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06-27-2012 IRS Proposes Changes to Single-Employer Benefit Plans During Bankruptcy

On June 21, 2012, the Internal Revenue Service proposed changes to the Treasury Regulations under Section 411(d)(6) of the Internal Revenue Code of 1986, as amended (the "Code"). The proposed changes would allow single-employer defined benefit plan sponsors (covered under Section 4021 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain conditions are satisfied.

An "optional form of benefit" is a distribution alternative that is available under the plan with respect to an accrued benefit or a retirement-type benefit. Affected optional forms of benefit include single-sum distribution options and prohibited payments (generally a payment that is in excess of the monthly amounts payable under a single life annuity). Different optional forms of benefit exist if a distribution alternative is not payable on substantially the same terms as another distribution alternative. For example, different optional forms of benefit may result from differences in terms relating to the payment schedule, timing, commencement, medium of distribution, election rights, differences in eligibility requirements, or the portion of the benefit to which the distribution alternative applies. Further information on optional forms of benefit can be found here.

Code Section 411(d)(6) currently prohibits plan amendments that eliminate or reduce accrued benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. The proposed changes would permit a single-employer plan to be amended in order to eliminate an optional form of benefit that includes a prohibited payment described in Section 436(d)(5), provided that the following conditions are satisfied on the amendment effective date:

  1. The plan's enrolled actuary has certified that the plan's adjusted funding target attainment percentage for the plan year that contains the applicable amendment date is less than 100 percent;
  2. The plan is not permitted to pay any prohibited payment because the plan sponsor is a debtor in a bankruptcy case;
  3. The court overseeing the bankruptcy case has issued an order, after notice to each affected party and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan or an involuntary termination of the plan before the plan sponsor emerges from bankruptcy; and,
  4. The Pension Benefit Guaranty Corporation ("PGBC") has issued a determination that: a) the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the sponsor emerges from bankruptcy; and, b) the plan is not sufficient for guaranteed benefits within the meaning of Section 4041(d)(2) of ERISA.

If all of the aforementioned conditions are met, a single-sum distribution option or other optional form of benefit that includes a prohibited payment would not be allowed in order to prevent the plan from being terminated in a distress or involuntary termination. In addition, the bankruptcy court and the PGBC would both have rendered a decision that the plan would be terminated unless that optional form of benefit was eliminated. The plan amendment could not eliminate or reduce early retirement benefits or retirement-type subsidies, which would continue to be available under the plan.

The proposed regulations would apply to plan amendments that are adopted and effective after August 31, 2012. Written or electronic comments must be received by August 20, 2012. Outlines of topics to be discussed at the public hearing scheduled for Friday, August 24, 2012, must also be received by August 16, 2012.

Fraser Stryker is a leader in tax and employee benefits law. Attorneys in the Firm's Taxation and Employee Benefits Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. For more information on single-employer defined benefit plans, please contact Nicole R. Konen.