Charles P. Stepnowski v. Commissioner , 124 T.C. No. 12 ( 2005 )

124 T.C. No. 12UNITED STATES TAX COURT
CHARLES P. STEPNOWSKI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE AND HERCULES INCORPORATED,
Respondents
Docket No. 8383-03R. Filed April 26, 2005.
Hercules amended its defined benefit plan in 2001.
The amendment to the plan’s lump-sum payment option
replaced the interest rate assumption that had
previously been used to calculate the present value of
a participant’s accrued benefit with the annual
interest rate on 30-year Treasury securities.
Hercules filed a request for a determination that
the amended plan met all of the qualification
requirements that were in effect under sec. 401(a),
I.R.C. P, as an interested party, sent a letter to the
IRS regarding Hercules’ determination request. P
asserted that the amendment to the plan’s lump-sum
payment option violated the anti-cutback rule of sec.
411(d)(6), I.R.C. The IRS issued a favorable
determination letter to Hercules.
P filed a Petition for Declaratory Judgment
(Retirement Plan) pursuant to sec. 7476(a), I.R.C.,
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challenging RC’s determination. P also filed a Motion
for an Order to Calendar for Trial and a Motion for
Permission for Discovery with the Court. The Court
denied P’s motions.
1. Held: P did not show good cause either to
commence discovery in this case or for this case to be
set for trial. The case is to be decided solely on the
administrative record.
2. Held, further, respondent Commissioner did not
err in determining that the amendment to the plan’s
lump-sum payment option did not violate the anti-
cutback rule of sec. 411(d)(6), I.R.C.
Mervin M. Wilf, for petitioner.
Brian M. Pinheiro, for respondent Hercules Incorporated.
Peter J. Gavagan, for respondent Commissioner of Internal
Revenue.
OPINION
COHEN, Judge: Respondent Commissioner of Internal Revenue
(respondent Commissioner) issued a favorable determination letter
to respondent Hercules Incorporated (Hercules) in which
respondent Commissioner determined that the Pension Plan of
Hercules Incorporated, as amended (the amended plan), met the
qualification requirements of section 401(a). Charles P.
Stepnowski, petitioner, filed a Petition for Declaratory Judgment
(Retirement Plan) pursuant to section 7476(a) challenging
respondent Commissioner’s determination. Hercules was joined as
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party/respondent to this case by Order dated August 20, 2003.
See Rule 215(a)(2).
The principal issue for decision is whether respondent
Commissioner erred in determining that the amendment to the
plan’s lump-sum payment option did not violate the anti-cutback
rule of section 411(d)(6).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
The parties have stipulated the administrative record. That
record is incorporated herein by this reference. Petitioner’s
address was in Kennett Square, Pennsylvania, at the time that the
Petition for Declaratory Judgment (Retirement Plan) was filed.
Hercules maintained its principal office in Wilmington, Delaware,
at the time that the Petition for Declaratory Judgment
(Retirement Plan) was filed.
The Pension Plan of Hercules Incorporated (the plan) is a
defined benefit plan as defined under the Employee Retirement
Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829. The
plan was established in 1913, and it uses the calendar year as
its plan year. On or about February 12, 1996, the Internal
Revenue Service (IRS) issued a favorable determination letter to
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Hercules with respect to the plan. This determination letter was
applicable to the amendments to the plan that were adopted on
October 27, 1994.
Hercules made additional amendments to the plan during 2001.
Hercules executed the amended plan on January 28, 2002. The
amended plan’s effective date was January 1, 2001. As of
January 31, 2002, the amended plan had 31,301 participants.
Various “universal provisions” and three schedules of rights
and benefits--Schedule A, Schedule B, and Schedule C–-govern the
amended plan. As relevant here, Article VII of Schedule B sets
forth the payment provisions for those participants falling under
that schedule of the amended plan. Paragraph D of Article VII
provides that an eligible participant may elect to receive his or
her plan benefits as a “51% Partial Cash Payment,” pursuant to
which the present value of 51 percent of the participant’s
accrued benefit is payable as a lump sum (lump-sum payment
option). The remaining 49 percent of the participant’s accrued
benefit is payable in an annuity form.
Prior to amending the plan, Hercules used the published
interest rates used by the Pension Benefit Guaranty Corp. (PBGC)
to calculate an immediate annuity beginning on the first day of
the first month of the calendar quarter of payment for purposes
of calculating the present value of a participant’s accrued
benefit under the lump-sum payment option. As amended, however,
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the lump-sum payment option states, in pertinent part, as
follows:
Participants entitled to receive benefits under
Article II, III, IV, or V of this Schedule may apply
for a 51% partial cash payment in accordance with the
following provisions:
1. A Participant may elect to receive in a single
partial cash payment an amount equal to the
present value equivalent of 51% of the monthly
pension benefit that otherwise would be payable
over the Participant’s expected lifetime. The
amount shall be calculated using the factors set
forth in Paragraph 4., below, applied in a uniform
and consistent manner. * * *
2. A married Participant applying for a 51% partial
cash payment must present a written consent by his
spouse to this form of benefit with such consent
notarized.
* * * * * * *
4. a. With respect to payments made on and after
January 1, 2002, the payment shall be
computed on the basis of the following
factors:
(1) the 1983 Group Annuity Mortality Table,
using a blend of 50 percent male and
50 percent female described in Rev. Rul.
95-6 (1995-1 C.B. 80) (or such other
mortality table as may be prescribed by
the Treasury Secretary pursuant to its
authority under Code section 417(e)(3))
* * *; and
(2) the annual interest rate on 30-year
Treasury securities as specified by the
Commissioner of the Internal Revenue
Service for the second calendar month
prior to the calendar quarter that
contains the benefit payment date (or
such other rate as the Secretary of the
Treasury may prescribe by regulation
under section 417(e) of the Code) * * *
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which rate shall remain stable for the
entire calendar quarter.
b. With respect to payments made prior to
January 1, 2002, the payment shall be
computed on the basis of the actuarial life
expectancy tables (1983 Group Annuity
Mortality Table, using a blend of 50 percent
male and 50 percent female factors described
in Rev. Rul. 95-6 * * *) (or such other
mortality table as may be prescribed by the
Treasury Secretary pursuant to its authority
under Code section 417(e)(3)), and PBGC
interest rates to determine immediate annuity
rates applicable on the first business day of
the first month in the calendar quarter of
payment. Notwithstanding the foregoing, with
respect to payments made on or after
January 1, 2000 and prior to January 1, 2002,
the payment shall be computed on the basis of
the assumptions set forth in Article
VII.D.4a. or VII.D.4b., whichever produces
the higher payment.
