Guidance Coming on Contingent Benefit Protection

The proposed guidance will deal with protections for early retirement benefits and retirement-type subsidies that are contingent on unpredictable events such as plant shutdowns and involuntary separation, according to Washington-based legal publisher BNA.

IRS expects the forthcoming regulations to address whether payment of an accrued benefit at an early commencement date on an unreduced or partially subsidized basis will be treated as providing a benefit that continues beyond normal retirement age and would be considered a retirement type subsidy.

The BNA said that the  IRS and Treasury Department want public comment on what guidance should be provided and the extent to which relief should be provided for amendments that eliminate or reduce contingent benefits or subsidies that create significant burdens or complexities.

Because Section 411(d)(6) does not prohibit the elimination by plan amendment of accruals, subsidies, or other benefits not yet accrued, the anticipated proposed regulations would not restrict an employer from amending a plan to compute the subsidized portion of the contingent benefit based solely on service completed before the amendment, officials said. Neither would they limit the benefit payable under a retirement-type subsidy to the amount payable before the amendment.

The section also does not prevent an employer from amending a plan to eliminate ancillary benefits. The regulations would not restrict a plan amendment to eliminate contingent benefits that are ancillary benefits, according to the IRS.

EGTRRA directed Treasury officials to permit the elimination of benefits or subsidies that create significant burdens or complexities for the plan or its participants as long as any participant’s rights are not affected in more than a marginal manner.

Interpreting Retirement-Type Subsidies

The Retirement Equity Act of 1984 extended Section 411(d)(6) to retirement-type subsidies but left interpretation of that term up to Treasury.

Congressional intent behind the provision of the bill provides that a subsidy that continues after retirement is generally considered a retirement-type subsidy, though it is expected that a qualified disability benefit, medical benefit, Social Security supplement, death benefit, or plant shutdown that does not continue after retirement age will not be considered a retirement-type subsidy, according to the BNA report.

Since then, questions have arisen over whether a benefit contingent on occurrence of an unpredictable event is a retirement-type subsidy and protected under Section 411(d)(6). Three circuit courts have held that an unpredictable contingent event benefit is protected under that section, while one held that it is not, IRS said.