Blogging Employee Benefits

August 22, 2006

PPA and Plan Amendments

Filed under: Amendments, Pensions — Fuguerre @ 8:00 pm

The sweeping changes made by the the Pension Protection Act of 2006 (P.L. 109-280) will require numerous plan amendments, as well as encourage other plan changes to take advantage of new opportunities or to control new concerns. Of necessity, this post will represent only the start of my own process of tending to the plan amendment side of PPA, with much much more to come following in the months ahead, as will be noted in comments I’ll add to this post.

Remedial Amendment Deadlines – (1) EOY 2008: §415 Limit on Lump Sums. If a defined benefit plan requires remedial amendment in order to reflect the revision and permanent extension of the rule relating to the interest rate to be used for the §415 limit on lump sum cashouts and other distributions subject to §417(e), as prescribed by PPA §303, then the amendment must be adopted no later than the close of the 2008 plan year. See PPA §301(c). If the plan had not yet met the previously applicable EOY 2006 deadline of making the earlier applicable PFEA amendment (see the section titled “Pension Funding Equity Act of 2004” in Notice 2005-95), then the manner in which PPA §301(c) sets the new amendment deadline — by amending PFEA itself, as opposed to adding a new deadline — presumably should mean that the original deadline is now moot, even though technically the substance of the new PPA provision is different than under the original PFEA provision. In fact, if a plan had already adopted the PFEA amendment, then it will need to revisit the plan terms, so as to extend the rule beyond 2005 and to reflect the new aspects of the rule.

Note that the provision of PFEA being extended here requires the plan prior to amendment to have been operated as though the plan amendment had been in effect. A plan that has paid out any lump sum distribution during the early part of 2006 prior to PPA enactment may have technically violated this operational compliance rule if the §415 limit applied to the distribution amount, since the effect of the PPA provision in such instance would be to retroactively decrease the §415 ceiling, as previously discussed here. One presumes that forthcoming regulatory relief would not preclude plans in that predicament from access to the extended PFEA amendment deadline, provided that operational compliance has at all times been consistent with the relevant provision under the existing statute in effect at the time of the distribution.

(2) EOY 2009: All Other PPA Remedial Amendments for Non-Governmental Plans. For any other provision (other than for the §415 limit on lump sums) for any qualified plan other than a governmental plan, remedial amendments reflecting PPA requirements should be adopted no later than the close of the first plan year beginning on or after 1/1/2009. See PPA §1107 and the JCX-38-06 technical explanation.

In contrast with several PPA provisions, there is no delayed date provided under this amendment deadline for plans maintained under collective bargining agreements. In some instances, the delayed effective dates for collectively bargained plans for some PPA provisions could essentially collide with the absence of a comparable extension to the PPA amendment deadline, leaving little or no amendment relief. For instance, the PPA §1004 requirement that a plan offer an additional survivor annuity option offers up to one year of delay in the effective date for collectively bargained plans, so that the provision may not apply to the plan until the plan year beginning in 2009; but despite the additional year of delay in applicability of the provision, a plan amendment regarding that provision would be required by the close of that 2009 plan year. For a tighter illustration, new interest rate rules and vesting standards might not apply to a collectively bargained hybrid plan until 2010 under PPA §701(e)(4), although a technical correction might be required to sort out the tangle on that particular delay; but if so, then the plan amendment actually adopting those changes would need to be in effect upon the effective date, with no PPA amendment relief after that delayed effective date (nor before that effective date, as discussed below).

In order to be eligible for relief under PPA §1107 with respect to any particular PPA provision, the plan must be in operational compliance with the new requirement during the period beginning with the statutory or regulatory effective date of that requirement. Since PPA provisions have a rather extraordinary patchwork of effective dates, operational compliance may involve varying dates for actions to be taken by a plan.

Remedial plan amendments that meet the conditions of this PPA amendment deadline qualify for §411(d)(6) relief, except as to be provided by IRS regulations. For instance, one might expect to see restrictions on the extent of §411(d)(6) relief for certain aspects PPA’s change in the valuation basis for the floor on lump sum cashouts (see PPA §302), such as were previously imposed on similar changes made in prior legislation. Moreover, the JCT technical explantion anticipates IRS regulatory guidance that will preclude a plan from using PPA’s 411(d)(6) relief for a plan amendment that is not directly related to PPA provisions.

