Everett Moreland

Treasury seems to be saying in 1.457-1© that a participant has no basis for purposes of Section 72 for previously taxable amounts that were not included in income. I don't know whether that is a generally applicable rule. If it is, the statute of limitations might not help.

One thing to consider if using mbozek's approach is what is called the duty of consistency, or sometimes the doctrine of consistency. The basis idea is you can't whipsaw the IRS by taking inconsistent positions on the same item in different years. I don't know enough about the duty of consistency to know whether it would apply here. If it would apply, distributions would be taxable. For a recent use by Treasury of the duty of consistency, see the second sentence of the following Treasury Regulation § 1.457©: "The amount included in gross income on the applicable date under paragraphs (a)(1) and (a)(2) of this section is equal to the present value of the compensation (including earnings to the extent provided in paragraph (a)(2) of this section) on that date. For purposes of applying section 72 on the applicable date under paragraphs (a)(3) and (4) of this section, the participant is treated as having paid investment in the contract (or basis) to the extent that the deferred compensation has been taken into account by the participant in accordance with paragraphs (a)(1) and (a)(2) of this section."

Submit under EPCRS as a nonamender. I've submitted several of these, some as nonamenders since the 60s. The IRS has been easy to deal with. A fairly painless process.

GBurns: My reason for not limiting the request for IRS guidance to my original post is I would like guidance from the IRS that goes well beyond my original post. In my last post I stated the possible request for guidance broadly, to see what reactions would be posted.

See Cooperative Benefit Administrators, Inc. V. Ogden (5th Cir, as revised 4/29/04).

Kirk: Do you know of an internet site or other available resource that lists the attorneys at the IRS and Treasury who are assigned to work on regulation projects? I suppose I should ask that the § 885 regulations clarify that § 885 does not apply to any nontaxable benefit, whether paid to a current employee or a retiree, and whether paid from the employer's assets or a trust.

mbozek: Thank you. GBurns: The accumulated funds can be used only to reimburse expenses for medical care as defined in IRC § 213(d)(1). The plan administrator determines whether expenses are reimbursable.

I would appreciate any thoughts or authority on whether an employer-funded plan and trust for retiree health benefits is a deferred compensation plan for purposes of IRC Section 457(e)(11) and (f) or the rules in Section 885 of the American Jobs Creation Act of 2004 for nonqualified deferred compensation. Assume that under the plan document the employer contributes a percentage of each participating employee's compensation for the plan year, to be allocated to an account for the employee to be used for health benefits after retirement.

See 1.411(a)-7© in general, 1.411(a)-7©(5) and 1.411(a)-7©(6) Ex. (4) in particular, and 411(b)(1)(G). See IRS Q&A from 2001 ASPA Annual Conference: "21. DB plan provides benefit of 3% of average annual compensation (AAC) times years of service. AAC is defined in the plan as highest 3 consecutive years of last 10 years of service. Employee goes part time and AAC goes down in such a manner that accrued benefit decreases. This does not seem to be prohibited under 411(d)(6) since an amendment did not cause the decrease. Is this correct? "No. This is prohibited under 411(b)(1)(G)."

I assume your early retiree is receiving an annuity and returned to work after a bona fide termination of employment. My understanding is that an early retiree who returns to work for the same employer before normal retirement age while receiving an annuity may continue to receive the annuity if allowed by the plan.

As I understand your question, by the terms of the plan document groups of employees became participants in 1994, 1995, and 1996, and the plan document gives a particular benefit to the 1995 group but not to the 1994 or 1996 group. As I understand the rule about employer discretion, employer discretion is not involved here because each group's benefit is fully described in the plan document.

I'm more uncertain than mbozek that the plan is not liable for the actuarial increases before the plan became a governmental plan. This might depend on whether the ERISA obligation to provide the actuarial increases, where not provided in the plan document, was the obligation of the plan or of the obligation of the employer. If the obligation of the plan, a state judge might give a hostile reception to the assertion that the plan's accrued benefit obligations immediately before the transfer didn't survive the transfer because not provided in the plan document. I haven't done the work required to speculate whether, under ERISA, the obligation to provide the actuarial increases here was an obligation of the plan. Whether the obligation survived the transfer might be controlled by documents outside the plan document or by legal authority. This might be covered by the acquisition agreement, and might be covered by a state statute dealing with, for example, the transfer of employees to a governmental unit. Here is Oregon we have such a statute, and it deals explicitly with retirement benefits.