On or about February 15, 2002, Hercules filed a request with
the IRS for a determination that the amended plan met all of the
qualification requirements that were in effect under section
401(a). Hercules described its request in the following manner:
Specifically, pursuant to Revenue Procedure
2000-27, we request a “GUST II” letter with respect to
all changes made by the Uruguay Round Agreements Act of
1994, the Uniform Services Employment and Reemployment
Rights Act of 1994, the Small Business Job Protection
Act of 1996, the Taxpayer Relief Act of 1997, the
Internal Revenue Service Restructuring and Reform Act
of 1998 and the Community Renewal Tax Relief Act of
2000.
Included with Hercules’ request were, among other documents,
Form 5300, Application for Determination for Employee Benefit
Plan; Schedule Q (Form 5300), Nondiscrimination Requirement; and
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an executed copy of the amended plan. Line 12a of Form 5300
asked the following question: “Does any amendment to the plan
reduce or eliminate any section 411(d)(6) protected benefit?” In
response to this question, Hercules checked the “No” box.
Hercules completed the Form 5300 on or about January 31, 2002.
On or about March 19, 2002, petitioner, as an interested
party, sent a letter to the IRS regarding the “Application for
Determination Letter Submitted February 15, 2002 by Hercules
Incorporated”. Petitioner made, in pertinent part, the following
statements in this letter:
I have been advised that the application for an
advance determination letter was filed on February 15,
2002 pursuant to the “Notice To Eligible Employees Of
Hercules Incorporated.”
The pension plan provides for the payment in a
lump sum of the actuarial value of 51% of a
participant’s monthly pension benefit. In 2001,
Hercules amended its plan to provide that the lump-sum
benefit will be computed based on the 30-year Treasury
bond rate for service prior to the date of that
amendment. Prior to the 2001 amendment, the value was
computed using the PBGC rate. I have been informed
that the use of the 30-year Treasury bond rate, instead
of the PBGC rate, is an illegal cutback under
Section 411(d)(6) of the Code and applicable
regulations and rulings. Accordingly, the pension plan
does not satisfy the requirements as a qualified plan.
Therefore, a favorable determination letter should not
be issued until and unless the plan is changed to
provide the anticutback protection required by the
applicable regulations and rulings regarding the proper
interest rate to be used in determining the actuarial
equivalent value for service prior to the date of a
proper amendment.
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On or about November 6, 2002, an Employee Plans Specialist
at the IRS sent a letter to Hercules informing it that she had
been assigned to evaluate and review the determination letter
application that it had submitted. On or about January 18, 2003,
petitioner received a letter from the IRS that acknowledged the
receipt of his comments concerning the request for determination
that had been submitted by Hercules. On or about January 21,
2003, Hercules received a letter from the IRS informing it that
the IRS had received comments from an interested party concerning
the request for determination that had been submitted by
Hercules.
On or about March 3, 2003, the IRS issued a favorable
determination letter to Hercules with respect to the amended
plan. This determination letter was applicable to the amendments
that Hercules had executed on January 28, 2002. In this letter,
the IRS stated that the changes that were made to the
qualification requirements by the following public laws had been
considered in reaching its determination: The Uruguay Round
Agreements Act, Pub. L. 103-465, 108 Stat. 4809; the Uniformed
Services Employment and Reemployment Rights Act of 1994, Pub. L.
103-353, 108 Stat. 3149; the Small Business Job Protection Act of
1996, Pub. L. 104-188, 110 Stat. 1755; the Taxpayer Relief Act of
1997, Pub. L. 105-34, 111 Stat. 788; the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat.
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685; and the Community Renewal Tax Relief Act of 2000, Pub. L.
106-554, 114 Stat. 2763A-587. The IRS sent a copy of this
determination letter to petitioner.
After the pleadings were filed, petitioner filed a Motion
for an Order to Calendar for Trial and a Motion for Permission
for Discovery. Petitioner sought discovery and trial concerning
his position that Hercules had falsely represented to the IRS
that the 2001 plan amendments were not a “cutback” of benefits.
On July 15, 2004, the Court issued an Order that denied
petitioner’s Motion for an Order to Calendar for Trial and
petitioner’s Motion for Permission for Discovery. The Court’s
Order explained:
Rule 217(a) states that the disposition of an
action for declaratory judgment involving the
qualification of a retirement plan “will ordinarily be
made on the basis of the administrative record, as
defined in Rule 210(b)(12). Only with the permission
of the Court, upon good cause shown, will any party be
permitted to introduce before the Court any evidence
other than that presented before the Internal Revenue
Service and contained in the administrative record as
so defined.” Only in very extraordinary circumstances
will the Court permit either party to supplement the
administrative record. See The Nationalist Movement v.
Commissioner, T.C. Memo. 1992-698, affd. 37 F.3d 216(5th Cir. 1994).
Based upon the record as developed at the motions
hearing, we are not persuaded that petitioner has shown
good cause either to commence discovery in this case or
for this case to be set for trial. In short, the legal
issue in this case is whether a change in the interest
rate that Hercules, Inc. uses to compute the present
value of a lump-sum retirement benefit under its
retirement plan constituted an impermissible “cut-back”
within the meaning of section 411. Petitioner raised
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this legal issue during the administrative process by
submitting to respondent Commissioner of Internal
Revenue a comment letter discussing the point.
Respondent Commissioner of Internal Revenue considered
petitioner’s assertion; however, respondent
Commissioner of Internal Revenue issued to respondent
Hercules, Inc. a favorable determination letter.
The pleadings place the legal issue as summarized
above squarely in dispute in this action. We do not
see any need to supplement the administrative record.
Consequently, in the absence of extraordinary
circumstances that would otherwise justify discovery or
a trial herein, we shall deny petitioner’s motions.
Discussion
Section 401(a) lists the requirements that must be met by a
trust forming part of a pension or profit-sharing plan in order
for that trust to be eligible for favorable tax treatment under
the various sections of the Internal Revenue Code.
