411(d)(6) Protected Benefit?

[Dougsbpc]

A defined benefit plan has never made benefit distributions to any participant yet. The plan has only existed for four years.

The document currently indicates that the present value of accrued benefits shall be paid as soon as administratively feasible after a participant terminates employment. The plan sponsor wishes to amend the plan to pay benefits as soon as administratively feasible after the end of the plan year during which employment termination occurs. Can this be done or would this be considered the elimination of an optional form of benefit due to the change in timing?

If it can be done, would a 204(h) notice be required?

Thanks much.

[Belgarath]

I believe this is a protected "optional form of benefit" and as such, may only be eliminated prospectively for benefits that accrue in the future. For current accrued benefits, can't be eliminated.

[Dougsbpc]

So, for example, lets say the employer amended the plan to pay benefits after year end. A participant's current accrued benefit is $500 and two years from now he terminates with accrued benefits of $700.

Would this mean his benefit would be determined in two parts? $500 upon termination of employment and $200 after the plan year end?

[AndyH]

I agree with Belgarath.

It is the accrued benefit that would be split up, not the lump sum. So if the accrued benefit changed from $500/month to $700/month, then the lump sum value of $500/m would be paid first, followed by the lump sum value of $200/m.

And, yes, I would definitely give notice as if 204(h) notice were required although perhaps you could argue that it is not required. I wouldn't want to tell Joe that quits to get his pension that guess what, he can't get it till next year.

[david rigby]

I agree with Andy.

[E as in ERISA]

Are there any circumstances under which you could claim that this was a clarification, not a change in plan terms. Could you claim that in a small plan the term "as soon as administratively feasible after termination" would generally never be sooner than the next year. Because you only have benefits calculated once a year?

[Guest Harry O]

You may want to look at the final regulations issued last August regarding permissible eliminations of optional forms of benefit under 411(d)(6). My recollection is that you can change the annuity starting date by 6 months without violating 411(d)(6) by perhaps adding a new optional form with the distribution date you want and then eliminating the old form per the procedures in the regulations. Caveat - those regs are hopelessly dense and it has been some time since I've read them so my recollection has a high liklihood of being wrong . . . But you should check these regs since they offer your only hope of getting most of the way where you want to go.

[AndyH]

Harry, I couldn't resist the urge to comment that those regs seem to have been targetted at what I call the "yellow brick road" plans, ones that pick up and merge acquisitions into them with their strange provisions, just adding more and more complexities and weird provisions, come to think of it exactly like the OM plan that I still struggle with!

But by the time they were finished writing the regs they found complications with just about everything and the final rules offer little practical relief, IMHO!

[Guest Harry O]

AndyH -

I couldn't agree more. This was another good idea from Congress that the IRS effectively killed off with ridiculous regulations (see also the law that would have postponed MRDs if employees work beyond age 70.5 and the law permitting retroactive annuity starting dates -- both also squashed by stupid IRS regs).

My condolences on your continued struggles with the OM plan!

[John Feldt ERPA CPC QPA]

Here's what I've found under current regulations, in §1.411(d)-4, Q&A-2(b)(2)(ix):

De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception.

I hope this helps, although I don't really like the 2 month restriction.

[Dougsbpc]

Thanks for the replies

Here is the only thing I am worried about. Suppose the plan were amended in July to require all distributions be paid after the close of the plan year. The only thing being affected is the timing. Currently, PVAB's would be based on the 417e rate as of last December (4.65%). Suppose an employee terminates in August, has to wait until January 2007 and has PVAB's based on 5.5% (if the rate climbs to that level by this December). That could make a big difference in benefits, although there is no guarantee the rates will not drop to below 4.65% by December 2006.

[John Feldt ERPA CPC QPA]

Well, maybe I read this wrong from the current regulations:

"A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within

two months

of the time such optional form was available before the amendment."

If the plan language currently provides for a distribution option to be paid as soon as administratively feasible after termination of employment (regardless of whether or not anyone was ever paid out), then the right to be paid according to that timing still exists in the plan language. Thus, every accrued benefit so far gets to retain that right as it relates to the timing of the distribution, with a single 2-month exception.

So, it appears to be permissible to adopt an amendment that changes the timing to say something like "benefits are to be paid as soon as administratively feasible

two months

after a participant's date of termination." Just make sure the plan does not get amended again for purposes of those accrued benefits that are affected by that amendment.

Alternatively, the plan could be amended for future accruals only (administratively impractical though) to move the payment timing for future accruals to be as administratively feasible after the calendar year-end following the participant's termination.

Or, the plan could be amended to affect only new participants (let's hope some new participants will be HCEs soon so this looks like it is not discriminatory).

Any amendment would have to prove to be nondiscriminatory.

With all of that said, are you just trying to change the month(s) that are used for purposes of determining the GATT interest rate for calculating the lump sum? That would be a diferent answer.

[Dougsbpc]

In this case the employer would just like to pay benefits after year end. The two month restriction makes changing the plan unattractive. They will most likely just stick with what they have.