Definition of Disability and Protected Benefits

[Abby N]

Hi everyone,

Any thoughts on if it is permissible to change the definition of disability in a DC plan, or would the definition of disability be considered a protected benefit subject to the anti-cutback rules?  Does the answer change if the definition of disability is used as a distribution trigger or to provide for immediate vesting?

I am aware that it's not uncommon for DC plans to be amended to change the definition of disability (ex. back in 2018 when the DOL issued the claims procedure regs requiring retirement plans to require adding disability claims procedures if the disability definition included some discretion) but have not been able to iron out whether this type of change is subject to the cutback rules.

Thanks for the community's help!

[david rigby]

The applicable reg under IRC 411(d)(6) is 1.411(d)-3.  

https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(d)-3

Subsection (b)(3) mentions that "ancillary" benefits are not protected.  Subsection (g)(2) defines "ancillary". 

 

[Peter Gulia]

With David Rigby’s good help, we see that an ancillary benefit includes “[a] benefit payable under a defined benefit plan in the event of disability (to the extent that the benefit exceeds the benefit otherwise payable)[.]” 26 C.F.R. § 1.411(d)-3(g)(2)(ii).

Here's a negative inference from that sentence: A participant’s right to a distribution under an individual-account (defined-contribution) plan because the participant is disabled is not an ancillary benefit.

Do BenefitsLink mavens read the rule that way?

[Belgarath]

FWIW - I don't know that I'd get hung up on the ancillary benefit question in the DC context. Seems to me that if disability is a distribution trigger, it falls under the definition of an optional form of benefit under 1.411(d)-(3)(g)(6)(ii), and if the change in disability definition RESTRICTS the previous provisions for a disability distribution, then it is an impermissible cutback with respect to the currently accrued benefit. It could be so amended prospectively for future accrued benefits.

If the change in definition makes it easier to qualify, then it should be ok.

[Abby N]

Thanks everyone for your response!  Feels like an honor to have received responses from the benefitslink glitterati!

Any thoughts on the basis (if any) that plans changed the definition of comp back in 2018 due to the disability claims procedures?  I was rereading the 1.411(d)-4(d) regs and am wondering whether the definition of disability could be considered either an administrative procedure re the distribution of benefits or a right that is derived from administrative and operational provisions (I've copied the regs below)- any thoughts are appreciated and thanks again!

(9) Administrative procedures for distributing benefits, such as provisions relating to the particular dates on which notices are given and by which elections must be made; and

(10) Rights that derive from administrative and operational provisions, such as mechanical procedures for allocating investment experience among accounts in defined contribution plans.

 

[Luke Bailey]

If the definition is really bad and the employer really wants it out of the plan long term, I think you could change it effective for contributions and earnings on those contributions after the date of the amendment. Eventually, everyone would fall under the new rule. However, at the other extreme, changing it for a currently disabled person would be asking for trouble, I think.