July 9, 2015
- IRS Issues Notice Prohibiting Certain Pension Plan Lump Sum Payments
- Council Files Amicus Brief in Deferred Stock Plan Case
IRS Issues Notice Prohibiting Certain Pension Plan Lump Sum Payments
The Internal Revenue Service (IRS) issued notice of its intent to amend the required minimum distribution regulations under Internal Revenue Code Section 401(a)(9) to prohibit lump sum payments or any other accelerated form of distribution of qualified benefit plans to replace any joint and survivor, single life or other annuity currently being paid.
Notice 2015-49, released on July 9, states that the amendments will be effective immediately, with some exceptions regarding “Pre-Notice Accelerations” of annuity payments.
The notice indicates the minimum distribution regulations will be amended, effective July 9, to prohibit a method of pension fund de-risking, where plan sponsors partially or fully discharge their ERISA plan liabilities through a lump sum payment to a participant or beneficiary currently receiving an annuity. Pension de-risking and participant disclosures for such activities are also currently being examined by the ERISA Advisory Council (EAC). The EAC, which has dubbed such activities “pension risk transfers,” heard testimony on the subject in a recent series of hearings, including testimony provided on the Council's behalf (see the May 29 Benefits Byte).
Under the exception, Notice 2015-49 states that the IRS anticipates that the amendments will not apply to an acceleration of ongoing annuity payments in association with a plan amendment specifically providing for implementation of a lump sum “risk-transferring” program if:
- the plan amendment was adopted or specifically authorized by a board, committee or similar body with authority to amend the plan prior to July 9, 2015;
- a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015;
- a written communication to affected plan participants stating an explicit and definite intent to implement the lump sum “risk-transferring” program was received by those participants prior to July 9, 2015; or
- the plan amendment was adopted as part of an agreement between the plan sponsor and an employee representative (with which the plan sponsor has entered into a collective bargaining agreement) specifically authorizing implementation of such a program that was entered into and was binding prior to July 9, 2015.
The notice refers to such types of acceleration of ongoing annuity payments as a “Pre-Notice Acceleration” and states that the IRS will not challenge a Pre-Notice Acceleration as an increase in benefits.
Council Files Amicus Brief in Deferred Stock Plan Case
The Council filed an amicus “friend of the court” brief in the U.S. Court of Appeals for the Fourth Circuit in the case of Bond v. Marriott Int’l, Inc. The brief, filed on July 2, argues not only that the claims, based on plans in effect until 1989, were outside of ERISA’s statute of limitations but also that the plan in questions qualified under ERISA’s “top hat” exception.
The case involves a plan that provided deferred stock bonus awards to participants that vested in pro-rata annual installments until the participant reached age 65. A group of former participants, who left employment before age 65 and therefore did not entirely vest in their awards, asserted that the plan did not qualify as a “top hat” plan and that the plan violated ERISA’s minimum vesting requirements.
“Top hat” plans are unfunded or insured pension plans established primarily for a select group of management or highly compensated employees. The plaintiffs in this case argued that the plan did not qualify as a “top hat” plan because it covered a large number of employees that was not a “select group” within the meaning of the ERISA exemption.
The Council’s brief, which was joined by the ERISA Industry Committee and the U.S. Chamber of Commerce, argues that this litigation is time-barred under ERISA’s statute of limitations. While the plaintiffs argued that there was no formal denial of a benefit claim and therefore the statute of limitations was not triggered, the brief argues that the Fourth Circuit set precedence in Cotter v. E. Conference of Teamsters Ret. Plan that it looks to whether “some event other than a denial” such as the notices and benefit distributions that occurred in this case should have alerted participants to their ERISA claims, thereby commencing the statute of limitations period.
The brief also argues that, should the Court not decide the case based on the statute of limitations, it should still affirm the district court’s previous ruling, as “the deferred benefits plan qualifies under ERISA’s top-hat exemption.” The brief recommends that the Court not defer to the interpretation provided by the U.S. Department of Labor (DOL) in its own amicus brief, and instead follow the statutory construction of the provision in ERISA.