Frozen pilot pension could suspend benefits after retirement age

Plain-English summary

An employer sponsored a frozen defined benefit pension plan for union pilots with a normal retirement age of 60. After federal law raised the pilots’ mandatory retirement age to 65, pilots could remain employed after the plan’s normal retirement age while their accrued benefits were otherwise immediately distributable. The IRS ruled that the actuarial-adjustment and benefit-suspension rules still applied despite the plan freeze. Participant consent rules did not determine whether a pilot was performing the type of post-retirement-age service that permits suspension. The plan could suspend benefits without an actuarial adjustment if its terms allowed suspension and it gave the required notice.

Ruling snapshot

• Question: Could the frozen pension plan suspend benefits for pilots working after normal retirement age without participant consent or an actuarial increase?
• Outcome: Approved, provided the plan authorized suspension and gave notice
• Key authorities: IRC §§ 411(a)(3)(B), 411(a)(11), and 411(c)(3); Treas. Reg. §§ 1.411(a)-11(c)(4) and 1.411(c)-1(f); DOL Reg. § 2530.203-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201531021 Third Party Communication: None
Release Date: 7/31/2015 Date of Communication: Not Applicable

Index Number: 411.02-05

Person To Contact:

, ID No.

Telephone Number:

Refer Reply To:
CC:TEGE:EB:QP1

PLR-T-101788-15

Date:
April 30, 2015

Taxpayer =
Plan =
Union =
Qualifying Participants =

Dear :

This is in response to your request dated September 17, 2007, supplemented by
correspondence dated December 12, 2011, and May 14, 2013, in which you request a
ruling under section 411 of the Internal Revenue Code (“Code”).

The following facts and representations have been submitted under penalty of perjury in
support of the ruling requested:

Taxpayer sponsors a single-employer defined benefit pension plan for its employees
who are members of Union. The Plan states that a participant's normal retirement date
is the first day of the month coincident with or next following the participant’s attainment
of his or her normal retirement age. Pursuant to then-existing Federal law, Taxpayer
imposed a mandatory retirement age for pilots who participate in the Plan of age 60,
which the Plan reflects as its normal retirement age. The Plan contains a provision for
the permanent withholding of benefit payments that would otherwise be payable to
participants who engage in “disqualifying employment,” which is employment after a
participant’s attainment of normal retirement age which results in entitlement to credit
for (i) at least 40 hours of service for a calendar month or (ii) at least one hour of service
performed on each of eight or more days (or separate work shifts) in a calendar month,
if the Plan has not for any purpose determined or used the actual hours of service
required to be credited to the participant. Taxpayer represents that this provision has

PLR-T-101788-15 2

been in the Plan since its inception, and was also in its predecessor plan since its
restatement as of January 1, 2001.

Congress enacted the Fair Treatment for Experienced Pilots Act of 2007, which
increased the mandatory retirement age for pilots from 60 to 65 years of age.
Accordingly, the Taxpayer adjusted its mandatory retirement age for pilots to 65. The
Plan’s normal retirement age, however, remains 60 years old. Pursuant to the Income
Tax Regulations (“Treas. Reg.”), a participant’s accrued benefit is immediately
distributable prior to the later of the date the participant attains normal retirement age
and the date he or she reaches age 62. Further, Taxpayer provided notice of
suspension of benefits to all employed pilots after their 60th birthdays.

Based on the facts and representations stated above, Taxpayer requests a ruling that:

1. The actuarial adjustment requirements of section 411(c)(3) of the Code and
   suspension of benefits rules of section 411(a)(3)(B) of the Code apply to the Plan, even
   though it is currently frozen.

2. In applying the suspension of benefits rules of section 411(a)(3)(B) of the Code to the
   Plan, the consent requirements of section 411(a)(11) of the Code are not applicable for
   purposes of determining whether a pilot participant is in “section 203(a)(3)(B) service.”

