The Internal Revenue Service (IRS) has issued Notice 2012-46 to provide detailed guidance on the notice requirements under ERISA Section 101(j). These requirements apply to single-employer pension plans subject to the benefit limitations under ERISA Section 436 of the Internal Revenue Code (Code) and the parallel limitations under ERISA Section 206. (Our references to the limitations under "Section 436" in this article are intended to include the limitations under Section 206 as well.) In general, if the funding status of a single-employer pension plan drops below certain levels, causing these limitations to be triggered, the plan's administrator must provide written notice to affected plan participants and beneficiaries (collectively, "participants") within 30 days. Notice 2012-46 clarifies the timing and content requirements of a Section 101(j) notice as well as the persons entitled to receive it.
Failure to comply with the notice requirements can result in a substantial penalty. Under applicable Department of Labor (DOL) regulations, the penalty can be up to $1,000 per day, multiplied by the number of participants who should have received the notice.
This article provides a summary of the principal guidance in Notice 2012-46. A prior article provides an overview of the Section 436 benefit limitations.
Timing Requirements of Section 101(j) Notices
Section 101(j) requires that notice to affected persons be given within 30 days of the date on which a single-employer defined benefit pension plan becomes subject to any of the following: (i) limitations on unpredictable contingent event benefits (i.e., the payment of special or enhanced benefits on certain events, such as a plant shutdown); (ii) prohibitions on certain payments (i.e., a payment that exceeds the amount payable under the plan in the form of a single-life annuity, such as a lump-sum distribution); and (iii) restrictions on additional benefit accruals.
Limitations on Unpredictable Contingent Events
A plan becomes subject to the limitations on unpredictable contingent events on the date the plan's "adjusted funding target attainment percentage" (AFTAP) is certified to be less than 60 percent. A plan's AFTAP is its assets-to-liabilities funding ratio, adjusted by certain annuity purchases. For example, if a calendar-year plan provides for an additional early retirement benefit upon the shutdown of a plant at a specified location and on March 18, 2013, and Plan X's AFTAP is certified to be less than 60 percent for the 2013 plan year, Notice 2012-46 requires that a Section 101(j) notice be provided by April 17, 2013, which is the 30th day following the March 18, 2013, Section 436 measurement date, even if the plant has not shut down and is not expected to be shut down. A "Section 436 measurement date" is the date that the plan's AFTAP is certified by the plan's enrolled actuary.
If a plan's AFTAP is 60 percent or more and the benefits paid on the unpredictable contingent event would make the plan's AFTAP less than 60 percent, the Section 101(j) notice generally must be provided within 30 days after the date of the unpredictable contingent event. However, a special timing rule requires that the notice be provided by the latest of the following:
- If the employer is covered by the Worker Adjustment and Retraining Notification Act (WARN Act) and the related unpredictable contingent event is an event for which a WARN Act notice must be provided, the date on which the WARN Act notice is provided;
- 60 days before the actual occurrence of the related unpredictable contingent event; and
- 30 days after the date the employer makes a decision to cause the related unpredictable contingent event to occur (for example, a decision to shut down a plant).
Thus, earlier notice will generally be required in situations in which the plan's AFTAP is greater than 60% before the unpredictable contingent event occurs. Notice is not required to be provided again within 30 days after the unpredictable contingent event occurs.
Limitations on Prohibited Payments and Benefit Accruals
A plan administrator must provide a Section 101(j) notice within 30 days of the date the plan is required to operate in accordance with the prohibited payment or benefit accrual limitations. For example, if a plan's AFTAP is certified to be less than 80 percent (but not less than 60 percent) on a Section 436 measurement date, such that the plan becomes subject to a limitation on prohibited payments on that date, then a Section 101(j) notice must be provided within 30 days after that Section 436 measurement date. If the plan's AFTAP is later certified to be less than 60 percent on a Section 436 measurement date so that additional accruals must cease under the plan, then a Section 101(j) notice must also be provided within 30 days after that later Section 436 measurement date.
Participants Entitled to Section 101(j) Notices
According to Notice 2012-46, a Section 101(j) notice needs to be provided only to participants to whom the relevant Section 436 limitation applies or could apply. For these purposes, a limitation applies or could apply to a participant only if he or she is or could be adversely affected by the limitation. For example, if a plan provides for a plant shutdown benefit in the form of an early retirement subsidy, a Section 101(j) notice must be provided to each participant who is employed at that plant, other than employees who have attained normal retirement age (and who thus could never become eligible for the early retirement subsidy).
