Category Archives: Defined Benefit

New IRS Defined Benefit Guidance for Plan Sponsors with Closed DB Plan and 401(k) Plan

At 10:10am ET this morning, the IRS issued new guidance for plan sponsors who sponsor both a “closed” defined benefit plan and a defined contribution plan. With so many state and local governments adopting these arrangements, or discussing adopting these arrangements, kudos to the IRS for tackling this issue in such a timely manner.

In Notice 2014-05, the IRS permits certain employers that sponsor a “closed” defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Code section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis.

Notice 2014-05 defines a “closed” defined benefit plan as a defined benefit plan that provides ongoing accruals but have been amended to limit those accruals to some or all employees who participated in the plan on a specific date. The IRS states that closing a defined benefit plan often occurs in conjunction with an amendment that provides new or greater contributions under a defined contribution plan intended to replace accruals under the defined benefit plan for new hires or other employees to whom the defined benefit plan is closed.

Notice 2014-05 is 7 pages long, and will be published on Jan. 6, 2014 in Internal Revenue Bulletin 2014-2.

Budget Deal Increases PBGC Fees

The text of the budget deal is now available, and, despite the rumors over the last several months, there are not many changes which affect pension and retirement plans other than an increase in PBGC fees. The text of the bill is here, and the changes to PBGC fees are in section 703, which starts on page 65 of 77 pages.

Cincinnati Explores Solving $870 Million Pension Shortfall: Pension System Funding is 61%

James Pilcher’s article published in the Cincinnati Enquirer – “Observers Say City Pension is a Frankenstein’s Monster” – discusses different proposals to solve Cincinnati’s $870 million shortfall in their pension system, including requiring the city to pay off its $870 million liability within 10 years or freezing the current pension plans and replacing them with a defined contribution plan.

“Cincinnati’s pension system is sick, and critically so, some observers say. This illness not only threatens the city’s current and retired workers, but also could hurt taxpayers, those receiving city services and even projects such as the planned streetcar. Longer term, some even say the pension system’s ailments could grow into something worse – a bankruptcy filing like the one Detroit was forced into this summer.”…rest of article

Today in ERISA History

June 7, 2004 – The U.S. Supreme Court released their decision in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004). The opinion by Justice Souter begins with:

“With few exceptions, the “anti-cutback” rule of the Employee Retirement Income Security Act of 1974 (ERISA) prohibits any amendment of a pension plan that would reduce a participant’s “accrued benefit”. (citation omitted) The question is whether the rule prohibits an amendment expanding the categories of post-retirement employment that triggers suspension of payment of early retirement benefits already accrued. We hold such an amendment prohibited.”

On May 2, 2005, the IRS issued Rev. Proc. 2005-23 addressing the retroactive application of this decision.

On Aug. 9, 2006, the IRS issues Final Regulations on Section 411(d)(6) Protected Benefits. Within those regulations, they state that these regulations are intended to reflect Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004).

Thomas C. Goldstein argued the case before the U.S. Supreme Court on behalf of the Central Laborers’ Pension Fund with Jeffrey M. Wilday, Patrick J. O’Hara and Amy Howe joining him on the brief. Patrick J. O’Hara and Jeffrey M. Wilday represented the Central Laborers Pension Fund before the U.S. Court of Appeals for the 7th Circuit.

David M. Gossett argued the case on behalf of Thomas Heinz and Richard Schmitt, Jr. with Charles A. Rothfeld and Gery R. Gasick joining him on the brief. Gery R. Gasick also represented Thomas Heinz and Richard Schmitt, Jr. before the U.S. Court of Appeals for the 7th Circuit.

John P. Elwood argued on behalf of the United States as amicus curiae urging reversal with Assistant Attorney General O’Connor, Deputy Solicitor Genera Keedler, Kenneth L. Greene, and John A Dudeck, Jr. joining him on the brief.

Teamsters Multiemployer Plan Takes Another Hit


    “There is a likelihood that pension fund would become insolvent in 10 to 15 years and I think that us proposing the 401(k) for our employees provides them a better avenue for their retirement.”

