Bankruptcy

Final Regulations for Single-Employer Defined Benefit Plans in Bankruptcy

Final regulations (T.D. 9601) offer a limited exception to single-employer defined benefit plans covered under ERISA Section 4021 from the anti-cut back rules under Internal Revenue Code Section 411(d)(6)(B). The regulations allow a plan sponsor who is a debtor in bankruptcy and who meets certain conditions to amend its plan to eliminate:

 

a lump-sum distribution option, or

another optional form of benefit providing for accelerated payments.

 

Conditions

A plan sponsor must satisfy these four conditions by the applicable amendment date (the later of the amendment’s adoption or effective date):

 

1)       The plan’s enrolled actuary has certified that the plan’s adjusted funding target attainment percentage is less than 100% for the plan year that contains the applicable amendment date.

 

2)       The plan can’t make any prohibited payments (generally, one that is in excess of the monthly amounts payable under a single life annuity) because its sponsor is a debtor in a bankruptcy.

 

3)       The sponsor’s bankruptcy court has issued an order, after notice and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary for the plan to avoid a distress or involuntary termination.

 

4)       The PBGC has determined the:

 

plan amendment to eliminate that optional form of benefit is necessary for the plan to avoid a distress or involuntary termination before the sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed), and

 

plan is not sufficient for guaranteed benefits (ERISA Section 4041(d)(2)).

 

Effective/Applicability Dates

The final regulations adopt most of the rules in the June 21, 2012, proposed regulations (REG 113738-12) and apply to plan amendments that are adopted and effective after November 8, 2012.

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