What Are the Requirements for a 204(h) Notice?
Properly notifying employees of a reduction in future retirement benefits involves specific legal steps. Learn how to ensure compliance and avoid costly tax penalties.
A 204(h) notice is a formal communication required under the Employee Retirement Income Security Act of 1974 (ERISA). Its purpose is to alert participants in certain retirement plans about upcoming changes that will significantly reduce the rate at which they earn future benefits. This advance warning gives individuals time to understand the changes and plan accordingly, ensuring they are not caught by surprise when a fundamental feature of their plan is altered.
Events Triggering a Notice Requirement
A 204(h) notice is required for defined benefit pension plans and money purchase pension plans. In these plans, the employer’s contribution is fixed, and the benefit is based on factors like salary and years of service. Common retirement plans like 401(k)s are not subject to these notice rules. A notice is triggered when a company amends its plan in a way that causes a “significant reduction in the rate of future benefit accrual.”
This means a tangible decrease in the value of benefits an employee will earn going forward. For instance, changing a benefit formula from 2% of an employee’s final average salary to 1% is a significant reduction. The requirement also applies to amendments that eliminate or substantially reduce an early retirement benefit or a retirement-type subsidy, which are features that allow employees to retire early.
An amendment that changes the assumptions for calculating lump-sum payments can also trigger a notice if it results in a smaller payout. Whether a reduction is considered “significant” depends on the specifics of the plan and the amendment. The notice only concerns a slowdown in earning new benefits, not a reduction in benefits already earned.
Required Content and Information
A compliant 204(h) notice must be understandable to the average plan participant and contain a clear, plain-language description of the plan amendment. It needs to explain what is changing and how it will affect the calculation of future benefits. The notice must also explicitly state the effective date of the amendment, so there is no ambiguity about when the new rules take effect.
For defined benefit plans, the notice must include one or more illustrative examples showing how the amendment will impact a hypothetical participant. For instance, the notice might compare the annual benefit accrued under the old and new formulas for an employee with a specific age, service history, and compensation level. This illustration helps translate the amendment’s terms into a concrete financial impact.
The notice must identify the classes of employees affected by the change, which could be all participants or a specific group. The information must be sufficient for individuals to understand the magnitude of the reduction in their expected retirement income. However, the notice is not required to provide a personalized calculation for every recipient.
Notice Delivery and Timing Rules
Plan administrators must follow strict distribution rules. The notice must be provided to all affected participants, including active employees and any alternate payee under a qualified domestic relations order (QDRO). It must also be sent to any employee organization, like a union, representing affected participants, and for multiemployer plans, to contributing employers.
The notice must be provided at least 45 days before the effective date of the plan amendment. Exceptions exist for specific situations. For small plans or certain amendments related to a corporate merger, the notice period can be 15 days, while in other cases involving corporate transactions where an amendment only reduces an early retirement benefit, the notice can be provided up to 30 days after the effective date.
Acceptable delivery methods include first-class mail to the individual’s last known address or hand delivery. Electronic delivery is also permissible if it complies with IRS and Department of Labor standards. These standards require that the electronic notice is as understandable as a paper version and that participants have consented to receive it electronically.
Consequences of Non-Compliance
Failing to provide a timely and complete 204(h) notice results in an excise tax under the Internal Revenue Code. The tax is $100 per day for each participant or alternate payee who was not properly notified. Liability for the tax falls on the employer or, for a multiemployer plan, the plan itself.
The excise tax accumulates daily during the noncompliance period, which begins on the date of the failure and ends when a corrected notice is issued. If the failure was due to reasonable cause and not willful neglect, the total tax is capped at $500,000. An employer can correct a failure by making a good faith effort to comply and providing a proper notice after the failure is discovered.
In addition to the excise tax, a court could find the plan amendment itself ineffective. If this happens, the intended benefit reduction is not legally valid, and participants would continue to accrue benefits under the plan’s original, more generous formula. This outcome can create a much larger financial liability for the plan sponsor than the tax.