In a ruling anxiously awaited by many pension plans (particularly multiemployer plans), the Internal Revenue Service has issued a revenue procedure pursuant to Section 7805(b) of the Internal Revenue Code that significantly limits the retroactive application of the Supreme Court’s decision in Central Laborers’ Pension Fund v. Heinz, 124 S.Ct. 2230, decided on June 7, 2004. Revenue Procedure 2005–23, scheduled for official publication on May 2, 2005, outlines what pension plans that previously were amended to tighten up their benefit suspension rules must now do to maintain their tax qualified status in light of the Heinz decision. A copy of the revenue procedure can be found on the Service’s website at http://www.irs.gov/pub/irs-drop/rp-05-23.pdf.
The Supreme Court in Heinz was faced with a challenge to an amendment to a multiemployer pension plan’s benefit suspension rules that expanded the types of post-retirement employment that would trigger a forfeiture of a retiree’s monthly pension. The challenge was brought by two plan participants that retired before the plan amendment was adopted and shortly after retirement went back to work as supervisors, which at the time was not a type of prohibited employment under the plan’s benefit suspension rules. (Under an exception to ERISA’s vesting rules, plans are permitted to permanently withhold payment of a participant’s vested retirement benefit for any month in which the participant works in certain types of employment following retirement.)
In Heinz, the Supreme Court held that an amendment to the plan’s benefit suspension rules that applied to a retiree’s benefits earned before the amendment’s adoption was subject to the anti-cutback limitations in Section 411(d)(6) of the Code, and its counterpart Section 204(g) of ERISA. (A detailed article discussing all aspects of the Supreme Court’s decision is available in our July 2004 edition which is posted on our website.) This holding was in conflict with a provision added to the Internal Revenue Service’s Audit Manual in 1996 stating that such amendments were not subject to the Code’s anti-cutback rules. Recognizing this conflict, and the fact that over the years many pension plans had received favorable determination letters from the Service covering amendments to their benefit suspension rules, the Court invited the Service to exercise its authority under Section 7805(b) to limit the retroactive application of its decision insofar as it might affect these plans’ tax qualified status for past years.
With Revenue Procedure 2005–23, the Service has done just that. Briefly summarized, the main rulings in the revenue procedure are as follows:
- First, the Service limits the applicability of Heinz to benefit suspensions for periods after June 7, 2004, the date of the Supreme Court’s decision. Those benefit suspensions will need to be reviewed to determine whether they run afoul of the anti-cutback rules and if so, some or all of the amounts suspended must be paid to the affected retirees with interest. This means that pension plans that may have been amended one or more times since ERISA became law to provide for more stringent benefit suspension rules will not be required to review benefit suspensions before June 7 2004, and refund to retirees or their estates benefits that were suspended in violation of Heinz.
- Second, the Service makes it clear that the Heinz decision extends anti-cutback protections to all accrued benefits earned before a more stringent benefit suspension rule was adopted, not just, as some thought, the benefits of participants who retired before the more stringent rules took effect.
- Third, plans can still enforce these more stringent benefit suspension rules as to any benefits accrued — and any benefit improvements adopted — after those rules became effective. And, they can still enforce their original benefit suspension rules with respect to all of a participant’s accrued benefits.
- Fourth, plans that have been amended in the past to impose more stringent benefit suspension rules must adopt reforming amendments that bring all prior noncompliant amendments into compliance with Heinz, as interpreted by the revenue procedure, with respect to any suspension of benefits that come due after June 7, 2004. The deadline for adopting these reforming amendments is the last day of the plan’s EGTRRA remedial amendment period. Plans can adopt reforming amendments that are more generous than the revenue procedure would require. For example, a plan that adopted a more stringent benefit suspension rule effective August 1, 1996 might conclude that it would be too burdensome to manually calculate exactly how much of a participant’s total accrued benefit was earned prior to that date, but that plan records did reflect each participant’s accrued benefit as of the end of each calendar year. Its reforming amendment could provide that the more stringent benefit suspension rule would only apply to those benefits a participant accrued after December 31, 1996 while the previous, less stringent rule would apply to benefits earned up through that date. Or a plan might decide to use an earlier retroactive cutoff date than June 7, 2004.
