Section 101(j) of ERISA provides:
(j) Notice of funding-based limitation on certain forms of distribution—The plan administrator of a single-employer plan shall provide a written notice to plan participants and beneficiaries within 30 days—
(1) after the plan has become subject to a restriction described in paragraph (1) or (3) of section 206(g),
[Note: Section 206(g)(1) is the limitation on “unpredictable contingent event benefits where the AFTAP is less than 60% or would be less than 60% when the unpredictable contingent event is taken into account. Section 206(g)(3) is the limitation on “prohibited payments”(i.e., lump sums) where the AFTAP is less than 60% or the plan sponsor is in bankruptcy and the 50% limit where the AFTAP is between 60% and 80%.]
(2) in the case of a plan to which section 206(g)(4) applies, after the valuation date for the plan year described in section 206(g)(4)(A) for which the plan’s adjusted funding target attainment percentage for the plan year is less than 60 percent (or, if earlier, the date such percentage is deemed to be less than 60 percent under section 206(g)(7), and
[Note: Section 206(g)(4) is the prohibition on future benefit accruals where the AFTAP is less than 60%. Section 204(g)(7) addresses the presumptions that apply if no actuarial certification is received by the 4th month or the 10th month of the current plan year.]
(3) at such other time as may be determined by the Secretary of the Treasury.
[Note: See discussion of IRS Notice 2012-46 below for other times that Secretary of Treasury has determined that a notice under Section 101(j) should be provided.]
The notice required to be provided under this subsection shall be in writing, except that such notice may be in electronic or other form to the extent that such form is reasonably accessible to the recipient. The Secretary of the Treasury, in consultation with the Secretary, shall have the authority to prescribe rules applicable to the notices required under this subsection.
Thus, the statute clearly provides that the notice must be provided after the plan has become subject to a benefit restriction. There is nothing in the statute that addresses whether a notice or other information could be provided before a benefit limitation takes effect.
The IRS has issued Notice 2012-46, dated July 23, 2012 to provide guidance regarding the notice requirement under ERISA 101(j). Q&A-1 in the notice basically repeats the statute and provides that a Section 101(j) notice is required to be provided “within 30 days after the date on which the plan has become subject to a limitation” on either unpredictable contingent event benefits or prohibited payments. Q&A-4 explains that “the date on which a plan becomes subject to a limitation on prohibited payments” is “the first day on which the plan is required to operate in accordance with the benefit limitation”.
Thus, a notice that is provided before the plan is required to operate in accordance with the benefit limitation does not appear to satisfy the Section 101(j) notice requirement.
When exactly must the plan be operated in accordance with the benefit limitation?
Q&A-4 refers to the applicable “436 measurement date”. The term “436 measurement date is defined in Treas. Regs. Section 1.436-1(j)(8), which says, in part, “See paragraphs (h)(1)(i), (h)(2)(iii)(B), (h)(2)(iv)(B) and (h)(3)(i) of this section regarding section 436 measurement dates that result from the application of presumptions under paragraph (h) of this section.”
Treas. Regs. Section 1.436-1(h)(1)(i) applies where a plan was subject to a limitation on the last day of the preceding plan year. In that case, the first day of the plan year is a section 436 measurement date, and the presumed AFTAP equals the AFTAP for the prior year until another certification or presumption changes the AFTAP. The remaining references to the (h) regulations work through the AFTAP presumptions that apply – minus 10% if the actuary does not provide a certification by April 1 and less than 60% if the actuary does not provide a certification by October 1. Further, the date of any new certification seems to a new “436 measurement date.” (See, for example, Treas. Regs. Section 1.436-1(h)(1)(iii)(B) stating that the date of a late prior plan year certification delivered in the current plan year “is a new section 436 measurement date for the current year.”)
As a result, benefit restrictions on “prohibited payments” seem to apply based on the date on which the plan’s AFTAP is either certified as being below 80% or 60%, as applicable, or deemed to be certified as being below 80% or 60%, as applicable. (I think this is right, and that the Morgan Lewis folks were simply being imprecise in their presentation where they used the term “valuation date”. See slide 17 of their presentation, which is available here: http://www.morganlewis.com/pubs/EB_Webinar_RestrictionsSingle-EmployerBenefitPlans_21mar2012.pdf )
Can a certification be provided later to delay imposition of benefit restrictions?