Teamsters Local 215 president Chuck Whobrey is quoted as saying “If you believe that then I have some nice ocean front property for you in Arizona.”

According to Susan Orr in Allied Waste Appears on Verge of Locking Out Union Workers, at issue are contributions Allied Waste makes into the Central States Pension Fund multiemployer plan on behalf of 79 members of Teamsters Local 215. Allied Waste says it will pay a $10 million withdrawal penalty when it withdraws from the Central States Pension Fund.

Allied Waste wants to replace the defined benefit plan with a safe harbor 401(k) plan providing matching contributions of 100 percentge of elective contributions up to 3 percent, and 50 percent of the next 2 percent. Allied Waste says its current contribution to the defined benefit plan is $107 per week per participant, and switching to the 401(k) plan will save them money.

The Central States Pension Fund is the largest multiemployer plan in the United States, covering more than 342,000 retirees and their survivors, and 81,000 active employees. On May 27, 2010, the multiemployer plan’s executive director testified before Congress that the plan would be insolvent within 10 to 15 years unless Congress acts to stabilize the fund.

Ford Asks Retirees Receiving Annuity Distributions to Switch to Lump Sum Distributions

Jerry Hirsch of the Los Angeles Times is reporting that Ford will offer lump-sum payments to about 90,000 U.S. salaried retirees and former employees vested in its pension plan. In the article – Ford Offers Pension Buyouts to 90,000 Retirees and Former Workers – Ford’s chief financial officer says that they believe this is the first time a program of this type and magnitude has been done in an ongoing pension plan, and Ford is working with federal regulators on how to execute this change.

Ford intends to make the lump sum payments from existing pension plan assets and not by making an additional contribution to the plan.

As a practical matter, it will be interesting to see how Ford amends their plan to accomplish this result. The article does not say which Ford Motor Company pension plan is involved, but my best guess is that it is the Ford Motor Company General Retirement Plan based on the number of retirees involved. Ford has a number of pension plans which group participants based on geography, job category, product line, or whether they are collectively bargained or not.

According to the 2010 Form 5500, the Ford Motor Company General Retirement Plan was originally effective on March 1, 1950. Line 14 of the 2010 Schedule B (SB) says the Funding target attainment percentage is 98.99%.

On Jan. 12, 2004, the IRS issued final regulations on the Disclosure of Relative Values of Optional Forms of Benefit. They require plans to provide participants with:

“the description of the relative value of an optional form of benefit compared to the value of the QJSA must be expressed in a manner that provides a meaningful comparison of the relative economic values of the two forms of benefit without the participant having to make calculations using interest or mortality assumptions. In order to provide this comparison, the benefit under one or both optional forms of benefit must be converted, taking into account the time value of money and life expectancies, so that both are expressed in the same form.”

Assuming that Ford complied with the Final Relative Value Regs, and, after reviewing the required disclosure, the 90,000 retirees chose an annuity instead of a lump sum when they first became eligible for a distribution, the reasons behind individual retirees switching to a lump sum should be compelling, and not just a possibly ill-placed bet that the retiree will not outlive the lump sum.

Today in ERISA History

April 30, 2007 – The IRS published Final Regulations on Limitations on Benefits and Contributions Under Qualified Plans, T.D. 9319, also known as the Final 415 Regs. The last time the IRS released comprehensive regulations pursuant to Code section 415 was on Jan. 7, 1981. These regulations update those 1981 comprehensive regulations and incorporate guidance the IRS issued in the form of notices and revenue rulings between Jan. 7, 1981 and April 30, 2007 along with statutory changes made by Congress during this time frame.

