[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Proposed Rules]
[Page 73680-73699]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-29]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-104946-07]
RIN 1545-BG36
Hybrid Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations providing guidance
relating to sections 411(a)(13) and 411(b)(5) of the Internal Revenue
Code (Code) concerning certain hybrid defined benefit plans. These
regulations provide guidance on changes made by the Pension Protection
Act of 2006. These regulations affect sponsors, administrators,
participants, and beneficiaries of hybrid defined benefit plans.
DATES: Written or electronic comments and requests for a public hearing
must be received by March 27, 2008.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-104946-07), Room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
104946-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-104946-07).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lauson C.
Green or Linda S. F. Marshall at (202) 622-6090; concerning submissions
of comments or to request a public hearing, Funmi Taylor at (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under sections 411(a)(13) and 411(b)(5) of the Code.
Generally, a defined benefit pension plan must satisfy the minimum
vesting standards of section 411(a) and the accrual requirements of
section 411(b) in order to be qualified under section 401(a) of the
Code. Sections 411(a)(13) and 411(b)(5), which were added to the Code
by section 701(b) of the Pension Protection Act of 2006, Public Law
109-280, 120 Stat. 780 (PPA '06), modify the minimum vesting standards
of section 411(a) and the accrual requirements of section 411(b).
Section 411(a)(13)(A) provides that an applicable defined benefit
plan (which is defined in section 411(a)(13)(C)) is not treated as
failing to meet either (i) The requirements of section 411(a)(2)
(subject to a special vesting rule in section 411(a)(13)(B) with
respect to benefits derived from employer contributions) or (ii) The
requirements of section 411(c) or 417(e) with respect to contributions
other than employee contributions, merely because the present value of
the accrued benefit (or any portion thereof) of any participant is,
under the terms of the plan, equal to the amount expressed as the
balance in a hypothetical account or as an accumulated percentage of
the participant's final average compensation. Section 411(a)(13)(B)
requires an applicable defined benefit plan to provide that an employee
who has completed at least 3 years of service has a nonforfeitable
right to 100 percent of the employee's accrued benefit derived from
employer contributions.
Under section 411(a)(13)(C)(i), a plan is an applicable defined
benefit plan if the plan is a defined benefit plan under which the
accrued benefit (or any portion thereof) of a participant is calculated
as the balance of a hypothetical account maintained for the participant
or as an accumulated percentage of the participant's final average
compensation. Under section
[[Page 73681]]
411(a)(13)(C)(ii), the Secretary of the Treasury is to issue
regulations which include in the definition of an applicable defined
benefit plan any defined benefit plan (or portion of such a plan) which
has an effect similar to a plan described in section 411(a)(13)(C)(i).
Section 411(b)(1)(H)(i) provides that a defined benefit plan fails
to comply with section 411(b) if, under the plan, an employee's benefit
accrual is ceased, or the employee's rate of benefit accrual is
reduced, because of the attainment of any age. Section 411(b)(5), which
was added to the Code by section 701(b)(1) of PPA '06, provides
additional rules related to section 411(b)(1)(H)(i). Section
411(b)(5)(A) generally provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H)(i) if a participant's
accrued benefit, as determined as of any date under the terms of the
plan, would be equal to or greater than that of any similarly situated
younger individual who is or could be a participant. Section
411(b)(5)(G) provides that, for purposes of section 411(b)(5), any
reference to the accrued benefit of a participant shall be a reference
to the participant's benefit accrued to date. For purposes of section
411(b)(5)(A), section 411(b)(5)(A)(iv) provides that the accrued
benefit may, under the terms of the plan, be expressed as an annuity
payable at normal retirement age, the balance of a hypothetical
account, or the current value of the accumulated percentage of the
employee's final average compensation.
Section 411(b)(5)(B) imposes several requirements on an applicable
defined benefit plan as a condition of the plan satisfying section
411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is
treated as failing to meet the requirements of section 411(b)(1)(H) if
the terms of the plan provide for an interest credit (or an equivalent
amount) for any plan year at a rate that is greater than a market rate
of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as
having an above-market rate merely because the plan provides for a
reasonable minimum guaranteed rate of return or for a rate of return
that is equal to the greater of a fixed or variable rate of return.
Section 411(b)(5)(B)(i)(II) provides that an interest credit (or an
equivalent amount) of less than zero can in no event result in the
hypothetical account balance or similar amount being less than the
aggregate amount of contributions credited to the account. Section
411(b)(5)(B)(i)(III) specifies that the Secretary of the Treasury may
provide by regulation for rules governing the calculation of a market
rate of return for purposes of section 411(b)(5)(B)(i)(I) and for
permissible methods of crediting interest to the account (including
fixed or variable interest rates) resulting in effective rates of
return meeting the requirements of section 411(b)(5)(B)(i)(I).
Section 411(b)(5)(B)(ii), (iii), and (iv) contain minimum benefit
rules that apply if, after June 29, 2005, an applicable plan amendment
is adopted. Section 411(b)(5)(B)(v)(I) defines an applicable plan
amendment as an amendment to a defined benefit plan which has the
effect of converting the plan to an applicable defined benefit plan.
