IRS Issues Final Regulations on Limited Exception to Anti-cutback Rules for Plan Sponsors in Bankruptcy | Practical Law

IRS Issues Final Regulations on Limited Exception to Anti-cutback Rules for Plan Sponsors in Bankruptcy | Practical Law

On November 8, 2012, the Internal Revenue Service (IRS) issued final regulations providing for a new exception to the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code (IRC) for plan sponsors of single-employer defined benefit plans that are debtors in bankruptcy proceedings. The new exception allows plan sponsors to eliminate a lump-sum distribution option if certain requirements are met. 

IRS Issues Final Regulations on Limited Exception to Anti-cutback Rules for Plan Sponsors in Bankruptcy

by PLC Employee Benefits & Executive Compensation
Published on 09 Nov 2012 • USA (National/Federal)
On November 8, 2012, the Internal Revenue Service (IRS) issued final regulations providing for a new exception to the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code (IRC) for plan sponsors of single-employer defined benefit plans that are debtors in bankruptcy proceedings. The new exception allows plan sponsors to eliminate a lump-sum distribution option if certain requirements are met.
On November 8, 2012, the IRS issued final regulations under the anti-cutback rules of IRC Section 411(d)(6). The regulations add an additional exception to the anti-cutback rules that would allow plan sponsors in bankruptcy to amend their plans to eliminate certain optional forms of benefit, including a lump-sum distribution option, from their single-employer defined benefit plans if specific requirements are met.
The regulations contain minor changes and updates from the regulations proposed on June 20, 2012, including:
  • The language addressing the notice and hearing requirement for plan amendments was modified to clarify that a failure to notify a particular participant or beneficiary does not automatically invalidate the amendment.
  • The IRS declined to impose additional conditions on the prospective elimination of the single-sum distribution option (or other optional form of benefit that includes a prohibited payment), such as a condition that the plan must offer annuity distribution options that provide substantial survivor benefits.
The Section 411(d)(6) anti-cutback rules generally prohibit plan sponsors from amending their qualified retirement plans to eliminate or reduce participants' accrued benefits such as:
  • Early retirement benefits.
  • Retirement-type subsidies.
  • Certain optional forms of benefits.
Treasury Regulation Section 1.411(d)-4 sets out exceptions to the anti-cutback rules, which allow plan sponsors to amend their plans to eliminate or reduce optional forms of benefit under certain circumstances. The final regulations:
  • Provide an additional limited exception to the anti-cutback rules, permitting plan sponsors to amend their plans to eliminate:
    • a lump-sum distribution option; or
    • any other optional form of benefit providing for accelerated payments under the plan.
  • Apply to plan sponsors who both:
    • sponsor single-employer defined benefit plans; and
    • are debtors in bankruptcy proceedings.
To take advantage of the new exception to the anti-cutback rules, the plan sponsor must satisfy the following four conditions:
  • The enrolled actuary of the plan must have certified that the plan's adjusted funding target attainment percentage (as defined in IRC Section 436(j)(2)) for the plan year that contains the applicable amendment date is less than 100%.
  • The plan is not permitted to pay any prohibited payment (generally a payment in excess of the monthly amount paid under a single life annuity) because the plan sponsor is a debtor in a bankruptcy case (under Title 11 of the US Code or under similar federal or state law).
  • The court overseeing the bankruptcy case must have issued an order, after notice to the affected parties (as defined in ERISA Section 4001(a)(21)) and a hearing (within the meaning of Section 102(1) of Title 11 of the US Code), finding that the adoption of the amendment eliminating the optional form of benefit is necessary to avoid, before the plan sponsor emerges from bankruptcy, either:
    • a distress termination of the plan (under ERISA Section 4041(c)); or
    • an involuntary termination of the plan (under ERISA Section 4042).
  • The Pension Benefit Guaranty Corporation (PBGC) must have issued a determination that:
    • the adoption of the amendment eliminating the optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy; and
    • the plan assets are not sufficient to cover the benefits guaranteed by the PBGC.
The final regulations apply to plan amendments that are both adopted and effective after November 8, 2012.
For more information on distress and involuntary terminations of defined benefit plans, see Practice Note, Defined Benefit Plans: Distress and Involuntary Terminations.