Section 7476(a) confers jurisdiction on this Court to issue
declaratory judgments as to the initial or continuing
qualification of a retirement plan under section 401(a).
Section 7476 “does not provide a broad grant of authority to the
Court to conduct a review of factual matters related to
controversies over retirement plans and to fashion equitable
remedies to resolve these controversies.” Simmons v.
Commissioner, T.C. Memo. 1995-422; see also Stevens v.
Commissioner, T.C. Memo. 1985-192; Wenzel v. Commissioner, T.C.
Memo. 1982-595, affd. 707 F.2d 694 (2d Cir. 1983). Rather, in a
declaratory judgment action under section 7476, we must decide
whether the Commissioner, in making a determination as to the
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initial or continuing qualification of a retirement plan under
section 401(a), properly applied the law to the facts presented
in the request for such determination. Thompson v. Commissioner,
71 T.C. 32, 36-37 (1978); see H. Rept. 93-807, at 108 (1974),
1974-3 C.B. (Supp.) 236, 343; S. Rept. 93-383, at 114 (1973),
1974-3 C.B. (Supp.) 80, 193; see also Wenzel v. Commissioner, 707
F.2d 694, 696 (2d Cir. 1983), affg. T.C. Memo. 1982-595; McManus
v. Commissioner, 93 T.C. 79, 87 (1989).
As a preliminary matter, we address petitioner’s contention
that the Court should reconsider its Order dated July 15, 2004,
and grant petitioner’s Motion for an Order to Calendar for Trial
and petitioner’s Motion for Permission for Discovery. Other than
making several conclusory statements as to the necessity of
“getting the facts”, petitioner has not discussed how discovery
and trial will assist the Court in reaching a decision on the
question of law that is before it in this case, i.e., whether
respondent Commissioner erred in determining that the amendment
to the plan’s lump-sum payment option did not violate the anti-
cutback rule of section 411(d)(6). Rather, petitioner asserts
that Hercules misrepresented to the IRS the effect of the plan
amendment. Respondent Commissioner has maintained throughout
these proceedings that (1) respondent Commissioner was aware of
the amendment to the lump-sum payment option at the time that the
favorable determination letter was issued to Hercules and (2) the
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issue to be decided is whether respondent Commissioner correctly
interpreted and applied the law in determining that the amendment
did not violate the anti-cutback rule of section 411(d)(6).
Petitioner argues that, because Rule 217(a) does not make an
explicit reference to declaratory judgment actions involving the
continuing qualification of a retirement plan, the “good cause”
provision of that Rule must apply only to declaratory judgment
actions involving the initial qualification of a retirement plan.
Rule 217(a) provides, in pertinent part, as follows:
(a) General: Disposition of an action for
declaratory judgment which involves the initial
qualification of a retirement plan * * * will
ordinarily be made on the basis of the administrative
record, as defined in Rule 210(b)(12). Only with the
permission of the Court, upon good cause shown, will
any party be permitted to introduce before the Court
any evidence other than that presented before the
Internal Revenue Service and contained in the
administrative record as so defined. * * *
By its terms, Rule 217(a) does not expressly preclude
discovery or introduction of extrinsic evidence in a declaratory
judgment action involving the continuing qualification of a
retirement plan. Nonetheless, to permit extrinsic evidence,
other than that present in the administrative record, in such an
action would convert the declaratory judgment proceeding to a
judicial trial de novo. See Tamko Asphalt Prods., Inc. v.
Commissioner, 71 T.C. 824, 837 (1979), affd. 658 F.2d 735 (10th
Cir. 1981); Houston Lawyer Referral Serv., Inc. v. Commissioner,
69 T.C. 570, 577 (1978); see also The Nationalist Movement v.
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Commissioner, 37 F.3d 216, 219 (5th Cir. 1994), affg. 102 T.C.
558 (1994) and T.C. Memo. 1992-698. The legislative history of
section 7476 makes clear that Congress did not expect the Court
to conduct a trial de novo in declaratory judgment actions
arising under that section, no matter whether that action arose
with respect to the initial qualification or the continuing
qualification of a retirement plan. See Tamko Asphalt Prods.,
Inc. v. Commissioner, 658 F.2d 735, 738-739 (10th Cir. 1981),
affg. 71 T.C. 824 (1979); H. Rept. 93-807, at 108 (1974), 1974-3
C.B. (Supp.) 236, 343; S. Rept. 93-383, at 114 (1973), 1974-3
C.B. (Supp.) 80, 193; see also Wenzel v. Commissioner, 707 F.2d
at 696. Therefore, discovery or introduction of extrinsic
evidence in such cases is inconsistent with the legislative
intent that such cases be resolved without a trial based solely
on the materials contained in the administrative record. See
Dr. Erol Bastug, Inc. v. Commissioner, T.C. Memo. 1989-262 (“The
rule of law cited in Houston Lawyer Referral and Tamko Asphalt is
predicated upon the legislative concern that the Court not bypass
the administrative determination procedure without good cause.”);
see also Note to Rule 217(a), 68 T.C. 1048 (1977); Prefatory Note
to amendments to this Court’s Rules in respect of declaratory
judgments under section 7476, 64 T.C. 1177-1179 (1975).
Consistent with this legislative intent, the Court has previously
held that it will not permit the administrative record to be
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supplemented in declaratory judgment actions involving the
qualification of a retirement plan unless very unusual
circumstances exist and good cause has been shown. See, e.g.,
Halliburton Co. v. Commissioner, T.C. Memo. 1992-533 (denying the
Commissioner’s motion to compel discovery in a declaratory
judgment proceeding relating to the partial termination of a
retirement plan); Dr. Erol Bastug, Inc. v. Commissioner, supra
(denying the taxpayer’s motion to calendar for trial in a
declaratory judgment proceeding relating to the initial
qualification of a retirement plan); cf. Tamko Asphalt Prods.,
Inc. v. Commissioner, 71 T.C. at 837 (upholding the Court’s
earlier refusal to grant the taxpayer’s request for a trial in a
declaratory judgment proceeding relating to the initial
qualification of a retirement plan). We see no reason to deviate
from the Court’s past practices in this case. Only in very
unusual circumstances and upon good cause shown will the Court
permit the administrative record to be supplemented in
declaratory judgment actions involving the initial or continuing
qualification of a retirement plan.