Under section 411(b)(5)(B)(ii), if, after June 29, 2005, an applicable
plan amendment is adopted, the plan is treated as failing to meet the
requirements of section 411(b)(1)(H) unless the requirements of section
411(b)(5)(B)(iii) are met with respect to each individual who was a
participant in the plan immediately before the adoption of the
amendment. Section 411(b)(5)(B)(iii) specifies that, subject to section
411(b)(5)(B)(iv), the requirements of section 411(b)(5)(B)(iii) are met
with respect to any participant if the accrued benefit of the
participant under the terms of the plan as in effect after the
amendment is not less than the sum of: (I) The participant's accrued
benefit for years of service before the effective date of the
amendment, determined under the terms of the plan as in effect before
the amendment; plus (II) The participant's accrued benefit for years of
service after the effective date of the amendment, determined under the
terms of the plan as in effect after the amendment. Section
411(b)(5)(B)(iv) provides that, for purposes of section
411(b)(5)(B)(iii)(I), the plan must credit the participant's account or
similar amount with the amount of any early retirement benefit or
retirement-type subsidy for the plan year in which the participant
retires if, as of such time, the participant has met the age, years of
service, and other requirements under the plan for entitlement to such
benefit or subsidy.
Section 411(b)(5)(B)(v) sets forth certain provisions related to an
applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if
the benefits under two or more defined benefit plans of an employer are
coordinated in such a manner as to have the effect of adoption of an
applicable plan amendment, the plan sponsor is treated as having
adopted an applicable plan amendment as of the date the coordination
begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the
Treasury to issue regulations to prevent the avoidance of the purposes
of section 411(b)(5)(B) through the use of two or more plan amendments
rather than through a single plan amendment.
Section 411(b)(5)(B)(vi) provides a special rule for converting a
variable interest crediting rate to a fixed rate for purposes of
determining plan benefits in the case of a terminating applicable
defined benefit plan.
Section 411(b)(5)(C) provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H)(i) solely because the
plan provides offsets against benefits under the plan to the extent the
offsets are allowable in applying the requirements of section 401(a).
Section 411(b)(5)(D) provides that a plan is not treated as failing to
meet the requirements of section 411(b)(1)(H) solely because the plan
provides a disparity in contributions or benefits with respect to which
the requirements of section 401(l) (relating to permitted disparity for
Social Security benefits and related matters) are met.
Section 411(b)(5)(E) provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H) solely because the
plan provides for indexing of accrued benefits under the plan. Under
section 411(b)(5)(E)(iii), indexing means the periodic adjustment of
the accrued benefit by means of the application of a recognized
investment index or methodology. Section 411(b)(5)(E)(ii) requires
that, except in the case of a variable annuity, the indexing not result
in a smaller benefit than the accrued benefit determined without regard
to the indexing.
Section 701(a) of PPA '06 added provisions to the Employee
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat.
829) (ERISA), that are parallel to the above-described sections of the
Code that were added by section 701(b) of PPA '06. The guidance
provided in these proposed regulations with respect to the Code would
also apply for purposes of the parallel amendments to ERISA made by
section 701(a) of PPA '06.\1\
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\1\ Under section 101 of Reorganization Plan No. 4 of 1978 (43
FR 47713), the Secretary of the Treasury has interpretive
jurisdiction over the subject matter addressed by these proposed
regulations for purposes of ERISA, as well as the Code.
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Section 701(c) of PPA '06 added provisions to the Age
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat.
602) (ADEA), that are parallel to section 411(b)(5) of the Code.
Executive Order 12067 requires all Federal departments and agencies to
advise and offer to consult with the Equal Employment Opportunity
Commission (EEOC) during the development of any proposed rules,
[[Page 73682]]
regulations, policies, procedures or orders concerning equal employment
opportunity. The IRS and the Treasury Department have consulted with
the EEOC prior to the issuance of these proposed regulations.
Section 701(d) of PPA '06 provides that nothing in the amendments
made by section 701 should be construed to create an inference
concerning the treatment of applicable defined benefit plans or
conversions of plans into applicable defined benefit plans under
section 411(b)(1)(H), or concerning the determination of whether an
applicable defined benefit plan fails to meet the requirements of
section 411(a)(2), 411(c), or 417(e) as in effect before such
amendments solely because the present value of the accrued benefit (or
any portion thereof) of any participant is, under the terms of the
plan, equal to the amount expressed as the balance in a hypothetical
account or as an accumulated percentage of the participant's final
average compensation.
Section 701(e) of PPA '06 sets forth the effective date provisions
with respect to amendments made by section 701 of PPA '06. Section
701(e)(1) specifies that the amendments made by section 701 generally
apply to periods beginning on or after June 29, 2005. Thus, the age
discrimination safe harbors under section 411(b)(5)(A) and section
411(b)(5)(E) are effective for periods beginning on or after June 29,
2005. Section 701(e)(2) provides that the special present value rules
of section 411(a)(13)(A) are effective for distributions made after
August 17, 2006.
