Employees, executives, retirees and soon-to-be retirees in Chicago participating in a single-employer defined benefit pension plan may encounter unpleasant benefit restrictions because of plan underfunding. According to a study by Mercer, in 2007 large employers' pension plans were over 100% funded. Just three years later, in 2010, the same test group of plans were only 73% funded. Following the passage of the Pension Protection Act of 2006, which took effect in 2008, certain benefit restrictions would begin to apply to some underfunded plans, with the various restrictions depending on the funding level.
For purposes of benefit restrictions, the funding level is derived from the Adjusted Funding Target Attainment Percentage ("AFTAP"), defined in I.R.C. § 436(j)(2). The Internal Revenue Code proscribes a complex scheme of applying presumed AFTAPs, until the plan provides an actual AFTAP certified by an enrolled actuary. An employer may not amend the plan in a way that would increase benefit liabilities if the AFTAP is below 80%, or the amendment would cause it to dip below 80%. Id. § 436(c). Also, plans less than 80% funded will become subject to partial payment restrictions, limiting accelerated payments (e.g., lump sum distributions) to half the value of the benefits. Id. § 436(d).
Plans funded less than 60% can pay no accelerated benefits. Id. In these cases, the participant will be forced to leave the money in the plan, except for a monthly annuity distribution based on a single life expectancy. Plans under 60% funded also must freeze the annual benefit accruals of participants still working. Id. § 436(e). These under 60% funded plans also may not pay any "unpredictable contingent event" benefits, commonly dubbed plant shutdown benefits. Id. § 436(b).
The interplay between the presumed AFTAP and certified AFTAP is important because the employer's failure to get the actuary to certify the AFTAP earlier could result in a presumed AFTAP that triggers benefit restrictions to which the plan may not have otherwise been subject. There are 3 presumption dates, all of which can be rebutted with an actual calculation of the certified AFTAP. On January 1st, the presumed AFTAP is the prior year's certified AFTAP. Id. § 436(h)(1). The presumed AFTAP drops from on April 1st by 10%--if the plan was subject to any benefit restrictions at any time during the preceding year, and the current year's January 1st presumed AFTAP is within 10 percentage points of a benefit restriction. Id. § 436(h)(3). It automatically drops to under 60% on October 1st if the employer has not yet obtained a certified AFTAP. Id. § 436(h)(2).
Many single-employer pension plans are bound to impose benefit restrictions because of these rules. If so, the employer is required to disclose the funding level of the plan in the annual funding notice now required under ERISA § 101(f). The Department of Labor has published sample funding notices, for readers wishing to see an example.
When these restrictions could have been avoided, but were not because the employer did not obtain a certified AFTAP soon enough, fiduciary issues arise. Some of these benefit restrictions, such as the restriction on payment of benefits, can result in a cutback of benefits. Many speculate that the plan sponsor and other fiduciaries might be liable for a breach of fiduciary duty in these circumstances. If your benefits are subject to restrictions, call an experienced ERISA lawyer.