Distribution Notice

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with an advisor in Nebraska is representative of a common inquiry related to plan amendments. The advisor asked: “My client is merging his firm with another firm, and they will be combining the companies’ defined benefit plans. Some participants will experience a reduction in benefits. Is there any kind of notice to participants that applies in this situation.”

Highlights of Discussion

If a plan amendment or other employer action (e.g., merger or acquisition) reduces future benefit accruals for participants and/or beneficiaries in a defined benefit, target benefit or money purchase pension plan, the plan sponsor must provide a special notice to the affected individuals under Sections 204(h) of ERISA and 4980F of the Internal Revenue Code (IRC). This special notice (a.k.a., the “204(h) Notice”) must be given to plan participants, beneficiaries and each employee organization that will experience a “significant” reduction.  

Significant is determined based on the reasonable expectations and the relevant facts and circumstances. For a defined benefit plan, it is a comparison of the retirement-age benefit after the amendment to the retirement-age benefit prior to the amendment. For a defined contribution plan, it is a comparison of the amounts to be allocated after the amendment to what would have been allocated prior to the amendment. 

The notice must state the specific provisions of the amendment causing a reduction in future accruals and its effective date. However, the notice need not explain how the individual benefit of each participant or alternate payee will be affected by the amendment. The notice should be written so it is understandable by the average plan participant and must provide sufficient information to allow a participant or beneficiary to understand the impact of the reduction. 

Timing of the 204(h) Notice is important and depends on the type of change. The timing rules are complicated, but, generally, plan sponsors must provide the notice at least  

-45 days before the effective date of benefit reduction; 

-30 days after the amendment for an early retirement subsidy in a merger or acquisition, and 

-15 days for other mergers or if a small plan (fewer than 100 participants) is involved.  

(See Treas. Reg. §54.4980F-1(b), Q&A-9(a) for more details on the timing of notices.) 

Failure to provide the notice could result in an excise tax of $100 for each day of noncompliance. 

Conclusion

Plan sponsors must provide a 204(h) notice when a plan amendment or other employer action (e.g., merger or acquisition) reduces future benefit accruals for participants and/or beneficiaries in a defined benefit, target benefit or money purchase pension plan. There are content and timing rules associated with the notice. A penalty for failing to provide the notice could apply.