Under section 701(e)(3) of PPA '06, in the case of a plan in
existence on June 29, 2005, the 3-year vesting rule under section
411(a)(13)(B) and the market rate of return limitation under section
411(b)(5)(B)(i) are generally effective for years beginning after
December 31, 2007. In the case of a plan not in existence on June 29,
2005, those sections are effective for periods beginning on or after
June 29, 2005. Section 701(e)(4) of PPA '06 contains special effective
date provisions for collectively bargained plans that modify these
effective dates.
Under section 701(e)(5) of PPA '06, sections 411(b)(5)(B)(ii),
(iii), and (iv) apply to a conversion amendment that is adopted after,
and takes effect after, June 29, 2005.
Section 702 of PPA '06 provides for regulations to be prescribed by
August 16, 2007, addressing the application of rules set forth in
section 701 of PPA '06 where the conversion of a defined benefit
pension plan into an applicable defined benefit plan is made with
respect to a group of employees who become employees by reason of a
merger, acquisition, or similar transaction.
Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and
411(b)(2) were published by the Treasury Department and the IRS in the
Federal Register on April 11, 1988 (53 FR 11876), as part of a package
of regulations that also included proposed regulations under sections
410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age
for participation, vesting, normal retirement age, and actuarial
adjustments after normal retirement age, respectively).\2\
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\2\ On December 11, 2002, the Treasury Department and the IRS
issued proposed regulations regarding the age discrimination
requirements of section 411(b)(1)(H) that specifically addressed
cash balance plans as part of a package of regulations that also
addressed section 401(a)(4) nondiscrimination cross-testing rules
applicable to cash balance plans (67 FR 76123). The 2002 proposed
regulations were intended to replace the 1988 proposed regulations.
In Ann. 2003-22 (2003-1 CB 847), see Sec. 601.601(d)(2)(ii)(b) of
this chapter, the Treasury Department and the IRS announced the
withdrawal of the 2002 proposed regulations under section 401(a)(4),
and in Ann. 2004-57 (2004-2 CB 15), see Sec. 601.601(d)(2)(ii)(b)
of this chapter, the Treasury Department and the IRS announced the
withdrawal of the 2002 proposed regulations relating to age
discrimination.
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Notice 96-8 (1996-1 CB 359), see Sec. 601.601(d)(2)(ii)(b) of this
chapter, described the application of sections 411 and 417(e) to a
single sum distribution under a cash balance plan where interest
credits under the plan are frontloaded (that is, where future interest
credits to an employee's hypothetical account balance are not
conditioned upon future service and thus accrue at the same time that
the benefits attributable to a hypothetical allocation to the account
accrue). Under the analysis set forth in Notice 96-8, in order to
comply with sections 411(a) and 417(e) in calculating the amount of a
single sum distribution under a cash balance plan, the balance of an
employee's hypothetical account must be projected to normal retirement
age and converted to an annuity under the terms of the plan, and then
the employee must be paid at least the present value of the projected
annuity, determined in accordance with section 417(e). Under that
analysis, where a cash balance plan provides frontloaded interest
credits using an interest rate that is higher than the section 417(e)
applicable interest rate, payment of a single sum distribution equal to
the current hypothetical account balance as a complete distribution of
the employee's accrued benefit may result in a violation of section
417(e) or a forfeiture in violation of section 411(a). In addition,
Notice 96-8 proposed a safe harbor which provided that, if frontloaded
interest credits are provided under a plan at a rate no greater than
the sum of identified standard indices and associated margins, no
violation of section 411(a) or 417(e) would result if the employee's
entire accrued benefit is distributed in the form of a single sum
distribution equal to the employee's hypothetical account balance,
provided the plan uses appropriate annuity conversion factors. Since
the issuance of Notice 96-8, four federal appellate courts have
followed the analysis set out in the Notice: Esden v. Bank of Boston,
229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001);
West v. AK Steel Corp. Ret. Accumulation Pension Plan, 484 F.3d 395
(6th Cir. 2007), reh'g and reh'g en banc denied, No. 06-3442, 2007 U.S.
App. LEXIS 20447 (6th Cir. Aug. 8, 2007); Berger v. Xerox Corp. Ret.
Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003), reh'g and reh'g en
banc denied, No. 02-3674, 2003 U.S. App. LEXIS 19374 (7th Cir. Sept.
15, 2003); Lyons v. Georgia-Pacific Salaried Employees Ret. Plan, 221
F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001).
Notice 2007-6, 2007-3 IRB 272 (January 16, 2007), see Sec.
