IRC §411(d)(6) provides in pertinent part:
“(6) ACCRUED BENEFIT NOT TO BE DECREASED BY AMENDMENT.
“(A) IN GENERAL-- A plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412(c)(8), or section 4281 of the Employee Retirement Income Security Act of 1974.
“(B) TREATMENT OF CERTAIN PLAN AMENDMENTS. -- For purposes of subparagraph (A), a plan amendment which has the effect of--
“(i) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or
“(ii) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a participant who satisfies (either before or after the amendment) the pre-amendment conditions for the subsidy. The Secretary may by regulations provide that this subparagraph shall not apply to a plan amendment described in clause (ii) (other than a plan amendment having an effect described in clause (i)).”
This rule has been around since ERISA was passed. However, until the mid ’80s it was common for a plan to provide that any alternate form of distribution permitted under the plan was subject to the prior approval by a plan fiduciary, such as a trustee, administrator, or advisory committee. In 1986 the Treasury issued proposed regulations stating that such discretion would no longer be permitted.[1]
These regulations became final in 1988[2] and they can be the source of great agony to a plan administrator. The general effective date of the regulations is January 30, 1986.[3] However, under a cumbersome set of rules, existing plans were generally not subject to the rule eliminating discretion until plan years beginning after December 31, 1988. Although preexisting plans need not have been amended prior to the TRA ‘86 extended remedial amendment date, compliance in operation was required.
Because many plans in existence in 1986 will not be amended until 1992, there is a period of time during which the face of the plan states that the fiduciary has discretion over the form of the distribution and yet the regulations prohibit the exercise of such discretion to deny access to a permissible form. Presumably, violation of the regulation will result in the disqualification of the plan. This can pose a trap to the employer, by giving participants the right to unusual forms of benefit theoretically available under the plan but seldom allowed in practice.
“A-2: (a) Reduction or elimination of section 411(d)(6) protected benefits–(1) In general. A plan may not be amended to eliminate or reduce a section 411(d)(6) protected benefit that has already accrued, except as provided in sections 412(c)(8) and 4281, and in paragraph (b) of this Q&A-2. This is generally the case even if such elimination or reduction is contingent upon the employee's consent. However, a plan may be amended to eliminate or reduce section 411(d)(6) protected benefits with respect to benefits not yet accrued as of the later of the amendment's adoption date or effective date without violating section 411(d)(6).”[4]
In the case of optional forms of benefit previously subject to employer discretion, the plan could be amended prior to the effective date of the regulations (1) to eliminate the discretion, (2) to eliminate the benefit, or (3) to substitute objective standards. If the effective date has come and gone and operational compliance is the course taken in the meantime, then how does the employer make manifest which of the three options has been elected? The regulations are unclear. A formal amendment should not have been necessary. It is clear that any form of benefit utilized prior to actual amendment is protected at that point if not already protected, since the payment in a particular form would be inconsistent with an election to eliminate the form.
Under the regulations it is only “protected benefits” that may not be eliminated. However, “protected benefits” include options relating to the timing, form and medium of distribution.
“(b) Optional forms of benefit--(1) In general. An 'optional form of benefit' is a distribution form with respect to an employee's benefit (described in paragraph (a)(1) and/or (a)(2) of this Q&A-1) that is available under the plan and is identical with respect to all features relating to the distribution form, including the payment schedule, timing, commencement, medium of distribution (e.g., in cash or in-kind), the portion of the benefit to which such distribution features apply and the election rights with respect to such optional forms. To the extent there are any differences in such features, the plan provides separate optional forms of benefit. Differences in amounts of benefits, methods of calculation, or values of distribution forms do not result in optional forms of benefit for purposes of this rule. However, such amounts, methods of calculation, or values may be protected benefits within section 411(d)(6)(A) and/or section 411(d)(6)(B)(i). See Sec. 1.401(a)-4 for further discussion and examples relating to optional forms of benefits.”[5]
Despite the literal language of §411(d)(6)(B)(ii), there are a number of important “ancillary” benefits that may still be eliminated:
“(d) Benefits that are not section 411(d)(6) protected benefits. The following benefits are examples of items that are not section 411(d)(6) protected benefits: (1) ancillary life insurance protection; (2) accident or health insurance benefits; (3) social security supplements described in section 411(a)(9); (4) the availability of loans (other than the distribution of an employee's accrued benefit upon default under a loan); (5) the right to make after-tax employee contributions or elective deferrals described in section 402(g)(3); (6) the right to direct investments; (7) the right to a particular form of investment (e.g., investment in employer stock or securities or investment in certain types of securities, commercial paper, or other investment media); (8) the allocation dates for contributions, forfeitures and earnings, the time for making contributions (but not the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied), and the valuation dates for account balances; (9) administrative procedures for distributing benefits, such as provisions relating to the particular dates on which notices are given and by which election must be made; and (10) rights that derive from administrative and operational provisions, such as mechanical procedures for allocating investment experience among accounts in defined contribution plans.”[6]
A plan may, without violating §411(d)(6), provide for the mandatory lump sum cash-out of certain distributions $3500, while providing alternate benefit form elections to all other participants.[7]
Interestingly, optional forms of death benefits are protected benefits under §411(d)(6).[8] And yet the consent requirements of §411(a)(11) do not apply to a death beneficiary.[9]
The above discussion is but a cursory overview of only the tip of the §411(d)(6) iceberg, but it will have to do. I suggest consulting Treas. Reg. §1.411(d)-4 for further insight.
