An overview of recent developments in employee benefits, including qualified and nonqualified retirement plans, welfare benefits and executive compensation.

• Author: Cvach, Gary Q.
• Position: Part 1

Qualified Plan Transactions

Sec. 415 Limits

The IRS released guidance on the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increases in the Sec. 415 contribution and benefit limits. In question-and-answer form, Rev. Rul. 2001-51 (1) addressed (1) allowable benefit increases and their effect on other qualification requirements, (2) plan amendments and (3) the sunset provision.

Prior to the EGTRRA effective date, the defined benefit dollar limit was $140,000 for 2001; under EGTRRA Section 611(a), it increased to $160,000 starting in 2002.

Annual additions credited to a participant's account under a defined contribution plan cannot exceed the Sec. 415(c) limits. For 2001, that limit was the lesser of (1) 25% of a participant's compensation or (2) $35,000. EGTRRA Sections 611 (b) and 632(a)(1) increased these thresholds to the lesser of (1) 100% of compensation or (2) $40,000, starting in 2002.

EGTRRA Section 901 contains a sunset provision; all EGTRRA provisions and amendments do not apply to tax, plan or limitation years after 2010. Rev. Rul. 2001-51 addresses many issues raised by the EGTRRA changes to Sec. 415 and should be quite useful to practitioners and plan administrators alike.

Qualified Plan Cases and Rulings

Partial Termination

The Supreme Court denied certiorari and vacated and remanded Matz v. Household Int'l Tax Reduction Investment Plan, (2) effectively affirming the Seventh Circuit's holding that only nonvested participants need to be counted in determining whether a qualified plan partially terminated.

Matz worked for Hamilton Investments, a subsidiary of Household International; he participated in its Sec. 401 (k) plan, which provided for employee deferrals and matching contributions. The matching contributions were subject to a vesting schedule.

In August 1994, Household sold some of its subsidiaries, including Hamilton Investments. Matz was 60% vested when he could no longer participate in the Household plan because of the sale. Believing that a partial termination of the Household plan had occurred that would have entitled him (as an affected employee) to be fully vested in his employer contributions, he sued to enforce his rights.

Seventh Circuit's original analysis:

Citing Weil v. Retirement Plan Admin. Committee (3) (in which the Second Circuit invited an amicus brief from the IRS), the Seventh Circuit gave great weight and deference to the IRS view that both vested and nonvested plan participants' must be counted in determining whether a partial termination has occurred. Because the IRS is the agency responsible for administering the statute, the court reasoned that the IRS's interpretation must be followed as long as it is reasonable. The court reached this conclusion even though it opined that counting only nonvested employees was a better policy.

The court further found that neither the statute nor the legislative history specify whether aggregation of years is permissible when determining whether a partial termination has occurred. The IRS has not taken a position on this issue. The Seventh Circuit held that nothing in the rule requires that only a single year's events be considered in making this determination.

Supreme Court's analysis: The Supreme Court vacated the Seventh Circuit's decision and remanded the case for further consideration in light of Mead Corp. (4) In Mead, the Court tried to delineate levels of deference owed to administrative agency pronouncements. The Court held that the highest level of deference is required when Congress has expressly or implicitly indicated that it intended the agency to speak with the force of law on a point, and the agency's position is reasonable. The Court explained that Congress generally indicates its intent when it provides for a relatively formal administrative procedure (such as "notice and comment rule making" or formal adjudication in a statute). When formal procedure is absent, an agency's pronouncement may still be entitled to deference if it is well reasoned and persuasive.

Remand: On revisiting Matz, the Seventh Circuit held that in determining whether a partial termination has occurred, only nonvested participants need to be counted. The court concluded that the position set out in the IRS's amicus brief (i.e., counting all participants) was not the result of a formal procedure and, thus, would be entitled to deference only if the court found it persuasive. The court found the IRS's position reasonable, but not persuasive.

The Supreme Court's vacating of the first Matz decision did not effect the multi-year issue; thus, the Seventh Circuit's original holding on that issue was undisturbed. The Court denied Matz's certiorari petition.

Given the conflict between the Second Circuit's Weil holding and the Seventh Circuit's Matz holding, the Supreme Court's denial of certiorari can be read as affirming the Seventh Circuit's stance.

The IRS's position dates to the early 1970s and is clearly set out in its "Plan Termination Handbook" which states, "[t]he Service takes the position that, in general, fully vested terminatees are included in determining whether there has been a partial termination."

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