April 20, 2005

IRS and Treasury Provide Heinz Case Suspension of Benefits Guidance

On April 18, the Internal Revenue Service (IRS) and U.S. Treasury Department (Treasury) released Rev. Proc. 2005-23 which provides guidance to plans affected by a U.S. Supreme Court decision regarding plan amendments that add or expand a suspension of benefits provision. In Central Laborers' Pension Fund v. Heinz, 124 S.Ct. 2230 (June 7, 2004), the Supreme Court held that a plan amendment that expanded the reasons for suspension of benefit payments retirees had already accrued could not be enforced because it violated anti-cutback rules under Internal Revenue Code Section 411(d)(6) and ERISA Section 204(g). The revenue procedure provides guidance to plan sponsors that adopted similar amendments prior to the court's June 7 decision.

The Heinz case was filed by two inactive participants in the Central Laborers' Pension Fund, a multiemployer pension plan. Both participants had retired and commenced payment and returned to work as construction supervisors, a position that at the time of their retirement was not covered by the pension plan, and reemployment in that position would not result in suspension of benefit payments under the plan. Following their retirements, the plan was amended to expand the definition of disqualifying employment (employment that would result in a suspension of payments) to include any employment in the construction industry in the geographic area covered by the plan, and the plan stopped payments to the two participants. The Supreme Court held that a condition may not be imposed after a benefit has accrued and that payments should continue to the two participants. However, the Court stated that the Internal Revenue Code gives the IRS Commissioner discretion whether to apply decisions of the Court retroactively and added that this situation was "an appropriate occasion for exercise of that discretion."

The IRS/Treasury guidance exercises that discretion by allowing plans to apply similar amendments (amendments that provided for a suspension of payment of the accrued benefit or for a suspension of the payment or early retirement benefits or retirement-type subsidies) until June 7, 2004, at the latest if the following requirements are met:

  • The plan sponsor adopts a reforming amendment which provides that, beginning on June 7, 2004 (or an earlier date selected by the plan sponsor), the provisions of the original amendment that suspends benefits do not apply with respect to benefits that had accrued as of the original amendment date.

  • The plan provides payment of retroactive benefits (beginning as of June 7 or the earlier date selected by the plan sponsor) to any affected plan participant with respect to benefits that had accrued as of the original amendment date. Payments must include any appropriate interest or actuarial increases.

  • Affected plan participants include participants who did not apply to commence benefits but would have qualified for payments under the plan if they had not engaged in employment that resulted in suspension of payments under the original amendment.

  • Participants must receive at least six months' notice of their option to retroactively elect commencement of the payment of benefits. Reasonable efforts must be taken to notify all affected participants, including the use of the IRS letter forwarding service or the Social Security Administration employer reporting service if the participant is not located after a mailing to the last known address.

  • The plan must be in operational compliance with the reforming amendment by January 1, 2006, with respect to benefits payable through December 31, 2005, and must maintain compliance for all periods on or after that date. Plan amendments must be done by the last day of the EGTRRA remedial amendment period for the plan.

The plan may choose to adopt a reforming amendment that would continue to apply the suspension of benefit provision that was in effect immediately prior to the original amendment with respect to all accrued benefits (accruing both before and after the original amendment) or limit the original amendment to only those participants who commenced participation in the plan after the original amendment date.

The effective date of the revenue procedure is April 18, 2005. The revenue procedure indicated that Treasury and the IRS intend to propose regulations that reflect the holding in the Heinz case.