DEFINED BENEFIT PLAN WILL NOT SATISFY ACCRUED BENEFIT RULES IF EARLY RETIREMENT SUBSIDY IS NOT AVAILABLE

Rev. Rul. 85-6

PURPOSE

The purpose of this revenue ruling is to consider Rev. Rul. 83-52, 1983-1 C.B. 87, in light of the enactment of section 301 of the Retirement Equity Act of 1984 (REA), Pub. L. 98-397, 1984-52 I.R.B. 11.

ISSUES

Will the return of the amount of plan assets determined as described below to an employer upon the termination of a qualified defined benefit plan meet the nondiversion and vesting requirements of sections 401(a)(2) and 411 of the Internal Revenue Code?

FACTS

A qualified defined benefit plan that is not a multiemployer plan described in section 414(f) of the Code provides that a participant who retires prior to the normal retirement age of 65, but after attaining age 55 and completing 30 years of service, is entitled to the immediate commencement of the participant's accrued benefit without any actuarial reduction. The plan also provides that upon termination the amount by which the value of plan assets exceeds the present value of all participants' benefits (whether or not nonforfeitable) on a termination basis will revert to the employer maintaining the plan.

The employer who maintains the plan proposes to terminate the plan after the effective date of section 301 of REA with respect to the plan and distribute cash and annuity contracts equal to the present value of the participants' benefits. Under the proposal, unless a participant has attained age 55 and completed 30 years of service at the time of the proposed termination, such present value will not include the value of the subsidy that had been provided with respect to the early retirement benefit. Thus, participants who do not satisfy the minimum age and service requirements at the time of the proposed termination, but who subsequently satisfy these conditions, will not receive the subsidized benefit.

At the time of the proposed termination, the value of the plan assets will exceed the present value of the participant's benefits determined in this manner.

LAW AND ANALYSIS

Section 401(a)(2) of the Code and section 1.401-2 of the Income Tax Regulations provide that plan funds must not be used for purposes other than the exclusive benefit of employees or their beneficiaries prior to the termination of the plan and the satisfaction of all liabilities with respect to those individuals. Section 1.401-2(b)(2) provides that the liabilities that must be satisfied include both fixed (those nonforfeitable prior to termination) and contingent (those not nonforfeitable prior to termination) liabilities. After satisfaction of those liabilities, an employer may recover any remaining funds from the plan as surplus resulting from actuarial error.

Rev. Rul. 83-52 provides guidance on the determination of the amount that may be returned to an employer upon the termination of a defined benefit plan in accordance with the nondiversion requirement of section 401(a)(2) of the Code.

Section 411(d)(6)(B) of the Code provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy or of eliminating an optional form of benefit with respect to benefits attributable to service before the amendment is treated as reducing the accrued benefit of a participant for purposes of section 411(d)(6)(A). Under section 411(d)(6)(A) such a decrease in accrued benefits results in the plan not satisfying section 411. However, section 411(d)(6)(B) provides that, in the case of a retirement-type subsidy, this prohibition applies only with respect to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy. The REA amendments to section 411(d)(6) described above apply generally to plan amendments made after July 30, 1984.

The explanation of REA in S. Rep. No. 98-575, 98th Cong., 2nd Sess. 31 (1984), provides:

The bill does not provide an exception to the prohibition against reduction of benefits or elimination of benefit options in the case of a terminated plan. Accordingly, a plan is not to be considered to have satisfied all of its liabilities to participants and beneficiaries until it has provided for the payment of contingent liabilities with respect to a participant who, after the date of the termination of a plan, meets the requirements for a subsidized benefit.

The right of a participant under the plan to immediate payment without actuarial reduction, if age 55 with 30 years of service, is both a retirement-type subsidy subject to section 411(d)(6)(B) of the Code and a liability for purposes of section 401(a)(2). A participant could, after the date of the proposed termination, satisfy the pretermination conditions necessary to receive this retirement-type subsidy. Accordingly, the proposed termination eliminating this accrued retirement-type subsidy would result in the plan failing to satisfy the vesting requirements of section 411. Further, all liabilities will not be satisfied for purposes of section 401(a)(2) if the value of this retirement-type subsidy is not provided with respect to a a participant who, after the date of the proposed termination, satisfies the pretermination conditions necessary to receive such benefit. Until the liabilities for these benefits are satisfied, the employer may not recover any remaining funds as surplus resulting from actuarial error without disqualifying the plan.

In this case, there are at least two ways in which the vesting requirements could be met, the liabilities could be satisfied, and the employer could recover any surplus. First, annuity contracts may be purchased from an insurance company that provides for the retirement-type subsidy in the event any participant, subsequent to plan terminations, satisfies the pretermination conditions of age 55 with 30 years of service necessary to receive the subsidized benefits. Second, the plan on termination may be amended to provide such subsidized benefits whether or not participants subsequently satisfy the necessary conditions. In order for the plan to remain qualified, such an increase in benefits must satisfy other Code requirements, be provided in a nondiscriminatory manner, and be distributed in a manner that is permitted with respect to an individual who has satisfied the conditions necessary for such subsidized benefits.

HOLDING

The return of the amount of plan assets determined as proposed above to the employer upon the termination of the qualified defined benefit plan will not meet the nondiversion and vesting requirements of sections 401(a)(2) and 411 of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 83-52 is modified and superseded.