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Final regs & Rev Proc cover suspension of benefits for plans in critical and declining status

T.D. 9765, 04/26/2016; Reg. § 1.432(e)(9)-1; Rev Proc 2016-27, 2016-19 IRB

IRS has issued final regs that provide guidance on the requirements under Code Sec. 432(e)(9) with regard to a suspension of benefits payable to participants and beneficiaries under a multiemployer defined benefit plan that is in critical and declining status. IRS has also issued a revenue procedure that provides the specifics of the application process for approval of a proposed benefit suspension.

Background. The Multiemployer Pension Reform Act of 2014 (MPRA), Division O of the Consolidated and Further Continuing Appropriations Act (P.L. 113-235), amended Code Sec. 432(e)(9) and ERISA § 305(e)(9) to allow the sponsor of a multiemployer defined benefit plan in critical and declining status to submit to the Secretary of the Treasury (Secretary) a proposal to suspend benefits in certain situations. MPRA requires the Secretary to approve a plan sponsor’s proposed suspension if the plan is eligible for the proposed suspension and the proposed suspension satisfies Code Sec. 432(e)(9)(C) through Code Sec. 432(e)(9)(F). A key condition under Code Sec. 432(e)(9)(H) is that no suspension of benefits may take effect before plan participants vote on the proposed suspension of their benefits.

In June of 2015, IRS released temporary and proposed regs plus a revenue procedure that provided guidance to multiemployer defined benefit pension plans on how to apply for approval of a proposed suspension of benefits under Code Sec. 432(e)(9) (see Weekly Alert ¶  23  06/25/2015 ). In September of 2015, IRS released temporary and proposed regs that provided guidance on the administration of the participant vote (see Weekly Alert ¶  33  09/03/2015).

In February of 2016, IRS issued proposed regs on the specific limitation on a suspension of benefits under Code Sec. 432(e)(9)(D)(vii) dealing with plans that include benefits directly attributable to a participant’s service with any employer that has, before Dec. 16, 2014, withdrawn from the plan in a complete withdrawal, paid its full withdrawal liability, and, under a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries equal to the benefits reduced as a result of the financial status of the plan.

Final regs. IRS has issued final regs that adopt the June 2015 and September 2015 proposed regs (collectively, the 2015 regs) with certain modifications. The June and September 2015 temporary regs under Code Sec. 432(e)(9)) are removed. The final regs do not finalize the February 2016 proposed regs.

The final regs provide that the plan sponsor of a multiemployer plan that is in critical and declining status within the meaning of Code Sec. 432(b)(6) for a plan year may, by plan amendment, implement a suspension of benefits that the plan sponsor deems appropriate (assuming, of course, that a majority of eligible voters has not voted to reject the proposed suspension, see below). Such a suspension is allowed notwithstanding the generally applicable Code Sec. 411(d)(6) anti-cutback provisions. The final regs clarify that the terms of the plan must satisfy the requirements of Code Sec. 401(a) (e.g., Code Sec. 411 minimum vesting with respect to the reduced accrued benefits). The plan amendment implementing a suspension of benefits must be adopted in a plan year in which the plan is in critical and declining status. (Reg. § 1.432(e)(9)-1(a))

Retiree representative. The final regs generally adopt, with some clarifications, the provisions of the 2015 regs with respect to the retiree representative. The retiree representative, who must be a plan participant in pay status and may or may not be a plan trustee, is selected by the plan sponsor to advocate for the interests of the retired and deferred vested participants and beneficiaries of the plan throughout the suspension approval process. Upon request, the plan sponsor must promptly provide the retiree representative with relevant information (such as plan documents and data) that is reasonably necessary to enable the retiree representative to perform his role. Under the final regs, a retiree representative must be selected for a plan with 10,000 or more participants (determined based on the number of participants reported on the most recently filed Form 5500, Annual Return/Report of Employee Benefit Plan). The plan sponsor must select the retiree representative at least 60 days before the plan sponsor submits an application to suspend benefits. (Reg. § 1.432(e)(9)-1(b)(4)(i))

The final regs also allow a plan sponsor of a plan that has fewer than 10,000 participants to select a retiree representative in connection with such an application, and plan sponsors are encouraged to do so. If a retiree representative is selected for such a (smaller) plan, the same rules that apply to larger plans apply (other than rules concerning the size of the plan and the timing of the appointment). (Reg. § 1.432(e)(9)-1(b)(4)(v))

