The proposal from the U.S. Treasury Department and the Internal Revenue Service (IRS) is designed to allow plan sponsors to slim down their allowed plan distribution option list – perhaps because certain options haven’t been used – while making sure participants aren’t being shortchanged in the process. Early retirement benefits are an example of the type of option that could be affected by the proposal.
“The regulations implement the directive from Congress to permit a plan to eliminate complex and burdensome benefits and subsidies as long as the effect on plan participants is insignificant,” Acting Treasury Assistant Secretary for Tax Policy Greg Jenner said in a statement. “The regulations would allow employers that have accumulated numerous optional forms to simplify plan administration, but would protect optional forms of benefit that are of importance for plan participants.”
Under the proposed regulations, an employer could eliminate an optional form of benefit if the plan keeps a similar form with the same value or if the plan permits participants to select among a specified group of core options that have the same value as the benefit form eliminated. “The proposed regulations would implement the provisions of section 645(b)(1) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) by permitting the elimination of early retirement benefits, retirement-type subsidies, and optional forms of benefit under a plan which create significant burdens or complexities for the plan and its participants, but only if the elimination does not adversely affect the rights of any participant in a more than de minimis manner,” officials said in the proposal.
The proposal also offers plan sponsors guidance on the proper way to determine a participant’s benefit level, given all applicable plan amendments. “The proposed regulations would retain the rules in the existing regulations that provide that, for purposes of determining whether or not any participant’s accrued benefit is decreased, all plan amendments affecting, directly or indirectly, the computation of accrued benefits are taken into account, and that, in determining whether a reduction has occurred, all amendments with the same applicable amendment date (the later of the adoption date or the effective date) are treated as one plan amendment, and would provide that these rules apply to section 411(d)(6)(B) protected benefits as well,” the proposal asserts.
“Thus, for example, if there are two amendments with the same applicable amendment date, and one amendment increases accrued benefits and the other amendment decreases the early retirement factors that are used to determine the early retirement annuity, the amendments are treated as one amendment and only violate section 411(d)(6) if the net dollar amount of the early retirement annuity after the two amendments is lower at any point in time than it would have been without the two amendments.”
While the regulations would allow plan sponsors with a substantial pension payment options lineup to slim it down to a more manageable size, they generally do not permit elimination of a lump sum payment option. Until the regulations are finalized after federal officials receive public comments, plans are required to preserve their current distribution options list, the Treasury/IRS announcement said.
Send submissions to: CC:PA:LPD:PR (REG-128309-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-128309-03), Courier Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Taxpayers may submit comments electronically to the IRS Internet site at www.irs.gov/regs .
The proposal is available at www.treas.gov/press/releases/reports/js1253reg12830903032304.pdf .