Reduction of accrued benefit

[Gary]

Say a plan sponsor cannot meet their funding requirement for a plan year that just ended.

My understanding is that 412©(8) allows for a retroactive amendment to the beginning of a plan year made within 2 1/2 months after the close of such plan year.

It also seems that 412©(8)(B) allows for an amendment that can in effect freeze the accrued benefit as of the beginning of such plan year, thus meeting the criteria of "does not reduce the accrued benefit of any participant determined as of the beginning of the plan year to which the amendment applies"

However, 412©(8)© seems to contradict (B) where it says "does not reduce the accrued benefit of any participant determined as of the time of adoption", since the adoption occurs AFTER the close of the plan year as compared to (B) above which refers to the BEGINNING of the plan year.

If, for example the plan is frozen as of the beginning of the plan year, it seems that a notice need not be filed with the Secretary. It seems that a notice s/b filed if the accrued benefit is reduced even lower than what the accrued benefit was as of the beginning of the plan year.

So for eg. if the AB were 1,000 as of the beginning of the plan year, it would be ok to freeze it at that time and amount, but it would require filing with the Secretary if the accrued benefit were reduced below $1,000.

I intentially make an aggressive interpretation.

Are there other interpretations? Any that have been supported with practical experience?

Thanks.

[david rigby]

I think © is in addition to (B), not a contradiction.

Note that 412©(8) allows recognition of this amendment (withing 2-1/2 months after EOY) for the purpose of minimum funding standards in IRC 412. This does not trump and/or modify IRC 411(d)(6).

[Blinky the 3-eyed Fish]

First, I agree with pax. Next, it sounds as if your plan is being frozen by the 412©(8) amendment. (Otherwise what's the point of your questions, right?)

So, in © it clearly says if you reduce the AB for funding at the time of adoption you need to file a notice with the Secretary. To even consider the notice there better be a substainal business hardship and funding waivers aren't of help. Not sure how you can read it any other way.

[Gary]

Thank you for the responses.

My response to your responses follows.

For purposes of this post, the plan year is 1/1/2004 through 12/31/2004 and we will assume that the adoption date is 3/1/2005.

Regarding 412©(8) we are dealing with retroactive plan amendments that are adopted after the end of the plan year.

So when © states that the AB cannot be reduced prior to the date of adoption, and the date of adoption is after the plan year beginning, I don't see the relevance of (B) (referring to the beginning of the plan year)

My understanding from your responses is that if a 412©(8) amendment were to freeze the AB at 1/1/04 (or reduce it further), it would require filing with the Secretary and it would only apply to funding. That is, it would not and could not reduce the accrued benefit as of the date the amendment were adopted (3/1/05) per 411(d)(6). Of course if 411(d)(6) does not allow the reduction at all, then the freeze as of say 1/1/04 is basically fictitious, just to lower the funding requirement?

Of course if an amendment freezes plan benefits effective as of the date of adoption has no application to 412©(8) since it is not retroactive and does not violate 411(d)(6).

The point of the question is to establish a proper interpretation of the application of 412©(8), to know the options available and how to implement them.

And lastly, it were after the 2 1/2 month period, the only option to minimize costs would be to freeze benefits as of the current date (or I should say after the 15 day advance notice), since 412©(8) relief is no longer an option and one must adhere to 411(d)(6).

[Blinky the 3-eyed Fish]

So when © states that the AB cannot be reduced prior to the date of adoption, and the date of adoption is after the plan year beginning, I don't see the relevance of (B) (referring to the beginning of the plan year)

Note that it says, "...as of the beginning of the plan year to which the amendment applies". Who says the amendment has to apply to the first year it is being made retroactive. Possibly splitting hairs here. I do see your point.

Of course if 411(d)(6) does not allow the reduction at all, then the freeze as of say 1/1/04 is basically fictitious, just to lower the funding requirement?

Yep.

Of course if an amendment freezes plan benefits effective as of the date of adoption has no application to 412©(8) since it is not retroactive and does not violate 411(d)(6).

Yep again, but to make it 412©(8) compliant the overall amendment is effective to the first day of the plan year, but the provison freezing the plan is effective prospectively, or you could provide grandfathered benefits and have the freeze retroactive.

And lastly, it were after the 2 1/2 month period, the only option to minimize costs would be to freeze benefits as of the current date (or I should say after the 15 day advance notice), since 412©(8) relief is no longer an option and one must adhere to 411(d)(6).

412©(8) is not an option but certainly there are other potential options like changing funding methods, actuarial assumptions or asset valuation methods.

[david rigby]

First, I agree with pax.

We need more of this.

204(h) notice done?

[Gary]

The husband and wife are the only employees/participants, but a 204(h) will be provided prior to plan freeze (if such amendment is done).