601.601(d)(2)(ii)(b) of this chapter, provides transitional guidance
with respect to certain requirements of sections 411(a)(13) and
411(b)(5) and section 701(b) of PPA '06. Notice 2007-6 includes certain
special definitions, including: accumulated benefit, which is defined
as a participant's benefit accrued to date under a plan; lump sum-based
plan, which is defined as a defined benefit plan under the terms of
which the accumulated benefit of a participant is expressed as the
balance of a hypothetical account maintained for the participant or as
the current value of the accumulated percentage of the participant's
final average compensation; and statutory hybrid plan, which is a lump
sum-based plan or a plan which has an effect similar to a lump sum-
based plan. Notice 2007-6 provides guidance on a number of issues,
including a rule under which a plan that provides for indexed benefits
described in section 411(b)(5)(E) is a statutory hybrid plan (because
it has an effect similar to a lump sum-based plan), unless the plan
either solely provides for post-retirement adjustment of the amounts
payable to a participant or is a variable annuity plan under which the
assumed interest rate used to determine adjustments is at least 5
percent. The Notice provides a safe
[[Page 73683]]
harbor for applying the rules set forth in section 701 of PPA '06 where
the conversion of a defined benefit pension plan into an applicable
defined benefit plan is made with respect to a group of employees who
become employees by reason of a merger, acquisition, or similar
transaction. This transitional guidance, along with other guidance
provided in Part III of Notice 2007-6, applies pending the issuance of
further guidance and, thus, will cease to apply when these regulations
are finalized and become effective.
Explanation of Provisions
Overview
In general, these proposed regulations would incorporate the
transitional guidance provided under Notice 2007-6. However, the
proposed regulations would utilize new terminology (such as statutory
hybrid benefit formula and lump sum-based benefit formula) to take into
account situations where plans provide more than one benefit formula.
These proposed regulations would also provide additional guidance with
respect to sections 411(a)(13) and 411(b)(5), taking into account
comments received in response to Notice 2007-6.
Section 411(a)(13): Special Vesting Rules for Applicable Defined
Benefit Plans and Applicable Definitions
The proposed regulations would reflect new section 411(a)(13)(A) by
providing that an applicable defined benefit plan does not violate the
requirements of section 411(a)(2), or the requirements of section
411(c) or 417(e), with respect to a participant's accrued benefit
derived from employer contributions, merely because the plan determines
the present value of benefits determined under a lump sum-based benefit
formula as the amount of the hypothetical account maintained for the
participant or as the current value of the accumulated percentage of
the participant's final average compensation under that formula.
However, section 411(a)(13) does not alter the definition of an accrued
benefit under section 411(a)(7)(A) (which generally defines a
participant's accrued benefit as the annual benefit commencing at
normal retirement age), nor does it alter the definition of a normal
retirement benefit under section 411(a)(9) (which generally defines a
participant's normal retirement benefit as the benefit under the plan
commencing at normal retirement age).
Section 411(b)(5)(G) provides that, for purposes of section
411(b)(5), any reference to the accrued benefit means the benefit
accrued to date. The proposed regulations refer to this as the
accumulated benefit, which is distinct from the participant's accrued
benefit under section 411(a)(7) (an annuity beginning at normal
retirement age that is actuarially equivalent to the participant's
accumulated benefit).
The regulations define a lump sum-based benefit formula as a
benefit formula used to determine all or any part of a participant's
accumulated benefit under which the benefit provided under the formula
is expressed as the balance of a hypothetical account maintained for
the participant or as the current value of the accumulated percentage
of the participant's final average compensation. Under the proposed
regulations, whether a benefit formula is a lump sum-based benefit
formula would be determined based on how the accumulated benefit of a
participant is expressed under the terms of the plan, and would not
depend on whether the plan provides an optional form of benefit in the
form of a single sum payment. Similarly, a formula would not fail to be
a lump sum-based benefit formula merely because the plan's terms state
that the accrued benefit is an annuity at normal retirement age that is
actuarially equivalent to a hypothetical account balance. In addition,
the regulations would provide that a participant is not treated as
having a lump sum-based benefit formula merely because the participant
is entitled to a benefit under a defined benefit plan that is not less
than the benefit properly attributable to after-tax employee
contributions.
Section 411(a)(13)(A) applies only with respect to a benefit
provided under a lump sum-based benefit formula. Accordingly, if the
present value rules of section 417(e) apply to a form of benefit under
a plan and the plan provides benefits under a benefit formula that is
not a lump sum-based benefit formula (including, for example, a plan
that provides for indexing as described in section 411(b)(5)(E)), then
the plan must set forth a methodology to determine the projected
benefit under that formula at normal retirement age for purposes of
applying the rules of section 417(e), as described in the ``Analysis''
section of Notice 96-8.
The proposed regulations use the term statutory hybrid benefit
formula to describe the portion of a defined benefit plan that is an
applicable defined benefit plan described in section 411(a)(13)(C)(i)
or the portion of the plan that has a similar effect. Specifically, the
proposed regulations would define a statutory hybrid benefit formula as
a benefit formula that is either a lump sum-based benefit formula or a
formula that has an effect similar to a lump sum-based benefit formula.
For this purpose, under the proposed regulations, a benefit formula
under a defined benefit plan has an effect similar to a lump sum-based
benefit formula if the formula provides that a participant's accrued
benefit payable at normal retirement age (or at benefit commencement,
if later) is expressed as a benefit that includes periodic adjustments
(including a formula that provides for indexed benefits described in
section 411(b)(5)(E)) that are reasonably expected to result in a
larger annual benefit at normal retirement age (or at commencement of
benefits, if later) for the participant, when compared to a similarly
situated, younger individual who is or could be a participant in the
plan. Thus, a benefit formula under a plan has an effect similar to a
lump sum-based benefit formula if the right to future adjustments
accrues at the same time as the benefit that is subject to the
adjustments.
