Final Regulations Issued Under IRC 4980F and ERISA 204(h)
On April 9, 2003, the IRS issued final regulations under IRC 4980F and ERISA 204(h) requiring a plan administrator to give notice to certain participants and beneficiaries when a plan amendment provides for a significant reduction in the rate of future benefit accruals. The final regulations retain the structure of the proposed regulations issued April 23, 2002 and include some additions and examples. The regulations contain 18 Q&As most of which have subsections illustrated by at least one example. The effective date of the final regulations is for plan amendments effective on or after September 2, 2003 with one exception for multiemployer plans. Highlights of the final regulations follow (quoted sentences or phrases are from the final regulations). At the bottom is a link to the final regulations.
Timing of 204(h) Notice
-
45 day notice before effective date of plan amendment for:
- Plans with 100 or more participants
-
15 day notice before effective date of plan amendment for:
- Plans with less than 100 participants
- Multiemployer plans
- Amendments adopted in connection with business mergers, acquisitions or dispositions
Distribution Methods
First class mail to the last
known address is acceptable as is hand delivery. By first class mail the notice
is considered provided as of the postmark. Electronic media is permitted as long
as the employer or plan administrator takes appropriate measures to ensure that
the notice is actually received and provided the participant is informed of his
or her right to request paper copies of the notice. Posting of the notice is not
acceptable. The 204(h) notice may be enclosed with or combined with other notice
provided by the employer or plan administrator. Q&A-13.
Conversion of Money Purchase Plan into a Profit Sharing Plan
The final regulation adopts the rule stated in Revenue Ruling 2002-42 which provides that the
merger of a money purchase plan into a profit sharing plan is always a significant
reduction in the rate of future benefit accrual and thus requires a 204(h)
notice. The 204(h) notice is required even if the profit sharing plan will
continue to make contributions substantially the same as those made to the money
purchase plan.
Department of Labor (DOL) permits 204(h) notice to be treated
as an Summary of Material Modifications (SMM)
The DOL advised the IRS that the 204(h) notice provided to applicable
individuals in accordance with the final regulations will be treated as having
furnished those individuals with an SMM regarding the section 204(h) amendment.
DOL also advised that using the last known address of the participant is
satisfactory provided the the plan has taken reasonable steps to keep plan
records up-to-date and to locate lost or missing participants. The plan
administrator is required to satisfy any other SMM or updated SPD requirement to
provide any other participant or beneficiary covered under the plan who are
entitled to an SMM regarding the amendment. (Section A. Overview)
Applicable Individuals
All applicable individuals must be given the 204(h) notice. "An applicable
individual is any participant or alternate payee whose rate of future benefit
accrual under the plan is reasonably expected to be significantly reduced ... by
the section 204(h) amendment." The final regulations clarified the
definition to provide that whether a plan participant or an alternate payee is
an applicable individual is based on a typical business day that is reasonably
proximate to the time the 204(h) notice is provided but no later than the latest
date for providing the 204(h) notice and based on all relevant facts and
circumstances. Q&A-10 also provides examples.
Applicable Pension Plans
Generally, the applicable pension plans to which this regulation applies are
defined benefit plan qualified under 401(a) OR 403(a) of the IRC and any
individual account plan subject to the section 412 minimum funding requirement
such as money purchase pension plans and target benefit plans (Q&A-3).
Profit sharing and 401(k) plans are exempt.
Content of the 204(h) Notice
Clarifications of the proposed regulations were made including that the
content must permit the applicable individual to determine the approximate
magnitude of the reduction applicable to that individual. "...this requirement
is deemed to be satisfied if the notice includes illustrative examples
satisfying certain conditions." ..."individualized benefit statements may be
used in lieu of illustrative examples if the statements include the same
information as the illustrative examples; such as showing the approximate range
of the reductions for the individual if the reductions vary over time and
identification of the assumptions used in the projections." Q&A-11.
Benefit Changes Made by Collective Bargaining Agreement
..."when a benefit formula in a plan document incorporates provisions of the
collective bargaining agreement by reference, those provisions are part of the
plan." A change in the provisions of the other document is an amendment to the
plan. This rule is in Q &A 7(a)(2).
LIST OF QUESTIONS IN THE FINAL
REGULATIONS
Q-1. What are the notice
requirements of section 4980F(e) of the Internal Revenue Code and section 204(h)
of ERISA?
Q-2. What are the differences between section 4980F and section 204(h)?
Q-3. What is an "applicable pension plan" to which section 4980F and
section 204(h) apply?
Q-4. What is a "section 204(h) notice" and what is a "section 204(h)
amendment"?
Q-5. For which amendments is section 204(h) notice required?
Q-6. What is an amendment that reduces the rate of future benefit accrual
or reduces an early retirement benefit or retirement-type subsidy for purposes
of determining whether section 204(h) notice is required?
Q-7. What plan provisions are taken into account in determining whether an amendment is a section 204(h) amendment?
Q-8. What is the basic principle used in determining whether a reduction in the rate of future benefit accrual or a reduction in an early retirement benefit or retirement-type subsidy is significant for purposes of section 4980F and section 204(h)?
Q-9. When must section 204(h) notice be provided?
Q-10. To whom must section 204(h) notice be provided?
Q-11. What information is required to be provided in a section 204(h) notice?
Q-12. What special rules apply if participants can choose between the old and new benefit formulas?
Q-13. How may section 204(h) notice be provided?
Q-14. What are the consequences if a plan administrator fails to provide section 204(h) notice?
Q-15. What are some of the rules that apply with respect to the excise tax under section 4980F?
Q-16. How do section 4980F and section 204(h) apply when a business is sold?
Q-17. How are amendments to cease accruals and terminate a plan treated under section 4980F and section 204(h)?
Q-18. What are the effective dates of section 4980F, section 204(h), as amended by EGTRRA, and these regulations?
Click here to view the Final Regulations.
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Bill Grossman 4-16-03