Final Rule Permits Small Cuts In Early-Retirement Benefits

The IRS continues to follow the rule that sponsors can eliminate benefits only if the elimination does not hurt the rights of any participant in a more than "de minimis" manner, according to the preamble to the final regulation, which was developed by Mark Matthews, an IRS official, and Eric Solomon, acting deputy assistant secretary at the U.S. Treasury Department, the parent department of the IRS.

The guidance permits employers to eliminate benefit form options if employers will offer a designated set of core retirement plan benefit form options before and after changing the plan. Core benefit form options include a straight life annuity, a 75% joint and contingent annuity, a 10-year term certain and life annuity, and the most valuable option for a participant with a short life expectancy.

An employer also may be able to eliminate a benefit if the actuarial present value of the cutback is no more than "2% of the present value of the retirement-type subsidy under the eliminated optional form of benefit…or 1% of the participant's compensation for the prior plan year," Matthews and Solomon write in the guidance preamble.

In a separate notice discussing the proposed regulations, the IRS says it will prohibit plans from imposing new restrictions on early-retirement benefits that plan participants already are collecting.

The IRS also says it wants to create a utilization test that will let a plan with at least 100 participants eliminate a protected benefit form if no participant has used that benefit form in at least 2 years.

Links to the notices about the final rule and efforts to develop the new retirement plan amendment regulations are on the Web at //a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/pdf/05-15958.pdf and http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/pdf/05-15960.pdf