There seems to have been a fair amount of anguish in the actuarial community about the ethics of holding off on providing a certification that would cause a plan to be subject to benefit restrictions. Typical of this is an April 1, 2011 article from the BNA Daily Tax Report, “Treasury, IRS Speakers Discuss Anti-Cutback Relief, Actuaries’ Duties”. Harlan Weller stated that he would expect actuaries to get their certifications done “as soon as practicable” and that actuaries would not “intentionally delay” issuing a certification. Carolyn Zimmerman, who is apparently the Chair of the Joint Board for the Enrollment of Actuaries reminded actuaries of their professional responsibilities and expressed concern about situations where a plan could become defunded by continuing to pay lump sums because someone manipulated the timing of the AFTAP certification.
Thus, there seems to be a somewhat fuzzy line here, but the actuary who knows that a plan will be subject to benefit limitations must issue his or her certification promptly, and then the plan must begin to operate in compliance with the limitations.
What are the other times at which a Section 101(j) notice must be provided?
Q&A-6 of Notice 2012-46 provides that a notice with respect to an unpredictable contingent event must be provided “… on or before the latest of” (1) the date a WARN Act notice is provided for the contingent event, (2) 60 days before the actual occurrence of the contingent event and (3) 30 days after the employer makes the decision to cause the contingent event (for example, the decision to shut down a plant). Thus, for an unpredictable contingent event, it seems that the Section 101(j) notice may need to be provided before the actual event occurs.
Where does this leave an employer as far as providing advance notice of benefit restrictions on lump sum payments?
The ERISA Industry Committee, or “ERIC” specifically requested that employers be allowed to provide the required notice of benefit restrictions before the restrictions become applicable. Specifically, ERIC’s letter, (available here: http://www.eric.org/forms/uploadFiles/28B7C00000005.filename.ERIC_Response_to_Treasury_Regulatory_Burden_RFI_042911.pdf ) states on page 4, “Many employers know in advance that the restrictions will apply, and wish to provide the § 101(j) notice in advance – when the information is most useful to affected participants. Regulations under ERISA § 101(j) should allow the notice to be provided at any time during a window that opens a reasonable time (e.g., 90 days) before the restrictions become applicable and closes 30 days after the restrictions become applicable.”
The IRS did not act on this recommendation. IRS Notice 2012-46 does not provide any comment on providing early warning that benefit limitations are likely to apply or will apply to a plan, but under the terms of Notice 2012-46, an early notice does not appear to satisfy the ERISA Section 101(j) notice requirement.
In an older Client Action Bulletin, dated March 16, 2009 (available here: http://publications.milliman.com/periodicals/cab/pdfs/CAB03-16-09-Benefit-Restrictions.pdf ), Milliman advises, “Although advance notification is not required, informing participants of possible benefit restrictions prior to the date restrictions will take effect may be prudent. This is particularly true for participants who have benefit elections in process before the effective date of the restrictions. Participants who discover that a lump sum option is not available only because their benefit election forms were received by the plan sponsor after benefit restrictions were received are likely to be upset.”
Yes, participants who do not receive lump sums are likely to be upset. On the other hand, at many employers, the number of participants who terminate and elect lump sums could increase dramatically if participants learn that benefit restrictions will apply in the future. If that causes the plan’s AFTAP to drop further, participants who then cannot receive a 50% lump sum may be upset as well.
It is difficult for me to reconcile the statements made by Carolyn Zimmerman with the suggestion made by Milliman. In either case, one group of participants may be privileged over another. Unless I am missing something, I think the plan’s fiduciaries would need to weigh making an advance disclosure carefully. In addition, I think that the advance disclosure would need to be made in a way that all participants were likely to receive it, even though it is not a required disclosure. The worst possible action seems to be allowing those “in the know” to take their lump sums while others miss the opportunity. That may weigh in favor of a more general disclosure, but I think there is no clear course of action under current guidance.
The bottom line, for me anyway, seems to be the plan fiduciaries seem to have a duty to all participants, and they will need to decide what sort of notice is in the best interests of participants generally. Sadly, by failing to provide advance notice, the employer and plan fiduciaries seem highly likely to be sued. If they provide advance notice, they may be less likely to be sued because the cause of any future harm to an individual participant may be more difficult to tie back to continued lump sum payments in a relatively brief period following the notice period unless the advance notice creates so much demand for lump sums that the funded status of the plan is clearly affected.