Benefit Statements Under PPA

One of the areas of the 2006 Pension Protection Act ("PPA") that has received relatively little attention, at least with respect to defined benefit pension plans, is the requirement to issue employee benefit statements. Perhaps this is because, under PPA, defined benefit plan statements are only required to be issued once every three years. The first year of applicability was the plan year beginning in 2007. (For collectively bargained plans, there may be a one or two year extension, depending on the duration of the bargaining agreements). But wait — time flies! — this means that for most plans the 2009 plan year is the third (and final) year of the first post-PPA triennial cycle. For defined benefit plan sponsors who have not addressed this new requirement — the moment is now!

First, a brief history refresher. ERISA has, since its inception in 1976, always required that employee benefit statements be issued upon employee request. What’s new under PPA is the requirement that plan administrators issue statements automatically and periodically.

For defined contribution plans, the required period is quarterly (unless participants are not able to direct their plan investments — in that case, the defined contribution statements are due annually). Because of this required frequency, defined contribution plans have generally been operating in compliance with the PPA statement requirement since 2007. However, for defined benefit plans, as mentioned above, the required frequency is once every three years — and the 2009 plan year is the final year of the first three-year cycle.

The statement must be issued to participants who are active employees of the plan sponsor (technically, only to vested employees). PPA has certain requirements as to what must be included in the statement. For instance, the statement must include the total accrued benefit, as well as the vested benefit (or earliest vesting date). The law allows the periodic statement to be based on "reasonable estimates", to be further clarified by pending regulations. In addition, if the plan is one that is "integrated with Social Security"the statement must include an explanation of that integration.

The statement must be written in a manner designed to be understood by the "average plan participant". This is akin to the Summary Plan Description drafting requirement. Also, the statement must be delivered in "written, electronic or other appropriate form to the extent such form is reasonably accessible to the participant or beneficiary". Certainly, mailing or internal distribution of paper statements meets that standard. Electronic delivery (e.g. via email or web posting) may also be permissible in certain circumstances, but in that case the plan administrator must pay careful attention to the Department of Labor regulations that govern electronic delivery (as well as Field Assistance Bulletin 2006-03). The requirements for acceptable electronic delivery are quite detailed and, in some cases, somewhat onerous.

Under PPA, there is an alternative, much less burdensome, method of compliance with the statement requirement. This alternative method involves the issuance of a notice, rather than a full blown statement, advising employees that a statement is available to them and how they may obtain it. The "rub", however, is that this notice must be issued annually, not every three years, and the information provided in response to an individual request must be precise calculations, rather than the "estimated" information standard applicable to the automatic statement option. So, if the plan administrator has not already issued such a notice for the 2007 plan year (and 2008 plan year, to the extent that plan year is over), it is too late. The alternative notice route is not currently available to that plan for the first triennial cycle. Even if not utilized for the current cycle, this may be an attractive option to consider for future compliance.

There are a few open issues with respect to the PPA statement requirement, including the exact due date of a statement for a given plan year, exactly how a website might be employed to provide benefit statement information in lieu of a statement, and the use of reasonable estimates. Our hope is that clarifying regulations will be issued, ideally in the near future. But in the meantime, it is important for plan sponsors to develop and implement a game-plan to fulfill the PPA statement requirement, if they have not already done so. Looking on the bright side, the issuance of a benefit statement can be so much more than just a means of legal compliance — it is an ideal opportunity to connect with employees and convey the value of their company pension benefit!

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