Attorneys Seek Changes to Proposed Anticutback Regs

To: Pamela Kinard; Linda Marshall

CC:PA:LPD:PR (REG-128309-03)

Bryan, Pendleton, Swats & McAllister, LLC (BPS&M), Actuaries and Consultants, submits the attached comments on the proposed regulations issued in March 2004 under Code section 411(d)(6) on eliminating optional forms of benefit from defined benefit plans (Prop. Reg. sections 1.411(d)-3). BPS&M is an actuarial and employee benefits consulting firm with offices in Nashville, Tennessee; Jackson, Mississippi; and Louisville, Kentucky.

We hereby submit these comments electronically via the IRS Internet site at http://www.irs.gov/regs. A confirmation copy will be mailed to the mailing address indicated above.

If additional information on any of our attached comments would be helpful, please contact Ben Sears in our Nashville area office by telephone at (615) 665-1640, by email at ben.sears@bpsm.com, or by correspondence at 5310 Virginia Way, Suite 400, Brentwood, Tennessee 37027.

1. Simplify the rules on redundant benefits that may be eliminated by reducing the number of families of optional forms of benefit.

The rules in Prop. Reg. section 1.411(d)-3(c) on permissible elimination of optional forms that are redundant describe six families of optional forms of benefit. These include (1) the 50% or more joint an contingent family; (2) the below 50% joint and contingent family; (3) the 10 year or less term certain and life family; (4) the greater than 10 years term certain and life family; (5) the 10 years or less installment family; and (6) the greater than 10 years installment family.

Further, annuities that do not fit within a particular family may not be eliminated as a redundant benefit. Thus, any annuity option which has a Social Security leveling feature, refund of employee contributions annuity feature, any pop-up annuities and annuity options that allow for retroactive annuity starting dates are excluded from this rule.

Complexity may be reduced by streamlining the number of families to a more manageable set. For example, the number of families may be reduced from six families to three families by establishing a mid-point or mid-range within which options are grouped for each of the three sets of joint and survivor; number of years and certain; and installments.

Complexity may also be further eliminated by allowing the annuities that would be part of a family except for the special feature to be included as part of the core option family, subject to the 4-year transition period as described further below.

2. Reduce the 4-year transition period to a shorter period.

The rules in Prop. Reg. section 1.411(d)-3(d) concerning permissible elimination of noncore optional forms where core options are offered includes a rule that limits elimination of a noncore optional form by plan amendment so that it cannot be effective until an annuity starting date that is at least four years after the date the amendment is adopted.

This 4-year transition period should be reduced to a shorter period. The 4-year transition period is overly restrictive for elimination of benefits that are noncore.

If the 4-year transition period is retained, the rules should be revised to permit the elimination of a Social Security leveling feature, refund of employee contributions annuity feature, pop-up annuities, and annuity options that allow for retroactive annuity starting dates.

3. Provide more detail on the facts and circumstances analysis assumptions and process for plan amendments eliminating protected benefits that create significant burdens and complexities.

Prop. Reg. section 1.411(d)-3(e)(2)(i) provides for a facts and circumstances analysis to determine whether a plan amendment eliminates section 411(d)(6) protected benefits that create significant burdens and complexities for the plan and its participants.

While the regulation provides some discussion of some factors to consider, more detail is needed to define the actuarial assumptions to be used and the process for analysis in order to make this determination.

4. More leeway is needed in the measurement of de minimis differences in early retirement subsidies.

With respect to the elimination of early retirement benefits or retirement-type subsidies that are de minimis (in Prop. Reg. section 1.411(d)-(3)(e)(3)(i)(B) and 1.411(d)-3(e)(5)), Prop. Reg. section 1.411(d)-(3)(e)(5) describes a difference between the actuarial present value of the eliminated optional form and the actuarial present value of the retained form of only 2% of the present value of the retirement-type subsidy under the eliminated optional form of benefit, or 1% of compensation for the prior plan year.

This definition of de minimis difference is so small that it does not provide a meaningful way to deal with differences in early retirement subsidies or differences in actuarial equivalence bases in plans resulting from merger and acquisition situations. A greater margin of difference should be permitted to be meaningful.

5. The expected transition period under the delayed effective date rule needs more detail and is too narrow.

The proposed regulations provide a de minimis test relating to changes in early retirement and other actuarial adjustment factors whereby the elimination of an optional form does not adversely affect the rights of any participant in more than a de minimis manner if the amendment does not apply to an annuity starting date before the end of an expected transition period for that optional form (i.e., delayed effective date rule in Prop. Reg. section 1.411(d)-3(e)(6)). Prop. Reg. section 1.411(d)-3(e)(6)(ii) indicates the expected transition period must be determined in accordance with reasonable actuarial assumptions about the future that are likely to result in the longest period of time until the eliminated optional form would be subsumed.

More detail is needed to define the actuarial assumptions and the process of determining the expected transition period further. A specific safe harbor transition period should be proposed in order for this relief to be more meaningful to the broad spectrum of employers who cannot or will not choose to afford the costly actuarial analyses to determine an average transition period. Greater flexibility is needed in this area to have meaningful relief for a broad base of employers.

6. More practical relief is needed to permit employers to eliminate optional forms for terminated vested participants.

Additional relief is needed under the proposed regulations so that an employer sponsoring a defined benefit plan can eliminate optional forms for terminated vested participants (in addition to active participants). The proposed regulations are so restrictive employers do not have a meaningful way to eliminate optional forms for terminated vested participants, who may have terminated employment many years ago. Employers with merger and acquisition history must maintain many optional forms for terminated vested participants. More practical relief is needed in this area.