3. If the rulings described in items 1 and 2 are issued, the Plan benefits of participants
   who are employed in “section 203(a)(3)(B) service” after the Plan’s Normal Retirement
   Age and while their accrued benefits under the Plan are immediately distributable (prior
   to age 62, as provided in Treas. Reg. § 1.411(a)-11(c)(4) may be suspended in
   accordance to section 411(a)(3)(B) of the Code without actuarial adjustment.

Section 401(a)(7) of the Code provides that a trust shall not constitute a qualified trust
under section 401(a) unless the plan of which such trust is a part satisfies the
requirements of section 411 of the Code (relating to minimum vesting standards).

Section 401(a)(14) of the Code and Treas. Reg. § 1.401(a)-14(a) provide that, unless
the participant otherwise elects, the payment of benefits under a plan to the participant
must begin no later than the 60th day after the latest of the close of the plan year in
which — (A) occurs the date on which the payment attains the earlier of age 65 or the
normal retirement age specified under the plan; (B) occurs the 10th anniversary of the
year in which the participant commenced participation in the plan; or (c) the participant
terminates his service with the employer.

Although section 401(a)(14) of the Code authorizes, in some cases, a delay in the
commencement of benefits beyond the time a participant attains normal retirement age,
that section does not authorize the forfeiture of such delayed benefits.

PLR-T-101788-15 3

The general rule under section 411(a) of the Code states, in part, that a trust shall not
constitute a qualified trust under section 401(a) of the Code unless the plan of which
such trust is a part provides that an employee’s right to his normal retirement benefit is
nonforfeitable upon the attainment of normal retirement age (as defined in section
411(a)(8)), and, for defined benefit plans, satisfies the requirements of section
411(b)(1).

Section 411(a) of the Code and Treas. Reg. §§ 1.411(a)-1 and 1.411(a)-4(a) require
that certain rights in an employee’s accrued benefit be nonforfeitable. Once such an
employee’s right becomes nonforfeitable (i.e., it is an unconditional right), then,
generally, it may not be forfeited.

Section 411(a)(3) of the Code provides for limited exceptions to the requirement of
nonforfeiture.

Section 411(a)(3)(B) of the Code and its counterpart, section 203(a)(3)(B) of the
Employee Retirement Income Security Act of 1974 (“ERISA”), state that a right to an
accrued benefit derived from employer contributions shall not be treated as forfeitable
solely because the plan provides that the payment of benefits is suspended for such
period as the employee is employed, subsequent to the commencement of payment of
such benefits (i) in the case of a plan other than a multiemployer plan, by the employer
who maintains the plan under which such benefits were being paid; and (ii) in the case
of a multiemployer plan, in the same industry, the same trade or craft, and the same
geographic area covered by the plan as when such benefits commenced. The
Secretary of Labor shall prescribe such regulations as may be necessary to carry out
the purposes of this subparagraph, including regulations with respect to the meaning of
the term "employed."

DOL Reg. 2530.203-3(c) defines “section 203(a)(3)(B) service” and clarifies that for a
non-multiemployer plan, section 203(a)(3)(B) service can occur not only subsequent to
the commencement of payment of benefits, but also where payment of benefits would
have continued had the employee not remained in or returned to employment after
normal retirement age.

DOL Reg. 2530.203-3(b) states, in part, that no payment shall be withheld by a plan
pursuant to this section (suspension upon reemployment) unless the plan notifies the
employee by personal delivery or first class mail during the first calendar month or
payroll period in which the plan withholds payments that his benefits are suspended.

Section 411(c)(3) of the Code states that for any defined benefit plan, if an employee's
accrued benefit is to be determined as an amount other than an annual benefit
commencing at normal retirement age, or if the accrued benefit derived from
contributions made by an employee is to be determined with respect to a benefit other
than an annual benefit in the form of a single life annuity (without ancillary benefits)

PLR-T-101788-15 4

commencing at normal retirement age, the employee's accrued benefit, or the accrued
benefits derived from contributions made by an employee, as the case may be, shall be
the actuarial equivalent of such benefit or amount determined under paragraph (1) or
(2).