Content of Section 101(j)Notices
Notice 2012-46 requires that a Section 101(j) notice must be written in a style to be understood by the average participant and must contain the following information:
- The name of the plan, its employer identification number (EIN) and plan number.
- A general description of the limitation.
- For a limitation on an unpredictable contingent event benefit, a prohibited payment limitation or benefit accruals having ceased, a statement that the limitation applies because of the level of the plan's AFTAP. The notice must state the AFTAP and whether the AFTAP that applies at the time a benefit limitation becomes applicable is a result of a certification issued by the plan's enrolled actuary or is the result of application of a presumption under applicable provisions of ERISA or the Code.
- For a limitation imposed because of the plan sponsor's bankruptcy, a statement that the limitation applies because of the bankruptcy proceedings (under which the plan sponsor is a debtor in a case under Title 11, United States Code, or similar federal or state law) and because the plan's AFTAP has not been certified to be at least 100 percent.
- For a limitation on an unpredictable contingent event, a description of the unpredictable contingent event benefits written in sufficient detail so that the notice is calculated to make evident the difference between the plan's benefits that would have been payable if the limitation had not applied and those that are payable after application of the limitation.
- For a limitation on prohibited payments, a description of the prohibited payments written in sufficient detail so that the notice describes the difference between the plan' benefits that would have been payable if the limitation did not apply and those that are payable after application of the limitation. If a limitation on prohibited payments applies as to forms of payment that may be payable for the participant's lifetime (such as a Social Security leveling option), the description is not required to provide more detail than a statement that benefits under any such form of payment may be limited, depending on relevant factors.
- A description of the conditions under which the limitation will cease to apply to the plan (such as "hen the plan's funded percentage is at least 80 percent") and a description of plan provisions that are applicable after the limitation ceases to apply, such as a provision on how benefits under the plan are restored after a benefit limitation no longer applies.
- For plans that provide new annuity starting dates for payments that are resumed, the notice must state that any participant to whom an election to receive a prohibited payment becomes available as a result of the limitation ceasing to apply will receive notice within 30 days after the date that the limitation ceases to apply.
- The effective date of the limitation.
- The class of participants or beneficiaries affected.
- The name, address and telephone number of the plan administrator, trustee or other contact person from whom more information may be obtained.
Notice Required When Section 436 Limitations Cease to Apply
In the event a limitation under Section 436 ceases to apply to a plan and the plan permits participants to elect to receive the remaining portion of their benefits in a form of distribution that had been a "prohibited payment," Notice 2012-46 requires that the plan administrator must provide a Section 101(j) notice to the affected participants within 30 days of the date on which the limitations cease to apply.
Such a notice must inform affected participants that the limitations have ceased and that the affected participants may elect to receive the remaining portion of their benefit in a form that was previously considered a prohibited payment. The notice must include the name of the plan and its EIN and plan number; a statement that the limitation that had been imposed on the form of distribution that constituted a prohibited payment no longer applies; and a statement that the participant may elect the form of distribution that had constituted a prohibited payment, including any deadlines and application procedures that apply for that purpose. Plan contact information must also be provided.
This requirement may be particularly relevant for plans that will experience an improvement in funding status as a result of the interest rate stabilization relief that was enacted this summer, and thus cease to be subject to the restriction on paying lump sums or other accelerated payments. For more information on funding stabilization, see our earlier article.
Methods of Providing Section 101(j) Notices
Under Notice 2012-46, a Section 101(j) notice must be in writing and may be furnished in any paper or electronic form to the extent such form is reasonably accessible to persons to whom the notice is required to be provided. Permissible electronic methods include those permitted under the DOL regulations on electronic disclosure as well as those described in IRS regulations on the electronic delivery of notices required under ERISA Section 204(h) as to plan amendments reducing the rate of future pension plan accruals. In an earlier article, we summarized the DOL electronic disclosure regulations.
Effective Date and Compliance Considerations
Notice 2012-46 is effective Nov. 1, 2012. Until that date, plan administrators may rely on Notice 2012-46, or may apply a reasonable interpretation of ERISA Section 101(j).
Plan administrators should begin to develop procedures to ensure that they timely provide the required notices if the Section 436 limitations are triggered, and the special rule for notice of cessation of the restriction on lump sum and other accelerated payments. Such procedures should include methods for documenting when and to whom notices were provided in case delivery of the notice is later questioned or challenged.