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Guest Article

Deloitte logo

(From the June 25, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Eliminating Prohibited Payment Options in Bankruptcy—IRS Proposes Limited Exception to Anti-Cutback Rule


Newly released IRS proposed regulations would provide a limited exception to the anti-cutback rule in order to allow single-employer defined benefit plans to adopt amendments to comply with Code section 436(d)(2), which prohibits those plans from paying any "prohibited payment" (i.e., lump sum distributions or any other payment in excess of the monthly amounts payable under a single life annuity) while the plan sponsor is in bankruptcy.

The anti-cutback rule of Code section 411(d)(6) generally prohibits the elimination of an optional form of benefit with respect to benefits that are attributable to service before the amendment. However, Code section 411(d)(6)(B) gives the Treasury Secretary the ability to except from the anti-cutback rule an amendment that eliminates an optional form of benefit to the extent that plan participants do not lose a valuable right. Under that authority, the proposed regulations address the constraint imposed by Code section 436(d)(2) which—as added by the Pension Protection Act of 2006—requires single-employer defined benefit plans to provide that no prohibited payment will be made while the plan sponsor is in bankruptcy. The preamble explains that the Code section 436(d)(2) requirements are satisfied:

... only if the plan provides that a participant or beneficiary is not permitted to elect an optional form of benefit that includes a prohibited payment, and the plan will not pay any prohibited payment, with an annuity starting date that occurs during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, except for payments made with an annuity starting date that occurs on or after the date within the plan year on which the enrolled actuary of the plan certifies that the plan's adjusted funding target attainment percentage for the plan year is not less than 100 percent.

To resolve the competing interests, the regulations propose a limited exception to the anti-cutback rule by which a plan sponsor in bankruptcy would be permitted to amend the plan to eliminate a single-sum distribution (or other optional form providing for accelerated payment) if certain conditions are satisfied. The following four conditions would need to be satisfied on the later of the date the amendment is adopted or effective (the "applicable amendment date"):

1) AFTAP Less than 100 Percent: The enrolled actuary has certified that the plan's adjusted funding target attainment percentage (AFTAP) for the plan year that contains the applicable amendment date is less than 100 percent.

2) Sponsor in Bankruptcy: The plan is not permitted to pay any prohibited payment due to the application of Code section 436(d)(2) because the sponsor is a debtor in a bankruptcy case under Federal or state law.

3) Bankruptcy Court Order: The court overseeing the bankruptcy case has issued an order finding that the amendment eliminating the optional form is necessary to avoid a distress termination of the plan or an involuntary termination of the plan before the sponsor emerges from bankruptcy.

4) PBGC Determination: The PBGC has issued a determination that the amendment is necessary to avoid a distress or involuntary termination of the plan before the sponsor emerges from bankruptcy and the plan is not sufficient for guaranteed benefits.

The preamble explains that, under these circumstances, an amendment to eliminate an optional form of benefit would not result in the loss of a valuable right of a participant or beneficiary and, therefore, justifies the exception to the anti-cutback rule. Comments on the proposal are requested by August 20.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2012, Deloitte.


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