On July 8, 2003, the Internal Revenue Service released proposed regulations under Section 411(d)(6) of the Internal Revenue Code. These proposed regulations are designed to simplify plan amendments of defined contribution plans, such as Section 401(k) and profit sharing plans, relating to the elimination or restriction of optional forms of benefit payments, other than a single-sum payment. The proposed regulations are proposed to be effective on the date that final regulations are issued by the IRS.
Existing Anti-Cutback Requirements
In general, pursuant to the regulations issued under Code section 411(d)(6) (the "Anti-Cutback Regulations"), sponsors of defined contribution plans may eliminate or restrict optional forms of benefit payments, if the following conditions are satisfied –
- After the plan amendment is effective, the remaining form(s) of payment available to participants include a single-sum payment form that is otherwise identical to the optional payment form(s) being eliminated (i.e., the single-sum payment must have the same or less restrictive timing of distribution, medium of distribution and eligibility conditions that were available for the eliminated forms of payment).
- The amendment must not be effective until the earlier of (i) the 90 th day after the date that plan participants are provided with written notice of the plan amendment in the form of a Summary of Material Modifications ("SMM") or (ii) the first day of the second plan year after the plan year in which the amendment is adopted. (This is generally referred to as the "advance notice requirement.")
The Anti-Cutback Regulations are discussed in detail in our September 2000 Legal Alert on our website at: http://www.kilpatrickstockton.com/publications/
Proposed Elimination of the Advance Notice Requirement
After the issuance of the final Anti-Cutback Regulations, the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") amended Code section 411(d)(6) in a manner that was similar to the Anti-Cutback Regulations, but without the advance notice requirement. In addition, EGTRRA also amended ERISA section 204(g) to add a rule parallel to Code section 411(d)(6) that was similar to the Anti-Cutback Regulations, but again without the advance notice requirement. Based on these EGTRRA amendments, the IRS now proposes to eliminate the advance notice requirement contained in the Anti-Cutback Regulations, while retaining all of its other conditions. The IRS confirms that the proposed elimination of the advance notice requirement would also apply to the parallel provisions of ERISA section 204(g). (EGTRRA granted the Department of Treasury authority to issue regulations under ERISA section 204(g)). The elimination of the advance notice requirement is a welcome change and it will give plan sponsors more discretion in amending their defined contribution plans to eliminate optional forms of payments. Even though the advance notice requirement is proposed to be eliminated, the IRS notes in the preamble that plans subject to ERISA must continue to describe the plan amendments in a timely distributed SMM or revised Summary Plan Description ("SPD"). In general, sponsors of ERISA plans must furnish an SMM or revised SPD not later than 210 days after the close of the plan year in which the plan amendment was adopted.
The proposed regulations provide that they are not applicable until the date of publication of final regulations. Therefore, on the face of the proposed regulations, amendments that are adopted prior to publication of the final regulations still must comply with the advance notice requirement. Interestingly, the related EGTRRA statutory changes that provide the basis for eliminating the notice requirement arguably should be effective for years after 2001. At the same time, however, the EGTRRA statutory rule does not apply "to the extent provided in regulations." The proposed regulations do not indicate whether they are relying on this special authority for the delay in the effective date, but it could be cited as authority for the delay.
The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact the author(s) of this Legal Alert or your existing firm contact. The invitation to contact the author is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing. You can also contact us through our web site at www.KilpatrickStockton.com.