Conditions for suspensions. A plan sponsor of a plan in critical and declining status may suspend benefits only if the actuarial certification requirement in Code Sec. 432(e)(9)(C)(i), and the plan sponsor determinations requirement in Code Sec. 432(e)(9)(C)(ii) are satisfied. Under the final regs, a plan sponsor may not suspend benefits unless the plan sponsor makes initial and annual determinations that the plan is projected to become insolvent unless benefits are suspended and all reasonable measures to avoid insolvency have been taken. These determinations are based on the non-exclusive list of factors described in Code Sec. 432(e)(9)(C)(ii). (Reg. § 1.432(e)(9)-1(c)(1))

Limitations on suspensions. The final regs generally adopt the individual and aggregate limitations on a suspension of benefits under Code Sec. 432(e)(9)(D), as provided under the 2015 regs, with minor clarifications. Under the final regs, the individual (i.e., participant-related) limits take into account (if applicable): (a) Pension Benefit Guaranty Corporation (PBGC) guarantees; (b) age; and (c) disability. After applying the individual limits, the aggregate limits take into account: (i) the aggregate size of the suspension; (ii) the equitable distribution of suspended benefits; and (iii) the effective date of the suspension made in combination with a plan partition. (Reg. § 1.432(e)(9)-1(d)(1))

Benefit improvements. Under the final regs, a plan satisfies the criteria in Code Sec. 432(e)(9)(E) dealing with benefit improvements only if, during the period that any suspension of benefits remains in effect, the plan sponsor doesn’t implement any benefit improvement except as provided in the final regs. The term “benefit improvement” is defined to mean a resumption of suspended benefits, an increase in benefits, an increase in the rate at which benefits accrue, or an increase in the rate at which benefits become nonforfeitable under the plan. For a suspension of benefits that expires as of a date that is specified in the original plan amendment providing for the suspension, the resumption of benefits solely from the expiration of that period is not treated as a benefit improvement. (Reg. § 1.432(e)(9)-1(e)(1))

Notice of proposed suspension. The final regs prescribe rules implementing the Code Sec. 432(e)(9)(F) notice requirements that are generally the same as those in the 2015 regs. Specifically, the final regs require the plan sponsor to provide notice of a proposed suspension to: (1) all plan participants, beneficiaries of deceased participants, and alternate payees (regardless of whether their benefits are proposed to be suspended), except those who cannot be contacted by reasonable efforts; (2) each employer that has an obligation to contribute (within the meaning of ERISA § 4212(a)) under the plan; and (3) each employee organization that, for purposes of collective bargaining, represents plan participants employed by such an employer. (Reg. § 1.432(e)(9)-1(f)(1)) Examples in the 2015 regs are clarified to detail the steps that must be taken to locate participants whose notices were returned as undeliverable; the examples demonstrate that it’s not sufficient to merely send notices to the individuals’ last known mailing addresses.

Under the final regs, the notice must contain sufficient information to enable plan participants and beneficiaries to understand the effect of the suspension of benefits, including:

…an individualized estimate, on an annual or monthly basis, of the effect of the suspension on a participant or beneficiary;
…a statement that the plan sponsor has determined that the plan will become insolvent unless the proposed suspension (and, if applicable, the proposed partition) takes effect, and the year in which insolvency is projected to occur if there were no suspension of benefits (and, if applicable, a proposed partition);
…a statement that insolvency of the plan could result in benefits lower than benefits paid under the proposed suspension, and a description of the projected benefit payments upon insolvency;
…a description of the proposed suspension and its effect, including a description of the different categories or groups affected by the suspension, how those categories or groups are defined, and the formula that is used to calculate the amount of the proposed suspension for individuals in each category or group;
…a description of the effect of the proposed suspension on the plan’s projected insolvency;
…a description of whether the suspension will remain in effect indefinitely or the date the suspension will expire if it will expire by its own terms; and
…a statement describing the right to vote on the suspension application. (Reg. § 1.432(e)(9)-1(d)(2))

The notice of proposed suspension may not include false or misleading information (or omit information so as to cause the information provided to be misleading), but it can include additional information. It must be written in a manner so as to be understood by the average plan participant. The final regs provide that the use of the model notice provided by the Treasury Department will satisfy the content requirement and the readability requirement with respect to the language provided in the model. The notice may be provided in writing or may also be provided in electronic form to the extent that the form is reasonably accessible to persons to whom the notice is required to be provided.