It seems to me that ERISA requires payment of the actuarial increases, but only for periods before the plan became a governmental plan. One thought is you might find some way to conclude that the liability is not a liability of the plan or of the current plan sponsor, for example because the liability was a liability of the transferring sponsor or of the plan administrator before the transfer, rather than an obligation of the plan.

You're right. My prior post is wrong. I assume the facts you're dealing with are that the amount of the actuarial increase for a plan year after normal retirement age is greater than the accrual for the year, and you are wondering whether the plan still owes the excess of the actuarial increase over the normal accrual. Your question might be controlled by the plan document. My starting assumption before reading the plan document would be that any excess of the actuarial increase over the normal accrual for periods before the plan became a governmental plan would be part of the accrued benefit the plan must pay, and that no future excesses would accrue after the plan became a governmental plan. Some thought would need to be given to how to deal with the excesses for the plan year the plan became a govermental plan, if that was mid-year. The plan document might provide more benefits than this. If the plan document provides the greater of the actuarial increase or the normal accrual, excesses would continue to accrue until the plan is amended to eliminate future accrual of the excesses. Whether the plan could be amended to eliminate these future accruals depends on collective bargaining agreements and whether the participants have a right under contract or state law to continue the present terms of the plan through their retirement.

The ADEA applies to governmental plans the requirements in IRC § 411 you want to avoid, so conversion of the plan from a private to a governmental plan will not help.

Normal retirement age has a special meaning for 457 plans. Those revenue rulings and 411 do not apply to 457 plans. The 457 regs define normal retirement age. You need to read those regs and the plan document definition of normal retirement age and then determine whether the employer is planning on amending the plan document definition of normal retirement age.

That sentence is an inartful statement of what is called the minimum distribution incidental benefit requirement in IRC Section 401(a)(9)(G) and Treasury Regulation Section 1.401-1(b)(1)(i). For defined benefit plans, the details of this requirement are stated in Treasury Regulation 1.401(a)(9)-6 Q&A-2, in today's Federal Register. This requirement applies to all forms (e.g., 50%, 75%, 100%). If you will read that regulation you will find the requirements are much different than you might expect from the sentence you asked about. My guess is the plan will be administered according to that regulation and not according to that inartful sentence.

Pax: The reason the plan tried to get away with it is the IRS has allowed it. The following is from the IRS audit guidelines for multiemployer plans (the Supreme Court cited and rejected this provision as inconsistent with the 411(d)(6) regulations): "An amendment that reduces IRC 411(d)(6) protected benefits on account of 203(a)(3)(B) service does not violate IRC 411(d)(6). In contrast, protected benefits may not be retroactively reduced on account of reemployment that is not 203(a)(3)(B) service. Because IRC 411(d)(6) only protects benefits from being reduced by amendment, receipt of protected benefits other than the normal retirement benefit may be conditioned on the participant's not performing any type of reemployment if the provision is present in the plan from its establishment. See DOL Reg. 2530.203-3(a)."

Lesser of $13,000 and 100% of 415©(3) compensation. A participant is also eligible to make additional contributions during the participant's last three taxable years ending before the participant's normal retirement age..

Under this decision (issued today by the Supreme Court), would it violate 411(d)(6) to amend a db plan to suspend actuarial increases on previously accrued benefits while working for the employer and not receiving benefits after normal retirement age, as to benefits accrued before the amendment, where these actuarial increases have been provided pursuant to ERISA and not pursuant to the plan document? My first reading of the decision is this would violate 411(d)(6). I would like to get others' thoughts.

The beneficiaries get it.

I think a plan document can be adopted in this situation without increasing the employer's liability. Because the plan document is not needed (all the required language is in the custodial agreement), the plan document does nothing more than describe what happens on the employer's and employees' end. It describes such things as the employees eligble to contribute, the procedure for making contributions, and what the employer will do with the contributions. Such a plan document serves to communicate to employees the basics about contributing to the plan and gives instructions to the employer about what the employer needs to do to satisfy the requirements in IRC Section 403(b).

Some mutual funds provide individual 403(b) custodial agreements for each participant. These are similar to an IRA custodial agreement or a 403(b) annuity contract. If you want a group custodial agreement with the mutual fund (in case of a governmental plan I can't think why you would), you might need to draft it for the mutual fund. The custodian (whether you use individual custodial agreements or a group custodial agreement)l will need to meet the requirements to qualify as a custodian. A plan document is not required, but I think having a plan document is a good idea, whether you use individual custodial agreements or a group custodial agreement.

taxable year of the participant

start with 1.1402(a)-2©