Code Section 411(d)(6)

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Code Section 411(d)(6) protects accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans from reduction. It is often called the "anti-cutback" rule.

General Anti-cutback Rule of Code Section 411(d)(6)

Generally, a qualified plan cannot reduce a participant's accrued benefit by a plan amendment. A plan amendment may reduce (or even eliminate) future accruals. However, Section 411(d)(6) protection applies to a participant’s entire accrued benefit as of the applicable amendment date, even if some of the benefit was accrued after termination.

Multiple amendments are considered as one amendment to determine if a cutback has occurred.

Elimination of Early Retirement Subsidies

The elimination of an early retirement benefit or subsidy with respect to benefits earned before the amendment is a reduction for any employee who satisfied the subsidy requirements prior to the amendment. A reduction occurs if there is any reduction in the actuarial present value or a later annuity starting date.

De Minimis Exception

A protected benefit that creates significant burdens or complexities for the plan and its participants may be eliminated if it does not adversely affect any participant’s rights in more than a de minimis manner.

A reduction in actuarial present value is of no more than a de minimis amount if the reduction does not exceed the greater of 2% of the present value of the retirement-type subsidy under the eliminated optional form of benefit (if any) prior to the amendment or 1% of the participant’s compensation for the prior plan year (as defined in section 415(c)(3)).

Whether a protected benefit creates significant burdens depends on the facts, including:

  • the number of different retirement-type subsidies and other actuarial factors available under the plan,
  • whether the terms and conditions applicable to the plan’s retirement-type subsidies are difficult to summarize in a manner that is concise and readily understandable to the average plan participant,
  • whether those different retirement-type subsidies and other actuarial factors were added to the plan as a result of mergers, acquisitions, or other business transactions,
  • whether the effect of the plan amendment is to reduce the number of categories of retirement-type subsidies or other actuarial factors,
  • whether the plan amendment eliminates one or more generalized optional forms and,
  • whether the plan amendment replaces a complex optional form of benefit with a simpler form.

Elimination of Optional Form

The elimination of an optional form of benefit with respect to any benefits earned before an amendment

Special Rule for Defined Contribution Plans

A defined contribution plan may eliminate any optional form if:

  1. a single, lump-sum payment is available to participants at the same time as the form being eliminated could have commenced; and
  2. such lump-sum payment is based on the same or greater portion of the participant's account as the form of distribution being eliminated.

Special rules also apply to ESOPs and to plan transfers.

Redundant Benefit Forms

A plan may eliminate redundant optional benefit forms. An optional form of benefit is redundant if

  • the retained optional form of benefit is in the same "family" of optional forms as the optional form of benefit being eliminated; and
  • the participant’s rights to the retained optional form are not subject to materially greater restrictions than those that applied to the eliminated optional form.

However, any amendment to eliminate an optional form cannot apply to a participant who may have already received a QJSA notice explaining the optional forms.

Core Benefit Forms

A plan may also eliminate optional forms if the plan offers a designated set of core options to plan participants with respect to benefits accrued both before and after the amendment.

The core options are defined as:

  • a straight life annuity,
  • a 75% joint and contingent annuity,
  • a 10-year term certain and life annuity, and
  • the most valuable option for a participant with a short life expectancy.

Any amendment to eliminate non-core forms cannot apply until four years the date the amendment is adopted. In addition, a plan may not be amended to eliminate an optional form of benefit that includes a single-sum distribution that applies with respect to at least 25% of a participant’s accrued benefit as of the date the optional form of benefit is eliminated.

Note: A special rule provides that a plan is permitted to treat both the 50% and 100% joint and contingent annuity options as core options in lieu of offering a 75% joint and contingent annuity if the plan otherwise satisfies the requirements of the core options rule.

Ancillary Benefits

Ancillary benefits are not protected by 411(d)(6).

Ancillary benefit means:

  1. A social security supplement under a defined benefit plan (other than a QSUPP as defined in §1.401(a)(4)-12);
  2. A benefit payable under a defined benefit plan in the event of disability (to the extent that the benefit exceeds the benefit otherwise payable), but only if the total benefit payable in the event of disability does not exceed the maximum qualified disability benefit, as defined in section 411(a)(9);
  3. A life insurance benefit;
  4. A medical benefit described in section 401(h);
  5. A death benefit under a defined benefit plan other than a death benefit which is a part of an optional form of benefit; or
  6. A plant shutdown benefit or other similar benefit in a defined benefit plan that does not continue past retirement age and does not affect the payment of the accrued benefit, but only to the extent that such plant shutdown benefit, or other similar benefit (if any), is permitted in a qualified pension plan (see §1.401-1(b)(1)(i)).

Changing Vesting Schedules

Plan sponsors should not adopt any change to vesting schedules without first ensuring that such an amendment does not cut benefits protected by Code Section 411(d)(6). Evan an amendment that merely adds a restriction or condition that is permitted under the vesting rules in Code section 411(a)(3) through (11) may be an impermissible cutback. See Treas. Reg. 1.411(d)-3 for the applicable rules.

Guidance