Guest Article

(From the January 20, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

IRS Plans to Issue Regulations on Whether Shutdown and Involuntary Separation Benefits Are Protected by Anticutback Rule

Do shutdown benefits funded through pension plans, and other payments contingent on unpredictable events, constitute "early retirement benefits" or "retirement-type subsidies" for purposes of the IRC section 411(d)(6) anticutback rule? The Treasury Department and the IRS are planning to draft proposed rules on this question, according to IRS Notice 2003-10. But until that time, the Notice provides that, until final regulations are issued in the Federal Register, the IRS will not consider a plan amendment that eliminates or reduces an early retirement benefit or retirement-type subsidy based on an unpredictable contingent event, such as a plant shutdown, to violate IRC section 411(d)(6), if the amendment is adopted and effective prior to the contingent event. The planned regulations are intended to resolve conflicting court decisions on these "contingent event" subsidies.

Background

In general, IRC section 411(d)(6) and ERISA section 204(g) prohibit amendments to tax-qualified pension plans that decrease any participants' accrued benefits. The statutes specify plan amendments that have the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy (or eliminating an optional benefit form) with respect to benefits attributable to service before the amendment will be treated as violating this anticutback rule. Both the IRC and ERISA defer to Treasury regulations to define "early retirement benefit" and "retirement-type subsidy."

At least four federal circuit courts have ruled on whether pension plan benefits contingent on the occurrence of an unpredictable event, such as a plant shutdown or involuntary separation, are early retirement benefits or retirement-type subsidies for purposes of IRC section 411(d)(6). In Richardson v. Pension Plan of Bethlehem Steel Corporation, 67 F.3d 1462 (9th Cir. 1995), withdrawn, 91 F.3d 1312 (9th Cir. 1996), modified, 112 F.3d 982 (9th Cir. 1997), the Ninth Circuit ruled a shutdown benefit was a retirement-type subsidy. The 5th Circuit, in Harms v. Cavenham Forest Industries, Inc., 984 F.2d 686 (5th Cir.), cert. denied, 510 U.S. 944 (1993), ruled an involuntary separation benefit was a retirement-type subsidy. By comparison, the Sixth Circuit found a plant shutdown benefit was not a retirement-type subsidy. Ross v. Pension Plan for Hourly Employees of SKF Industries, Inc., 847 F.2d 329 (6th Cir. 1988).

More recently, the Third Circuit held an involuntary separation benefit funded through a pension plan was both an early retirement benefit and a retirement-type subsidy to the extent it provided for the payment of normal retirement benefits that continued beyond normal retirement age. Bellas v. CBS, Inc., 221 F.3d 517 (3rd Cir. 2000), cert. denied, 531 U.S. 1104 (2001). The Bellas case has drawn significant attention because a number of plan sponsors have eliminated similar separation benefits in the recent past due to cost and concerns about worker retention, among other things.

Overview of Upcoming Proposed Regulations

According to Notice 2003-10, IRS and Treasury anticipate the upcoming proposed regulations "will provide general guidance concerning early retirement benefits and retirement-type subsidies under 411(d)(6)(B)." However, IRS and Treasury also expect the proposed regulations to specifically address a series of key issues raised in the Third Circuit's Bellas decision.

• Are benefits that are contingent on the occurrence of certain events, such as plant shutdown or involuntary separation, and that continue beyond normal retirement age, retirement-type subsidies that are protected under section 411(d)(6)(B)?

• If the answer to the above is "yes," are these benefits retirement-type subsidies both before and after the occurrence of the contingency? (CBS argued the involuntary separation benefit did not accrue until an eligible participant was terminated, and thus that the elimination of the involuntary separation benefit for active workers did not result in the elimination or reduction of an accrued benefit. The Third Circuit disagreed.)

• Should payment of the accrued benefit at an early commencement date on an unreduced or partially subsidized basis be treated as providing a benefit that continues beyond normal retirement age and, hence, be considered to be a retirement-type subsidy?

The notice states that any final regulations issued with respect to these issues will be prospective. In other words, regardless of the position the IRS takes in final regulations, the Service will not disqualify any plan merely because it "eliminates or reduces an early retirement benefit or retirement-type subsidy that is conditioned on the occurrence of an unpredictable contingent event ... if the amendment is adopted and effective prior to the occurrence of the contingent event and prior to the publication of final regulations addressing this issue in the Federal Register." (The notice stresses these benefits clearly cannot be eliminated once the contingency has occurred.) However, this IRS position may not prevent employees from challenging such a change in court.

Request for Comments

According to Notice 2003-10, IRS is interested in comments on what guidance should be provided regarding early retirement benefits and retirement-type subsidies. The Service also is looking for comments on whether the proposed regulations should "include relief for amendments that eliminate or reduce early retirement benefits or retirement-type subsidies that are contingent on unpredictable events, that create significant burdens or complexities for the plan and plan participants, and that affect the rights of any participant in no more than a de minimis manner." [Section 645(b) of the Economic Growth and Tax Relief Reconciliation Act amended section 411(d)(6)(B) to direct the Treasury Secretary to issue regulations on this latter issue.]

Comments are due by May 5, 2003.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.