Some of the changes made by Congress during this time frame include:

  • The current statutory limitations under sections 415(b)(1)(A) and 415(c)(1) applicable for defined benefit and defined contribution plans, respectively, as most recently amended by EGTRRA.
  • Changes to the rules for age adjustments to the applicable limitations under defined benefit plans, under which the dollar limitation is adjusted for commencement before age 62 or after age 65.
  • Changes to the rules, including specification of parameters, for benefit adjustments under defined benefit plans.
  • The phase-in of the dollar limitation under section 415(b)(1)(A) over 10 years of participation, as added by TRA ’86.
  • The addition of the section 401(a)(17) limitation on compensation that is permitted to be taken into account in determining plan benefits, as added by TRA ’86, and the interaction of this requirement with the limitations under section 415.
  • Exceptions to the compensation-based limitation under section 415(b)(1)(B) for governmental plans and multiemployer plans.
  • Changes to the aggregation rules under section 415(f) under which multiemployer plans are not aggregated with single-employer plans for purposes of applying the compensation-based limitation of section 415(b)(1)(B) to a single-employer plan.
  • The repeal under SBJPA of the section 415(e) combined limitation on participation in a defined benefit plan and a defined contribution plan.
  • The changes to section 415(c) that were made in conjunction with the repeal under EGTRRA of the exclusion allowance under section 403(b)(2).
  • The current rounding and base period rules for annual cost-of-living adjustments pursuant to section 415(d), as most recently amended in EGTRRA and WFTRA.
  • Changes to section 415(c) under which certain types of arrangements are no longer subject to the limitations of section 415(c) (such as individual retirement accounts other than SEPs) and other types of arrangements have become subject to the limitations of section 415(c) (such as certain individual medical accounts).
  • The inclusion in compensation (for purposes of section 415) of certain salary reduction amounts not included in gross income.
  • The modification for distributions with annuity starting dates in plan years beginning in years 2004 and 2005 made by PFEA with respect to the interest rate assumptions in section 415(b)(2)(E) for converting certain forms of benefits to an actuarially equivalent straight life annuity.
  • The following modifications to section 415 that were made by PPA ’06:
    • (i) changes to the interest rate assumptions in section 415(b)(2)(E) that are used for converting certain forms of benefits to an equivalent straight life annuity (section 303 of PPA ’06);
    • (ii) elimination of the active participation requirement in determining a participant’s high-3 years of service in section 415(b)(3) (section 832 of PPA ’06);
    • (iii) exemption from the section 415(b)(1)(B) compensation limit for certain benefits provided under a defined benefit plan maintained by an organization described in section 3121(w)(3)(A) (section 867 of PPA ’06); and
    • (iv) expansion of the definition of qualified participant in section 415(b)(2)(H) to include certain participants in a defined benefit plan maintained by an Indian tribal government (section 906(b) of PPA ’06).

The regulations are effective April 7, 2007. The principal authors of these regs. are Vernon S. Carter, Linda S.F. Marshall, and Christopher A. Crouch.

Today in ERISA History

April 17, 2000 – The IRS releases Revised Regulations Concerning Disclosure of Relative Values of Optional Forms of Benefit, adding a sentence to the end of Treas. Reg. 1.401(a)-20, Q&A-16; adding a sentence to the end of Treas. Reg. 1.401(a)-20, Q&A-36; and revising Treas. Reg. 1.417(a)(3)-1. The final regulations are effective March 24, 2006 and impose content requirements on explanations of qualified joint and survivor annuities and qualified preretirement survivor annuities payable under certain retirement plans.

Code section 417(a)(3) and ERISA section 205(c)(3) require a plan to provide each participant, within a reasonable period before the annuity starting date, a written explanation that includes:

    1) the terms and conditions of the qualified joint and survivor annuity (QJSA);
    2) the participant’s right to make an election to waive the QJSA form of benefit;
    3) the effect of such an election;
    4) the rights of the participant’s spouse; and
    5) the right to revoke an election to waive the QJSA form of benefit.

In 1988, the IRS issued Treas. Reg. 1.401(a)-20, Q&A-36. It required that the Code section 417(a)(3) written explanation must contain a general description of the eligibility conditions and other material features of the optional forms of benefit available under the plan, including sufficient information explaining the relative values of the optional forms of benefit available under the plan.

On Dec. 17, 2003, the IRS issued final regulations under Code section 417(a)(3) regarding disclosure of the relative value and financial effect of optional forms of benefit as part of the QJSA explanations provided to participants receiving qualified plan distributions. They were generally effective for QJSA explanations provided with respect to annuity starting dates beginning on or after Oct. 1, 2004.

