Early Retirement Subsidy Upon Plan Termination

[Guest amboyd]

A defined benefit pension plan participant is 49 years old in May 2000. Plan provides an early retirement subsidy benefit at age 50 and 10 years of service. DB Plan is frozen as of December 2000 and the Plan is subsequently amended to provide for termination. In May 2001, after accruals under the plan have been frozen, but before distribution of the plan assets, participant turns 50 years old. Does the participant still qualify for the early retirement subsidy?

I have not found any IRS guidance.

Any input would be greatly appreciated.

Thank you.

A. Boyd

[david rigby]

Probably depends on the plan terms. However, the general rule is that the subsidy should be available to the participant in the annuity option he receives, and does not have to be included in the lump sum option he receives.

But be aware that precedent is likely very important. That is, if the plan has offered a lump sum to past early retirees, what subsidy, if any, was included in that lump sum?

[Guest Harry O]

Yes, the employee is entitled to the subsidy as applied to the age 65 benefit accrued as of the date accruals were frozen.

There is a Revenue Ruling right on point. I'm at home but I believe it was issued in 1986 or 1985. See Section 411(d)(6) for the statutory authority (terminating the plan or freezing accruals are obviously "amendments" to a plan that can't eliminate early retirement benefits).

[Guest Keith N]

Just to clarify, I'm agreeing with both PAX and Harry O. Most likely he is entitled to the subsidized early retirement benefit (assumine he has the 10 years), but it does not have to be recognized in the lump sum (unless it's the plan's practice to do so).

When a Plan terminates the participants always have the right to take the annuity, which must contain all of the same options, rights & features of the Plan. The lump sum is generally based on the accrued benefit payable @ NRD and does not have to contain all of the ER subsidies. In effect, the participant can choose to waive the early retirement subsidies in return for the cash up front.

I beleive this should be explained to the participants in the various benefit information related to the Plan's termination.

[Guest amboyd]

Thanks for the helpful responses. I reviewed the plan documents, including the spds, but did not find that they addressed the issue in any useful

way. I reviewed Rev. Rul. 85-6, which helped.

It seems clear that the early retirement subsidy

would be required if the participant elected the annuitized payment. The participant wants the

lump sum, and given the terms of the plan and

past practice, it seems likely that the

er subsidy would be payable in the lump sum

option as well. Thanks again for the input.

[Guest nikomendy]

on a similar vein and follwing the above questions- if a qualified db plan has a choice,

of a lump sum with no er subsidys OR participant

can choose the annuity (with er subsidys included);

if a participant is eligibe under plan provisons,

is there any legal way (without violating 411(d)

6b--- that

a participant can be forced into the lump sum,

and denied the annuity choice ?

Does the recent loophole to 411(d)6b, opened

to allow susidy removals if no participant is

impacted more than deminimis-- (in the recently

enacted tax bill), now legitimize removal of

retirement subsidys ?

[Guest Keith N]

I seems to me that you raised two issues: 1) forcing a lump sum and 2) removing a subsidized benefit.

1) The only time you can force a lump sum is if the amount is less than $5,000 and your document provides for it. Other than that, I don't think you can ever force a participant to take a lump sum.

2) I'm not familiar with any new 411(d)(6) "loophole" allowing you to remove subsidized early retirement benefits in a db plan. Maybe someone has a site?

If something exists with a "deminimis" requirement, I would still be very careful and would make sure I'm working with a good ERISA attorney.

[Guest nikomendy]

"I have extracted the portion of the recently enacted law in enrolled hr1836", which opens a new

loophole to 411(d)6 of tax code And 204(g) of ERISA. Note that this section is considered by some to be broad and vague-- but it seems to disallow cutbacks which have more than a de minimis impact on any participant". When new treasury regs are issued this will elide this

section. However-- even though treasury is ordered

to issue new regs- since erisa, also has the

de minimis wording-- it is doubtful that a trasury

regulator could interpret de minimis to mean

a significant elimination of these retirement

subsidys. It is always poosible, that a plan sponsor might emerge and test this section with

cutbacks-- but that could be very risky until new regs are finalized.

===extract from just enacted Pension/tax bill==

(B) REGULATIONS-

(1) AMENDMENT OF INTERNAL REVENUE CODE- Paragraph (6)(B) of section 411(d) (relating to

accrued benefit not to be decreased by amendment) is amended by inserting after the second sentence thefollowing: `The Secretary shall by regulations provide that this subparagraph shall not apply to any planamendment which reduces or eliminates benefits or subsidies which create significant burdens or complexities for the plan and plan participants, unless such amendment adversely affects the rights of any participant in a more

than de minimis manner.'.

