A plan amendment violates the anti-cutback prohibition of IRC §411(d)(6) if it places greater restrictions or conditions on a participant’s right to protected benefits, even if the amendment simply adds a restriction otherwise permissible under §411′s vesting rules, under final IRS regulations on §411(d)(6) protected benefits reflecting the Supreme Court’s 2004 Heinz ruling. The final regulations also provide a utilization test whereby certain early retirement benefits, retirement-type subsidies, or optional forms of benefit may be eliminated. [71 FR 45379]
Heinz Restrictions – In Central Laborers’ Pension Fund v. Heinz (02-891, 6/7/2004), the U.S. Supreme Court held that although certain conditions such as suspension-of-benefit rules may be elements of the benefit itself, a plan amendment could not impose such conditions on the benefit after it had already accrued. See discussion of the Heinz decision and background of earlier IRS guidance on Heinz compliance at Benefitsblog. See also proposed IRS regulations published in August 2005.
The final IRS regulations retain the agency’s broad interpretation of Heinz that a plan amendment may not impose new restrictions or conditions on a participant’s rights to §411(d)(6) protected benefits, even if the amendment merely adds a restriction or condition that is otherwise permitted under the vesting rules of §411(a)(3) through §411(a)(11). In particular, the IRS notes that the §411(a)(10) rules for a change in vesting schedule apply with respect to future accruals, whereas the Heinz ruling prohibits changes with respect to previously accrued benefits. The final regulations do provide a limited exception, however, for an amendment that changes a plan’s vesting computation period, as set forth in applicable Department of Labor regulations.
Utilization Test – The previously published 2005 final IRS regulations permitted two methods for elimination or reduction of §411(d)(6) protected benefits: elimination of redundant optional forms of benefit; or elimination of noncore optional forms of benefit where core options are offered. Today’s final IRS regulations add a third method whereby a plan may eliminate a generalized optional form if a utilization test is satisfied, designed to deem an optional form to be of no significant value if no participant had actually elected the form for distribution of benefits.
Under the utilization test, the generalized optional form must have been available to at least a minimum number of plan participants during a look-bak period. The final regulations set the look-back period as the 2 plan years immediately preceding the amendment’s adoption, together with the pre-adoption portion of the plan year of the amendment’s adoption. An employer may elect to exclude the month of amendment adoption together with the 1 or 2 immediately preceding months (to the extent those preceding months were in the pre-adoption period of the plan year of the amendment adoption) from the look-back period.
The generalized optional form being eliminated must have been available to at least 50 participants during the look-back period. A special rule permits the plan to take into account participants who elected a single-sum distribution of at least 25% of the participant’s accrued benefit, provided that the applicable number of participants for the utilization test is increased from 50 to 1,000.
Separate Application of Redundancy Rules – The final regulations change the previously published redundancy method to permit separate application with respect to each portion of a participant’s benefit to which separate distribution elections apply.
Effective Dates – The restrictions against plan amendments modifying suspension of benefits apply to periods beginning on or after July 7, 2004, the date of the Heinz decision. Retroactive correction under Rev. Proc. 2005-23 of previous amendments of plan is required only for plan amendments adopted on or after January 1, 1989. Restrictions against plan amendments with respect to vesting apply to plan amendments adopted on or After August 10, 2006.
The utilization test may be used for plan amendments adopted on or after January 1, 2007.
Separate application of the redundancy rule is permitted for a plan amendment adopted on or after August 10, 2006.
And Don’t Forget PPA – Before too eagerly applying the redundancy rule to sweep out the benefit option family of joint and contingent options with continuation percentages of 50% to 100% as scoped out under Reg. §1.411-(d)-3(c)(4)(ii), make sure you acquaint yourself with PPA §1004, generally applicable to plan years beginning on or after 1/1/2008.