It is important to note that the participant and the participant's beneficiary may have the right to demand payment of benefits under §401(a)(14) at a time earlier than that required under the minimum distribution rules.
§401(a)(14), provides that, unless the participant otherwise elects, the payment of benefits under the plan to the participant must begin no later than 60 days after the latest of the close of the plan year in which -
(1) the participant attains the earlier of age 65 or the normal retirement age specified under the plan,
(2) occurs the 10th anniversary of the year in which the participant commenced participation in the plan, or
(3) the participant terminates his service with the employer.
The preretirement survivor annuity rules require the payment of certain death benefits earlier than might have otherwise been required.
Under IRC §417(c)(1)(b) a defined benefit plan must begin making distributions of the QPSA[10] benefit no later than the earliest retirement age under the plan, but the plan may permit payments to begin earlier.[11]
Although the statute is silent, the regulations require that a defined contribution plan must permit the surviving spouse to direct the commencement of the QPSA within a reasonable time after the Participant's death.[12]
The List of Required Modifications (LRMs) was amended in April of 1985 by adding the following sentence to the paragraph dealing with the qualified preretirement survivor annuity (¶3.1), in the case of a defined contribution plan subject to the joint and survivor annuity rules:
"The surviving spouse may elect to have such annuity distributed immediately."[13]
The IRS has prepared Alert Guidelines and Worksheets on Qualification Requirements, for use by IRS plan specialists in reviewing plans submitted in connection with an application for a determination letter.[14] Worksheet 3, the Joint and Survivor worksheet, asks in Part III, the section dealing with the Preretirement Survivor Annuity, at line e:
"[D]oes the plan provide that the surviving spouse can begin receiving the qualified preretirement survivor annuity in a defined benefit plan no later than the date at which a participant who had died earlier would have reached the plan's earliest retirement age, or immediately in a defined contribution plan? [0325]"[15] (Emphasis added.)
In Explanation No. 3 to the Alert Guidelines, the IRS explains line e as follows:
"Line e. A defined benefit plan must allow a surviving spouse to begin collecting the preretirement survivor annuity no later than the date at which the participant (who died earlier) would have achieved the earliest retirement age. A defined contribution plan must offer an immediate annuity. The plan cannot require payments to begin, however, until the later of normal retirement age or age 62.
"417(c)"[16]
Query: When must death benefits commence under a profit sharing plan that is not subject to §417?
IRC §411(a)(11) requires that all plans, whether or not subject to the joint and survivor annuity rules of §417, must obtain the consent of the participant (not the spouse!) before a distribution can be made prior to the later of age 62 or normal retirement age under the plan, unless the participant’s accrued benefit is $3500 or less.[17]
Further, the regulations under §411(a)(11) require that the
participant be notified of this right and also be notified of the various
alternative forms of benefit which may be available under the plan. The form of
the notice and the manner in which it is given is similar to the notice of the
QJSA required to be given under §417. Under Treasury Regulations, the notice should be delivered no earlier
than 90, and no later than 30 days prior to the Proposed Distribution Date.[18]
[2]Treas. Reg. §1.411(d)-4. In case the reader decides to consult these regulations, make special note that for some reason the regulation is 1.411(d)-4 and NOT (d)-6. This insight could save much time.
[3]Treas. Reg. §1.411(d)-4 Q&A-9(a).
[4]Treas. Reg. §1.411(d)-4 Q&A-2(a).
[5]Treas. Reg. §1.411(d)-4 Q&A-1(b).
[6]Treas. Reg. §1.411(d)-4 Q&A-1(d).
[7]Treas. Reg. §1.411(d)-4 Q&A-2(b)(2)(iv).
[8]Treas. Reg. §1.411(d)-4, A(2)(a)(4).
[9]Treas. Reg. §1.411(a)-11(c)(5).
[10]Qualified Preretirement Survivor Annuity.
[11]Treas. Reg. §1.417(e)-1T(c)(2)(i).
[12]Treas. Reg. §1.417(e)-1T(c)(2)(ii).
[13]TRA and REA Modifications For Defined Contribution Plans, prepared by the IRS for assistance of sponsors of master or prototype defined contribution plans. CCH Pension Plan Guide (1987), ¶41,038, p.38,533.
All references to REA or REACT are to the Retirement Equity Act of 1984, P.L. 98-397.
[14]IR-1743, dated January 28, 1977, CCH Pension Plan Guide (1987), ¶17,012.
[15]IRS Alert Guidelines, Worksheet Number 3, CCH Pension Plan Guide (1987), ¶41,003, p.38,031.
[16]Employee Benefit Plans, Explanation No. 3 "Joint and Survivor", Department of the Treasury, IRS, Document 6391 (Rev. 2-85), CCH Pension Plan Guide (1987), ¶41,003, p.38,033-2.
[17]IRC 411(a)(11), Temp Treas. Reg. §1.417(e)-1T(b)(1) and (c)(1) and IR 85-99.
[18]Treas. Reg. §1.411(a)(11)(c)(2). Treas. Reg. §1.417(e)-1(b)(3). Treas. Reg. §1.401(a)-20 Q&A 36.