IRS approves a small-benefit cash-out amendment without disturbing a multiemployer plan's funding extension

Plain-English summary

A multiemployer defined-benefit plan already had an IRS-approved extension for amortizing certain unfunded accrued liabilities. It proposed a mandatory cash-out window for terminated participants whose vested benefits had a present value below a redacted threshold, with repayment rights if they returned to covered employment. Many affected participants had very small, partially vested benefits whose PBGC premiums and tracking costs could exceed the benefits themselves. Although the amendment would initially increase actuarial accrued liability by a redacted amount, the plan projected that it would improve funded status by the end of the longest extended amortization base. The IRS found the amendment reasonable and de minimis under § 412(c)(7)(B)(i), so it would not disturb the existing § 431(d) amortization extension. The IRS did not rule on compliance with the rules for a plan in critical and declining status under § 432(b)(6).

Ruling snapshot

• Question: Is the mandatory small-benefit cash-out amendment reasonable and de minimis, allowing the plan to retain its existing amortization extensions?
• Outcome: Approved (the amendment qualifies for the § 412(c)(7)(B)(i) exception and does not interfere with the prior extension).
• Key authorities: IRC §§ 411(a)(7)(C), 412(c)(7), 431(d), 432(b)(6), and 6110(k)(3).

Full text (IRS public release)

Significant Index No. 0431.00-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

SEP 28 2020

Number: 202052014
Release Date: 12/24/2020

Re: Request for a reasonable and de minimis plan ruling

Taxpayer =

Plan =

Dear

This letter is in response to your December 4, 2019 request for a ruling on whether the
proposed amendment described in your submission satisfies the exception under
section 412(c)(7)(B)(i) of the Internal Revenue Code (“Code”) so that the Plan can retain
the section 431(d)(1) of the Code amortization extensions. Your request has been
approved. The proposed amendment is reasonable and de minimis and satisfies the
exception under section 412(c)(7)(B)(i) of the Code. As a result of this ruling, the ruling
issued December 15, granting an extension of time to amortize certain unfunded
accrued liabilities of the Plan for plan years beginning will not be adversely
affected by the adoption of the proposed amendment.

Section 412(c)(7)(A) of the Code provides that no amendment of a plan which increases
the liabilities of the plan by reason of any increase in benefits, any change in the accrual
of benefits, or any changes in the rate at which benefits become nonforfeitable under
the plan shall be adopted if an extension of time under section 431(d) of the Code is in
effect with respect to the plan. If a plan is amended in violation of the preceding
sentence, any such extension of time shall not apply to any plan year ending on or after
the date on which such amendment is adopted.

Section 412(c)(7)(B)(i) of the Code provides that the restriction in section 412(c)(7)(A)
of the Code shall not apply to any plan amendment which the Secretary determines to
be reasonable and which provides only de minimis increases in the liabilities of the plan.

The Plan is a multiemployer defined benefit plan.

The proposed amendment provides a mandatory cash out window to all participants
who have terminated employment with a vested benefit and who on
have an accrued benefit that has a single sum present value that does not exceed
. The mandatory cash out would result in full satisfaction of all liability under the
Plan to such participant, spouse, or beneficiary. Each participant shall have the right to
repay the distribution upon a return to covered employment to the extent required by
section 411(a)(7)(C) of the Code.

The Plan has had various graded vesting schedules. These vesting schedules have
resulted in a significant number of partially vested participants with very small benefits.
Because these participants do not meet the eligibility requirements to retire early, the
earliest their benefits can commence is their normal retirement date (typically age 65).
For many of these participants eligible under the proposed amendment, the annual
Pension Benefit Guaranty Corporation (“PBGC”) premium amount is greater than the
benefit being held by the Plan. The proposed amendment would reduce the
administrative expense associated with tracking these participants as well as reduce
PBGC premiums going forward.

The proposed plan amendment will eliminate administrative expenses associated with
retaining very small benefits owed by the Plan that are more costly in some situations
than the benefit is actually worth, and the proposed amendment is projected to improve
the Plan’s funded status. Accordingly, we conclude this amendment is reasonable.

According to information submitted by the Plan’s authorized representative, the
proposed amendment would increase the Plan’s actuarial accrued liability by
approximately as of . However, the proposed amendment is projected
to ultimately improve the Plan’s projected funded status approximately on
, the end of the longest extended amortization base. Accordingly, we
conclude this amendment is de minimis.

Consequently, your request for a ruling that the proposed amendment is reasonable
and de minimis has been granted because it has been determined that it meets the
requirements for the exception in section 412(c)(7)(B)(i) of the Code, and therefore,
does not interfere with the amortization extension approval issued December 15,

In granting this approval, it is expected that the Plan's assumptions and methods will be
reviewed and updated as appropriate so that each assumption is reasonable (taking
into account the experience of the plan and reasonable expectations) and such
assumptions, in combination, offer the best estimate of anticipated experience under the
plan.

We are not expressing any opinion outside the ruling requested. This ruling does not
address whether the proposed amendment complies with the rules for operation while a
plan is in critical and declining status under section 432(b)(6) of the Code. Furthermore,
we are not expressing any opinion as to the accuracy of any material submitted as part
of your application.

We have sent a copy of this letter to your authorized representatives pursuant to a
Power of Attorney and Declaration of Representative (Form 2848) on file with this office,
the Manager, EP Classification in , the Manager, EP Compliance Unit in

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

If you require any further assistance in this matter, please contact
(ID# ) at ( ) - .

Sincerely,

David M. Ziegler
Manager, EP Actuarial Group 2

cc: