Protected benefit

[Guest ENT]

Can a plan be amended to remove a lump sum distribution right for participants who have termianted employment but are not currently entitled to commence distributions (for example, until the following year) without violating the anti-cutback rule? The new distribution rules would comply with section 409(o).

Section 411(d)(6)© permits the modification of a plan's distribution options in a nondiscriminatory manner. The regulations are more specific and include the condition that the elimination of a lump sum benefit apply with respect to all participants.

Does this also allow benefit commencement to be delayed in accordance with 409(o)? Does it matter whether a participant has satisfied the other conditions for benefit commencement, such as having terminated employment?

[Marcus R Piquet]

Since nobody has answered yet, I'll throw my hat in the ring.

IRC §411(d)(6) prohibits a reduction in any "accrued benefit" by plan amendment, including the elmination of an "optional form of benefit." However, §411(d)(6)© provides a special rule for ESOPs - ESOPs are permitted to "modify distribution options in a nondiscriminatory manner."

Treasury Regs §1.411(d)-4 Q&A 2(d) exapnds on the ESOP exceptions as the following:

- Single sum vs. installment optional forms of benefit;

- Cash instead of stock if the company becomes substantially employee-owned or becomes an S corporation;

- Stock instead of cash if the comany becomes readily tradable; or

- Cash instead of stock if the company ceases to be readily tradable.

It would appear that your first concern is addressed in the first exception.

Your second concern deals with inserting a delay, up to the limit imposed by §409(o). This is more contraversial as it doesn't appear to be one of the specifically-enumerated items in the regulation. I've heard arguments on both side of this one, so I try to avoid it where I can by carefully crafting the distribution policy for accelerated timing to apply only to certain groups (e.g., small account balance or a limited-time offer window period distribution). If you're really interested in this, there is one court case I am aware of that supports the insertion of a delay - Lee v. The Builder's Supply ESOP, a 1995 case in Nebraska district court. The basic logic is that the delay falls within the first exception because one installment optional form of benefit which begins on an accelerated basis is replaced with another optional form of benefit which is delayed for six years. I'll send you a copy of the ruling if you need it.

[ESOP Guy]

I meant to reply but forgot but Marcus brought it to the top again.

I agree with Marcus I know plenty of ERISA attorneys that don't have a problem with the change you are making. But to be honest I think it is at least a grey area.