In the Court’s Order of July 15, 2004, we concluded that
petitioner had not shown good cause either to commence discovery
in this case or for this case to be set for trial. There is no
reason to change the analysis or the result reached in that
Order. In particular, we emphasize that the issue in this case
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is a legal one, and neither discovery nor extrinsic evidence is
necessary or appropriate for its decision. Petitioner’s asserted
purpose for discovery is simply a disagreement with the position
taken by Hercules with respect to the effect of the 2001 plan
amendment.
We now turn to the question of whether respondent
Commissioner erred in issuing a favorable determination letter to
Hercules. As noted above, section 401(a) lists the requirements
that must be met by a trust forming part of a pension or profit-
sharing plan in order for that trust to be eligible for favorable
tax treatment under the various sections of the Internal Revenue
Code. Under section 401(a)(7), a trust shall not constitute a
qualified trust unless the retirement plan of which such trust is
a part satisfies the minimum vesting standards of section 411.
Under section 411(a), a retirement plan must provide that, inter
alia, the requirements of section 411(a)(11) are met. Section
411(a)(11), as amended by the Uruguay Round Agreements Act, Pub.
L. 103-465, sec. 767(a)(1), 108 Stat. 5038, provides that, if the
present value of a participant’s nonforfeitable accrued benefit,
as determined under section 417(e)(3), exceeds a specified dollar
amount, the plan must provide that such benefit may not be
immediately distributed without the participant’s consent. See
sec. 411(a)(11)(A) and (B); see also sec. 1.411(a)-11(a), (d),
Income Tax Regs.
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In the case of a defined benefit plan, the term “accrued
benefit” means the employee’s accrued benefit determined under
the plan and expressed in the form of an annual benefit
commencing at normal retirement age. Sec. 411(a)(7)(A)(i); see
also sec. 1.411(a)-7(a)(1), Income Tax Regs. More generally, an
accrued benefit represents the progressively increasing interest
in a retirement benefit that an employee earns each year, under a
formula that is provided in the plan. Bd. of Trs. of the Sheet
Metal Workers’ Natl. Pension Fund v. Commissioner, 117 T.C. 220,
228 (2001), affd. 318 F.3d 599 (4th Cir. 2003); see also
Ashenbaugh v. Crucible Inc., 1975 Salaried Ret. Plan, 854 F.2d
1516, 1524 (3d Cir. 1988).
Under section 401(a)(11), a trust forming part of a defined
benefit plan will not constitute a qualified trust unless, inter
alia, the accrued benefit payable to a vested participant is
provided in the form of a qualified joint and survivor annuity
(QJSA). See sec. 401(a)(11)(A) and (B). Section 417 provides
special rules and definitions for purposes of applying section
401(a)(11). Sec. 401(a)(11)(F).
Section 417(e) provides rules for “cash-outs” (i.e., lump-
sum payments) of a participant’s QJSA. If the present value of a
participant’s QJSA exceeds the amount that can be distributed
without the participant’s consent under section 411(a)(11),
section 417(e)(2) provides that the participant and the
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participant’s spouse must consent in writing before the plan may
distribute the present value of the participant’s QJSA. Under
section 417(e)(3), as amended by the Uruguay Round Agreements
Act, Pub. L. 103-465, sec. 767(a)(2), 108 Stat. 5038, the present
value of a participant’s QJSA shall not be less than the present
value calculated by using the applicable mortality table and the
applicable interest rate. See also sec. 1.417(e)-1(d)(1), Income
Tax Regs. Under section 417(e)(3)(A)(ii)(II), the term
“applicable interest rate” means the annual interest rate on
30-year Treasury securities for the month before the date of
distribution or such other time as the Secretary may by
regulations prescribe. See also sec. 1.417(e)-1(d)(3), Income
Tax Regs. Prior to its amendment by the Uruguay Round Agreements
Act, section 417(e)(3) required retirement plans to calculate the
present value of a participant’s QJSA using an interest rate
assumption based on the rate that would be used (as of the date
of distribution) by the PBGC for purposes of determining the
present value of a lump-sum distribution on plan termination
(PBGC interest rate). Section 417(e)(3), as amended, is
effective for plan years beginning after December 31, 1994.
Uruguay Round Agreements Act, Pub. L. 103-465, sec. 767(d)(1),
108 Stat. 5040.
The amendment to section 417(e)(3) offered a financial
benefit to sponsors of defined benefit plans by allowing them to
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use a higher discount rate when calculating the present value of
a participant’s accrued benefit. See Myers-Garrison v.
Johnson & Johnson, 210 F.3d 425, 428 (5th Cir. 2000). Because
the use of a higher discount rate results in a lower present
value for a participant’s accrued benefit, the question that
arises is whether that reduction in present value violates the
anti-cutback rule of section 411(d)(6). That section provides,
in pertinent part, as follows:
(6) Accrued benefit not to be decreased by
amendment.--
(A) In general.–-A plan shall be treated as
not satisfying the requirements of this section if
the accrued benefit of a participant is decreased
by an amendment of the plan, other than an
amendment described in section 412(c)(8), or
section 4281 of the Employee Retirement Income
Security Act of 1974.
(B) Treatment of certain plan amendments.–-
For purposes of subparagraph (A), a plan amendment
which has the effect of–-
(i) eliminating or reducing an early
retirement benefit or a retirement-type
subsidy (as defined in regulations), or
(ii) eliminating an optional form of
benefit,
with respect to benefits attributable to service
before the amendment shall be treated as reducing
accrued benefits. In the case of a retirement-
type subsidy, the preceding sentence shall apply
only with respect to a participant who satisfies
(either before or after the amendment) the
preamendment conditions for the subsidy. The
Secretary shall by regulations provide that this
subparagraph shall not apply to any plan amendment
which reduces or eliminates benefits or subsidies
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which create significant burdens or complexities
for the plan and plan participants, unless such
amendment adversely affects the rights of any
participant in a more than de minimis manner. The
Secretary may by regulations provide that this
subparagraph shall not apply to a plan amendment
described in clause (ii) (other than a plan
amendment having an effect described in
clause (i)).
The Uruguay Round Agreements Act, Pub. L. 103-465, sec.