The proposed regulations would set forth certain additional rules
that are used in determining whether a benefit formula has an effect
similar to a lump sum-based benefit formula. For example, the proposed
regulations provide that a benefit formula that does not include
periodic adjustments is treated as a formula with an effect similar to
a lump sum-based benefit formula if the formula is otherwise described
in the preceding paragraph and the adjustments are provided pursuant to
a pattern of repeated plan amendments. See Sec. 1.411(d)-4, A-1(c)(1).
The proposed regulations would provide that, for purposes of
determining whether a benefit formula has an effect similar to a lump
sum-based benefit formula, indexing that applies to adjust benefits
after the annuity starting date (for example, cost-of-living increases)
is disregarded. In addition, the proposed regulations would provide
that a benefit formula under a defined benefit plan that provides for a
benefit properly attributable to after-tax employee contributions does
not have an effect similar to a lump sum-based benefit formula. The
proposed regulations would also provide that adjustments under a
variable annuity do not have an effect similar to a lump sum-based
benefit formula if the assumed interest rate used to determine the
adjustments is at least 5 percent. Such an annuity does not have an
effect similar to a lump sum-based benefit formula even if post-annuity
starting date adjustments are
[[Page 73684]]
made using a specified assumed interest rate that is less than 5
percent.
Pursuant to new section 411(a)(13)(B), the proposed regulations
would provide that, in the case of a participant whose accrued benefit
(or any portion thereof) under a defined benefit plan is determined
under a statutory hybrid benefit formula, the plan is not treated as
meeting the requirements of section 411(a)(2) unless the plan provides
that the participant has a nonforfeitable right to 100 percent of the
participant's accrued benefit if the participant has 3 or more years of
service. This requirement would apply on a participant-by-participant
basis and would apply to the participant's entire benefit (not just the
portion of the participant's benefit that is determined under a
statutory hybrid benefit formula). Furthermore, if the participant is
entitled to the greater of two benefits under a plan, one of which is a
benefit calculated under a statutory hybrid benefit formula, the
proposed regulations would provide that the 3-year vesting requirement
applies to that participant even if the participant's benefit under the
statutory hybrid benefit formula is ultimately smaller than under the
other formula. The proposed regulations do not address how the 3-year
vesting requirement applies in the case of floor-offset
arrangements.\3\ See the discussion in this preamble under the heading
``Comments and Requests for Public Hearing.''
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\3\ See Rev. Rul. 76-259 (1976-2 CB 111), see Sec.
601.601(d)(2)(ii)(b) of this chapter, for certain standards
applicable to floor-offset arrangements.
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Section 411(b)(5): Safe Harbor for Age Discrimination, Conversion
Protection, and Market Rate of Return Limitation
A. Safe Harbor for Age Discrimination
The proposed regulations under new section 411(b)(5)(A) would
provide that a plan is not treated as failing to meet the requirements
of section 411(b)(1)(H)(i) with respect to certain benefit formulas if,
as determined as of any date, a participant's accumulated benefit
expressed under one of those formulas would not be less than any
similarly situated, younger participant's accumulated benefit expressed
under the same formula. A plan that does not satisfy this test is
required to satisfy the general nondiscrimination test of section
411(b)(1)(H)(i).
Under the proposed regulations, the safe harbor standard for
satisfying section 411(b)(5)(A) would be available only where a
participant's accumulated benefit under the terms of the plan is
expressed as an annuity payable at normal retirement age (or current
age, if later), the balance of a hypothetical account, or the current
value of the accumulated percentage of the employee's final average
compensation. For this purpose, if the accumulated benefit of a
participant is expressed as an annuity payable at normal retirement age
(or current age, if later) under the plan terms, then the comparison of
benefits is made using such an annuity. If the accumulated benefit of a
participant is expressed under the plan terms as the balance of a
hypothetical account or the current value of an accumulated percentage
of the participant's final average compensation, then the comparison of
benefits is made using the balance of a hypothetical account or the
current value of the accumulated percentage of the participant's final
average compensation, respectively.
The proposed regulations would require a comparison of the
accumulated benefit of each possible participant in the plan to the
accumulated benefit of each other similarly situated, younger
individual who is or could be a participant in the plan. For this
purpose, the proposed regulations would provide that an individual is
similarly situated to another individual if the individual is identical
to that other individual in every respect that is relevant in
determining a participant's benefit under the plan (including but not
limited to period of service, compensation, position, date of hire,
work history, and any other respect) except for age.\4\ In determining
whether an individual is similarly situated to another individual, any
characteristic that is relevant for determining benefits under the plan
and that is based directly or indirectly on age is disregarded. For
example, if a particular benefit formula applies to a participant on
account of the participant's age, an individual to whom the benefit
formula does not apply and who is identical to a participant in all
respects other than age is similarly situated to the participant. By
contrast, an individual is not similarly situated to a participant if a
different benefit formula applies to the individual and the application
of the different formula is based neither directly nor indirectly on
age.
