Tax Court Upholds IRS Approval of Interest Rate Change

May 2, 2005 ( - The United States Tax Court has upheld an Internal Revenue Service (IRS) decision that a suburban Philadelphia company did not illegally cut back employees' pension benefits by changing its lump-sum distribution interest rate.

>In affirming the IRS decision approving the plan amendment by Hercules Incorporated, Judge Mary Ann Cohen said the company did not violate the anti-cutback rule of the Employee Retirement Income Security Act (ERISA).

According to the ruling, the company’s 2001 plan amendment changed the interest rate from Pension Benefit Guaranty Corporation published interest rates to the annual interest rate on 30-year Treasury securities. As a result of the amendment, a higher discount rate was used, which resulted in a lower present value for a participant’s accrued benefits.

After IRS issued a favorable determination letter, plan participant Charles Stepnowski sued in Tax Court to challenge the IRS ruling. Stepnowski argued that the amendment resulted in an illegal reduction in benefits and as such violated the anti-cutback rule.

In agreeing with the IRS determination letter, the court noted that Section 767(d)(2) of the Uruguay Round Agreements Act provided that a participant’s accrued benefit is not considered to have been reduced in violation of ERISA’s anti-cutback rule, merely because the benefit is determined in accordance with the annual interest rate on 30-year Treasury securities.

The court said the amendment met safe harbor requirements because it:

  • replaced an interest rate based on the PBGC interest rate
  • provided that the present value of a participant’s accrued benefit shall be no less than the amount calculated using the applicable mortality table and the applicable interest rate
  • provided that the applicable interest rate is the annual interest rate on 30-year Treasury securities for the second calendar month preceding the calendar month in which the PBGC interest rate would otherwise have been determined before the amendment.

Hercules’s defined benefit pension plan had 31,301 participants at the time of the amendment, according to the court.

>The Tax Court ruling in Stepnowski v. Commissioner of Internal Revenue, T.C., No. 8383-03R, 124 T.C. No. 12, 4/26/05, is  here .