767(d)(2), 108 Stat. 5040, provides that a participant’s accrued
benefit is not considered to be reduced in violation of section
411(d)(6) merely because the benefit is determined in accordance
with the applicable interest rate under section 417(e)(3)(A),
i.e., the annual interest rate on 30-year Treasury securities.
Section 1.417(e)-1(d)(10), Income Tax Regs., explains the scope
of this relief from the anti-cutback rule of section 411(d)(6).
See T.D. 8768, 1998-1 C.B. 1027, 1029-1030. Section
1.417(e)-1(d)(10)(i), Income Tax Regs., provides the general rule
that a plan amendment that changes the interest rate, the time
for determining the interest rate, or the mortality assumptions
used for the purposes described in section 1.417(e)-1(d)(1),
Income Tax Regs. (relating to the calculation of the present
value of a participant’s accrued benefit), is subject to section
411(d)(6). Subdivisions (ii) through (v) of section
1.417(e)-1(d)(10), Income Tax Regs., provide safe harbors from
the general rule of section 1.417(e)-1(d)(10)(i), Income Tax
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Regs. As relevant here, section 1.417(e)-1(d)(10)(iv), Income
Tax Regs., provides as follows:
(iv) Section 411(d)(6) relief for plan amendments
pursuant to changes to section 417 made by RPA ‘94
providing for prior determination date or up to two
months earlier. Notwithstanding the general rule of
paragraph (d)(10)(i) of this section, except as
provided in paragraph (d)(10)(vi)(B) of this section
[relating to the replacement of a non-PBGC interest
rate], a participant’s accrued benefit is not
considered to be reduced in violation of section
411(d)(6) merely because of a plan amendment that
changes any interest rate or mortality assumption used
to calculate the present value of a participant’s
benefit under the plan, if the following conditions are
satisfied–-
(A) The amendment replaces the PBGC interest
rate (or an interest rate or rates based on the PBGC
interest rate) as the interest rate used under the plan
in determining the present value of a participant’s
benefit under this paragraph (d); and
(B) After the amendment is effective, the
present value of a participant’s benefit under the plan
cannot be less than the amount calculated using the
applicable mortality table and the applicable interest
rate, but only if the applicable interest rate is the
annual interest rate on 30-year Treasury securities for
the calendar month that contains the date as of which
the PBGC interest rate (or an interest rate or rates
based on the PBGC interest rate) was determined
immediately before the amendment, or for one of the two
calendar months immediately preceding such month.
Hercules’ amendment to the lump-sum payment option fits
squarely within the safe harbor provided by section
1.417(e)-1(d)(10)(iv), Income Tax Regs. Specifically, the
amendment to the lump-sum payment option (1) replaces an interest
rate based on the PBGC interest rate; (2) provides that the
present value of a participant’s accrued benefit shall be no less
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than the amount calculated using the applicable mortality table
and the applicable interest rate; and (3) provides that the
applicable interest rate is the annual interest rate on 30-year
Treasury securities for the second calendar month preceding the
calendar month in which the PBGC interest rate would have
otherwise been determined before the amendment. (The amendment
to the lump-sum payment option also satisfies the requirements of
section 1.417(e)-1(d)(4), Income Tax Regs., by (1) providing for
a calendar quarter “stability period” with respect to the
applicable interest rate; (2) specifying that the “lookback
month” for determining the applicable interest rate is the second
calendar month preceding the stability period; and (3) applying
the time and method for determining the applicable interest rate
uniformly to all of the participants falling under Schedule B of
the amended plan. See sec. 1.417(e)-1(d)(4)(i) through (iii),
Income Tax Regs.)
Notwithstanding the amendment’s compliance with the safe
harbor provided by section 1.417(e)-1(d)(10)(iv), Income Tax
Regs., petitioner contends that the amended plan violates the
anti-cutback rule of section 411(d)(6) because the change in the
interest rate assumption used to calculate the present value of a
participant’s accrued benefit under the lump-sum payment option
occurred after the deadline specified in the following portion of
section 1.417(e)-1(d)(10)(i), Income Tax Regs.:
- 22 -
[A] plan amendment that changes the interest rate or
the mortality assumptions used for the purposes
described in paragraph (d)(1) of this section merely to
eliminate use of the interest rate described in
paragraph (d)(3) or paragraph (d)(9) of this section,
or the applicable mortality table, with respect to a
distribution form described in paragraph (d)(6) of this
section, for distributions with annuity starting dates
occurring after a specified date that is after the
amendment is adopted, does not violate the requirements
of section 411(d)(6) if the amendment is adopted on or
before the last day of the last plan year ending before
January 1, 2000. [Emphasis added.]
As discussed below, petitioner’s argument is unpersuasive.
According to the portion of section 1.417(e)-1(d)(10)(i),
Income Tax Regs., upon which petitioner relies, only those plan
amendments made with respect to distribution forms described in
section 1.417(e)-1(d)(6), Income Tax Regs., are subject to the
deadline specified in section 1.417(e)-1(d)(10)(i), Income Tax
Regs. Section 1.417(e)-1(d)(6), Income Tax Regs., provides as
follows:
(6) Exceptions. This paragraph (d) (other than
the provisions relating to section 411(d)(6)
requirements in paragraph (d)(10) of this section) does
not apply to the amount of a distribution paid in the
form of an annual benefit that–-
(i) Does not decrease during the life of the
participant, or, in the case of a QPSA [qualified
preretirement survivor annuity], the life of the
participant’s spouse; or
(ii) Decreases during the life of the
participant merely because of–-
(A) The death of the survivor annuitant
(but only if the reduction is to a level not below 50%
of the annual benefit payable before the death of the
survivor annuitant); or
- 23 -
(B) The cessation or reduction of Social
Security supplements or qualified disability benefits
(as defined in section 411(a)(9)).
Petitioner has not considered whether the amendment to the
interest rate assumption was made with respect to a distribution
form described in section 1.417(e)-1(d)(6), Income Tax Regs. In
particular, petitioner has not argued that the lump-sum payment
option provides for a “distribution paid in the form of an annual
benefit” described in section 1.417(e)-1(d)(6), Income Tax Regs.
Even if petitioner had done so, such an argument would not
persuade us, because a lump-sum payment is not a distribution
form described in section 1.417(e)-1(d)(6), Income Tax Regs.