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\4\ For example, if a plan provides for an election extended to
all participants that affects a participant's accumulated benefit,
then someone who makes such an election is similarly situated to a
participant who makes such an election, and someone who does not
make an election is similarly situated to a participant who does not
make such an election.
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The comparison of accumulated benefits is made without regard to
any subsidized portion of any early retirement benefit that is included
in a participant's accumulated benefit. For this purpose, the
subsidized portion of an early retirement benefit is the retirement-
type subsidy within the meaning of Sec. 1.411(d)-3(g)(6) that is
contingent on a participant's severance from employment and
commencement of benefits before normal retirement age.
In addition, the comparison of accumulated benefits generally must
be made using the same form of benefit. Thus, the safe harbor is not
available for comparing the accumulated benefit of a participant
expressed as an annuity at normal retirement age with the accumulated
benefit of a similarly situated, younger participant expressed as a
hypothetical account balance. Nevertheless, the proposed regulations
would permit a plan that provides the sum of benefits that are
expressed in two or more different forms of benefit to satisfy the safe
harbor if the plan would separately satisfy the safe harbor for each
separate form of benefit. Similarly, the proposed regulations would
permit a plan that provides the greater of benefits that are expressed
in two or more different forms of benefit to satisfy the safe harbor if
the plan would separately satisfy the safe harbor for each separate
form of benefit. For this purpose, a similarly situated, younger
participant is treated as having an accumulated benefit of zero with
respect to a benefit formula that does not apply to the participant.
Thus, the safe harbor would be available if an older participant is
entitled to benefits under more than one type of benefit formula, even
if not all of those types of benefit formulas are available to every
similarly situated participant who is younger.
The proposed regulations would reflect new section 411(b)(5)(C),
which provides that a plan is not treated as failing to meet the
requirements of section 411(b)(1)(H) solely because the plan provides
offsets of benefits under the plan to the extent such offsets are
allowable in applying the requirements under section 401 and the
applicable requirements of the Employee Retirement Income Security Act
of 1974, Public Law 93-406 (88 Stat. 829) (ERISA) and the Age
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat.
602) (ADEA). The proposed regulations incorporate the provisions of
section 411(b)(5)(D) (relating to permitted disparity under section
401(l)) without providing additional guidance.
The proposed regulations would reflect new section 411(b)(5)(E),
which
[[Page 73685]]
provides for the disregard of certain indexing of benefits for purposes
of the age discrimination rules of section 411(b)(1)(H). The proposed
regulations limit the disregard of indexing to formulas under defined
benefit plans other than lump sum-based formulas. In addition, the
proposed regulations limit the disregard of indexing to situations in
which the extent of the indexing for a participant would not be less
than the indexing applicable to a similarly situated, younger
participant. Thus, the disregard of indexing is only available if the
indexing is neither terminated nor reduced on account of the attainment
of any age.
Section 411(b)(5)(E) requires that the indexing methodology be a
recognized methodology. The proposed regulations would treat only the
following indexing methodologies as recognized for this purpose:
indexing using an eligible cost-of-living index as described in Sec.
1.401(a)(9)-6, A-14(b); indexing using the rate of return on the
aggregate assets of the plan; and indexing using the rate of return on
the annuity contract for the employee issued by an insurance company
licensed under the laws of a State.
Under the proposed regulations, the section 411(b)(5)(E)(ii)
protection against loss (``no-loss'') requirement for an indexed plan
(which provides that the indexing not result in a smaller accrued
benefit) would be implemented by applying the ``preservation of
capital'' rule of section 411(b)(5)(b)(i)(II) to indexed plans. (The
preservation of capital rule is discussed in this preamble paragraph
heading ``C. Market rate of return limitation.'') For this purpose, the
exemption from the application of the no-loss rule for variable
annuities would be limited to situations in which the variable annuity
adjustment is based on the rate of return on the aggregate assets of
the plan or the annuity contract. Thus, the exemption from the
application of the no-loss rule would not apply if the variable annuity
adjustment is based on the rate of return of a portion of the assets of
the plan. In addition, this exemption would also apply for purposes of
the preservation of capital requirement that applies to statutory
hybrid plans.
B. Conversion Protection
The regulations would provide guidance on the new conversion
protections under section 411(b)(5)(B)(ii), (iii), and (iv). Under the
proposed regulations, a participant whose benefits are affected by a
conversion amendment which occurred after June 29, 2005, must generally
be provided with a benefit after the conversion that is at least equal
to the sum of the benefits accrued through the date of the conversion
and benefits earned after the conversion, with no permitted interaction
between these two portions. This would assure participants that there
will be no ``wear-away'' as a result of a conversion, both with respect
to the participant's accrued benefits and any early retirement subsidy
to which the participant is entitled based on the pre-conversion
benefits.
The proposed regulations would provide an alternative mechanism
under which the plan provides for the establishment of an opening
hypothetical account balance as part of the conversion and keeps
separate track of (1) The opening hypothetical account balance and
interest credits attributable thereto, and (2) The post-conversion
hypothetical contributions and interest credits attributable thereto.
