The IRS recently finalized regulations that permit qualified defined
contribution plans to eliminate some optional forms of benefit. The regulations
will be particularly helpful to employers whose plans contain a wide variety of
payment choices.
Section 411(d)(6) of the Internal Revenue Code contains the "anti-cutback
rule," which generally provides that a participant’s accrued benefit may not be
reduced by plan amendment, and that all optional forms of benefit that relate to
such accrued benefit must be preserved. The anti-cutback rule has been
particularly burdensome in the context of plan mergers, where, for example,
optional forms of benefit contained in one plan must be duplicated in the second
plan.
Under the new regulations, however, a defined contribution plan may be
amended to eliminate or restrict a participant’s right to receive payment of
accrued benefits under a particular optional form of benefit if, after the plan
amendment is effective with respect to the participant, the alternative forms of
payment available to the participant include payment in a single sum
distribution form that is "otherwise identical" to the eliminated or restricted
form of benefit. To be otherwise identical, the single sum distribution form
must be identical in all respects to the eliminated or restricted form (or would
be identical except that it provides greater rights to the participant), except
with respect to the timing of payments after commencement. For example, a single
sum distribution form is not otherwise identical to a specified installment form
of benefit if the single sum distribution form is not available for distribution
on the date on which the installment form would have been available for
commencement, is not available in the same medium of distribution as to the
installment form or imposes any condition of eligibility that did not apply to
the installment form.
The regulations also specifically permit a plan that offers an annuity
contract providing cash payments as an optional form of benefit to adopt a plan
amendment substituting cash payments from the plan for the annuity contract, as
long as the cash payments from the plan are identical in all respects to the
cash payments payable under the annuity contract. And the regulations
specifically permit a plan that offers the distribution of marketable
securities, other than employer securities, as an optional form of benefit, to
adopt a plan amendment substituting cash for the marketable securities.
In order to decrease cost and complexity of plan operations associated with
maintaining a wide variety of distribution forms, employers should review their
defined contribution plans in order to identify optional distribution forms that
may now be eliminated or restricted.
An Eerie Decision
In a decision with far reaching implications, the Third Circuit Court of
Appeals recently held in Erie County Retirees Association v. Erie County
that the Age Discrimination in Employment Act (the "ADEA") applies to retirees.
Therefore, the Court determined that Erie
County may not
provide less generous medical benefits to its Medicare-eligible retirees than it
provides to retirees who are not Medicare-eligible unless the difference is cost
justified.
The ADEA generally provides that it is unlawful for an employer to
discriminate against any individual with respect to compensation, terms,
conditions or privileges of employment because of such individual’s age. It is
not unlawful to provide a less generous benefit based on age if the benefit is
cost justified.
Erie County
offered its Medicare-eligible retirees coverage
under a Medicare HMO instead of the traditional indemnity insurance they had
before becoming Medicare-eligible. Non-Medicare-eligible retirees were offered
group health plan coverage under both an HMO option and a traditional indemnity
option. The district court determined that the ADEA was not intended to apply to
retirees and therefore dismissed the retirees’ case. The retirees appealed to
the Third Circuit which held that the ADEA does apply to retirees and that,
unless the differences in benefits could be justified on the basis of cost
(i.e., the county was spending the same amount to provide retiree medical
benefits for each retiree) then providing less favorable benefits for
Medicare-eligible retirees violates the ADEA. It should be noted that the court
concluded that the benefits provided under Medicare could be taken into account
in determining whether the county provided the same benefits for each retiree
but that in determining whether the county was spending the same amount of
money, the county could not consider the cost which Medicare incurs on behalf of
persons covered under the Medicare HMO.
The Third Circuit covers the states of
Pennsylvania,
New Jersey and
Delaware. Employers with employees
in those states should carefully review their retiree programs if any
differences exist in the benefits provided to different classes of retirees.
The Employee Benefits Alert is intended to keep readers current on
matters affecting employee benefits, and is not intended to be legal advice. If
you have any questions, please call any of the following Employee Benefit
attorneys: John J. Kearns, III. at 412.566.2075; Paul M. Yenerall
at 412.566.1944;John R. Owen, III at 412.566.6852; Kathryn A.
English at 412.566.1226 or Sandra R. Mihok at 412.566.1903.