Section 411(a)(11) of the Code states that if the present value of any nonforfeitable
accrued benefit exceeds $5,000, a plan meets the requirements of this paragraph only if
such plan provides that such benefit may not be immediately distributed without the
consent of the participant.

Treas. Reg. § 1.411(c)-1(f)(1) states that no adjustment to an accrued benefit is
required on account of any suspension of benefits if such suspension is permitted under
section 203(a)(3)(B) of ERISA. Treas. Reg. § 1.411(c)-1(f)(2) states that no actuarial
adjustment to an accrued benefit is required on account of employment after normal
retirement age. For example, if a plan with a normal retirement age of 65 provides a
benefit of $400 a month payable at age 65 the same $400 benefit (with no upward
adjustment) could be paid to an employee who retires at age 68.

Treas. Reg. § 1.411(a)-11(c)(4) provides that participant consent is required for any
distribution while the accrued benefit is “immediately distributable,” defined as prior to
the later of the time a participant has attained normal retirement age or age 62.

With respect to your first requested ruling, the requirement under section 411(c)(3) of
the Code that a participant’s benefit must be actuarially adjusted if the benefit is
calculated as other than an annual benefit commencing at normal retirement age
applies whether or not the plan is frozen, as this section relates to amounts already
accrued. However, an exception to this rule is provided in section 411(a)(3)(B) of the
Code that allows suspension of payments of the accrued benefit upon reemployment of
a retiree. The Plan contains a provision stating that it can suspend the payment of
benefits to a participant that is reemployed with the employer. Thus, as long as the
Taxpayer properly provides notice of suspended benefits to the participant, which was
done here, the benefits may be suspended without any actuarial adjustment.

With respect to your second requested ruling, the consent requirements of section
411(a) of the Code are not applicable for purposes of determining whether a Participant
is reemployed with the employer and thus performing “section 203(a)(3)(B) service.”
Whether or not a participant consents to begin receiving benefits under the plan is not a
factor as to whether or not the Participant is reemployed. The consent requirement of
section 411(a)(11) of the Code does not have any effect on whether or not the employer
may suspend the payment of a participant’s benefit without actuarial adjustment.

With respect to your third requested ruling, Treas. Reg. § 1.411(c)-1(f) states that a plan
does not have to provide an actuarial adjustment to a participant’s accrued benefit if that
participant continues to be employed by the company after normal retirement age.
Because the adjustment is not required, it follows that not making that adjustment does

PLR-T-101788-15 5

not constitute a forfeiture of benefits. A participant under the Plan who is reemployed
with the Taxpayer in “section 203(a)(3)(B) service” and his or her accrued benefit is
immediately distributable under the Plan may have their benefits suspended while
reemployed without any actuarial adjustment, as long as the Plan allows for such a
suspension, and that, as here, notice is provided to the participant prior to the
suspension of the benefit payments.

Therefore, the IRS rules that:

1. The actuarial adjustment requirements of section 411(c)(3) of the Code and
   suspension of benefits rules for reemployed participants pursuant to section
   411(a)(3)(B) of the Code apply to the Plan. These requirements apply despite the fact
   that the Plan is currently frozen.

2. In applying the suspension of benefits rules of section 411(a)(3)(B) of the Code to the
   Plan, the consent requirements of section 411(a)(11) of the Code are not applicable for
   purposes of determining whether a Qualified Participant is in “section 203(a)(3)(B)
   service.”

3. The Plan benefits of participants who are employed in “section 203(a)(3)(B) service”
   after the Plan’s Normal Retirement Age and while their accrued benefits under the Plan
   are immediately distributable (prior to age 62), as provided in Treas. Reg. § 1.411(a)-
   11(c)(4) may be suspended in accordance to section 411(a)(3)(B) of the Code without
   any actuarial adjustment.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

Sincerely,

Jason E. Levine

Senior Tax Law Specialist

Qualified Plans Branch 4

(Tax Exempt and Governmental Entities)