Under this alternative, the plan must provide that, when a participant
commences benefits, the plan will determine whether the benefit
attributable to the opening hypothetical account payable in the
particular optional form of benefit selected is greater than or equal
to the benefit accrued under the plan prior to the date of conversion
and payable in the same generalized optional form of benefit (within
the meaning of Sec. 1.411(d)-3(g)(8)) at the same annuity starting
date. For example, if a participant elects a straight life annuity
payable at age 60, the plan must determine if the straight life annuity
payable at age 60 that is attributable to the opening hypothetical
account balance is greater than or equal to the straight life annuity
payable at age 60 based on service prior to the conversion and
determined under the terms of the pre-conversion plan. If the benefit
attributable to the opening hypothetical account balance is greater,
then the plan must provide that such benefit is paid in lieu of the
pre-conversion benefit together with the benefit attributable to post-
conversion contribution credits. If the benefit attributable to the
opening hypothetical account balance is less, then the plan must
provide that such benefit will be increased sufficiently to provide the
pre-conversion benefit. In such a case, the participant must also be
entitled to the benefit attributable to post-conversion contribution
credits.
The proposed regulations would provide that, if an optional form of
benefit is available on the annuity starting date with respect to the
benefit attributable to the opening hypothetical account balance or
opening accumulated percentage, but no optional form within the same
generalized optional form of benefit was available at that annuity
starting date under the terms of a plan as in effect immediately prior
to the effective date of the conversion amendment, then the comparison
must still be made by assuming that the pre-conversion plan had such an
optional form of benefit. For example, if the pre-conversion plan did
not provide for a single sum distribution option, the alternative would
require that any single sum distribution option that is attributable to
the opening hypothetical account balance be greater than or equal to
the present value of the pre-conversion benefit, where present value is
determined in accordance with section 417(e).
The IRS and the Treasury Department are seeking comments on another
alternative means of satisfying the conversion requirements that would
involve establishing an opening hypothetical account balance, but in
limited situations would not require the subsequent comparison. Any
such alternative would be permitted only if it were designed to provide
adequate protection to participants in plans that adopt conversion
amendments. For example, such an alternative might be limited to
situations in which the participant elects a single sum distribution,
and where the pre-conversion plan either did not provide a single sum
option or had a single sum option that was based on the benefit payable
at normal retirement age (rather than the benefit payable at early
retirement age). In those situations, the alternative might provide
that the comparison is not necessary if (1) The opening hypothetical
account balance is equal to the present value of the pre-conversion
benefit determined in accordance with section 417(e), (2) The interest
credits on the opening hypothetical account balance are reasonably
expected to be no lower than the interest rate used to determine the
opening hypothetical account balance, and (3) Either the plan provides
a death benefit equal to the hypothetical account balance or no pre-
retirement mortality decrement is applied in establishing the opening
hypothetical account balance. Such an alternative could result in a
single sum distribution attributable to the pre-conversion benefit that
is lower, or higher, than the present value of the pre-conversion
benefit, depending on whether the actual interest credits applicable to
the opening hypothetical account balance during the interim are lower,
or higher, than the interest rate used in determining the opening
hypothetical account balance and whether the
[[Page 73686]]
applicable interest rate and applicable mortality table under section
417(e)(3) have changed in the interim.
The proposed regulations also would provide guidance on what
constitutes a conversion amendment under section 411(b)(5)(B)(v). Under
the proposed regulations, whether an amendment is a conversion
amendment is determined on a participant-by-participant basis. The
proposed regulations would provide that an amendment (or amendments) is
a conversion amendment with respect to a participant if it meets two
criteria: (1) The amendment reduces or eliminates the benefits that,
but for the amendment, the participant would have accrued after the
effective date of the amendment under a benefit formula that is not a
statutory hybrid benefit formula and under which the participant was
accruing benefits prior to the amendment, and (2) After the effective
date of the amendment, all or a portion of the participant's benefit
accruals under the plan are determined under a statutory hybrid benefit
formula.
The proposed regulations would provide that only amendments that
reduce or eliminate accrued benefits described in section 411(a)(7), or
retirement-type subsidies described in section 411(d)(6)(B)(i), that
would otherwise accrue as a result of future service are treated as
amendments that reduce or eliminate the participant's benefits that
would have accrued after the effective date of the amendment under a
benefit formula that is not a statutory hybrid benefit formula. Under
the proposed regulations, a plan is treated as having been amended for
this purpose if, under the terms of the plan, a change in the
conditions of a participant's employment results in a reduction or
elimination of the benefits that the participant would have accrued in
the future under a benefit formula that is not a statutory hybrid
benefit formula (for example, a job transfer from an operating division
covered by a non-statutory hybrid defined benefit plan to an operating
division that is covered by a cash balance formula). However, in the
absence of coordination between the formulas, the special requirements
for conversion amendments typically will be satisfied automatically.
