On December 15, 1995, the IRS issued new temporary regulations on so-called "204(h)" notices. The purpose of a 204(h) notice is to give affected participants minimum advance notice of a significant reduction in the rate of future benefit accruals. The new regulations apply to plan amendments adopted on or after December 15, 1995 and to amendments effective on or after December 30, 1995.
Under the regulations, plans that must issue 204(h) notices are defined benefit pension plans and only those individual account retirement plans, such as money purchase plans, that are subject to minimum funding requirements.
A written 204(h) notice must be provided after the amendment has been adopted and at least 15 days before it is effective. The notice must describe the amendment and its effective date.
What is an amendment that causes a significant reduction in the rate of future accruals?
Defined benefit plans: annual benefit commencing at normal retirement age. The regulations clarify that, with respect to a defined benefit plan, the 204(h) notice must be provided only with respect to amendments that are reasonably expected to significantly reduce the amount of the future annual benefit commencing at normal retirement age. Changes to optional forms of benefit, early retirement benefits, retirement-type subsidies and ancillary benefits are not taken into account.
Individual account plans: future allocations to accounts. An amendment to an individual account plan that is reasonably expected to reduce the amount of future allocations to participants' accounts is subject to the notice requirement. (Remember, individual account plans that are not subject to minimum funding requirements are not subject to the 204(h) notice requirements either.) Changes to investment options, payment forms, and other rights or features are not taken into account.
Examples: 204(h) Amendments
- Formula Change. A defined benefit plan's formula, payable at normal retirement age as a single life annuity, is as follows:
2% x final three years pay x years of service
An amendment to change this formula to:
* 1% x final three years pay x years of service; or
* 2% x final five years pay x years of service; or
* 2% x final three years pay x years of service up to 20 years;
would consist of an amendment that is reasonably expected to significantly reduce the amount of the future annual benefit commencing at normal retirement age.
- Underlying Definitions. Any amendment that changes the definition of final pay, years of service or normal retirement age could potentially be an amendment that would significantly reduce the amount of the future annual benefit commencing at normal retirement age.
- Benefit Freeze. A prospective freeze on benefit accruals or allocations would be covered by the 204(h) requirements.
Examples: Non-204(h) Amendments.
- A switch to GATT actuarial factors in converting to a lump sum from a single life annuity in a defined benefit plan.
- Prospective elimination of an automatic 40% spouse pension in a defined benefit plan.
- Prospective elimination of a social security "bridge" benefit in a defined benefit plan.
- Elimination of a disability retirement benefit in a defined benefit plan.
- Elimination of a lump-sum death benefit in a defined benefit plan.
- Prospective elimination of an installment payment option from an individual account plan.
- Elimination of plan loans.
- Termination of a plan (if accruals or allocations continue up to the termination date).
Who must receive the notice?
Only participants (and their collective bargaining representatives) and alternate payees who are reasonably anticipated to be affected by the amendment, based on all the relevant facts and circumstances, must be notified. The regulation clarifies that participants who are not immediately affected by the amendment, but who reasonably are expected to be affected in the future, must be notified. For example, if allocations to accounts in Division A's money purchase plan are scaled back, and a high percentage of Division B employees routinely transfer into Division A, then the Division B employees also must be notified.
If the notice is inadvertently not provided to a "de minimis" percentage of participants and alternate payees, the 204(h) requirements will be deemed to have been satisfied if a good faith effort was made, collective bargaining representatives were notified (if applicable) and the notice promptly is provided upon discovery of the error.
If the notice is inadvertently not provided to more than a "de minimis" percentage of participants and alternate payees, the 204(h) requirements will be satisfied only with respect to the individuals who were provided the notice. The amendment will not be effective with respect to the remaining participants and alternate payees until at least 15 days after they are provided the notice.