The Internal Revenue Service has issued a final rule that limits employers’ ability to tighten benefit plan terms for benefits already accrued.
The new rule, Section 411(d)(6) Protected Benefits, published today in the Federal Register, deals with the relationship between Section 411(a) of the Internal Revenue Code, which lets employers add conditions or other restrictions to plan rules in some circumstances, and Section 411(d)(6), a 1988 regulation that prohibits employers from cutting an early retirement benefit, a retirement-type subsidy, or an optional form of benefit for benefits already accrued.
The IRS has based the new rule on a proposed rule published in August 2005. In the 2005 draft, the IRS was responding to Central Laborers’ Pension Fund vs. Heinz, a 2004 U.S. Supreme Court case.
In the Central Laborers’ case, the court held that the conditions imposed on plan members’ ability to receive benefits are integral to the benefits.
“An amendment placing materially greater restrictions on the receipt of the benefit ‘reduces’ the benefit just as surely as a decrease in the size of the monthly benefit,” the court held, according to excerpts of the court’s opinion published in a preamble to the new final rule.
The Central Laborers’ case deals with one specific Internal Revenue Code provision, Section 411(a)(3)(B), which states that a qualified retirement plan may be able to suspend benefits payments while an employee is still working for the employer that sponsors the plan. The provision also states that a multiemployer plan can suspend benefits payments while a worker is working in the same industry, trade or craft that sponsors the multiemployer plan..
“These regulations generally retain the rule in the 2005 proposed regulations that a plan amendment that decreases a participant’s accrued benefits, or otherwise places greater restrictions or conditions on a participant’s rights to Section 411(d)(6) protected benefits, violates Section 411(d)(6), even if the amendment merely adds a restriction or condition that is otherwise permitted under the vesting rules in section 411(a)(3) through (11),” IRS officials write in the preamble to the final rule.
Some members of the public who commented on the IRS’s 2005 proposed rule noted that the Central Laborers’ Supreme Court opinion deals with only one small provision of Section 411(a). Those commentators asked the IRS to narrow the scope of the final rule, officials write.
The IRS has decided to keep the original broad scope, but it has changed the final rule to note that a plan can still change a plan’s vesting computation period without necessarily violating the Section 411(d)(6) requirements, officials write.
The final rule also describes a utilization test that plan sponsors can use to show that a benefit payment option is of little interest to plan participants. Sponsors must go through that step when they want to get rid of little-used optional forms of benefit.
A copy of the final rule is on the Web at Document Link