Rather, section 1.417(e)-1(d)(6), Income Tax Regs., describes
distributions that are paid in certain annuity forms. This
conclusion is supported by the preamble accompanying the issuance
of the final regulations at section 1.417(e)-1(d), Income Tax
Regs. See T.D. 8768, 1998-1 C.B. 1027; see also Armco, Inc. v.
Commissioner, 87 T.C. 865, 868 (1986) (“A preamble will
frequently express the intended effect of some part of a
regulation. As a statement of intent that represents an
institutional viewpoint, such a document might be helpful in
interpreting an ambiguity in a regulation.”). The preamble to
those final regulations states, in pertinent part, as follows:
Exceptions from the requirements of section 417(e)(3)
The temporary regulations provided an exception
from the requirements of section 417(e)(3) and sec.
- 24 -
1.417(e)-1T(d) for the amount of a distribution under a
nondecreasing annuity payable for a period not less
than the life of the participant or, in the case of a
QPSA, the life of the surviving spouse. For purposes
of this exception, a nondecreasing annuity included a
QJSA, a QPSA, and an annuity that decreased merely
because of the cessation or reduction of Social
Security supplements or qualified disability payments
(as defined in section 411(a)(9)). This exception was
identical to the exception provided under former final
regulations. Several commentators pointed out that
this exception did not cover several other types of
annuity forms of distribution that were nondecreasing
during the life of the participant, and suggested that
the regulations be changed to provide additional
exceptions for these additional annuity forms of
distribution.
The IRS and Treasury have determined that it is
appropriate to provide additional exceptions for these
benefit forms. Accordingly, under the final
regulations, section 417(e)(3) and sec. 1.417(e)-1(d)
do not apply to the amount of a distribution paid in
the form of an annual benefit that does not decrease
during the life of the participant, or, in the case of
a QPSA, the life of the participant’s spouse; or that
decreases during the life of the participant merely
because of the death of the survivor annuitant (but
only if the reduction is to a level not below 50% of
the annual benefit payable before the death of the
survivor annuitant) or merely because of the cessation
or reduction of Social Security supplements or
qualified disability benefits. * * * [T.D. 8768,
1998-1 C.B. 1027, 1028.]
This conclusion is further supported by the commonsense notion
that, because section 417(e) specifically deals with the
calculation of the present value of a participant’s accrued
benefit for purposes of determining the amount of a lump-sum
payment to that participant, lump-sum payments would not be
excepted from the present value requirements of section
1.417(e)-1(d), Income Tax Regs. Therefore, because the lump-sum
- 25 -
payment option does not provide for a distribution form described
in section 1.417(e)-1(d)(6), Income Tax Regs., the deadline
specified in section 1.417(e)-1(d)(10)(i), Income Tax Regs., is
not applicable to the amendment at issue in this case.
While there is no deadline specified in section 1.417(e)-1,
Income Tax Regs., for adopting plan amendments to which the
present value requirements of section 1.417(e)-1(d), Income Tax
Regs., actually apply, the Commissioner has issued a series of
revenue procedures in which the deadline to adopt such plan
amendments was set and then extended. The first of these revenue
procedures was Rev. Proc. 99-23, 1999-1 C.B. 920. Rev. Proc.
99-23, supra, provides, in pertinent part, as follows:
SECTION 1. PURPOSE
.01 This revenue procedure extends until the last
day of the first plan year beginning on or after
January 1, 2000, the remedial amendment period under
sec. 401(b) of the Code for amending plans that are
qualified under sec. 401(a) or sec. 403(a) for changes
made by the Small Business Job Protection Act of 1996,
Pub. L. 104-188 (“SBJPA”) and for other recent changes
in the law. * * *
* * * * * * *
.03 This revenue procedure also provides that the
extension of the remedial amendment period applies to
the time for adopting amendments of defined benefit
plans to provide that benefits will be determined in
accordance with the applicable interest rate rules and
applicable mortality table rules of sec. 1.417(e)-1(d)
of the Income Tax Regulations. However, such a plan
amendment must provide that, with respect to
distributions with annuity starting dates that are on
or after the effective date of the amendment but before
the adoption date of the amendment, the distribution
- 26 -
will be the greater of the amount that would be
determined under the plan without regard to the
amendment and the amount determined under the plan with
regard to the amendment.
* * * * * * *
SECTION 2. BACKGROUND
* * * * * * *
.07 Under sec. 417(e)(3), as amended by sec. 767
of the Retirement Protection Act of 1994 (“RPA 94,”
which is part of GATT), and sec. 1.417(e)-1(d), a
defined benefit plan must provide that the present
value of any accrued benefit and the amount of any
distribution must not be less than the amount
calculated using the applicable interest rate described
in sec. 1.417(e)-1(d)(3) and the applicable mortality
table described in sec. 1.417(e)-1(d)(2). * * *
Section 767 of RPA 94 and sec. 1.417(e)-1(d) are
generally effective for distributions with annuity
starting dates in plan years beginning after
December 31, 1994. However, sec. 417(e)(3)(B) provides
a transition rule for plans adopted and in effect as
of December 7, 1994 (“pre-GATT plans”). In general,
under this rule, the present value of a distribution
from a pre-GATT plan that is made before the earlier of
(i) the first plan year beginning after December 31,
1999, or (ii) the later of the adoption or effective
date of a plan amendment applying the changes made to
sec. 417(e)(3) to the plan is to be determined under
the plan’s pre-GATT terms. Thus, for pre-GATT plans,
amendments applying the changes to sec. 417(e)(3) to
plan years beginning before January 1, 2000, could not
be adopted retroactively, and these plans could not be
operated in accordance with the changes prior to plan
amendment.
.08 Section 767(d)(2) of RPA 94 provides that a
participant’s accrued benefit is not considered to be
reduced in violation of sec. 411(d)(6) merely because
the benefit is determined in accordance with the
applicable interest rate rules and the applicable
mortality table rules of sec. 417(e)(3)(A), as amended
by RPA 94. Section 1.417(e)-1(d)(10) explains the
scope of relief from the requirements of sec.
411(d)(6). A plan amendment to comply with the
- 27 -
applicable interest rate rules and the applicable
mortality table rules of sec. 417(e)(3)(A), as amended
by RPA 94, must apply to all distributions with annuity
starting dates that occur in plan years beginning after
December 31, 1999.
