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IRS Issues Final Regulations Permitting Plan Sponsors to Eliminate Prohibited Payment Options

Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit. On November 8, the IRS issued a limited exception to the anti-cutback rules to permit a plan sponsor in bankruptcy to amend its plan to eliminate prohibited payments such as lump sums. The exception applies if the following four conditions are satisfied: first, the enrolled actuary certifies that the plan is less than fully funded; second, the prohibition on making prohibited payments arises because the plan sponsor is a debtor in bankruptcy; third and fourth, the bankruptcy court must issue an order and the PBGC must issue a determination, each finding that the adoption of the amendment is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy. The Final Regulations can be found here.

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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