REVENUE RULE 92-66

1992-2 C.B. 92, 1992-36 I.R.B. 11.

Internal Revenue Service
Revenue Ruling

EARLY RETIREMENT WINDOW BENEFIT

Published: August 20, 1992

26 CFR 1.411(d)-4: Section 411(d)(6) protected benefits.

(See Also Section 401; 1.401-1.)

Early retirement window benefit. Where a defined benefit pension plan is repeatedly amended so that an early retirement window benefit is available to certain employees for substantially consecutive, limited periods of time, the benefit is not required to be provided permanently if the facts and circumstances so warrant.

ISSUE

Do sections 411(d)(6) and 401(a)(25) of the Internal Revenue Code require that an early retirement window benefit be provided permanently to all employees under a plan where the employer amends its plan to make the benefit available for substantially consecutive, limited periods of time?

FACTS

Z, an employer, maintains a defined benefit pension plan (the "Plan") that is qualified under section 401(a) of the Code. The normal retirement age under the Plan is 65. The amount of an employee's retirement benefit at normal retirement age is an annuity equal to X percent of the employee's average annual compensation multiplied by the employee's years of service.

Employees are eligible for early retirement under the Plan after attaining age 55 and completing ten years of service. If an employee retires and begins to receive an annuity before normal retirement age, the Plan provides that the amount of the employee's annuity will be actuarially reduced to reflect early commencement.

During 1989, Z experiences a significant economic downturn. In response, Z announces to its employees that it is taking certain measures to reduce its operating costs, including reorganizing its business operations and reducing the workforce of its manufacturing division. As part of its efforts to reduce the manufacturing division's workforce, Z amends the Plan to inake available an "early retirement window benefit.11 This benefit is available to any employee who works at a facility of the manufacturing division, who has attained age 55, who has completed at least five years of service and who retires during a limited period of time specified in the amendment. Under the terms of the amendment, eligible employees receive a normal retirement benefit that is not actuarially reduced to reflect early commencement. If an eligible employee retires from Z after the end of the specified period, the employee's eligibility for early retirement and the amount of the employee's benefit under the Plan are determined without regard to the early retirement window benefit.

Z continues to experience significant adverse business conditions in 1990 and 1991. In each of these years, Z takes further cost-reduction measures, including further reductions in its manufacturing division workforce. Z amends the Plan in each of these years to make available an early retirement window benefit that is substantially similar to the benefit offered in 1989. In 1992, economic conditions stabilize, but the cost-reduction measures, including the number of employees who elected the early retirement window benefit, do not meet Z's projections. Therefore, in 1992, Z amends the Plan to make available an early retirement window benefit that is substantially similar to the benefit offered in 1989, 1990, and 1991.

LAW AND ANALYSIS

Section 401(a) of the Code provides the general qualification requirements for pension, profit-sharing and stock bonus plans. Section 1.401-1(b) (1) (i) of the Income Tax Regulations provides that a pension plan within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years after retirement.

Section 401(a) (25) of the Code provides that, whenever the amount of any benefit is to be determined on the basis of actuarial assumptions, a defined benefit pension plan shall not be treated as providing definitely determinable benefits unless such assumptions are specified in the plan in a way that precludes employer discretion.

Section 411(d) (6) (A) of the Code provides that, subject to exceptions that are not relevant here, a plan qualified under section 401(a) may not be amended to reduce the accrued benefit of any participant. Section 4 11 (d) (6) (B) provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit, a retirement-type subsidy, or an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits.

Q&A-4 of section 1.411(d)-4 of the regulations provides that, subject to exceptions that are not relevant here, a plan violates sections 411(d) (6) and 401(a) of the Code, including section 401 (a) (25), if the plan permits either direct or indirect employer discretion to deny a participant a section 411(d) (6) protected benefit for which the participant is otherwise eligible (but for the employer's discretion).

Under Q&A-1 (c) (1) of section 1. 411 (d) -4 of the regulations, an employer cannot circumvent the prohibition against employer discretion in the administration of the plan, including through the adoption of plan amendments, where the effect is to eliminate a participant's valuable rights under the plan. Under this standard, plan amendments that make benefits available for a limited period of time do not automatically result in the elimination of a participant's valuable right once that period of time has ended. Rather, the regulations preclude a pattern of plan amendments that would make benefits available only for a limited period of time if the plan amendments give rise to a reasonable expectation that the benefit is an ongoing feature of the plan, and therefore a valuable right.

Specifically, Q&A-l(c)(1) of section 1.411(d)-4 of the regulations provides as follows:

Generally, benefits described in section 4 11 (d) (6) (A), early retirement benefits, retirement-type subsidies, and optional forms of benefit are section 4 11 (d) (6) protected benefits only if they are provided under the terms of a plan. However, if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of section 411(d)(6), and, where applicable, the definitely determinable requirement of section 401(a)(25). A pattern of repeated plan amendments providing that a particular optional form of benefit is available to certain named employees for a limited period of time is within the scope of this rule and may result in such optional form of benefit being treated as provided under the terms of the plan to all employees covered under the plan without regard to the limited period of time and the limited group of named employees.

Whether the recurrence of plan amendments constitutes a pattern of amendments within the meaning of 1.411(d)-4 of the regulations is determined on the basis of the facts and circumstances. Although no one particular fact is determinative, relevant factors include: (i) whether the amendments are made on account of a specific business event or condition; (ii) the degree to which the amendment relates to the event or condition; and (iii) whether the event or condition is temporary or discrete or whether it is a permanent aspect of the employer's business.

Z's amendments providing early retirement window benefits to employees of its manufacturing division were made in connection with Z's overall efforts to reorganize its business operations, reduce its operating costs, and reduce the manufacturing division's workforce. The facts indicate that the reduction of the manufacturing division is temporary and that the early retirement window benefits are limited to the duration of this event. Based on these facts, the recurrence of the plan amendments during this period does not give rise to a reasonable expectation that the window benefit is an ongoing plan feature and therefore a valuable right under the plan. Thus, the plan amendments do not contravene the standards of section 411(d)(6) of the Code and the definitely determinable benefits requirement under section 401(a)(25).

HOLDING

Sections 411(d)(6) and 401(a)(25) of the Code do not require that an early retirement window benefit be provided permanently to all employees under a plan when the employer amends its plan to make the benefit available for substantially consecutive, limited periods of time, if, based on the facts and circumstances, the repeated amendments do not contravene the purposes of section 411(d)(6) and the definitely determinable benefits requirement of section 401(a)(25).

Nothing in this revenue ruling relieves Employer Z or the Plan of the need to comply with other applicable Code requirements, including the nondiscrimination requirements imposed by section 401(a)(4) of the Code and the accrued benefit requirements under sections 411(b), including section 411(b)(1)(G).

DRAFTING INFORMATION

The principal authors of this revenue ruling are Thomas G. Schendt of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations) and John H. Turner of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue ruling, contact Mr. Schendt on (202) 622-6060 or contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service or Mr. Turner between the hours of 1:30 and 4:00 p.m. Eastern time, Monday through Thursday, on (202) 622-6074/6075 or (202) 622-6214 respectively. None of these numbers is toll- free.

Rev. Rul. 92-66, 1992-2 C.B. 92, 1992-36 I.R.B. 11.