Code Sec. 432(e)(9)(F) provides that the notice of proposed suspension must be given concurrently with the submission of an application to the Treasury Department, but does not specify a precise time frame for satisfying this requirement. The final regs interpret the Code Sec. 432(e)(9)(F) requirement that the notice must be given concurrently with the submission of an application as allowing the sponsor to provide written notice a few days earlier than the electronic submission of the application (in order for the mailed notice and application to be received on or about the same date). The final regs thus allow a plan sponsor to give notice no earlier than four business days before the submission of its application. The final regs also provide that a plan sponsor is allowed to give written notice no later than two business days after the Treasury Department notifies the plan sponsor that it has submitted a complete application. This allows a plan sponsor a maximum of four business days following its submission of an application to provide the required notices. (Reg. § 1.432(e)(9)-1(f)(3))

Approval or denial of an application for suspension of benefits. The final regs generally adopt the provisions of the 2015 regs under which the Treasury Department, in consultation with the PBGC and the Labor Department, will approve a complete application upon a finding that: (a) the plan is eligible for the suspension; (b) the plan actuary and plan sponsor have satisfied the requirements of Code Sec. 432(e)(9)(C), Code Sec. 432(e)(9)(E), and Code Sec. 432(e)(9)(F); and (c) the design of the suspension satisfies the criteria of Code Sec. 432(e)(9)(D). The Treasury Department’s approval of the design of the suspension of benefits doesn’t constitute approval of any individual benefit calculation for any participant or beneficiary. A complete application will be deemed approved unless, within 225 days after a complete application is received, the Treasury Department notifies the plan sponsor that its application doesn’t satisfy one or more of the requirements for approval. In unusual circumstances, the Treasury Department and the plan sponsor may mutually agree in writing to stay the 225-day period. (Reg. § 1.432(e)(9)-1(g))

Participant vote on proposed benefit reduction. With regard to the Code Sec. 432(e)(9)(H) rule that no suspension of benefits may take effect before plan participants vote on the proposed suspension of their benefits, the final regs provide that a participant vote requires the completion of three steps: (i) a package of ballot materials is distributed to eligible voters; (ii) the eligible voters cast their votes and the votes are collected and tabulated; and (iii) the Treasury Department (in consultation with PBGC and the Labor Department) determines whether a majority of the eligible voters has voted to reject the proposed suspension. The 2015 regs had defined the term “eligible voters” as all plan participants and all beneficiaries of deceased participants; the final regs clarify that eligible voters include terminated vested participants and retirees (but not alternate payees). As under the 2015 regs, the final regs provide that the Treasury Department is allowed to designate a service provider (or service providers) to facilitate the administration of the vote. The final regs also set out the rules on the ballot package that is sent to eligible voters and the plan sponsor’s responsibilities relating to ballots and related communications to participants and beneficiaries, including the content of the ballot. (Reg. § 1.432(e)(9)-1(h))

Revenue procedure. Rev Proc 2016-27, 2016-19 IRB prescribes the specifics on how to apply for approval of a proposed benefit suspension. Applications for such approval will be accepted by the Treasury Department beginning on or after Apr. 26, 2016. These procedures replace those in Rev Proc 2015-34, 2015-27 IRB 1218. Rev Proc 2016-27 also provides a model notice (Appendix A) that a plan sponsor proposing a benefit suspension may use to satisfy the statutory notice requirement.

Effective date and date of application. The final regs apply with respect to suspensions for which the approval or denial is issued on or after Apr. 26, 2016. In the case of a systemically important plan (a plan for which PBGC projects that the present value of its financial assistance payments will exceed $1 billion if the suspension isn’t implemented), the final regs apply with respect to any modified suspension implemented on or after that date. (Reg. § 1.432(e)(9)-1(f))

References: For benefit suspensions by multiemployer plans in critical and declining status, see FTC 2d/FIN ¶  H-9791  et seq.; United States Tax Reporter ¶  4324  et seq.