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2004-04A
ERISA Sec. 407(d)(3) & 407(d)(9)
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Steven J. Sacher
Kilpatrick Stockton LLP
607 14th Street, NW, Suite 900
Washington, DC 20005-2018
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Dear Mr. Sacher:
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This is in response to your request for an advisory
opinion on behalf of Butler Manufacturing Company (Company) concerning the
application of section 9345(a)(3) of the Omnibus Budget Reconciliation Act
of 1987 (OBRA ’87) (the grandfather provision) to the amendment of a
defined benefit plan reducing future benefit accruals.
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You represent that the defined benefit plan (DB Plan) and a stock bonus plan
(DC Plan) together make up a floor-offset arrangement (Arrangement) that was
established before December 17, 1987.(1)
The DC Plan currently holds approximately ten percent of all shares of the
Company’s common stock (Common Stock). The annuity values of participant
accounts in the DC Plan offset benefits under the DB Plan. Company Stock
represents between 13 and 14 percent of the combined DB and DC Plan assets.
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You further represent that, on July 14, 2003, the Company adopted an
amendment (Amendment) to the DB Plan to reduce future accruals of benefits
under the DB Plan. The Amendment is effective September 1, 2003. Under the
Amendment, the accrual formula would be changed from a percentage of final
average monthly compensation formula to a percentage of career average
monthly compensation formula on a prospective basis. You represent that
notice of the amendment was timely provided to participants consistent with
section 204(h) of the Employee Retirement Income Security Act of 1974 (ERISA)
and applicable Internal Revenue Service (IRS) regulations. You represent
that the IRS has given the Company a favorable determination letter on the
Amendment.
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You indicate that the Amendment does not create a new pool of assets from
which these future accruals will be paid and does not relate to investment
of plan assets. You state that the Amendment merely modifies specific
sections of the DB Plan that is part of the existing Arrangement and
contemplates the continued existence of the DB Plan and the Arrangement. You
represent that the Amendment affects only the DB Plan, which has no material
holdings of employer securities or employer real property. You state that,
because the Amendment relates only to benefit accruals, not investment of
plan assets, it cannot even indirectly increase either the DB or DC Plan’s
holding of Company Stock or other employer securities. You state that
reducing the rate of future accruals will gradually reduce the DB Plan’s
liability and thus, the PBGC’s exposure, in the event of plan termination.
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You have requested an advisory opinion as to whether
the Amendment to the DB Plan will render the grandfather provision of
section 9345(a)(3) of OBRA '87 inapplicable to the Arrangement, such that
the holding of the Company Stock by the Arrangement will fail the
limitations imposed on the Arrangement for the holding of employer
securities under section 407 of ERISA.
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Section 406(a)(1)(E) of ERISA prohibits a fiduciary with respect to a plan
from causing the plan to engage in a transaction if he or she knows or
should know that such transaction constitutes a direct or indirect
acquisition on behalf of the plan of any employer security or employer real
property in violation of section 407(a). Section 406(a)(2) of ERISA provides
that no fiduciary who has authority or discretion to control or manage the
assets of a plan shall permit the plan to hold any employer security or
employer real property if he or she knows or should know that the holding of
such security or real property violates section 407(a).
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Section 407(a) provides, in part, that (1) a plan may not acquire or hold
any employer security which is not a qualifying employer security, and (2) a
plan may not acquire any qualifying employer security if immediately after
such acquisition the aggregate fair market value of employer securities held
by the plan exceeds 10 percent of the fair market value of the assets of the
plan.
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Section 407(b)(1) of ERISA, however, provides, in part, that the 10 percent
limitation of section 407(a) shall not apply to the acquisition or holding
of qualifying employer securities by an eligible individual account plan.
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Section 407(d)(3)(A) of ERISA defines "eligible
individual account plan" to include an individual account plan which
is (i) a profit-sharing, stock bonus, thrift or savings plan, (ii) an
employee stock ownership plan, or (iii) a money purchase plan which was in
existence on the date of enactment of ERISA and which on such date
invested primarily in qualifying employer securities. Such term excludes
an individual retirement account or annuity described in section 408 of
the Code. Section 407(d)(3)(B) provides that, notwithstanding subparagraph
(A), a plan shall be treated as an eligible individual account plan with
respect to the acquisition or holding of qualifying employer securities
only if such plan explicitly provides for the acquisition and holding of
qualifying employer securities or qualifying employer real property.
Section 407(d)(3)(C) of ERISA, as added by section 9345(a)(1) of OBRA '87,
provides that the term "eligible individual account plan" does
not include any individual account plan the benefits of which are taken
into account in determining the benefits payable to a participant under
any defined benefit plan.
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Section 407(d)(9) of ERISA, as added by section 9345(a)(2) of OBRA '87,
provides that, for purposes of section 407, an arrangement which consists of
a defined benefit plan and an individual account plan shall be treated as
one plan if the benefits of such arrangement are taken into account in
determining the benefits payable under such defined benefit plan.
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Section 9345(a)(3) of OBRA '87 provides that sections 407(d)(3)(C) and
407(d)(9) shall apply with respect to arrangements established after
December 17, 1987. Thus, sections 407(d)(3)(C) and 407(d)(9) of ERISA do not
apply to floor-offset arrangements established on or before December 17,
1987.
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You have represented that the Amendment to reduce future benefit accruals
will not terminate or replace the existing floor-offset Arrangement or alter
the substantive nature of the Arrangement. The Amendment modifies specific
sections of the DB Plan that is part of the existing Arrangement. On the
basis of the facts and representations contained in your submission, it is
the opinion of the Department that the implementation of the Amendment to
the DB Plan to reduce benefit accruals, with the existing floor-offset
arrangement being retained, would not render the grandfather provision
contained in section 9345(a)(3) of OBRA '87 inapplicable to the Arrangement.
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This letter deals only with the issues arising under
section 407(d)(3)(C) and 407(d)(9) of ERISA. The Department has not
considered the effect of any other provision of ERISA or the Internal
Revenue Code as they may relate to your request.(2)
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, this letter is issued subject to the
provisions of the procedure, including section 10 relating to the effect
of advisory opinions.
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Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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The Arrangement was the subject of
Advisory Opinion 89-11A (July 13, 1989). In that opinion, the
Department concluded that, under the circumstances therein presented,
the application of the OBRA '87 grandfather provision would not be
affected by the proposed modification of the DC Plan to satisfy
technical requirements of section 4975(e)(7) of the Internal Revenue
Code and the proposed merger of six defined benefit plans into the
current DB Plan. Specifically, it was represented that benefits would
be provided at the highest level offered by any of the six defined
benefit plans and no substantive changes would be made to the
Arrangement. The Arrangement was also the subject of Advisory Opinion
97-18A (July 16, 1997). Similarly, in that opinion, the Department
concluded that the application of the OBRA ’87 grandfather provision
would not be affected by the proposed amendments to the DC Plan
permitting participants to redirect and diversify investment of
employer securities allocated to their accounts into other investment
options.
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This opinion does not address any
matters or events that occurred subsequent to the July 14, 2003
adoption of the Amendment.
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