On December 12, 2005, the Internal Revenue Service (IRS) issued Revenue Procedure 2005-76, which extends until January 1, 2007, the date by which the sponsor of a tax-qualified retirement plan must amend any impermissible suspension of benefits provisions and take certain other described corrective actions. Plan sponsors should take advantage of this extended deadline to determine whether they have made any impermissible plan amendments and whether corrective action is needed. IRS-required corrective action may include payment of retroactive benefits and distribution of notices to affected participants.
In this regard, many plan sponsors may be unaware that their plans’ suspension of benefits provisions have become violative of federal law even without ever having been amended—e.g., as a result of the merger of an acquired company’s plan that contained more lenient (or no) suspension of benefits rules into a plan that imposes benefit suspension rules.
On June 7, 2004, the U.S. Supreme Court, in Central Laborer’s Pension Fund v. Heinz, held that qualified retirement plan amendments adding or expanding a plan’s suspension of benefits provision violated the anti-cutback provisions of section 411(d)(6) of the Internal Revenue Code (Code) and section 204(g) of the Employee Retirement Security Act of 1974 (ERISA). The plan sponsor in Heinz had imposed new suspension of benefits conditions on benefits already accrued by participants. The Heinz decision, which limited a plan’s ability to add or expand suspension of benefits provisions, was in direct conflict with IRS’ prior practices and thereby created the potential for disqualification of many retirement plans that followed applicable IRS guidelines.
IRS Revenue Procedures 2005-23 and 2005-76
Earlier in 2005, IRS Revenue Procedure 2005-23 limited the retroactive adverse application of the Heinz decision by providing relief for qualified retirement plans that adopted impermissible plan amendments before June 7, 2004 (the date of the Heinz decision). An amendment adding or expanding a plan’s suspension of benefits provisions is referred to throughout Revenue Procedure 2005-23 as the "original amendment."
To qualify for relief granted under Revenue Procedure 2005-23, a plan must adopt a "reforming amendment" that, effective June 7, 2004, reverses the original amendment with respect to benefits accrued as of the date of the original amendment. The reforming amendment may either re-apply the suspension of benefits provisions that were in effect immediately before the original amendment, apply more generous suspension of benefits provisions with respect to benefits accrued both before and after the reforming amendment, or apply either type of amendment to benefits accrued before the date of the reforming amendment and apply a more stringent provision to benefits accrued after the date of the reforming amendment.
Revenue Procedure 2005-76 extends the date by which a qualified retirement plan must be in compliance with the provisions set forth in Revenue Procedure 2005-23 in order to maintain qualified plan status under Code section 401(a). Qualified plans now have until January 1, 2007 to:
- Be in operational compliance with the reforming amendment adopted by the plan sponsor (note the reforming amendment must be adopted before the end of the plan’s EGTRRA remedial amendment period)
- Pay required retroactive "make-up" benefits equal to payments that would have been made on and after June 7, 2004 with respect to benefits accrued as of the original amendment date
- Provide notice to eligible participants of the opportunity to elect retroactive commencement of benefit payments
All plan sponsors should examine their tax-qualified plans to determine whether any changes in the suspension of benefits provisions violate the ruling in the Heinz case. Of particular concern are retirement plan mergers in which plan provisions are integrated. In such instances, if the merging plan’s suspension of benefits provisions are more generous to participants than the surviving plan’s provisions, and the surviving plan’s provisions are applied to the merged-in plan, the resulting merged plan could be in violation of Heinz. Plan sponsors that discover Heinz violations must take steps to make timely reforming amendments to their plans and calculate corrective payments in accordance with Revenue Procedure 2005-76.