Consequences of failing to provide suspension-of-benefits notice.

• Author: Valer, Robert D.
• Position: Defined benefit pension plan

A recent court decision takes a different approach from the IRS as to the consequences of failing to provide notice of suspension of benefits under a defined benefit pension plan (Monks v. Keystone Powdered Metal Co., 78 F Supp2d 647 (DC Mich. 2000)). In Monks, the sponsoring employer failed to provide the required suspension-of-benefits notice to an employee who had continued in employment beyond normal retirement age. The Service typically would have viewed this error as a qualification failure and required the employer to correct the situation in a manner that would have awarded Monks his requested relief. However, the court determined that Monks suffered no harm and did not award him any relief. This issue is important to many companies; failing to provide suspension-of-benefits notices is common and the costs of correction can be costly.

Notice Failure

Monks participated in his employer's traditional defined benefit pension plan, which was tax-qualified under Sec. 401(a) and subject to the Employee Retirement Income Security Act of 1974 (ERISA) Title I. Under such a plan, an employee who retires at normal retirement age becomes entitled to begin receiving immediately his pension benefit in the form of a lifetime annuity (i.e., monthly payments for life). Typically, the amount of the monthly payment is a function of years of service and average earnings.

Monks continued to work for his employer for two years past his plan's normal retirement age of 65. During that period, the plan paid no monthly benefits to Monks (i.e., his benefits were suspended), even though his employer violated the plan terms and Department of Labor (DOL) regulations by failing to provide him with a suspension-of-benefits notice once he reached the plan's normal retirement age. Instead, the plan began paying Monks his monthly benefit when he actually retired at age 67. The employer awarded Monks two additional years of credited service under the terms of the plan to reflect his continued employment past normal retirement age, but made no adjustment to the age 65 benefit for its failure to provide a suspension-of-benefits notice.

Monks asserted that the appropriate remedy under ERISA was to elect between (1) his monthly benefit as it continued to accrue under the plan with the two additional years of service (with no actuarial adjustment to reflect the shorter life expectancy and payout period) and (2) the adjusted value of his monthly benefit computed as of his...