IRS PROPOSES PIA OFFSET SAFE HARBOR FOR DEFINED-BENEFIT PLANS.

Notice 92-32

PURPOSE

This notice describes and requests comments on a proposal to add a "PIA offset" safe harbor to the regulations under sections 401(a)(4) and 401(l). The proposed safe harbor would apply to a defined benefit plan design under which an employee's benefit is offset by a percentage of the employee's primary insurance amount under Social Security ("PIA"). The Service and Treasury intend to publish the safe harbor in a forthcoming notice of proposed rulemaking. The proposed safe harbor is being described in this notice in order to permit public comment on the proposal before formal publication in proposed regulation form.

BACKGROUND

Final regulations under sections 401(a)(4) and 401(l) do not currently provide a safe harbor for plans that offset benefits by a portion of the employee's PIA. In addition, a plan that bases an offset on the employee's PIA fails the requirement that the offset be a uniform percentage of final average compensation for all employees. Thus, these plans do not qualify for any other regulatory safe harbors.

Though not providing a safe harbor, the regulations allow a PIA offset plan to demonstrate nondiscrimination in the amount of benefits using the general test provided under the section 401(a)(4) regulations, including the imputed permitted disparity rules. Since publication of the regulations, some employers have commented that certain PIA offset plans, particularly those with low offset percentages, are passing the general test easily. In order to simplify their testing process, these employers have requested a safe harbor for PIA offset plans of this type.

PROPOSED PIA SAFE HARBOR

The proposal would create a safe harbor for a PIA offset design that limits the offset to the maximum offset under the permitted disparity rules of section 401(l) ("401(l) offset limit"). Addition of the 401(l) offset limit implements the maximum offset restrictions of section 401(l) while avoiding the need for detailed rules limiting the PIA offset percentage.

Under the proposal, the regulations under sections 401(a)(4) and 401(l) would provide that a defined benefit plan that otherwise satisfies any of the existing safe harbors under the section 401(a) (4) regulations would not fail to be a safe harbor plan merely because it offsets benefits by a percentage of PIA. The percentage of PIA offset would have to be uniform (i.e., the same for all employees in the plan with the same years of service) or be deemed uniform under the existing provisions of the regulations.

As stated above, detailed rules limiting the PIA offset percentage (such as those set forth in Rev. Rul. 71-446, 1971-2 C.B. 187, and later guidance) would not be needed for the safe harbor because of the application of the maximum offset allowance under section 401(l). For example, in the case of early retirement benefits, the maximum offset allowance under section 401(l) would be adjusted as required under the current regulations, indirectly limiting the PIA offset as well, and thus no additional adjustment to the PIA offset would be needed. In addition, a plan that defers application of the PIA offset by providing a temporary supplement at early retirement could avoid adjustments to the maximum offset allowance by using a qualified social security supplement (QSUPP). Moreover, because section 401(l) does not require a reduction in the permitted disparity merely because benefits are paid in the form of an annuity that is not a straight life annuity, the PIA offset would not have to be reduced in that case.

Because the offset under section 401(l) cannot exceed one-half of the gross benefit provided with respect to compensation up to covered compensation, the level of the plan's gross benefit rate would affect the amount of the maximum offset. In addition, under the existing rules on cumulative permitted disparity, a plan that limited the PIA offset to the maximum offset allowance under section 401(l) could apply the PIA offset for no more than 35 years. Alternatively, the plan could use an annual 401(l) offset limit that is lower than the maximum offset allowance under section 401(l) and apply the PIA offset for more than 35 years of service.

Primary insurance amount would have to be determined in a consistent manner for all employees, generally in accordance with the principles of Rev. Rul. 71-446. However, in determining an employee's PIA, employers could assume that the employee's compensation continued until age 65 without the proration of PIA required under Rev. Rul. 71-446. For an employee's compensation history, employers would have to use the existing rules under Rev. Rul. 84-45, 1984-1 C.B. 115.

COMMENTS

The Service and Treasury invite comments on the proposal described in this notice. Comments should be submitted in writing, referencing Notice 92-32, and should be addressed to --

                       Associate Chief Counsel

The principal author of this notice is Patricia McDermott of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information, contact Ms. McDermott at (202) 377-9372 (not a toll-free number).