Compliance November 4, 2003

IRS Proposes DB Plan Change Notices

April 23, 2002 (PLANSPONSOR.com) - Defined benefit plan participants will get between 15 and 45 days notice before implementation of significant plan changes likely to cut future benefit accruals, under rules recently proposed by the Internal Revenue Service (IRS).

Reported by

Fred Schneyer

The suggested regulations are designed to clear up uncertainty caused by a provision in EGTRRA requiring notice of plan amendments that reduce benefits.

According to the IRS proposal, defined benefit participants would hear about plan changes that would cut their benefits:

at least 45 days before,
a month in advance if it is a change to early-retirement or other retirement subsidy that is prompted by an M&A transaction, and
15 days prior to another change in connection with an M&A deal or change to a small plan

IRS said the regulations were designed to strike a balance between giving participants and affected parties enough warning about a plan amendment to understand its effects and giving employers enough flexibility to change plans for legitimate business reasons.

Content of Change Notices

The IRS said plan change notices must include the approximate magnitude of the expected benefit reduction with a description of how plan provisions are being amended and when.

Plans may hand out different notices to different kinds of employees. For example, the IRS said a notice might require illustrative examples if a narrative description of upcoming benefit cuts would be unclear. Several examples should be used if different employees will be affected to a different extent, the IRS said

In the case of a cash-balance conversion where a participant has to choose between an old and new benefit formula, the IRS said plans have to give participants enough information to make that decision.

Non-Compliance Tax

The excise tax for noncompliance will be waived if the person subject to the tax exercised reasonable diligence in trying to deliver a timely notice to applicable participants, the IRS said.

If there is an “egregious failure” to give the notice, the IRS said plan provisions giving participants higher benefits will be applied instead of any proposed benefit cutbacks.

The proposed regulations, REG-136193-01, are expected to be published in the April 23 Federal Register. A public hearing on the matter is scheduled for August 15, with written comments and requests to speak at the hearing due by July 22.