DOL Issues Proposed Amendments to Abandoned Plan Regulations and PTE 2006-06 | Practical Law

DOL Issues Proposed Amendments to Abandoned Plan Regulations and PTE 2006-06 | Practical Law

The Department of Labor (DOL) issued proposed amendments to three abandoned plan regulations issued in 2006 to encompass plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code. The DOL also issued a notice of a proposed amendment to Prohibited Transaction Exemption 2006-06 that would expand the definition of qualified termination administrator (QTA) to include bankruptcy trustees and their eligible designees.

DOL Issues Proposed Amendments to Abandoned Plan Regulations and PTE 2006-06

Practical Law Legal Update 4-523-0918 (Approx. 4 pages)

DOL Issues Proposed Amendments to Abandoned Plan Regulations and PTE 2006-06

by PLC Employee Benefits & Executive Compensation
Published on 11 Dec 2012 • USA (National/Federal)
The Department of Labor (DOL) issued proposed amendments to three abandoned plan regulations issued in 2006 to encompass plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code. The DOL also issued a notice of a proposed amendment to Prohibited Transaction Exemption 2006-06 that would expand the definition of qualified termination administrator (QTA) to include bankruptcy trustees and their eligible designees.
On December 11, 2012, the DOL issued:
  • Proposed amendments to three abandoned plan regulations issued in 2006 (Abandoned Plans Regulations) to permit bankruptcy trustees to terminate and wind up plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code (Chapter 7 Plans).
  • A notice of proposed amendment to Prohibited Transaction Exemption 2006-06 (PTE 2006-06) that would expand the definition of qualified termination administrator (QTA) to include bankruptcy trustees and their eligible designees.
The DOL issued these proposals to provide a process for bankruptcy trustees to terminate plans, distribute benefits to participants and beneficiaries and pay necessary related expenses in a manner consistent with their fiduciary obligations under ERISA.
Comments on the proposed regulations and notice are due by February 12, 2013.

Amendments to Abandoned Plan Regulations

In 2006, the DOL issued the Abandoned Plans Regulations and PTE 2006-06 establishing a program to facilitate the termination of and distribution of benefits from abandoned individual account plans. The Abandoned Plans Regulations currently do not apply to Chapter 7 Plans.
The proposed amendments to the Abandoned Plan Regulations, issued in accordance with ERISA Section 505, would expand the program by making it available to bankruptcy trustees who may have responsibility for administering Chapter 7 Plans under the Bankruptcy Code.
Under the proposed amendments:
  • Chapter 7 Plans would be considered abandoned when the Bankruptcy Court enters an order of relief in the plan sponsor's bankruptcy proceeding.
  • The bankruptcy trustee or a designee would be eligible to terminate and wind up Chapter 7 Plans using procedures similar to those provided under the program.
The proposed amendments generally apply the same provisions to Chapter 7 Plans as are currently in place under the Abandoned Plans Regulations, with modifications to reflect fundamental differences between Chapter 7 Plans and abandoned plans. Specifically, the proposed amendments set out rules that:
  • Describe when Chapter 7 Plans may be considered abandoned and who may serve as QTAs.
  • Provide content requirements for the notice of plan abandonment that QTAs of Chapter 7 Plans must send to the DOL.
  • Give procedures for winding up Chapter 7 Plans.
  • Govern the accountability of bankruptcy trustees to these plans. These accountability standards preclude a bankruptcy trustee from seeking a release from liability under ERISA as a condition to the trustee receiving the benefit of the limited liability provided by the Abandoned Plans Regulations.
The proposed amendments also propose certain technical changes to the Abandoned Plans Regulations that are unrelated to Chapter 7 Plans.

Amendment to Prohibited Transaction Exemption

In 2006, the DOL issued PTE 2006-06, which among other things permits a QTA of an individual account plan that has been abandoned by its sponsoring employer to:
  • Select itself to provide services to the plan in connection with the plan's termination.
  • Pay itself fees for those services.
The proposed amendment to the class exemption, issued in accordance with ERISA Section 408(a) and IRC Section 4975(c)(2), would permit bankruptcy trustees to qualify as a QTA under the Abandoned Plans Regulations or to appoint an eligible designee to act as a QTA under these regulations. Accordingly, the bankruptcy trustee or eligible designee would then be permitted to provide services (such as terminating and winding up a Chapter 7 plan) and to pay themselves for these services from the assets of the plan under an industry rates standard.
Under this amendment, an eligible designee of a bankruptcy trustee is defined as any entity appointed by a bankruptcy trustee or QTA who:
  • Is eligible to serve as a trustee or issuer of an individual retirement plan.
  • Holds assets of the plan or plans sponsored by the entity that is the subject of the Chapter 7 liquidation proceeding.

Coordination with Internal Revenue Service (IRS)

The DOL coordinated with the IRS regarding the qualification requirements under the Internal Revenue Code of 1986 (IRC) as applied to abandoned plans that are terminated, as modified by the proposed amendments to the Abandoned Plans Regulations. The IRS advised that it would not challenge the qualified status of plans that are terminated or seek to impose any penalty on the QTA, the plan or any participant or beneficiary of the plan (including Chapter 7 Plans terminated under these proposed amendments), provided the QTA satisfies these three conditions:
  • The QTA reasonably determines whether and to what extent the survivor annuity requirements of IRC Sections 401(a)(11) and 417 apply to any benefit payable under the plan and takes reasonable steps to comply with these requirements, if applicable.
  • Each participant and beneficiary has a nonforfeitable right to his accrued benefits as of the date of deemed termination, subject to income, expenses, gains and losses between that date and the date of distribution.
  • Each participant and beneficiary receives notification of their rights under IRC Section 402(f).
The IRS also advised the DOL that Chapter 7 bankruptcy trustees using the Abandoned Plans Program would not be expected to use the Employee Plans Compliance Resolution System (EPCRS) as a condition to this relief.