.09 Section 1.401(b)-1T(c)(3) authorizes the
Commissioner to impose limits and provide additional
rules regarding the amendments that may be made within
the remedial amendment period with respect to a plan
provision that has been designated by the Commissioner
as a disqualifying provision under sec. 401(b).
* * * * * * *
SECTION 3. EXTENSION OF REMEDIAL AMENDMENT PERIOD
.01 The remedial amendment period described in
Rev. Proc. 97-41 and Rev. Proc. 98-14, hereafter
referred to as the “GUST” remedial amendment period,
is, in the case of nongovernmental plans, hereby
extended to the last day of the first plan year
beginning on or after January 1, 2000. * * *
* * * * * * *
.06 Finally, the extension of the remedial
amendment period also applies to the time for adopting
amendments of defined benefit plans to provide that
benefits will be determined in accordance with the
applicable interest rate rules and applicable mortality
table rules of sec. 1.417(e)-1(d). Thus, such a plan
amendment may be adopted at any time up to the last day
of the extended remedial amendment period, provided the
amendment is made effective for distributions with
annuity starting dates occurring in plan years
beginning after December 31, 1999. However, pursuant
to the Commissioner’s authority in sec.
1.401(b)-1T(c)(3), if such a plan amendment is adopted
after the last day of the last plan year beginning
before January 1, 2000, the amendment must provide
that, with respect to distributions with annuity
starting dates that are after the last day of that plan
year but before the date of adoption of the amendment,
the distribution will be the greater of the amount that
would be determined under the plan without regard to
the amendment and the amount determined under the plan
- 28 -
with regard to the amendment. [Rev. Proc. 99-23,
1999-1 C.B. at 920-923.]
Rev. Proc. 99-23, supra, was subsequently modified by Rev.
Proc. 2000-27, 2000-1 C.B. 1272. Rev. Proc. 2000-27, supra,
provides, in pertinent part, as follows:
SECTION 1. PURPOSE
.01 * * * This [revenue] procedure * * * extends
until the last day of the first plan year beginning on
or after January 1, 2001, the remedial amendment period
under sec. 401(b) of the Code for amending plans for
GUST * * *
.02 The term “GUST” refers to the following:
1 the Uruguay Round Agreements Act, Pub. L.
103-465 (“GATT”);
2 the Uniformed Services Employment and
Reemployment Rights Act of 1994, Pub. L. 103-353
(“USERRA”);
3 SBJPA;
4 the Taxpayer Relief Act of 1997, Pub. L. 105-34
(“TRA ‘97"); and
5 the Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206 (“RRA ‘98").
SECTION 2. BACKGROUND
* * * * * * *
.03 Under sec. 401(b), plan sponsors have a
remedial amendment period in which to adopt GUST plan
amendments. Rev. Proc. 99-23, 1999-16 I.R.B. 5,
provides that the GUST remedial amendment period for
nongovernmental plans ends on the last day of the first
plan year beginning on or after January 1, 2000. * * *
The end of the GUST remedial amendment period is the
deadline for making all GUST plan amendments, including
plan amendments reflecting the repeal of sec. 415(e)
- 29 -
and other plan amendments specifically enumerated in
Rev. Proc. 99-23. * * *
* * * * * * *
SECTION 4. EXTENSION OF THE REMEDIAL AMENDMENT PERIOD
.01 The GUST remedial amendment period for
nongovernmental plans is extended to the last day of
the first plan year beginning on or after January 1,
2001. * * *
.02 In general, all plan provisions that either
cause a plan to fail to satisfy the qualification
requirements of the Code because of changes to those
requirements made by GUST or are integral to a
qualification requirement changed by GUST are
disqualifying provisions under sec. 1.401(b)-1(b) of
the regulations. Thus, this extension of the GUST
remedial amendment period applies to all GUST plan
amendments, including all those specifically enumerated
in Rev. Proc. 99-23. * * * [Rev. Proc. 2000-27,
2000-1 C.B. at 1272-1273.]
Rev. Proc. 2000-27, supra, was subsequently modified by Rev.
Proc. 2001-55, 2001-2 C.B. 552. Rev. Proc. 2001-55, supra,
provides, in pertinent part, as follows:
SECTION 1. PURPOSE
This revenue procedure extends the GUST remedial
amendment period under sec. 401(b) of the Code for
qualified retirement plans. First, the revenue
procedure extends the GUST remedial amendment period
for all plans to February 28, 2002, if the period would
otherwise end before then. * * *
SECTION 2. BACKGROUND
.01 Under sec. 401(b), plan sponsors have a
remedial amendment period in which to adopt plan
amendments for GUST. The end of the GUST remedial
amendment period is the deadline for making all GUST
plan amendments and other plan amendments specifically
enumerated in Rev. Proc. 99-23 (1999-1 C.B. 920).
* * *
- 30 -
.02 Rev. Proc. 2000-27 (2000-26 I.R.B. 1272)
provides that the GUST remedial amendment period for
nongovernmental plans ends on the last day of the first
plan year beginning on or after January 1, 2001. * * *
* * * * * * *
.05 Section 1.401(b)-1(f) of the Income Tax
Regulations provides that, at his discretion, the
Commissioner may extend the remedial amendment period
or may allow a particular plan to be amended after the
expiration of its remedial amendment period and any
applicable extension of such period. In determining
whether such an extension will be granted, the
Commissioner shall consider, among other factors,
whether substantial hardship to the employer would
result if such an extension were not granted, whether
such an extension is in the best interest of plan
participants, and whether the granting of the extension
is adverse to the interests of the government.
SECTION 3. GENERAL EXTENSION OF REMEDIAL AMENDMENT
PERIOD TO FEBRUARY 28, 2002
.01 The GUST remedial amendment period is
extended to February 28, 2002, if the period would
otherwise end before then. This extension applies to
all GUST plan amendments, including all those plan
amendments specifically enumerated in Rev. Proc. 99-23.
* * * [Rev. Proc. 2001-55, 2001-2 C.B. at 552-553; fn.
ref. omitted.]
With the publication of Rev. Proc. 2001-55, supra, the
Commissioner extended the deadline for plan sponsors to adopt the
amendments enumerated in Rev. Proc. 99-23, 1999-1 C.B. 920, until
February 28, 2002. The amendments enumerated in Rev. Proc.
