Notice Requirement/Excise Tax. ERISA Section 204(h), as amended by EGTRRA, requires a plan administrator to provide a notice to participants and alternate payees a reasonable time before the effective date of the amendment. EGTRRA also added Code Section 4980F, which imposes an excise tax when a plan administrator fails to provide a timely notice of a significant reduction in future benefit accrual. If an employer fails to give timely notice, the Revenue Service may impose a penalty not exceeding $100 per failure (i.e., per individual not notified). The IRS will waive the penalty only if the person responsible for giving the notice used reasonable diligence in attempting to give notice and believed notice in fact was given (e.g., the employer sent the notice via commercial overnight carrier and the carrier failed to deliver on time). Failure to provide notice does not render the amendment ineffective, except where the failure is egregious. An egregious failure occurs where the failure is in control of the plan sponsor and is intentional.

Final Regulation Provisions. The final regulations generally follow the proposed regulations. Specifically, the final regulations:

1. adopt the rule of the proposed regulations that a reasonable period of time generally is 45 days before the effective date of the amendment reducing the benefit accrual rate. However, the plan administrator may provide notice at least 15 days in advance of the effective date in the case of a "small" plan (defined as having fewer than 100 participants with an accrued benefit), or in case of an amendment in connection with a business acquisition or disposition.

2. add a provision that generally a 15-day notice period applies to a Section 204(h) amendment to a multiemployer plan.

3. incorporate the guidance of Rev. Rul. 2002-42, and provide that a plan amendment to convert a money purchase pension plan into a profit sharing plan, including a merger, consolidation or transfer, is a plan amendment that significantly reduces the rate of future benefit accrual for purposes of ERISA Section 204(h) and Code Section 4980F.

4. clarify that an amendment reducing a contribution formula is not considered insignificant solely because expected future investment returns might offset a portion of the reduction in the contribution formula.

5. provide that the determination of "applicable individuals" for purpose of distribution of the Section 204(h) notice is made, based on "all relevant facts and circumstances," with respect to individuals the plan administrator reasonably expects to be participants or alternate payees on the effective date of the Section 204(h) amendment. However, the plan administrator may make the determination on a typical business day that is reasonably proximate to the time the plan administrator provides the Section 204(h) notice, or if earlier, on the latest date for providing the Section 204(h) notice.

Effective Date. The final regulations generally are applicable to amendments with an effective date after September 1, 2003. Transition rules apply to amendments enacted between the June 7, 2001, effective date of the EGTRRA changes and the regulatory applicability date.