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Employee Benefits Security Administration

Advisory Opinion

May 20, 2004

2004-04A
ERISA Sec. 407(d)(3) & 407(d)(9)

Steven J. Sacher
Kilpatrick Stockton LLP
607 14th Street, NW, Suite 900
Washington, DC 20005-2018

Dear Mr. Sacher:

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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)

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.

Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations

Footnotes

  1. 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.

  2. This opinion does not address any matters or events that occurred subsequent to the July 14, 2003 adoption of the Amendment.