IRS Proposes Anti-Cutback Relief for DB Sponsors in Bankruptcy

June 21, 2012 (PLANSPONSOR.com) – The Internal Revenue Service (IRS) has issued proposed regulations that would provide guidance under the anti-cutback rules of section 411(d)(6) of the Internal Revenue Code.

Section 411(d)(6) generally prohibits plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefits under qualified retirement plans. The proposed regulations would provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit (DB) plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied.  

The conditions are: 

• The enrolled actuary of the plan has certified that the plan's adjusted funding target attainment percentage (as defined in 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, due to application of the requirements of section  436(d)(2) of the Code and section 206(g)(3)(B) of the Employee Retirement Income Security Act (ERISA), because the plan sponsor is a debtor in a bankruptcy case (that is, a case under title 11, United States Code, or under similar Federal or State law); 
• The court overseeing the bankruptcy case has issued an order, after notice to each affected party (within the meaning of section 4001(a)(21) of ERISA) and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan pursuant to section 4041(c) of ERISA or an involuntary termination of the plan pursuant to section 4042 of ERISA before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed); and 
• The Pension Benefit Guaranty Corporation (PBGC) has issued a determination that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed) and that the plan is not sufficient for guaranteed benefits within the meaning of section 4041(d)(2) of ERISA.