Furthermore, if remedial amendments satisfy the PPA conditions, then the plan is treated as being operated in compliance with plan terms during the period starting with the applicable statutory or regulatory effective date and ending with the amendment’s adoption (or with the close of the relief period, if earlier).

The JCT technical explanation states that PPA §1107’s rules for remedial amendment timing and relief are effective on the date of PPA enactment; but that effective date is not actually stated in PPA itelf. If remedial plan amendments are necessary with respect to any PPA provision that is retroactively effective prior to PPA enactment, the specific timing rules of PPA §1107 should extend relief to those plan amendments as well, provided IRS regulations grant suitable relief with respect to the PPA §1107 condition requiring operational compliance as of each provision’s effective date.

Conversely, the JCT explanation precludes from the scope of PPA §1107 any plan amendment adopted prior to the effective date of any particular PPA provision —

A plan amendment will not be considered to be pursuant to the bill (or applicable regulations) if it has an effective date before the effective date of the provision under the bill (or regulations) to which it relates. Similarly, the provision does not provide relief from the anticutback rule for periods prior to the effective date of the relevant provision (or regulations) or the plan amendment.

For a notable example on this point, return to the new rules for valuation of lump sum distributions referenced earlier in this post, as prescribed by PPA §302, which is not effective until plan years beginning on or after January 1, 2008. If a plan sponsor were to attempt to amend the plan to adopt those new lump sum valuation rules for any earlier plan year, then aside from the technical difficulty (if not impossibility) of doing so without having the new interest rates on hand, the relief offered by PPA §1107 would not be available to such a plan amendment. As discussed previously in this post, another illustration of this point might arise under the delayed effective date for the interest rate and vesting standards applicable to a collectively bargained hybrid plan: if those new rules take effect beginning with the 2010 plan year, then no amendment relief applies for such a plan for any pre-2010 periods, for instance were the plan to accelerate adoption of the new rules (e.g., in order to use the new interest rate rules versus the plan’s current basis, in which instance there could be potential 411(d)(6) implications).

(3) EOY 2011: All Other PPA Remedial Amendments for Governmental Plans. For any other provision (other than for the §415 limit on lump sums) for any governmental plan, remedial amendments reflecting PPA requirements should be adopted no later than the close of the first plan year beginning on or after 1/1/2011. Refer back to PPA §1107 and the JCX-38-06 technical explanation. Since governmental plans are exempt from IRC §411, PPA’s offer of §411(d)(6) relief is of no consequence, but governmental plan amendments that satisfy the PPA amendment conditions still benefit from the PPA relief that considers the plan to have been operated in compliance with plan terms for the applicable period between the effective date of a provision and the adoption of the remedial amendment.

(4) Or Earlier: Plan Termination. Long-standing requirements, most recently enunciated in Section 8 of Rev. Proc. 2005-66, have held that termination of a plan ends the plan’s remedial amendment period. PPA §1107 does not alter that rule: if a plan is terminated after the effective date of any particular PPA provision and prior to the end of the otherwise applicable PPA remedial amendment period, then the PPA amendment relief is still available for the period through plan termination, but only if a suitable retroactive remedial amendment is adopted in connection with the termination of the plan.

Or later . . . since now that we’ve brought up Rev. Proc. 2005-66, surely you know what question we now raise:

What Cycle Are You On? If you have a plan on Cycle D or E under Section 12 of Rev. Proc. 2005-66, then your initial EGTRRA remedial amendment period ends after the main PPA remedial amendment period described under subsection (2) of this post. So, would we not expect the IRS to quite quickly extend the PPA remedial amendment period, since it’s rather unlikely we might be forced to adopt PPA remedial amendments before the close of the EGTRRA remedial amendment period? How about: PPA remedial amendment period extended through the close of the second remedial amendment cycle? That’s probably way too lenient to expect, except perhaps for plans on Cycles A and B, whose initial EGTRRA remedial amendment cycle ends before the main PPA remedial amendment period. We eagerly await IRS guidance to tell us how to have PPA jump on the fast-moving amendment merry-go-round.

Disqualifying Provisions. And then I’ll close out my first segment on PPA amendments by pointing back in the direction of Section 5 of Rev. Proc. 2005-66, using its guidance as the backdrop to the new entry on my task list: “Segregate those provisions of PPA that give rise to disqualifying provisions, versus those where plan amendments would not be characterized as relating to a disqualifying provision.” Toward future posting.

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