On June 20, 2012, the Internal Revenue Service (IRS) issued proposed regulations providing for a new exception to the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code (IRC) for plan sponsors of single-employer defined benefit plans that are debtors in bankruptcy proceedings. The new exception allows plan sponsors to eliminate a lump-sum distribution option if certain requirements are met.
On June 20, 2012, the IRS issued proposed regulations under the anti-cutback rules of IRC Section 411(d)(6). The proposed regulations add an additional exception to the anti-cut back rules that would allow plan sponsors in bankruptcy to amend their plans to eliminate certain optional forms of benefit, including a lump-sum distribution option, from their single-employer defined benefit plans if specific requirements are met. The regulations are proposed to apply to plan amendments that are both adopted and effective after August 31, 2012.
The Section 411(d)(6) anti-cutback rules generally prohibit plan sponsors from amending their qualified retirement plans to eliminate or reduce participants' accrued benefits such as:
Early retirement benefits.
Certain optional forms of benefits.
Treasury Regulation Section 1.411(d)-4 sets out exceptions to the anti-cutback rules, which allow plan sponsors to amend their plans to eliminate or reduce optional forms of benefit under certain circumstances. The new proposed regulations:
Provide an additional limited exception to the anti-cutback rules, permitting plan sponsors to amend their plans to eliminate:
a lump-sum distribution option; or
any other optional form of benefit providing for accelerated payments under the plan.
Apply to plan sponsors who both:
sponsor single-employer defined benefit plans; and
are debtors in bankruptcy proceedings.
To take advantage of the new exception to the anti-cut back rules, the plan sponsor must satisfy the following four conditions:
The enrolled actuary of the plan must have certified that the plan's adjusted funding target attainment percentage (as defined in IRC Section 436(j)(2)) for the plan year that contains the applicable amendment date is less than 100%.
The plan is not permitted to pay any prohibited payment (generally a payment in excess of the monthly amount paid under a single life annuity) because the plan sponsor is a debtor in a bankruptcy case (under Title 11 of the US Code or under similar federal or state law).
The court overseeing the bankruptcy case must have issued an order, after notice to each affected party and a hearing, finding that the adoption of the amendment eliminating the optional form of benefit is necessary to avoid, before the plan sponsor emerges from bankruptcy, either:
a distress termination of the plan (under ERISA Section 4041(c)); or
an involuntary termination of the plan (under ERISA Section 4042).
PBGC must have issued a determination that:
the adoption of the amendment eliminating the optional form of benefit is necessary to avoid termination of the plan before the plan sponsor emerges from bankruptcy; and
the plan assets are not sufficient to cover the benefits guaranteed by the PBGC.
The regulations are proposed to apply to plan amendments that are both adopted and effective after August 31, 2012.
The IRS requests comments on all aspects of the proposed rules, including specifically whether the regulations should impose additional conditions on the prospective elimination of the lump-sum distribution option to enable participants who have substandard mortality the opportunity to protect their survivors. Comments must be submitted to the IRS by August 20, 2012.