Annuity Purchase an Alternative to Pension Reliance
Amendment Reduces Highly Compensated Employee Required Contributions
The IRS privately ruled that a retroactive plan amendment which had the effect of decreasing participants' accrued benefits, was permitted only as it pertained to highly compensated employees participating in the plan, but not as it pertained to all other participants. The plan sponsor experienced substantial business hardship, but because it intended to terminate the plan, waiver of the minimum funding standard was not available. (IRS Letter Ruling 9745026)
The sponsor of a money purchase pension plan covering all of its eligible employees experienced financial hardship due to adverse business conditions. In fact, since 1993 the compensation paid to the owner-employee physicians of the sponsor had declined by 60%. As a result, the sponsor amended the contribution formula under the plan for the 1996 plan year in order to reduce the required contribution, and indicated its intent to terminate the plan in 1997. The amendment was executed on March 13, 1997, and was made retroactively effective to January 1, 1996. The sponsor requested an IRS letter ruling seeking approval of the amendment.
Fixed Index Annuity table
|Company / Product||Cap Rate||Bonus||Yrs.|
|Midland NationalEndeavor 12||5.75%||N/A||8|
|Great AmericanAmerican Legend III||5.40%||N/A||7|
|SymetraSymetra Edge Pro 7||5.25%||N/A||7|
|SymetraSymetra Edge Pro 5||5.00%||N/A||5|
|ProtectiveProtective Indexed Annuity II 7||4.90%||N/A||7|
|ProtectiveProtective Indexed Annuity II 5||4.80%||N/A||5|
This is a table illustrating today's top interest rates for fixed index annuities. The table lists the name of the insurance company, years that surrender charges would apply, and the premium bonus, if any. To learn more about deferred annuities click any line in the chart or call 800-872-6684 for quick answers.
A plan amendment that has the effect of decreasing a participant's accrued benefit under a plan is prohibited by the anti-cutback rule of Code Sec. 411(d)(6). However, an exception is provided for certain kinds of amendments described under Code Sec. 412(c)(8). Code Sec. 412(c)(8) provides that any amendment applying to a plan year will, at the election of the plan sponsor, be deemed to have been made on the first day of that plan year, if the amendment:
- is adopted no later than 2½ months after the close of that plan year,
- does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment applies, and
- does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances.
However, no amendment which reduces the accrued benefit of any participant can be effective unless the sponsor notifies the IRS and the IRS either affirmatively approves it or fails to disapprove it within 90 days of filing the notice.
Additionally, Code Sec. 412(c)(8) provides that no amendment which reduces the accrued benefits of plan participants can be approved unless it is determined that: (1) the amendment is necessary because of substantial business hardship as determined under Code Sec. 412(d)(2), and (2) a waiver of the minimum funding standard is unavailable or inadequate.
The factors taken into account for determining a temporary substantial business hardship under Code Sec. 412(d)(2) include whether or not:
- the employer is operating at an economic loss
- there is substantial unemployment or underemployment in the trade or business and in the industry concerned
- the sales and profits of the industry concerned are depressed or declining; and
- it is reasonable to expect that the plan will be continued only if the waiver is granted.
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Although the sponsor experienced substantial business hardship, it also expressed an intent to terminate the plan in 1997, and so, item 4 (above) was not satisfied. Thus, a waiver of the minimum funding standard was not available. As a result, although approval of the retroactive amendment was granted as it applied to the highly compensated employees participating in the plan, approval was denied to the extent it applied to all other participants. observation: The IRS did not provide a rationale for its conclusion that the plan amendment was permissible only as it related to highly compensated employees.
The minimum funding requirement of the plan for the 1996 plan year, before the recognition of the amendment, was approximately $785,000. Upon the recognition of the terms of the amendment (as approved by the IRS), the minimum funding requirement for the 1996 plan year was reduced to approximately $185,000.