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comment letter 411 d 6 2 2

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November 9, 2005 Via Electronic Filing CC:PA:LPD:PR (REG-156518-04) Courier’s Desk Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20044 Re: Proposed 411(d)(6) Regulations Dear Sir or Madam: The American Benefits Council (Council) appreciates the opportunity to comment on the proposed 411(d)(6) regulations. The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, the Council’s members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. The Council commends the Department of Treasury and Internal Revenue Service (collectively referred to as the “IRS”) for its efforts to help employers simplify defined benefit plans by issuing final and proposed regulations primarily designed to allow elimination of redundant or infrequently used distribution options. The Council also appreciates that the IRS needs to address the analysis adopted by the Supreme Court in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004) (hereafter Heinz), a case that held that a plan cannot expand the categories of post-normal retirement age employment resulting in suspension of benefit payments for benefits already earned. However, the Council would urge the IRS to reconsider whether to apply the Heinz analysis in the ...
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November 9, 2005
Via Electronic Filing
CC:PA:LPD:PR (REG-156518-04)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20044
Re:
Proposed 411(d)(6) Regulations
Dear Sir or Madam:
The American Benefits Council (Council) appreciates the opportunity to
comment on the proposed 411(d)(6) regulations.
The Council is a public policy
organization representing principally Fortune 500 companies and other
organizations that assist employers of all sizes in providing benefits to
employees.
Collectively, the Council’s members either sponsor directly or
provide services to retirement and health plans that cover more than 100 million
Americans.
The Council commends the Department of Treasury and Internal Revenue
Service (collectively referred to as the “IRS”) for its efforts to help employers
simplify defined benefit plans by issuing final and proposed regulations
primarily designed to allow elimination of redundant or infrequently used
distribution options.
The Council also appreciates that the IRS needs to address
the analysis adopted by the Supreme Court in
Central Laborers’ Pension Fund v.
Heinz
, 541 U.S. 739 (2004) (hereafter
Heinz
), a case that held that a plan cannot
expand the categories of post-normal retirement age employment resulting in
suspension of benefit payments for benefits already earned.
However, the
Council would urge the IRS to reconsider whether to apply the
Heinz
analysis in
the manner adopted by the proposed regulations.
The Council believes the
regulatory interpretation contradicts other statutory and regulatory sections.
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In
Heinz
, the Supreme Court held that
[a] participant’s benefits cannot be understood without reference to the
conditions imposed on receiving those benefits, and an amendment
placing materially greater restrictions on the receipt of the benefit
“reduces” the benefit just as surely as a decrease in the size of the monthly
benefit.
Heinz, at 744, quoting
Heinz v. Central Laborers’ Pension Fund
, 303 F.3d 802 (7
th
Cir.
2002).
The proposed regulations take the
Heinz
analysis to their logical conclusion,
extending the protection of the anti-cutback rule to all aspects of the vesting
rules, and effectively prohibiting any change in any of a plan’s vesting provisions
that would adversely affect a participant’s ability to commence distribution of
benefits.
The proposed regulations provide three examples of amendments that
would violate the new application of the anti-cutback rule.
In addition to an
example that replicates the fact pattern in the
Heinz
case, the proposed
regulations indicate that a change to a plan’s rule of parity forfeiture provision
and a change in the plan’s vesting schedule as it applies to benefits earned to
date will both be considered a violation of the anti-cutback rule under the
Heinz
analysis.
While these examples are logical extensions of the
Heinz
analysis, they
demonstrate the pitfalls with that analysis.
The example that changing a plan’s
vesting schedule violates the anti-cutback rule indicates that this interpretation of
§411(d)(6) essentially renders §411(a)(10) meaningless.
That section requires
plans to offer participants with at least three years of service the election to
remain under the prior vesting schedule.
Changing the vesting schedule for any
participant, including ones who have elected to vest under the new schedule
pursuant to an election offered under §411(a)(10), would violate the anti-cutback
rule.
In essence, the
Heinz
analysis interprets §411(d)(6) so as to delete
§411(a)(10) from the Code.
Other examples of regulatory or statutory contradictions can be readily found.
Under the proposed regulations, it would appear that a plan could not change
how it credits vesting service, such as switching from a method that counts hours
of service to elapsed time, or vice versa, if it would delay the vesting of benefits
earned to date for any participant.
This is contrary to reg. 1.410(a)-7(f) and (g).
It
is not clear whether a plan could change its vesting computation period for
determining vesting service, even though such practice is permitted subject to
specified restrictions established in DOL reg. 2530.203-2(c)(1).
It is also not clear
whether a plan with five-year cliff vesting and no forfeiture provision or the rule
3
of parity could be amended to add a deemed cash-out provision.
Under the
proposed regulations, any change to the plan’s forfeiture provisions could be
viewed as an impermissible cutback of the plan’s vesting provisions, even
though any participant who forfeits a benefit under a deemed cash-out provision
will have that benefit restored upon rehire in covered employment under a
deemed buy-back provision.
