Permitted Amendments To Alternative Forms Of Payment Under A Defined Contribution Plan
IRC Section 411(d)(6) provides that an employee benefit plan fails to remain qualified if a participant's accrued benefit is decreased by a plan amendment. An amendment that eliminates an optional form of benefit (i.e., an alternate form of distribution) generally is treated as reducing accrued benefits to the extent the amendment applies to benefits accrued as of the later of the adoption date or the effective date of the amendment.
Under the Proposed Regulations, a DC Plan could be amended to restrict or eliminate the right to the payment of an accrued benefit in a particular optional form if the remaining distribution forms include both a single-sum distribution form and an extended distribution form, each of which is otherwise identical to the eliminated or restricted optional form of benefit. A distribution form is considered otherwise identical with respect to an eliminated or restricted optional form only if the distribution form is identical in all respects except with respect to the timing of payments after commencement. For example, a single-sum distribution form is not an otherwise identical distribution form with respect to a specified installment form of benefit if the single-sum distribution form (A) is not available for distribution on any date on which the installment form would have been available for commencement, (B) is not available in the same medium of distribution as the installment form, (C) does not apply to the benefit to which the installment form applied or imposes any condition of eligibility that did not apply to the installment form, or (D) lacks any related election rights that were available with respect to the installment form. A distribution form does not fail to be identical just because it provides greater rights to the participant or because it fails to preserve rights or features not otherwise protected under IRC Section 411(d)(6). Moreover, in the case of an optional form of benefit that is in the form of an annuity and that provides for distribution of an annuity contract, a distribution form that is not in the form of an annuity would not fail to be an otherwise identical distribution form with respect to that optional form of benefit merely because the non-annuity distribution form does not provide for distribution of an annuity contract.
A plan would satisfy the requirement to retain an extended distribution form if the plan provides for distributions in the form of either (i) a life annuity, (ii) substantially equal periodic payments, to be made at least annually over the participant's life expectancy (or, at the participant's election, over the joint life expectancies of the participant and spouse), or (iii) for an amendment that does not eliminate an optional form that is an extended distribution form, substantially equal periodic payments made (not less frequently than annually) over a period at least as long as the longest period over which the participant is entitled to receive a plan distribution before the plan amendment becomes effective, under any of the optional forms of benefits that are eliminated by the plan amendment. Thus, a defined contribution plan that offers life annuity options but is not the type of plan otherwise required to provide life annuities (i.e., a money purchase plan) could eliminate the qualified and joint survivor annuity option by discontinuing all life annuity options as long as the plan retains a single sum option and an installment option that pays benefits over a period based on life expectancy.
Voluntary Direct Transfers Between Plans
The Proposed Regulations make a number of changes to the existing regulations relating to elective transfers between qualified plans. Under certain circumstances, the existing regulations permit elimination of optional forms of benefit in connection with plan transfers with a participant's consent, but only where the participant's benefit under the transferring plan is immediately distributable (by reason of, for example, IRC Section 401(k)(10)).
Under the Proposed Regulations, the elective transfer provision would be available for transfers made in connection with certain corporate transactions (such as a merger or acquisition), or in connection with the transfer of a participant to a different job (for example, to a different subsidiary or division of the employer) that is not covered by the transferor plan, even if the event is not one that allows a distribution. The Proposed Regulations also permit an elective transfer even if the participant's benefit is not fully vested, provided that the requirements relating to preservation of vesting schedules are satisfied. Elective transfers could be made to plans that are within the employer's controlled group or to plans that are outside the employer's controlled group but in any event must be made to plans of a like kind (i.e., money purchase plan to money purchase plan or 401(k) plan to 401(k) plan).
Remember, however, that an elective transfer of benefits between DC Plans must involve a transfer of assets or liabilities that satisfies IRC Section 414(l) (i.e., that benefits be preserved after a spin-off or merger) and all other qualification requirements. Thus, in the case of transfers from plans that are subject to the survivor annuity requirements, those survivor annuity requirements would apply to the receiving plan with respect to the transferred amounts.
Transfers Of Benefits
A transfer of distributable benefits between qualified defined contribution plans (or qualified defined benefit plans) that results in the elimination of reduction of protected benefits would not violate IRC Section 411(d)(6) if (i) the participant voluntarily elects the transfer, and (ii) the amount transferred, together with a contemporaneous direct transfer, equals the participant's entire nonforfeitable accrued benefit under the plan. Such transfer would remain subject to the cash-out rules, the early termination requirements, the survivor annuity requirements but not the minimum distribution rules. The right to such a transfer is also an optional form of benefit which is subject to the nondiscrimination requirements of the IRC.
Rules Regarding In-Kind Distributions
While the existing regulations state that the right to a medium of distribution, such as cash or in-kind payments, is an optional form of benefit to which IRC Section 411(d)(6) applies, the Proposed Regulations permit a DC Plan to be amended to replace the ability to receive a distribution in the form of marketable securities (other than employer securities) with the ability to receive a distribution in cash. The right to distributions in cash, employer securities or other property that is not marketable securities would generally be protected. (The IRS has requested comments on whether section 411(d)(6) protection for in-kind distributions of employer securities and property that is not marketable securities from DC Plans should be preserved or eliminated.) However, the Proposed Regulations do permit a DC Plan having a right to an in-kind distribution (including employer securities and property that is not marketable securities) to be amended to limit the types of property in which distributions could be made to specific types of property in which the participant's account is invested at the time of the amendment. In addition, the Proposed Regulations permit a DC Plan giving a participant the right to a distribution in a type of property to be amended to specify that the participant is permitted to receive a distribution in that type of property only to the extent that the plan assets held in the participant's account at the time of the distribution include that type of property.
Last, under the Proposed Regulations, a defined benefit plan that provides for distribution of an annuity contract could be amended to substitute cash payments from the plan that are identical in all respects protected by section 411(d)(6) to the payments available from the annuity contract except with respect to the source of the payments.
Proposed Effective Date
The proposed regulations will not be effective until publication as final regulations in the Federal Register and thus cannot be relied upon before such date.