- Fifth, no later than December 31, 2005, all affected plans must be in operational compliance with the reforming amendments that they ultimately adopt. Put another way, plans can continue to apply their current benefit suspension rules for the next few months until the plan sponsors decide just how they plan to implement the requirements of the revenue procedure, as long as they implement those requirements by the end of the 2005 calendar year. As a practical matter, decisions on implementation will need to be made long before the end of the year.
- Sixth, affected plans must review all benefit suspensions imposed pursuant to their pre-Heinz rules for benefit payments due for the period beginning after June 7, 2004 through December 31, 2005. Depending on how a plan chooses to implement the revenue procedure and whether a particular retiree accrued additional benefits after the plan’s benefit suspension rules were made more stringent, all or some portion of the retiree’s suspended benefit payments for that period must be refunded with interest no later than December 31, 2005. Individuals whose benefits were immediately suspended from the effective date of their retirement because they were then in “prohibited employment” must be treated in the same fashion as individuals whose benefits were suspended some time later. And, if a plan that tightened up its benefit suspension rules in violation of Heinz provides for in-service benefit suspensions for participants who work past normal retirement age, thus denying them an actuarial increase in their accrued benefit for deferred retirement, those participants must be included in the “remediation effort.”
- Finally, the revenue procedure specifies additional remediation steps a plan must take to reach out to retirement-eligible participants who in the past might have been deterred from applying for retirement benefits because they were then engaged in the type of “prohibited employment” defined by the plan’s more stringent benefit suspension rule. If those participants satisfy certain criteria outlined in the revenue procedure, they must be given the option of electing to commence retirement benefits retroactive as far back as the retroactive effective date of the plan’s reforming amendment (which can be no later than June 7, 2004) provided the participant was then eligible to retire and commence receiving benefits but for the plan’s more stringent benefit suspension rules. Plans must send a notice to these participants no later than January 1, 2006 advising them of their election rights. They must be given a reasonable time (at least six months) from the time they receive this notice to make the election. As a practical matter, since a plan in many cases will not know if a non-retired participant had been working in “prohibited employment” under its more stringent benefit suspension rule while retirement eligible, the notice will have to be sent to a much broader group of participants, for example anyone who was retirement eligible at the time the benefit suspension rule was adopted or who became so thereafter. If a plan does not have a valid mailing address for some of the participants in this category, reasonable efforts must be made to locate them including the use of locater services such as the IRS Letter Forwarding Program, the Social Security Employer Reporting Service or one of the private locater services offered by credit bureaus and other providers.
Revenue Procedure 2005–23 also contains an important caveat: its limitation on retroactivity “has no effect on the rights of any party under section 204(g) of [ERISA] or any other law.” Thus, affected plans remain exposed to civil litigation under Title I of ERISA by plan participants seeking restoration of benefits suspended prior to June 7, 2004 under benefit suspension rules that run afoul of Heinz.
Last but not least, Revenue Procedure 2005–23 provides some cause for cautious optimism that the Service will issue regulations restoring to plans some ability to adopt more stringent benefit suspension rules that will apply to prior as well as future benefit accruals. The revenue procedure announces that the Service intends to propose regulations that reflect the holding in Heinz and in the process provide guidance “on when an amendment may add a benefit entitlement condition that is permitted under the vesting rules (e.g., a condition described in § 411(a)(3)) with respect to benefits accrued before the date of the amendment.” This overture was perhaps prompted in part by the suggestion of the concurring opinion of three Justices in Heinz that the Service could amend its regulations to permit what the Supreme Court held the Service’s current regulations prohibited in this area.
The foregoing is not an exhaustive explanation of all the details of Revenue Procedure 2005–23. There are many details and issues that affected plan sponsors will need to address in the context of their particular circumstances. At the same time as it issued the revenue procedure, the Service posted on its web site an example illustrating how plans can comply with the provisions of the revenue procedure and avoid plan disqualification. The example is quite helpful in understanding the requirements of the revenue procedure. It can be found at http://www.irs.gov/retirement/article/0,,id=137638,00.html.