Guest Article

(From the April 25, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Provides Qualification Relief for Plans Affected by Supreme Court Anti-Cutback Decision

On Monday, April 18, 2005 the IRS released Revenue Procedure 2005-23, 2005-18 I.R.B. 1, which provides relief from disqualification for plans that have in the past adopted amendments similar to those at issue in Central Laborer's Pension Fund v. Heinz, 541 U.S. 739 (2004). In Heinz, an amendment to a multiemployer pension plan expanded the types of post-retirement employment that would result in the suspension of benefit payments. The Court held that this amendment violated the prohibition against retroactive cutbacks in accrued benefits. The revenue procedure limits the retroactive impact of the Court's decision. Affected sponsors may avoid plan disqualification through timely adoption of a remedial amendment and operational compliance with that amendment.

Effect on Pension Plan Sponsors

Both the Heinz ruling and Rev. Proc. 2005-23 are most likely to affect multiemployer plans. Single-employer plans with suspension-of-benefits provisions should be reviewed to confirm that those provisions were part of the plan's original terms rather than the result of later amendments. Note that "suspension of benefits" includes failure to provide automatic actuarial increases for participants who continue employment past the plan's normal retirement age without commencement of benefits. Plans that were improperly amended must rescind the amendment, effective as of June 7, 2004, and may in some circumstances be required to make restorative payments to certain participants. In general, corrective action must be taken by January 1, 2006.

Statutory Background

Both ERISA  203(a) and IRC  411(a) require that accrued benefits attributable to employer contributions become nonforfeitable pursuant to schedules based on service.(1) An exception to this vesting rule allows plans to suspend benefit payments to retirees in pay status under certain circumstances. In the case of a single-employer plan, the plan may suspend benefit payments to a retiree who returns to work for the employer.(2) A collectively bargained multiemployer plan may suspend benefit payments to a retiree who returns to work "in the same industry, in the same trade or craft, and the same geographic area covered by the plan." Reemployment that can result in suspension of benefits is often referred to as "203(a)(3)(B) service" after the ERISA section in which it is defined.

Both ERISA  204(g) and IRC  411(d)(6) prohibit pension plan amendments that decrease a participant's accrued benefits or have the effect of "eliminating or reducing an early retirement benefit or retirement-type subsidy" (the "anti-cutback rule").

Heinz Facts and Holding

The plaintiffs in Heinz were retired construction workers who participated in a multiemployer pension plan. The plaintiffs retired after accruing sufficient pension credits to qualify for a fully subsidized early retirement benefit. They then took jobs as construction supervisors. At the time of their retirement, the plan had provisions for suspension of benefits if a participant returned to employment in the construction industry, but the disqualifying employment did not include supervisory positions. Two years later, the plan was amended to expand the definition of "disqualifying employment" to include supervisory work in the construction industry. After receiving notice of the amendment from the plan, the plaintiffs continued to work as supervisors and the plan proceeded to suspend payment of their benefits.

The Supreme Court agreed with the plaintiffs that the plan amendment suspending their benefits violated the anti-cutback rule, stating, "[A]n amendment placing materially greater restrictions on the receipt of the benefit `reduces' the benefit just as surely as a decrease in the size of the monthly benefit payment." Appreciating the potential impact of the decision on plans, the Court invited the IRS to use its power under IRC  7805(b) to limit the retroactive impact of the decision.

Required Amendment

Rev. Proc. 2005-23 provides relief from disqualification for plans that, prior to June 7, 2004, were amended to restrict the right of participants to receive previously accrued benefits on account of 203(a)(3)(B) service. To avoid disqualification, affected plans must adopt a "reforming amendment" within the EGTRRA remedial amendment period.

The reforming amendment must provide that as of June 7, 2004 (or an earlier date chosen by the plan) the provisions of the original benefit suspension amendment do not apply to benefits that had accrued as of the later of the original amendment's effective date or date of adoption. Any suspension of benefits rules that the plan had in effect before the improper amendment may be reinstated and applied to all accrued benefits. Since it is impracticable to apply different rules on suspending benefits to different portions of a participant's accrued benefit, plan sponsors will generally wish to adopt this alternative or provide that the rescinded rules will continue to apply to participants who entered the plan after their original adoption date. For example, the plan that was the subject of the Heinz decision has these options: (i) treat only nonsupervisory employment as 203(a)(3)(B) service on and after June 7, 2004; (ii) treat supervisory employment as 203(a)(3)(B) service for participants who did not accrue any benefits before the amendment adding that restriction was adopted; (iii) treat supervisory employment as 203(a)(3)(B) service only for benefits accrued after the amendment was originally adopted; or (iv) eliminate suspension of benefits altogether.

The "reforming amendment" must provide for the payment of retroactive benefits (including interest and actuarial increases) beginning as of June 7, 2004 (or an earlier date chosen by the plan) to "affected plan participants" with respect to the benefits that had accrued before the plan was improperly amended. "Affected plan participants" include participants who started receiving benefits that were suspended as a result of the original amendment and those who applied for benefits which did not commence because of the original amendment. Payment of these make-up benefits must begin no later than January 1, 2006.

In addition, employees who did not apply for benefits but would have been able to do so if the original amendment had not been adopted must be given the opportunity to elect retroactive benefit commencement. Notice of this right must be given to eligible participants no later than January 1, 2006, and they must be given at least six months after receipt of the notice to make their elections.

Examples of the application of the new Revenue Procedure demonstrating proper means of making retroactive payments are posted on the IRS homepage.

Additional Comments

The IRS noted that plans which had obtained determination letters for amendments like those at issue in Heinz have been unable to rely upon those letters since June 7, 2004. Additionally, such amendments are now "disqualifying provisions" resulting from a change in the qualification requirements under IRC  401(a). The amendments required by the Revenue Procedure must be adopted within the EGTRRA remedial amendment period, effective no later than June 7, 2004. Operational compliance, as noted above, is required by January 1, 2006.

The Revenue Procedure by its terms has no effect on the rights of any party under counterpart provisions of ERISA. Hence, it is possible that participants affected by suspension-of-benefits amendments may bring actions to recover benefits suspended before June 7, 2004. It will be up to the courts to determine to what extent Heinz will apply retroactively to those claims.

The IRS also announced that it expects to issue regulations reflecting Heinz. It appears that these regulations will not accept the invitation, extended by Justice Breyer in an opinion joined by three other Justices, "to issue regulations explicitly allowing plan amendments to enlarge the scope of disqualifying employment with respect to benefits attributable to already-performed services".

1 Accrued benefits attributable to employee contributions must always be nonforfeitable.

2 See IRC  411(a)(3)(B)(i).

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Bart Massey 202.220.2104, Elizabeth Drigotas 202.879.4985, Diane McGowan 202.220.2077, Taina Edlund 202.879.4956, Martha Priddy Patterson 202.879.5634, Laura Edwards 202.879.4981, Tom Pevarnik 202.879.5314, Mike Haberman 202.879.4963, Tom Veal 312.946.2595, Stephen LaGarde 202.879.5608, Deborah Walker 202.879.4955, J.D. Lutz 202.879.5366 Copyright 2005, Deloitte.