Cutback Relief and Retroactive Effect for Remedial Plan Amendments

Cutback Relief and Retroactive Effect for Remedial Plan Amendments

It is among the most fundamental tenets of pension law that benefits once earned cannot be taken away. It is made explicit in IRC § 411(a), reinforced by the specific protection afforded by the anti-cutback rule of IRC § 411(d)(6). There are few exceptions, but among those is the remedial amendment period allowed under IRC § 401(b).

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Section 1107 of the Pension Protection Act of 2006 (PPA '06) [Pub. L. 109-280], directly bears on plan amendments made pursuant to Title VII of the PPA '06, although it is located in Title XI... If one's eyes were to fall upon its two pages, one would see no words that even tie Section 1107 to IRC Sections 411(a)(13) or 411(b)(5).

But it is as integrally related to those sections as any words physically within the four corners of Title VII, and will become very familiar to practitioners as they get into the business of conforming clients' existing cash balance and pension equity plans to the new rules, or converting traditional DB plans to the lump sum based hybrids.

The intent of Section 1107 is to enable plans to do exactly that: conform to the requirements of the Pension Protection Act and regulations thereunder issued by the Treasury and Labor Departments, by means of plan amendments directly related to the PPA '06. To accomplish that the statute requires the necessary amendments to be adopted on or before the last day of the first plan year beginning on or after January 1, 2009, and to be retroactive to the effective date of the pertinent statutory or regulatory provision, with the further proviso that the plan be operated as if the plan amendment were in effect during such entire period. If those conditions are satisfied, the statute provides the plan with retroactive satisfaction of the Section 401(a) qualification requirements as provided in Section 401(b), and with protection against violation of the anti-cutback rules...

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... Section 1107 of the Act extends to the entirety of the Pension Protection Act. It is notable that 1107 even reaches beyond the Act to regulations issued under it, and not just Treasury regulations, but also regulations of the Department of Labor. Treasury is directed in Section 701 to issue some regulations relating to hybrid plans, such as a definition of plans having a "similar effect" to an applicable defined benefit plan [The PPA § 701(b)(2), amending, 411(a)(13)(C)(ii)]; and, as such, it would constitute a so-called legislative regulation, carrying essentially the same weight as a statute. It is understandable that legislative regulations would be treated identically to statutory provisions. But no provisions in the Labor regulations are accorded such status in Title VII. Section 1107 makes no distinction between legislative and non-legislative regulations.

Retroactive Remedial Amendments

The grant of retroactive efficacy of the requisite plan amendments is essential because the general deadline under Section 401(b) for instituting corrective amendments necessary for qualification, i.e., the tax return filing due date, will have preceded the end of the 2009 plan year, absent an extension granted by the Secretary of Treasury (which under the law is within his authority to grant). [Treas. Reg. § 1.401(b)-1(f)]...

Section 1107 is not a model of clarity; but understanding its purpose and effect is greatly aided by reading it in conjunction with the report on the PPA '06 by the staff of the Joint Committee on Taxation, IRS Notice 2007-6 and the proposed regulations.

The grant of retroactive relief under 1107 for effectuating remedial amendments beyond the Section 401(b) general deadline is not stated in 1107 to be an exercise of remedial amendment authority, but the JCT report makes it clear that it is so intended, citing IRC Section 401(b) as authority for its statement that "(p)resent law provides a remedial amendment period." The remedial amendment concept is not actually expressed in Section 401(b), but in the regulations under that section. [Treas. Reg. § 1.401(b)-1(a), (d)]...

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Anti-Cutback Relief

Section 1107 of the PPA provides, in addition to the foregoing rules, relief from IRC Section 411(d)(6), which generally prohibits retroactive reduction of accrued benefits by a plan amendment. However, under Section 1107 a plan amendment will not violate that prohibition, regularly called the anti-cutback rule, if it satisfies the same requirements described above that relate to retroactive remedial plan amendments. In addition, as a limitation on the anti-cutback relief, the statute authorizes the Secretary of the Treasury to provide exceptions to its availability. In what seems a gratuitous instruction to the Treasury the JCT report states, "it is intended that the Secretary will not permit inappropriate reductions in contributions or benefits that are not directly related to the provisions under the (Act)."

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Changes in Interest Crediting Rates and Code Section 411(d)(6)

Under the 2010 Proposed Regulations, in the absence of a special rule under IRC Section 411(d)(6), a participant's benefit can never be less than the pre-amendment benefit, increased for periods after the amendment using the pre-amendment interest crediting rate, thereby effectively requiring a minimum interest crediting rate. Except to the extent permitted under Section 1107 of PPA, an amendment to change a plan's future interest crediting rate with respect to benefits that have already accrued (i.e., with respect to an existing account balance) must satisfy Section 411(d)(6) if the change could result in interest credits that are smaller, as of any date after the applicable amendment date, than the interest credits that would be credited without regard to the amendment.

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The preamble to the 2010 Proposed Regulations states that, after they are issued as final regulations, it is expected that relief from Section 411(d)(6) will be granted for a plan amendment that eliminates or reduces a Section 411(d)(6) protected benefit, provided that (1) the amendment is adopted before those final regulations apply to the plan, and (2) the elimination or reduction is made only to the extent necessary to enable the plan to satisfy Section 411(b)(5).

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LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 9 pages)

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