Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has finalized, with modifications, proposed regulations under Code Secs. 411(d)(6) and
4980F providing guidance on the application of the notice requirements for plan amendments that are allowed to provide for reduction in benefits accrued before the plan amendment's applicable amendment date. The final regulations reflect changes made by the Pension Protection Act of 2006 (2006 PPA) (P.L. 109-280). The final regulations apply also for purposes of ERISA Sec. 204(g) and (h), which contain rules parallel to the rules in Code Secs. 411(d)(6) and
4980F, respectively.

Background

 
Code Sec. 411(d)(6) generally provides that a plan is treated as not satisfying the Code Sec. 411 minimum vesting requirements if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in Code Sec. 412(d)(2), ERISA Sec. 4281, or any other applicable law. ERISA Act sec. 204(g) contains parallel rules to Code Sec. 411(d)(6). Act Sec. 1107 of P.L. 109-280 provides that any plan amendment made pursuant to a change made by P.L. 109-280 may be retroactively effective and, except as provided by the IRS, does not violate the anti-cutback rules of Code Sec. 411(d)(6) or ERISA Act sec. 204(g) if, in addition to satisfying the conditions specified in Act sec. 1107(b)(2) of P.L. 109-280, the amendment is made on or before the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, with respect to governmental plans).

 
Code Sec. 4980F imposes an excise tax when a plan administrator fails to provide timely notice of a plan amendment that provides for a significant reduction in the rate of future benefit accrual. Except as provided in regulations, the notice must be provided within a reasonable time before the effective date of the plan amendment. ERISA Act sec. 204(h) contains parallel rules to Code Sec. 4980F, and a notice required under any of these two provisions is generally referred to as a "section 204(h) notice". P.L. 109-280 amended Code Sec. 4980F and ERISA Act sec. 204(h) to require that a section 204(h) notice be provided to any employer that has an obligation to contribute to a plan. P.L. 109-280 also provided that, in the case of a plan amendment adopted in order to comply with the rules in Act Sec. 402 of P.L. 109-280 (i.e., funding rules for plans maintained by an employer that is a commercial passenger airline or the principal business of which is providing catering services to a commercial passenger airline), any notice required under Code Sec. 4980F(e) or ERISA Act sec. 204(h) must be provided within 15 days of the effective date of the plan amendment.

  In addition to the section 204(h) notice requirement, both the Code and ERISA include a number of other notice requirements to provide information to certain parties (such as participants, beneficiaries, and contributing employers) regarding the potential effect of a plan amendment that is permitted to reduce or eliminate previously accrued benefits.

Final Regulations

  To reflect the changes made by P.L. 109-280, the final regulations clarify that the requirement that a section 204(h) notice be given to contributing employers applies only to employers in a multiemployer plan, not to employers in a single employer plan. For certain plans maintained by an employer that is a commercial passenger airline or the principal business of which is providing catering services to a commercial passenger airline, a section 204(h) notice must be provided at least 15 days before the effective date of the amendment. The final rules also retain the proposal that no section 204(h) notice is required if a defined benefit plan is amended to reflect changes to the Code Sec. 417(e)(3) applicable interest or mortality assumptions made by P.L. 109-280.

  In addition, the final regulations provide a conforming amendment to the current regulations under Code Sec. 411(d)(6) to include Act sec. 1107 of P.L. 109-280 as a statutory exception to the general anti-cutback rule in Code Sec. 411(d)(6). Moreover, in the case of an amendment that is permitted to be adopted retroactively, the effective date of the amendment, for purposes of Code Sec. 4980F, is the date the amendment is put into effect on an operational basis under the plan, so that a section 204(h) notice must generally be provided at least 45 days before the date the amendment is put into effect on an operational basis (15 days for multiemployer plans). The cross-references in Reg. §54.4980F-1, Q&A-7(b), are also revised to provide that any plan amendment that is permitted to eliminate or reduce a Code Sec. 411(d)(6) protected benefit under certain provisions, is not an amendment for which a section 204(h) notice is required.

  The final regulations further provide that for any section 204(h) notice that is required to be provided in connection with an amendment to a Code Sec. 411(a)(13)(C) statutory hybrid plan that is first effective before January 1, 2009, and that limits the amount of a distribution to the account balance under Code Sec. 411(a)(13)(A), a section 204(h) notice does not fail to be timely if the notice is provided at least 30 days before the date the amendment is first effective. This special timing rule reflects the 30-day timing rule described in
Notice 2007-6, 2007-1 CB 272. The final regulations permit the use of this transitional timing rule through the end of 2008. Thereafter, the general 45-day timing rule applies to such amendments.

  To eliminate the need for a plan to provide multiple notices at different dates and with substantially the same function and information to affected persons, the final regulations provide that, with respect to an amendment that triggers a section 204(h) notice requirement as well as another statutory notice requirement listed in the regulations, if a plan provides the latter notice in accordance with the applicable standards for such a notice, then the plan is treated as having timely complied with the requirement to provide a section 204(h) notice. However, this special treatment does not apply if a plan is amended to implement benefit reductions independent of the reductions permitted under the relevant notice requirement. The final regulations remove the proposed rule under which the timing and content of a Code Sec. 432(e)(8)(C) notice for a multiemployer plan in a critical status would also satisfy such requirements for a section 204(h) notice because such interaction will be addressed in a separate guidance. The regulations, however, add the Code Sec. 432(b)(3)(D) notice to the list of similarly-situated benefit reduction notices.

  Finally, the regulations delegate authority to the IRS to publish revenue rulings, notices, or other guidance under Code Sec. 4980F, which would also apply to ERISA Act sec. 204(h), that the IRS determines to be necessary or appropriate for a plan amendment that applies with respect to benefits accrued before the applicable amendment date but that does not violate Code Sec. 411(d)(6). This delegation authority provides the IRS with greater flexibility to develop special rules to address special circumstances in the future, such as future statutory changes, and also extends to circumstances in which such a plan amendment may require another notice in addition to a section 204(h) notice.

Effective and Applicability Dates

  The final regulations generally apply to section 204(h) amendments that are effective on or after January 1, 2008. With respect to the timing rules on providing a section 204(h) notice for a plan amendment that has a retroactive effective date, the final rules generally apply to plan amendments adopted in plan years beginning after July 1, 2008. With respect to any amendment to a lump sum-based benefit formula, the special rules under the regulations relating to an amendment that applies to benefits accrued before the applicable amendment date apply to amendments adopted after December 21, 2006. In addition, the special 30-day limit timing rule for providing a section 204(h) notice applies to such amendments effective on or after December 21, 2006, and no later than December 31, 2008. The IRS anticipates issuing guidance in the near future relating to the application of Code Sec. 4980F to plan amendments that are adopted to comply with the Code Sec. 411(b)(5)((i) requirements regarding market rates of return. This future guidance may provide a special timing rule for when a section 204(h) notice must be provided.

T.D. 9472, 2009FED ¶47,040

Other References:

 
Code Sec. 411

  CCH Reference - 2009FED ¶19,072

 
Code Sec. 4980F

  CCH Reference - 2009FED ¶34,618B

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