In response to commenters requesting the effective date be postponed, the IRS issued Announcement 2004-58, postponing the effective date of the 2003 regulations.

On Jan. 28, 2005, the IRS issued proposed regulations stating that the 2003 regulations were generally effective for QJSA explanations provided with respect to annuity starting dates beginning on or after Feb. 1, 2006. These regulations finalize the 2005 proposed regulations.

On May 8, 2006, the IRS issues a correction to Treas. Reg. 1.417(a)(3)-1, stating:

2. Section 1.417(a)(3)-1(c)(5)(ii)(B) is amended by removing the language “Similarly, a participant is entitled” and adding the language “Similarly, if a participant is entitled”.

Small Business Pension Promotion Act Takes Another Step Forward

I try not to write about bills pending before Congress because most ERISA-related legislation is introduced with little fanfare and then will spend months or years in obscurity before dying on the Dec. 31st of an even-numbered year when the Congressional term ends. A quick search of today revealed 47 bills introduced during this Congressional term containing the word “ERISA”. Only one of those bills has become law (H.R. 2832 which became Public Law 112-40) and it didn’t really affect the ERISA landscape in any major way. It mostly had to do with amending the Trade Act of 1974 and only had a little to do with amending the Internal Revenue Code to extend the tax credit for health insurance costs paid by TAA (Trade Adjustment Assistance).

An exception to this rule is H.R. 3561, the Small Business Pension Promotion Act of 2011. It has everything to do with ERISA. In concise and efficient language, it proposes these important changes by:

    1. Allowing a later valuation date to determine required minimum distributions (RMDs), and allowing additional time for making RMDs;
    2. Changing the way net earnings from self-employment are calculated beginning after Dec. 31, 2011, by including deductions for pension and IRA contributions;
    3. Changing Code section 436(j)(2) to adjust the funding target attainment percentage for single-employer defined benefit plans;
    4. Repealing Code section 4972, the tax on nondeductible contributions to qualified employer plans, for taxable years beginning after Dec. 31, 2011;
    5. Instructing the Secretary of the Treasury to provide greater flexibility and reduce plan sponsor burden for interim amendments to qualified plans;
    6. Adding Code section 411(f), grandfathering plans with normal retirement age based on earlier of attainment of specific age or completion of 30 or more years of benefit accrual services;

The Small Business Pension Promotion Act, H.R. 3561, was introduced on Dec. 5, 2011 by Rep. Ron Kind (R-WI) and was immediately referred to the House Ways and Means Committee and the House Education and the Workforce Committee. It remained there with nothing happening until March 29, 2012, when it was referred to the Subcommittee on Health, Employment, Labor and Pensions. It is a small step but it means that this bill may be moving forward into worth-watching territory.

If this bill does move forward, it would be nice to see something added to it which amends Code section 401(a)(9) to increase the required beginning date for required minimum distributions from age 70 ½ to at least age 75. When the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) added the age 70 ½ required beginning date requirement to Code section 401(a)(9), it was debated whether age 70 ½ was too young, and a later date, such as age 75, would be more realistic while still accomplishing the same public policy goal. With so many participants delaying retirement due to the rough economy over the last several years, maybe it is time to re-open the debate over what is, or should be, the best required beginning date for required minimum distributions.

Today in ERISA History

April 5, 2011 – The Dept. of Labor announces Technical Revisions to Actuarial Information on Form 5500 Annual Return/Report for Pension Plans Electing Funding Alternatives Under Pension Relief Act of 2010. The Pension Relief Act, Pub. L. 111-192, 124 Stat. 1280 (2010) was signed into law by President Obama on June 25, 2010. It provided retroactive pension funding relief for single employer and multiemployer defined benefit pension plans, and that funding relief required certain technical revisions to Form 5500 Schedule MB and SB. Without these revisions, the DOL said that accurate and complete Schedules MB and SB could not be filed with respect to plans to which the funding relief applies because complying IRS Notice 2010-83 and Notice 2011-3 required certain information to be included.