Does 411(d)(6) protection of the subsidized lump sum apply in these scenarios

[gle318612]

General Scenario:

A US tax-qualified pension plan (FAE with early retirement subsidy and a lump sum optional form) is split as part of a corporate spin-off. Part of the plan (assets/liabilities) remains with the remaining company...part moves to the spin-off company. The plan design is mirrored with the spin-off company. The mirrored plan design of the spin-off company includes the provision that the lump sum optional form of benefit includes the early retirement subsidy if the participant is eligible for the subsidy based on plan provisions (tied to age and service with the company before terminiation).

Seemingly, law requires that participants in the spin-off company can grow into the early retirement subsidy with additional age and service recognition with the spin-off company. This would be true even if the spin-off company froze the plan to new accruals/new entrants. I believe that the lump sum form of a benefit does not have to include the subsidy if the plan explicitly indicates such (participants would see such in the SPD and in the relative value disclosure).

Questions...

For those participants who met early retirement eligibility in the spin-off company plan before it was frozen but who leave and commence the benefit after the plan was frozen, is the lump sum of the benefit, inclusive of the subsidy, protected by 411(d)(6) or is it only the normal form of benefit (inclusive of the subsidy) protected? In other words, the lump sum optional form would still be available but the question is whether it must include the subsidy.

For those participants who met early retirement eligibility in the spin-off company plan after it was frozen and who leave and commence the benefit after the plan was frozen, is the lump sum of the benefit, inclusive of the subsidy, protected by 411(d)(6) or is it only the normal form of benefit (inclusive of the subsidy) protected? In other words, the lump sum optional form would still be available but the question is whether it must include the subsidy.

If the spin-off company amended the mirrored plan after spin-off to remove the provision that the lump sum optional form would not include the subsidy (if that, in and of itself, would not be an impermissible cutback) would that change your responses to the two questions above?

Are these scenarios explicitly covered in any of the relevant regulations? If so, please provide the reference/cite. If not covered in law/regulations...have court cases been decided dealing with these scenarios?

Thanks for your hoped-for help in a complex matter.

[SoCalActuary]

You have a fact-driven issue that deserves the attention of ERISA Counsel.

This forum may not be your best solution.

That said, you must deal with the anti-cutback issues if you attempt to eliminate an option. If the employee is covered under a plan that states benefits are provided once the employee has met the conditions, and the employee then meets those conditions, that seems like a protected benefit. Good luck.

[Guest Quagmire]

Unless the plan previously forfeited any early retirement subsidy when paying a lump sum, inclusion of the subsidy in the lump sum cannot be eliminated for any participant who has accrued the right to the subsidy as of the effective date of the amendment.

For participants who have not yet accrued the right to an early retirement subsidy, the right to accrue future service toward that subsidy can be eliminated but the right to accrue future age toward that subsidy cannot be eliminated. For example, if the plan provides an early retirement subsidy for active participants who are age 55 with 30 years of service, a participant who is age 50 with 30 years of service at the time of an amendment cannot have the right to earn the subsidy (by remaining active until age 55) eliminated. However a participant who is age 50 with 29 years of service at the time of the amendment can have the right to earn the subsidy eliminated.

Having said that, contact ERISA counsel, some of this (especially aging into a protected benefit) is case law.

Start research at:

http://www.regulationdocs.com/regulations/...11(d)-3/#(b)(2)

See also:

http://www.regulationdocs.com/regulations/...11(d)-3/#(b)(3)

and

http://www.regulationdocs.com/regulations/...)-3/#(b)(3)(ii)

[Guest Quagmire]

I should add that the subsidy can be eliminated from future accrual for any partiicpant, although that's an administrative headache. Also the subsidy can be eliminated from future lump sum accrual only, while retained for future annuity forms, although that's an even bigger administrative headache.