Employee Benefits-IRS Provides Guidance On Notice Requirements For Benefit Restrictions On Single-Employer Defined Benefit Plans

December 10, 2012

In Employee Plans News (Issue 2012-3, Nov. 14, 2012), the Internal Revenue Service ("IRS") says that Notice 2012-46 (issued July 23, 2012) contains the following guidance:

• It explains when and how single-employer defined benefit plans must notify participants and beneficiaries of benefit restrictions (Internal Revenue Code Section 436 and ERISA Section 206(g))

• It contains a sample notice for plans to comply with ERISA Section 101(j)

Benefit Restrictions. The "benefit restrictions" are the following:

• Single-employer DB plans less than 60% funded must:

--restrict benefits, if any, for unpredictable contingent events (for example, a plant shutdown or similar event that isn't based on age, performance of services, receipt of compensation, death or disability), and

-- suspend benefit accruals.

• Plans less than 80% funded must restrict lump-sum distributions.

• Plans less than 80% funded, or where the sponsor is in bankruptcy, can't make prohibited payments. Prohibited payments include those:

-- that exceed the monthly single-life annuity payment, and

--made to insurers for irrevocable commitments to pay benefits.

Timing. The plan must restrict benefits on the first date that the plan's adjusted funding target attainment percentage (the "AFTAP") is actually or presumed to be less than the applicable 60% or 80%. A plan's AFTAP is its funded target attainment percentage plus any employee annuities purchased during the previous two plan years.
Plan administrators must notify participants and beneficiaries who are, or are likely to be, affected by the restrictions, in writing within 30 days after the date the restrictions take effect. Otherwise, the plan may be penalized up to $1,000 each
day it fails to provide the notice.

Effective Date. Although the notice requirements took effect on October 22, 2012, plan administrators could have relied on the notice or any reasonable interpretation of ERISA Section 101(j) before then.