Change Distribution Policy

Our ESOP lays out the statutory requirements for distributions.  Our Distribution Policy has the details.  Can we literally just change anything in the Distribution Policy as long as we stay within the statutory requirements?

For example, the ESOP says we can require participant to wait until the plan year that is five years after the year of employment termination.  The Distribution Policy says we will distribute small accounts (say, $10,000 or less) in the year following separation.  Can we change the Distribution Policy to say all accounts (no matter what size) have to wait five years?  

This still complies with the statutory requirements and is consistent with the ESOP language, but is it a problem that we are treating similar employees differently (i.e. small account balance participants have very different treatment before and after the Distribution Policy change)?

Thank you!

The proposed change will be more restrictive than the existing provision and would defer the availability of the distribution for small account balances, so the existing provision is a protected benefit.  I expect that the existing provision would be preserved for current participants, but the new provision could be applicable to new participants.

Generally, there is a broad exception for ESOPs allowing changes to distribution rules without violating the anti cutback rule in the statute on protected benefits.  The regulations have interpreted this exception more narrowly.  So best to consult with legal counsel on the proposed change and the scope of the amendment to the plan and/or distribution policy.  

Consider also that a change the Internal Revenue Service treats as not an Internal Revenue Code cutback might nonetheless be an ERISA title I cutback.

Although the 1978 Reorganization Plan transfers to the Secretary of the Treasury some authority to interpret some of ERISA’s title I part 2 participation and vesting provisions, a Federal court interpreting a statute—and whether a plan’s provision or change is contrary to the statute’s command—does not defer to an executive agency’s interpretation. Yet, a court might be persuaded by an executive agency’s interpretation.

As MBESQ notes, you'll likely get different opinions on how much flexibility the anti-cutback exception allows. My own personal rule of thumb is to amend the distribution policy only for payment events that occur after the change in the policy (not all payments that occur after the change in the policy). So, for example, if your policy currently pays five installments starting the year after termination, and you want to change it to five years after termination, I typically would say for anyone who terminates on or after X date, the new payment rules apply.

I think it's too messy if someone is mid-stream under the current rules and you try to impose a delay. You'll have a short run-off period where people are getting paid under different sets of rules, but it's always made the most sense to me. 

The same broad statutory exception to the anti-cutback rule is also found in ERISA.  Based on the premise that the corresponding Treasury regulations attempt to narrow the broad scope of the statute, it seems unlikely that a court would find unacceptable an action that was acceptable to the IRS in this context.  The larger risk would be to change distribution options beyond the scope of the regulations relying on the statutory language alone.  Also, the plan amendment language might not allow the contemplated change if it prohibits plan amendments restricting distribution options without mentioning the broad statutory ESOP exception.  All qualified retirement plans are supposed to contain language prohibiting such plan amendments, and this is an instance where careful drafting of ESOP plan documents is productive.  Again, best to confer with legal counsel.

Perhaps all in this discussion recognize that the law is ambiguous, and open to many possible interpretations. We all suggest a retirement plan’s sponsor or administrator seek its lawyer’s advice.

A plan’s sponsor might want its lawyer’s advice about whether a change is contrary to ERISA § 204 or another provision of ERISA’s title I.

A plan’s sponsor might want its lawyer’s advice about whether the plan’s governing documents, including the plan’s ERISA § 402(b)(3) plan-amendment procedure and any discretions granted, permit or preclude the to-be-considered change.

Even if a plan’s governing documents do not preclude a change, a plan’s sponsor might want its lawyer’s advice about whether a change is within or beyond ERISA § 204(g), including § 204(g)(3).

A plan’s administrator might want its lawyer’s advice about whether a change is valid or invalid.

A plan’s administrator might want its lawyer’s advice about whether a fiduciary’s duty of obedience to the plan’s governing documents does not apply to the extent that a document is inconsistent with ERISA’s title I. See ERISA § 404(a)(1)(D).

A cautious plan administrator might recognize that it bears a responsibility that does not apply to the plan’s sponsor (in its role as the plan’s sponsor).

Before last summer, one might have presumed a Federal court would apply Chevron deference to the Treasury’s interpretive rule. After the Supreme Court’s Loper Bright Enterprises decision, an Article III court may respect and consider an executive agency’s interpretation of a statute, but might not be persuaded by such an interpretation.

How to manage uncertainties and risks (and how much or how little advice an advisee seeks) are an advisee’s choices.

(I don’t intend anything I’ve written in this discussion to state or suggest a prediction about what a court might find. Rather, my points are that a court might or might not be persuaded by the Treasury’s interpretation when interpreting ERISA’s title I.)