In this issue of The Benefits Professional Report, Leslie A. Klein continues discussion of the Employee Plans Compliance Resolution System ("EPCRS") as set forth in Rev. Proc. 2000-16. While EPCRS describes how to correct certain plan failures, Mr. Klein notes that there may be other acceptable methods which are not described in the Rev. Proc., as well as areas where the Rev. Proc. provides no guidance on correction. With third party administrators often in the position of consulting with plan sponsors in the area of correction, it is important to carefully consider the different methods of correction and consult with experienced ERISA counsel when necessary.
In previous newsletters we have discussed the Employee Plans Compliance Resolution System ("EPCRS") as set forth in Rev. Proc. 2000-16 which permits plan sponsors to correct plan qualification failures. EPCRS describes how to correct certain failures. However, there may be other acceptable methods of correcting a failure which are not described in the Rev. Proc. and there are many failures for which the Rev. Proc. provides no guidance on correction. Thus, a plan sponsor and its third party administrator must carefully determine how to correct failures taking into account the principles set forth in the Rev. Proc., the cost of correction and the administrative burden associated with correcting the failure. To illustrate this consider the following:
A common administrative error not specifically addressed is a plan's failure to provide a suspension of benefits notice to a participant who reaches a defined benefit plan's normal retirement age (age 65), but continues to work. Under ERISA's nonforfeitability requirements, a participant's accrued benefit must not be forfeitable upon reaching normal retirement. This requirement is satisfied for a participant who works past 65 if (1) the participant's pension commences at 65, (2) the participant is paid an actuarially increased benefit upon retirement, or (3) the participant receives a suspension of benefits notice at age 65 (i.e. a notice that his or her pension will not commence until after retirement). See DOL Reg. § 2530.203-3 To avoid the costs related to the first two options, most plans use the third option and provide that the suspension of benefits notice will be given to participants working past age 65.
It is a common error for a Plan to fail to properly notify participants. A plan that fails to provide a proper suspension of benefits notice will not conform with the regulations or the plan provisions. Accordingly, the failure should be corrected to ensure that the plan maintains its qualified status.
There are several possible ways of correcting the failure to provide a proper suspension of benefits notice to participants working past age 65:
The possible methods of correction have dramatically different results in terms of cost and operation of the plan. The first option is the most expensive, but would clearly be accepted by the IRS. However, this option appears to give a windfall to a participant by placing the participant in an even better position than he or she would have been had he or she received the notice and retired.
The second option, which should also be accepted by the IRS, makes the participant whole by eliminating any disparity in benefits between employees who retire at normal retirement age and those who retire later and receive benefits for fewer years. However, providing the increased benefit still may be expensive.
The expense of correcting under options 1 and 2 can be reduced by giving a late suspension of benefits notice to participants working past 65. No actuarial increase should be required for benefits that accrue after the notice is given. Thus, a participant's benefit after giving the notice should be the greater of (1) the accrued benefit determined as of the date the notice is given increased through the date the notice is given or (2) the accrued benefit determined as of retirement without actuarial adjustment. Thus, if the notice is given late and the participant continues to work, the actuarial increase may be partially or fully "worn away" depending on when the participant retires.
The third option, which is not normally accepted by the IRS (but has on occasion been accepted) is to merely provide the notice to participants who should have received the notice at age 65. This option has the benefit of no expense to the plan with minimal administrative burden. However, this option does not conform the operation of the plan to the plan provisions because the notice is late and arguably doesn't make a participant whole. The participant may not be put in the same position if he would have terminated employment in order to receive pension benefits.
The fourth option is to do nothing. This option, on its surface, seems to neither conform the operation of the plan to its language or the regulation. However, this argument may be viable based on Monks v. Keystone Powdered Metal Co., 78 F. Supp.2d 647 (E.D. Mich. 2000). The court in Monks, while not reaching a conclusion on the applicability of the DOL regulation, suggested that benefits could not be considered suspended where they never actually commenced at age 65, and where the plan didn't treat benefit payments as suspended at age 65, but instead continued to accrue benefits for the participant. Id. at 666. In Monks, the court, agreed with the defendant's constructive notice defense and found that while the plan administrator failed to provide proper notice, it did not operate to the plaintiff's detriment because the plaintiff, who continued to work past age 65, was already aware that his benefits would not commence until he actually retired. Id. at 667.
The facts the court considered included information provided in the summary plan description and calculations the plaintiff had received of his benefits before and after his normal retirement date, but before he actually retired. Id. at 668. Also, the plaintiff had stated that he did not expect to receive benefits until after he retired. The court found it undisputed that the plaintiff was aware of the deferral of his retirement benefits and therefore any purposes served by the notice requirement were achieved. Id. at 670.
The court also found it significant that the plaintiff's benefits continued to grow until he actually reached retirement. Because of the continued benefit accruals, the court stated there was no forfeiture of benefits. Id. at 669. The court concluded that the "continued accrual overcomes any claimed entitlement to the actuarial equivalent of the benefits Plaintiff would have received if he had retired at age 65." Id. at 670.
As Monks suggests, if a plan continues to accrue benefits for a participant after the participant's normal retirement date and if evidence of constructive notice is present, the notice requirements may be met. This implies that in instances where a participant receives constructive notice, the participant has not been placed in a worse position than if formal notice had been provided and that the plan has essentially operated in conformance with its language; thus, there is no plan failure.
The availability of different methods for correcting a failure illustrates the importance of getting IRS approval of the correction method pursuant to the VCR program or Walk-in CAP program particularly where the sponsor desires to use a creative method of correction. If a plan fails to provide the suspension of benefits notice and the sponsor would like to take the position that based on the Monks decision there is no plan failure or that the failure may be corrected by providing the notice, it is important to get the IRS' approval of the correction so that the IRS does not at a later date take the position that the failure was not corrected. However, prior to filing with the IRS, the plan sponsor should be prepared that the IRS may require, as a condition of approval, the plan to pay the participant an actuarially increased benefit.
Copyright 2000 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Report, Second Quarter Report.