The final regulations under Sections 204(h) of ERISA and 4980F of the Internal Revenue Code (IRC), which are similar to the rules proposed last year, specify that advanced notice is required to be given to an “affected individual” when a defined benefit plan subject to ERISA minimum funding requirements is amended to significantly reduce either the rate of future benefit accrual or an early retirement benefit or retirement-type subsidy (RTS). This covers such actions as a reduction in the percentage of payout as well as a change in the basic format for determining benefits, if a participant could end up with a lower pension, according to a news release by The Segal Group.
However, notice is not required if:
- future benefit obligations are reduced by an action outside of a plan amendment, such as the reassignment of an employee to a different benefit formula.
- changes in plan features that are not protected from reduction by the IRC Section 411(d)(6), such as provisions for plan loans and disability benefits.
Additionally, the final regulations differ from rules proposed last year by adding two defining rules clarifying what constitutes an amendment:
- changing a document to which a plan refers in defining benefit amounts, such as a collective bargaining agreement, is considered a plan amendment that requires notice
- any conversion of a money purchase plan to a profit sharing plan, even if employer contributions are expected to stay at the same level.
When a qualifying event is identified and the plan sponsor prepares to notify every “affected individual” – participants and alternate payees whose future benefits are reasonably expected to be significantly reduced by the action and any labor organization representing them – it must provide enough information to enable recipients to understand the effect of the change.
For both accrual rate reductions or reductions in early retirement benefits this includes a narrative description of benefit formula before the amendment, the formula after the amendment and the effective date of the change. If the full scope of the change is not apparent from this description, then more explanation is also required. Additionally, examples are always required for reductions related to the conversion of a cash balance plan or wearaways – which occur when a participant accrues no additional benefits for a period because of their existing accrued benefits exceed the initial accruals under the new formula.
Generally, the notice must be delivered 45 days before the effective amendment date. Exceptions to this rule include:
- amendments reducing benefit accrual rates in connection with mergers or spinoffs, in which case only a 15-day advanced notice is required
- amendments to all multiemployer plans and plans with fewer than 100 participants with accrued benefits on the amendment’s effective date, in which case only a 15-day advanced notice is required
- amendments when participants may choose between old and new benefit formulas, in which case additional information is also necessary for an informed decisionmaking process and notice must be given early enough before the choice to provide ample opportunity for careful consideration
- amendments related to corporate transactions that only reduce early retirement benefits; the deadline is 30 days after the effective date.
Delivery of the notices can only be made via:
- first-class mail
- hand delivery
- approved electronic means.
The electronic notice standards are essentially the same as those that govern for giving other ERISA notices electronically. Electronic notices must alert participants to the significance of the message and let them know that they may request a free paper copy.
Employers and multiemployer plans will face a $100 per day excise tax penalty per participant up to a maximum of $500,000. Additionally, if the failure to give a required notice is “egregious” – an intentional failure to provide the required notice or a failure to provide most of the information to most of the affected participants – all participants whose benefits would be reduced significantly by the amendment are entitled to their benefit under the terms of the plan before the amendment.
The penalties can be waived if the IRS determines that the plan sponsor exercised “reasonable diligence” in distributing the notice, did not know of the violation and corrected it within 30 days of discovering it.
The final rules apply, generally, to plan amendments that take effect on or after September 2, 2003. The rule treating changes in collective bargaining agreements and other documents as plan amendments applies to amendments that take effect on or after January 1, 2004. Until these dates, plan administrators must make a reasonable, good faith effort to comply with the statutory requirements.The final regulations were published in the Federal Register on April 9, 2003 and can be accessed at http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/pdf/03-8290.pdf .