included guidance on plan amendments adopting the new interest rate and mortality table, provided that amendments reflecting the new interest rate or mortality table for an annuity starting date in 2008 or later would not violate the anti-cutback rules.

The proposed regs would provide that a reduced single-sum distribution that’s caused by an amendment to a traditional defined benefit plan adopting the new interest rate and mortality tables does not require a section 204(h) notice. (Prop Reg § 54.4980F-1, Q&A 8(d); Preamble to Prop Regs 3/20/2008)

Section 204(h) notice timing rules for retroactively effective amendments. Reg. § 1.411(d)-3(a)(1) generally provides that a plan is not qualified if a plan amendment decreases the accrued benefit of any plan participant. These rules are generally based on the “applicable amendment date,” which is defined as the later of (i) the amendment’s effective date, or (ii) the date the amendment is adopted.

While the general rule under Reg. § 1.411(d)-3(a)(1) prohibits plan amendments that reduce a plan participant’s accrued benefit, certain exceptions exist, such as those under Code Sec. 412(d)(2), providing special rules for retroactive plan amendments. Rev Proc 94-42, 1994-1 CB 717, sets forth the procedures that a plan sponsor must follow in filing notice with, and obtaining approval from, IRS for a retroactive amendment that reduces accrued benefits.

The proposed regulations would provide special timing rules for when a section 204(h) notice must be provided to affected parties where the amendment is permitted to reduce benefits accrued before the plan amendment’s applicable amendment date. Specifically, the proposed regulations would clarify that the date on which these plan amendments are effective is the first day that the plan is operated as if the amendment were in effect (the date the amendment is put into effect on an “operational basis”). Thus, a section 204(h) notice must generally be provided at least 45 days (15 days for a multiemployer plan) before the amendment is effective (even if the amendment is not adopted until a later date). (Prop Reg § 54.4980F-1, Q&A 9(g); Preamble to Prop Regs 3/20/2008)

The same rules would apply to retroactive amendments made under the PPA’s remedial amendment period (Section 1107), Code Sec. 418D, Code Sec. 418E, and ERISA § 4281.

Cash balance plan conversions. The proposed regulations provide a special timing rule for section 204(h) amendments to an “applicable defined benefit plan,” as defined in Code Sec. 411(a)(13)(C)(i).

    Observation: These plans are also called “statutory hybrid plans” in IRS guidance under Code Sec. 411 , and are more commonly known as cash balance plans.

The proposed regs would provide that any section 204(h) notice required to be provided for an amendment converting a traditional defined benefit plan to a cash balance (or other hybrid) plan that’s first effective before Jan. 1, 2009, and that limits the amount of the distribution to the account balance as permitted under Code Sec. 411(a)(13)(A), will be considered timely if provided at least 30 days before the date the conversion amendment is first effective. This special timing rule reflects the 30-day timing rule described in Notice 2007-6, 2007-3 IRB 272, and may be used through the end of 2008. Thereafter, the general 45-day timing rule would apply to these conversions. (Prop Reg § 54.4980F-1, Q&A 18(b)(3)(iii); Preamble to Prop Regs 3/20/2008)

Multiemployer plans in endangered or critical status. Code Sec. 432 , relating to multiemployer plans that are in endangered or critical status based on their level of underfunding, permits a plan amendment to be adopted that reduces prior accruals under certain circumstances. For amendments for a plan in critical status, Code Sec. 432(e)(8)(C) requires that notice of the plan amendment be sent to, among other parties, plan participants and beneficiaries, at least 30 days before the general effective date of the reduction. Reg. § 54.4980F-1, Q&A 9(c) provides that a section 204(h) amendment made in the case of a multiemployer plan must be provided at least 15 days before the amendment’s effective date. The proposed regs would provide that complying with the 30-day timing rule for the Code Sec. 432(e)(8)(C) notice would also satisfy the 15-day timing rule for the 204(h) notice. (Prop Reg § 54.4980F-1, Q&A 11(a)(7); Preamble to Prop Regs 3/20/2008)

However, for an amendment to which Code Sec. 432 applies for a multiemployer plan in endangered (as opposed to critical) status, the normal timing and content rules for a section 204(h) notice under Code Sec. 4980F would apply, so that any required section 204(h) notice would have to be provided at least 15 days, instead of 30 days, before the amendment’s effective date. (Preamble to Prop Regs 3/20/2008)

Effective date. The regs are proposed to apply to 204(h) amendments effective after 2007. The 204(h) notice rules of Prop Reg § 54.4980F-1, Q&A 9(g)(2), regarding plan amendments with retroactive effective dates, apply to plan amendments that are effective after June 30, 2008. Finally, the 204(h) notice rules for cash balance (and other hybrid) plan conversions apply to amendments made effective after December 21, 2006, but not later than December 31, 2008.

A public hearing regarding the proposed regs will held July 10, 2008, at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC. Written or electronic comments regarding the proposed regs must be received by June 19, 2008. Outlines of topics to be discussed at the public hearing must be received by June 20, 2008.

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