2) AMENDMENT OF ERISA- Section 204(g)(2) of the Employee Retirement Income Security Act of 1974 (29U.S.C. 1054(g)(2)) is amended by inserting after the second sentence the following: `The Secretary of theTreasury shall by regulations provide that this paragraph shall not apply to any plan amendment which reduces or eliminates benefits or subsidies which create significant burdens or complexities for the plan and plan participants,unless such amendment adversely affects the rights of any participant in a more than de minimis manner.'.

(3) SECRETARY DIRECTED- Not later than December 31, 2003, the Secretary of the Treasury is directed toissue regulations under section 411(d)(6) of the Internal Revenue Code of 1986 and section 204(g) of the Employee Retirement Income Security Act of 1974, including the regulations required by the amendment made by this subsection. Such regulations shall apply to plan years beginning after December 31, 2003, or such earlier date as is specified by the Secretary of the Treasury.

[MGB]

This section of EGTRRA is targeted at mergers, not ongoing plan situations. If you read the conference report, they give examples of situations that the regulations are to address. This is not meant to allow the removal of subsidies in a plan...it is to remove one of two alternate subsidies that are nearly equal to each other and create administrative complications in trying to administer both. The de minimus issue comes in during the comparison of the two types of subsidy. A single subsidy is not a de minimus difference from another by definition (it has nothing to compare to).

[KJohnson]

As to the original question, look at the legislative history of REA. The Senate Finance Committee Report regarding REA contained specific examples of the effects of §411(d)(6) with respect to a plan that contained early retirement subsidies This legislative history to REA specifically notes that even if a participant does not meet a plan's requirement for an unreduced early retirement benefit at the time of a plan amendment, that amendment cannot eliminate the participant's right to subsequently satisfy or "grow into" such an unreduced benefit. The Report then notes that:

The bill does not provide an exception to the prohibition against reductions of benefits or elimination of benefit options in the case of a terminated plan. Accordingly, a plan is not to be considered to have satisfied all of its liabilities to participants and beneficiaries until it has provided for the payment of contingent liabilities with respect to a participant who, after the date of termination of a plan, meets the requirements for a subsidized benefit.

[Guest nikomendy]

-even if new enactly law, allowing deminimis

cutbacks in early retirement subsidys-- is targeted for plan mergers--- treasury regs will

still have to elide just what is de minimis.

Plan (a) has an age 52 early retirement subsidy,

plan (B) has none, and only the normal age 65.

Plan (a) is merged into plan (B). employees

of plan (a) are placed under plan (B).

It seems clear that 100% elimination of plan (a)

subsidys are still not allowed- even under the recently amended 411(d)6. BUT treasury is charged

to articulate, effectively just what % reduction

does consitute more than "de minimis".

Last year, new treasury regs liberalized what

optional froms of benfit could be withdrawn,

primarily when defined contribution plans merge.

BUT no relaxation of the DB plan 411(d) protection

was allowed. Even then, there were write-in comments trying to suggest that in future regs,

perhaps extended distribution rights could be

withheld from those say younger than 65. A very

obvious scheme to effectively remove 411(d) protection of early retirement subsdiys,

by only allowing lump sums for retirement, pre65.

(subsidys not protected in lump sums).

It remains to be seen, if the regs which are

drafted as a result of the just enacted de minimis

allowance of cutbacks- attempt to suggest

pre-65 (forced lump sums), justified by this

newly amended 204g2 section of erisa. Certainly,

it was not the intent of this legislation to allow

100% elimination --BUT, DE MINIMIS IS STILL NOT

defined!

[Guest Hans Moleman]

I want to know what elide means.

[Guest nikomendy]

ELIDE, in the context used, means:

TO SPECIFY IN MORE DETAIL

Treasury will have to specify in more detail,

in new regulations, what does or does not constitute a "de minimis" reduction in early retirement subsidys.........

[Steve72]

Just to be an annoying stickler:

Elide

I belive the Treasury may have already elided the definition. They may, however, need to elucidate it

[Guest slt]

In response to KJohnson's post, what happens under the following scenario:

Plan provides that Participant P can get an early retirement subsidy at age 55 with 20 years of service. In 2000, P is 55 and has 19 YOS. In 2001, the Plan is amended to do away with the early retirement subsidy. However, in light of the Code (as KJohnson and others point out), the plan would violate 411(d)(6) if it did not let P grow into the subsidy.

Suppose the Plan lets P grow into the subsidy. Does the subsidy apply only with respect to 19 years of service with the 1 year of service earned after the amendment subject to reduction for early retirement?

IN other words, can I preserve the subsidy and let the participant grow into becoming eligible for it, but reduce benefits accrued AFTER the date of the amendment? Seems like I could. Any thoughts would be appreciated! Thanks!

[Guest chordbender]

The Relative Value Notice will illuminate what is missing from any lump sum so at least there is very little hidden from people as they make their choices.