Voluntary Reduction of 411(d)(6) Benefits...

[Fielding Mellish]

I think I know the answer to this but I wanted to see if anyone had any other input. Defined benefit plan with 5 year cliff vesting. The Plan is in some trouble financially, mostly due to the fact that retirees currently receiving benefits are receiving very high monthly payments. This is due to a high accrual rate in the 90s and early 2000s.

I have had a number of people ask me if we can ask the retirees to voluntarily reduce their benefits in order to stave off PBGC involvement (which will be happening within the next 10-15 years if things stay the way they are).

26 CFR 1.411(d)-4 Q&A # 2 states "A plan is not permitted to be amended to eliminate or reduce a section 411(d)(6) protected benefit that has already accrued, except as provided in 1.411(d)-3 or this section. This is generally the case even if such elimination or reduction is contingent upon the employee's consent."

Seems to me that it's clear that we cannot ask the retirees (or anyone with an accrued benefit) to voluntarily reduce their benefits. But, when I've said this to other professionals, I sometimes get a look like I'm crazy.

Thoughts? Thanks.

[My 2 cents]

1. Assuming that this is a normal ERISA plan and not a governmental plan essentially exempt from 411's protections, it is pretty clear that no reductions in benefits, especially those already in pay status, would be acceptable under the law and regulations.

2. Not to say that there weren't companies lulled into a false sense of security in the late 1990s into the early 2000s, but too characterize the problem as being due to benefits being paid to retirees as "very high" and to ascribe that to "a high accrual rate" in the 90's and early 2000's strikes me as, at best, disingenuous. Wouldn't the funding for those and subsequent years have reflected appropriately high contribution requirements? Wouldn't the Pension Protection Act of 2006 have set them on the road to paying off all unfunded accrued benefits by 2015 (even if they chose to lower costs for current years by electing to lengthen the amortization period)? Perhaps the problem is that the sponsor has, for years, failed to act responsibly with respect to funding the plan liabilities that it agreed to assume.

3. Is there any reason to expect the retirees to voluntarily give up any of their benefits (even if the plan could ask them to do so)? Wouldn't one of the gentler responses be to ask the current management to slash their salary and bonuses and to use that money (as well as dividends to stockholders, if applicable) to fund the plan better?

4. Who are these professionals who seem to think that it can be done?

All of the above presumes that it is not possible to establish some sort of case that the high accruals granted to these retirees are the result of some sort of fraud.

[Andy the Actuary]

Have seen the IRS not comment on waivers to HCE key employees. I believe the PBGC will not object if the waivers are by no more than two substantial owners. These exceptions, however, have been witnessed only when final distribution was made subsequent to a plan termination. I.e., not when the plan is ongoing.

Some practitioners take the position that if you are okay if you have an IRS determination letter. However, what is done and included in document for an IRS D-Letter doesn't mean that it wouldn't later have to be rectified upon audit. It would mean only that the IRS wouldn't retroactively disqualify the plan.

The pension world is well aware of an infamous disenrolled EA who would make up numbers to satisfy clients' contribution objectives, reduce future accruals without giving 204(h) notices, and waive benefits without even having a supporting piece of paper. Anything is doable if you choose to flout the law. The generally accepted understanding is that as you stated, a plan participant can't voluntarily forfeit benefits.

Whatever action is taken should be preceded by a legal review.

While you didn't state it, presumably plan benefits and future participation are frozen?

[gregmk]

There's no way a plan could permit participants in pay status to waive their benefits.

[Fielding Mellish]

This is a Taft-Hartley multiemployer plan. It's mostly the Trustees who ask the question about voluntary reduction of benefits, it's just that many of the other plan professionals seem unsure about the response. To me, it seems so clear that it was disconcerting that others had to even think about it.

Frankly, I sincerely doubt any retirees would elect to reduce their pensions, so it would be a moot point anyway.

But, I'm glad you guys all think along the same lines that I do. Thanks.

[GMK]

Among other things, the prohibition prevents the possibility of using coercion to get people to 'voluntarily' reduce their benefits.

[My 2 cents]

Is it true that some protections against loss of accrued benefits may be lost if a multiemployer plan is in endangered status? If so, would that apply here?

Still, the idea of asking retirees to absorb voluntarily the impact of plan underfunding seems wrong.

Shouldn't the contributing employers be asked to step up to improve the funding (or face stiff withdrawal liability if they try to leave)?

I recall that the PBGC had (at least previously) left alone benefit levels in excess of the guarantee limit in underfunded single employer plans that they trusteed for people who had been in pay status for more than 3 years. Do they still do that? What is their practice with respect to long-time retirees in underfunded multiemployer plans?

[Fielding Mellish]

This Plan is in critical status and has already cut pretty much everything that they're allowed to cut. All adjustable benefits have been cut and any benefits that had been added within the 60 previous months had been cut, too. Contributing employers are already contributing a good chunk of change. Really both the employers and the Union have stepped up to the plate. It's just that the only way to save this Plan (like so many others) is to cut retiree benefits, but there's just no way to do that now.

[My 2 cents]

Right. There is no just way to do that now. The retirees performed their jobs relying on the negotiated benefits as a means of support after their working careers were over. "Contributing employers are already contributing a good chunk of change" is a value judgement. Too bad for the company owners, but the retirees have a greater moral and legal claim to company assets than the owners.

Oh! You said "there is just no way to do that now". That too.

[Effen]

FWIW, the Central States Plan is currently negotiating with the PBGC to allow them to reduce benefits in order to delay the inevitable bankruptcy. The theory is that when the plans run out of money, the PBGC will step in and fund the benefit up to the PBGC maximum. The multiemployer maximum is relatively low and therefore would result in drastic benefit reductions. The funds are petitioning the PBGC to allow them to reduce the benefits gradually in an effort to delay PBGC takeover. The PBGC has not issued a ruling, but it is being negotiated.

If the PBGC permits central states to do this, your client may be able to attempt a similar resolution. But I wouldn't hold out too much hope that it will produce a viable solution any time soon.

Also, if your client is facing an certain plan bankruptcy, they should be aware that the PBGC has already stated that once central states fails, it will take the multiemployer side of the PBGC with it, and without a government bailout (which the republican congress has continually stated will not happen), even the guaranteed benefit will go away.