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.


March 12, 2006

EGTRRA Amendment Extension for SIMPLE IRAs

Filed under: Amendments, IRS, SIMPLE IRA — Fuguerre @ 10:01 am

If your SIMPLE IRA plan has not been amended for the tax law changes enacted by EGTRRA by the deadlines contained in Revenue Procedure 2002-10, your plan is no longer eligible to receive tax deferred contributions for yourself or your employees after December 31, 2001. However, amending your plan under the EGTRRA relief initiative will enable you to retain the many favorable tax benefits of your plan.

Employers that sponsor SIMPLE IRAs are being offered an extension through 12/31/2006 to amend their plans for EGTRRA. Sponsors that previously failed to amend their SIMPLE IRAs for EGTRRA may either adopt the latest version of the IRS model SIMPLE IRA plan (revised August 2005) or adopt the SIMPLE IRA plan document that their financial institution has updated for EGTRRA. [Employee Plan News; Retirement News for Employers; SIMPLE IRA Plan Document Compliance and Relief]

Previously, SIMPLE IRA plans needed to be amended for EGTRRA no later than the end of 2002 (or, in the case of prototype SIMPLE IRA plans, 180 days after the plan was approved by the IRS) in order to be eligible for tax preference treatment after 12/31/2001. [Rev. Proc. 2002-10] SIMPLE IRA sponsors may determine if a plan is in compliance by checking the date on the plan document. If an IRS model plan (Form 5304-SIMPLE or Form 5305-SIMPLE) is being used, then the date in the upper left-hand corner should be either March 2002 or August 2005, else an updated version must be completed and signed by 12/31/2006. SIMPLE IRA sponsors not using an IRS model plan should contact the custodian or trustee of the plan to assure updated compliance. See also SIMPLE IRA Plans and the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and FAQs regarding Relief for SIMPLE IRA Plans.

The IRS intends to provide notice of the relief period through individual correspondence to each known SIMPLE IRA sponsor, including those whose plans are already in compliance with EGTRRA. The IRS also encourages SIMPLE IRA plan custodians, trustees, and sponsors of SIMPLE IRA prototype plan documents to remind their clients of the requirement for updated plan documents. [Letter 4083; Letter 4084]

January 14, 2006

Alito on Transferred Early Retirement Subsidies

Filed under: Amendments, Litigation, Pensions — Fuguerre @ 3:09 pm

“I join the opinion of the court, but I write separately to highlight my understanding of the question concerning early retirement benefits that is before us and the reasons why the district court’s decision with respect to this question was incorrect.”

Pension plan participants retain the right to grow into eligiblity for subsidized early retirement through further employment with a successor firm, according to a 1993 appellate court decision that includes an opinion written by Judge Samuel Alito. [Gillis v. Hoechst Celanese Corp. No. 92-1879 (9/7/93)]

Following the sale of a unit, plaintiff employees in that unit continued working in their same jobs. Had the unit remained with the original employer, the employees would have been entitled to subsidized early retirement benefits. The plaintiffs alleged that the seller had transferred insufficient assets to the unit’s new owner. The district court granted summary judgment to the defendant company, ruling that plaintiffs were ineligible for early retirement benefits at the time of the sale of the unit.

Although finding no clear explicit rule under ERISA itself regarding elimination of rights to early retirement subsidies for employees not yet eligible for those subsidies, the Third Circuit appellate court reversed, looking to the Rev.Rul. 85-6 protection of future early retirement subsidies upon plan termination. “Because the employees continued to work in their same positions after the sale of the division, the court found that the employees had not been separated from service and continued to accumulate service for purposes of the subsidized early retirement with respect to their transferred benefits while working for the buyer.” [ERISA: A Comprehensive Guide; Schneider, Freedman, eds.; Aspen Publishers; 2002; p13.09.] The Third Circuit accordingly held that the subsidies were to be fully funded upon transfer of assets.

Alito wrote a separate opinion connecting the dots, first focusing on plaintiff’s reliance on the preservation rule of IRC 414(l), which requires benefits after a transfer to be at least as valuable as those present prior to the transfer, as judged in the context of the asset allocation rules of ERISA 4044. The effect, wrote Alito, was to require that allocation of plan assets to the plaintiff’s early retirement benefits if the plan had terminated immediately after the transfer could not be less than the allocation that would have been made upon plan termination immediately before the transfer. To make that determination, Alito pointed further to the IRC 411(d)(6) anti-cutback rule, notably the prohibition against reducing early retirement benefits for any participant who satisfies preamendment conditions either before or after a plan amendment. While recognizing that IRC 414(l) did not expressly characterize plan termination as a plan amendment for such purposes, Rev.Rul. 85-6 drew that conclusion. Alito thus agreed with the Third Circuit’s majority, concluding that the seller was required to transfer sufficient assets to ensure funding of early retirement subsidies that would be at least as great as had the plan been terminated.

The Gillis v. Hoechst Celanese ruling requiring funding of early retirement subsidies upon asset transfer implied “in dicta that such protection would have to be provided even if there had been no transfer of plan assets and liabilities.” [Employee Benefits Law; BNA Books; 2000; p226.] The Third Circuit subsequently rejected that position in cases where a buyer did not assume the pension plan, adopting an Eighth Circuit holding that in such instances “participants whose employment was terminated by reason of a sale of assets could not use postsale service with the buyer to earn early retirement subsidies from the seller’s pension plan.” [ibid] “Nothing in ERISA suggests that plans are required to give credit for future service with an unrelated employer for any purposes, including eligibility for early retirement benefits.” [Pension Plan Terminations; Veal, Mackiewicz; BNA Books; 1998; p133.]

January 10, 2006

Phantom Account Offset Was Phantom Amendment

Filed under: Amendments, Litigation, Pensions — Fuguerre @ 4:21 am

Modifications made to the methodology that Xerox’s pension plan used to reduce rehired workers’ additional the benefit accruals of rehired workers by the value of lump sum distributions taken at earlier departure from the company were not properly communicated to employees. According to an appellate court ruling vacating the district court’s dismissal of the case, the changes to the plan did not constitute a permissible plan amendment; thus the plan’s “phantom account offset” could not be applied to reduce workers’ benefits. [Frommert et al. v. Conkright et al. No. 04-4609-cv, CA2 (1/6/06)]

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