These examples demonstrate the extraordinary administrative burden the
proposed regulations will impose on qualified plans.
Merged plans seldom have
complete agreement concerning vesting provisions, and the proposed
regulations would preclude any change to the vesting rules for benefits earned
prior to the merger.
It is easily conceivable that plans will eventually be
crediting vesting service for different groups of participants under a method that
counts hours, the elapsed-time method, and one or more equivalencies method,
as well as applying different suspension of benefit service rules, different vesting
schedules, and different forfeiture provisions.
Simply put, the administrative
requirements to comply with this application of the anti-cutback rule will be
among the most onerous requirements under ERISA or the Code.
However, the Council believes that the IRS is not forced to apply the
Heinz
analysis in this manner, or even at all.
Note that the concurring opinion in
Heinz
indicates four justices agreed with the decision
on the assumption that it does not foreclose a reading of the Employee
Retirement Income Security Act of 1974 that allows the Secretary of Labor,
or the Secretary of the Treasury, to issue regulations explicitly allowing
plan amendments to enlarge the scope of disqualifying employment with
respect to benefits attributable to already-performed services.
Even with a concurring opinion expressly indicating that the IRS has authority to
issue regulations explicitly allowing plan amendments changing a plan’s
suspension of benefit provisions, it is understandable that the IRS chose not to
adopt that position in the proposed regulations.
Interpretations of statutory
requirements by the Supreme Court are considered controlling when applying
the applicable statute by government agencies.
But the recent Supreme Court decision in
National Cable and Telecommunications
Assoc. v. Brand X Internet Services
, 125 S.Ct. 2688, Nos. 04-277 and 04-281 2005 U.S.
LEXIS 5018 (2005) (hereafter
Brand X
), released after proposed regulations were
published in the Federal Register, expands the standard for determining the
deference due regulatory guidance under
Chevron USA Inc. v. Natural Resources
Defense Council
, 467 U.S. 837 (1984) (hereafter
Chevron
), and specifically notes that
4
deference may be due agency guidance that is contrary to a prior judicial
interpretation.
In essence,
Brand X
states that the only court decision that forecloses a later,
contrary interpretation of a statute by an agency is a decision that determines the
only permissible reading of the statute, not merely the best or preferable reading
of several alternatives.
(See also
AARP v. EEOC
, No. 05-CV-509, 2005 U.S. Dist.
LEXIS 21495 (E.D. Penn, Sept. 27, 2005)).
Using that standard, it is clear the
Heinz
decision is not the only permissible reading of the statute:
The statute, admittedly, is not as helpful as it might in answering this
question; it does not explicitly define “early retirement benefit,” and it
rather circularly defines “accrued benefit. . .”
Brand X
grants this authority to agency interpretations in order to permit the
continuing evolution of the law as it is enforced by the appropriate government
agency.
Preventing agency interpretation of statutory requirements, even after
judicial interpretation, would result in “the ossification of large portions of our
statutory law.”
Brand X
,
at 2700,
quoting
U.S. v. Mead Corp.
, 533 U.S. 218, at 247
(2001).
That the
Heinz
decision is based, in part, on the Supreme Court’s interpretation
of existing IRS regulations does not preclude the issuance of new guidance.
Brand X
makes clear that future guidance that otherwise satisfies the criteria for
Chevron
deference is still entitled to that deference even though the guidance is
contrary to or reverses prior agency guidance or practices.
“Agency
inconsistency is not a basis for declining to analyze the agency’s interpretations
under the
Chevron
framework.”
Brand X
, at 2699.
In fact, if the
Heinz
decision were by any other court than the Supreme Court, a
straightforward application of the
Brand X
decision would permit the IRS to
propose and finalize regulations “explicitly allowing plan amendments to
enlarge the scope of disqualifying employment with respect to benefits
attributable to already-performed services.”
Heinz
, at 751. The fact that the prior
judicial decision is a Supreme Court decision does not exclude application of the
Brand X
analysis or preclude the IRS from issuing guidance contrary to the
Heinz
decision.
A crucial purpose in permitting agency guidance contrary to existing
judicial authority is to permit the clarification or revision of “unwise judicial
constructions of ambiguous statutes.”
Brand X
, at 2701.
In conclusion, the Council requests that the IRS reconsider the proposed
regulation and, at the very least, narrow the regulatory interpretation of the
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Heinz
decision so that it is limited to the type of fact pattern involved in
Heinz
.
This action will eliminate apparent contradictions with other regulatory and
statutory provisions and ease plan administration.
Again, we appreciate the opportunity to comment on the proposed 411(d)(6)
regulations.
The American Benefits Council offers an important and unique
perspective of the employer sponsors of retirement plans and we would be
pleased to make this perspective and additional information available to the IRS.
If this would be helpful, please call me at 202-289-6700.
S
i
n
c
e
r
e
l
y
,
J
a
n
M
.
J
a
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s
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n
Director, Retirement Policy
American Benefits Council
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