99-23, supra, included amendments of defined benefit plans to
provide that the present value of a participant’s accrued benefit
would be determined in accordance with the applicable interest
rate rules and applicable mortality table rules of section
- 31 -
1.417(e)-1(d), Income Tax Regs. Thus, it follows that plan
sponsors had until February 28, 2002, to adopt plan amendments
falling under the safe harbors provided by section
1.417(e)-1(d)(10)(ii) through (v), Income Tax Regs. Accordingly,
Hercules had until February 28, 2002, to adopt amendments to the
lump-sum payment option in accordance with the safe harbor
provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs.
In an effort to avoid this conclusion, petitioner contends
that, because “the continuing use of the PBGC interest rate
cannot be a ‘disqualifying provision’” within the meaning of the
Treasury regulations promulgated under section 401(b), “the
series of Revenue Procedures relating to the remedial amendment
period with respect to the extensive GUST I or GUST II amendments
did not extend the period during which Hercules could amend the
plan to provide that the 30-year Treasury bond rate would be
used”. As discussed below, petitioner’s contention is
unpersuasive.
Section 1.401(b)-1, Income Tax Regs., explains the operation
of section 401(b) and provides, in pertinent part, as follows:
(a) General rule. Under section 401(b) a * * *
pension * * * plan which does not satisfy the
requirements of section 401(a) on any day solely as a
result of a disqualifying provision * * * shall be
considered to have satisfied such requirements on such
date if, on or before the last day of the remedial
amendment period * * * with respect to such
disqualifying provision, all provisions of the plan
which are necessary to satisfy all requirements of
* * * [section] 401(a) * * * are in effect and have
- 32 -
been made effective for all purposes for the whole of
such period. * * *
(b) Disqualifying provisions. For purposes of
this section, with respect to a plan described in
paragraph (a) of this section, the term “disqualifying
provision” means:
* * * * * * *
(3) A plan provision designated by the
Commissioner, at the Commissioner’s discretion, as a
disqualifying provision that either–-
(i) Results in the failure of the plan
to satisfy the qualification requirements of the
Internal Revenue Code by reason of a change in those
requirements; or
(ii) Is integral to a qualification
requirement of the Internal Revenue Code that has been
changed.
(c) Special rules applicable to disqualifying
provisions–-
* * * * * * *
(2) Method of designating disqualifying
provisions. The Commissioner may designate a plan
provision as a disqualifying provision pursuant to
paragraph (b)(3) of this section only in revenue
rulings, notices, and other guidance published in the
Internal Revenue Bulletin. * * *
(3) Authority to impose limitations. In the
case of a provision that has been designated as a
disqualifying provision by the Commissioner pursuant to
paragraph (b)(3) of this section, the Commissioner may
impose limits and provide additional rules regarding
the amendments that may be made with respect to that
disqualifying provision during the remedial amendment
period. The Commissioner may provide guidance in
revenue rulings, notices, and other guidance published
in the Internal Revenue Bulletin. * * *
- 33 -
Paragraphs (b)(3), (c)(2), and (c)(3) of section 1.401(b)-1,
Income Tax Regs., were promulgated as temporary regulations on
August 1, 1997, and adopted without substantive change as final
regulations on February 4, 2000. See T.D. 8871, 2000-1 C.B. 641;
T.D. 8727, 1997-2 C.B. 47.
Under section 1.401(b)-1(b)(3), Income Tax Regs., the
Commissioner has discretion to designate certain plan provisions
as disqualifying provisions. As implied by Rev. Proc. 99-23,
sec. 3.06, 1999-1 C.B. at 923, and Rev. Proc. 2000-27, sec. 4.02,
2000-1 C.B. at 1273, the Commissioner designated plan provisions
providing for the determination of the present value of a
participant’s accrued benefit as disqualifying provisions because
they were integral to a qualification requirement that had been
changed. Consequently, the Commissioner subjected these plan
provisions to the remedial amendment period set forth in those
revenue procedures. Because the lump-sum payment option is such
a plan provision, it was subject to the remedial amendment
period. Therefore, petitioner cannot avoid the conclusion that
Hercules had until February 28, 2002, to adopt amendments to the
lump-sum payment option in accordance with the safe harbor
provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs.
In addition to subjecting plan provisions providing for the
determination of the present value of a participant’s accrued
benefit to the remedial amendment period, the Commissioner also
- 34 -
exercised the Commissioner’s authority under section
1.401(b)-1(c)(3), Income Tax Regs., in Rev. Proc. 99-23, supra,
by establishing an additional requirement for plan sponsors that
adopted amendments to those plan provisions in plan years
beginning after December 31, 1999. Specifically, Rev. Proc.
99-23, sec. 3.06, 1999-1 C.B. at 923, added the following
requirement: If the sponsor of a defined benefit plan, which
uses the calendar year as its plan year, adopted an amendment to
a plan provision providing for the determination of the present
value of a participant’s accrued benefit on or after January 1,
2000, the amendment had to be made effective for distributions
with annuity starting dates occurring on or after January 1,
2000, and had to provide that, with respect to distributions with
annuity starting dates occurring on or after January 1, 2000, but
before the date of the adoption of the amendment, the amount of
any such distributions would be the greater of the amount
determined under the plan without regard to the amendment and the
amount determined under the plan with regard to the amendment.
As discussed above, the amendment that Hercules made to the
lump-sum payment option falls squarely within the safe harbor
provided by section 1.417(e)-1(d)(10)(iv), Income Tax Regs.
Because Hercules amended the lump-sum payment option in 2001, the
amendment occurred before the February 28, 2002, deadline to
adopt such plan amendments had passed. Furthermore, the 2001
- 35 -
amendment to the lump-sum payment option satisfied the additional
requirement established by the Commissioner in Rev. Proc. 99-23,
sec. 3.06, 1999-1 C.B. at 923, by offering the greater of the
accrued benefit calculated using the PBGC interest rate or the
annual interest rate on 30-year Treasury securities for payments
occurring on and after January 1, 2000, but before January 1,
2002.
In sum, we conclude that respondent Commissioner did not err
in determining that the amendment to the plan’s lump-sum payment
option did not violate the anti-cutback rule of section
411(d)(6).
We have considered the arguments of the parties that were
not specifically addressed in this opinion. Those arguments are
either without merit or irrelevant to our decision.
To reflect the foregoing,
Decision will be entered
for respondents.