The proposed regulations would provide rules prohibiting the
avoidance of the conversion protections through the use of multiple
plans or multiple employers. Under the proposed regulations, an
employer is treated as having adopted a conversion amendment if the
employer adopts an amendment under which a participant's benefits under
a plan that is not a statutory hybrid plan are coordinated with a
separate plan that is a statutory hybrid plan, such as through a
reduction (offset) of the benefit under the plan that is not a
statutory hybrid plan. In addition, if an employee's employer changes
as a result of a merger, acquisition, or other transaction described in
Sec. 1.410(b)-2(f), then the two employers would be treated as a
single employer for this purpose. Thus, for example, in an acquisition,
if the buyer adopts an amendment to its statutory hybrid plan under
which a participant's benefits under the seller's plan (that is not a
statutory hybrid plan) are coordinated with benefits under the buyer's
plan, such as through a reduction (offset) of the buyer's plan
benefits, the seller and buyer would be treated as a single employer
and as having adopted a conversion amendment. However, if there is no
coordination between the plans, there is no conversion amendment.
The proposed regulations would provide that a conversion amendment
also includes multiple amendments that result in a conversion
amendment, even if the amendments would not be conversion amendments
individually. Under the proposed regulations, if an amendment to
provide a benefit under a statutory hybrid benefit formula is adopted
within 3 years after adoption of an amendment to reduce non-statutory
hybrid benefit formula benefits, then those amendments would be
consolidated in determining whether a conversion amendment has been
adopted. In the case of an amendment to provide a benefit under a
statutory hybrid benefit formula that is adopted more than 3 years
after adoption of an amendment to reduce non-statutory hybrid benefit
formula benefits, there would be a presumption that the amendments are
not consolidated unless the facts and circumstances indicate that
adoption of an amendment to provide a statutory hybrid benefit formula
was intended at the time of the reduction in the non-statutory hybrid
benefit formula.
The proposed regulations would provide that the effective date of a
conversion amendment is, with respect to a participant, the date as of
which the reduction occurs of the benefits that the participant would
have accrued after the effective date of the amendment under a benefit
formula that is not a statutory hybrid benefit formula. In accordance
with section 411(d)(6), the proposed regulations would provide that the
date of a reduction of those benefits cannot be earlier than the date
of adoption of the conversion amendment.
C. Market Rate of Return Limitation
The proposed regulations would reflect the rule in section
411(b)(5)(B)(i)(I) under which a statutory hybrid plan is treated as
failing to satisfy section 411(b)(1)(H) if it provides an interest
crediting rate that is in excess of a market rate of return. The
proposed regulations would define an interest crediting rate as the
rate by which a participant's benefit is increased under the ongoing
terms of a plan to the extent the amount of the increase is not
conditioned on current service, regardless of how the amount of that
increase is calculated. Thus, whether the amount is an interest credit
for this purpose is determined without regard to whether the amount is
calculated by reference to a rate of interest, a rate of return, an
index, or otherwise.
The proposed regulations would require a plan to specify the timing
for determining the plan's interest crediting rate that will apply for
each plan year (or portion of a plan year) using one of two permitted
methods--either pursuant to a daily interest crediting rate based on
permissible interest crediting rates specified in the proposed
regulations, or pursuant to a specified lookback month and stability
period. For this purpose, the plan's lookback month and stability
period must satisfy the rules for selecting the lookback month and
stability period under Sec. 1.417(e)-1(d)(4). However, the stability
period and lookback month need not be the same as those used under the
plan for purposes of section 417(e)(3).
In addition, the proposed regulations would require a plan to
specify the periodic (at least annual) frequency at which interest
credits are made under the plan. If, under a plan, interest is credited
more frequently than annually (for example, monthly or quarterly), then
the interest credit for that period must be a pro rata portion of the
annual interest credit. Thus, for example, in the case of a plan the
terms of which provide for interest to be credited at an interest
crediting rate that would be permitted under the proposed regulations,
if the plan provides for monthly interest credits and if the interest
rate for a plan year has a value of 6 percent, then the accumulated
benefits at the beginning of each month would be increased by 0.5
percent per month during the plan year. The proposed regulations would
provide that interest credits are not treated as creating an effective
rate of return in excess of a market rate of return merely because an
otherwise permissible
[[Page 73687]]
interest crediting rate is compounded more frequently than annually.
The proposed regulations would provide that an interest crediting
rate for a plan year is not in excess of a market rate of return if it
is based on specified indices. As in Notice 2007-6, these include the
safe harbor rates described in Notice 96-8, the interest rates on 30-
Year Treasury securities, and the rate of interest on long-term
investment grade corporate bonds (as described in section
412(b)(5)(B)(ii)(II) prior to amendment by PPA '06 for plan years
beginning before January 1, 2008, and the third-segment bond rate used
under section 430 for subsequent plan years). For this purpose, the
third-segment bond rate is permitted to be determined with or without
regard to the transition rules of section 430(h)(2)(G).
These rates would be required to change on at least an annual
basis.\5\ These rates are market yields to maturity on outstanding
bonds and do not reflect the change in the market value of an
outstanding bond as a result of future changes in the interest rate
environment or in a bond issuer's risk profile.\6\ As noted in the
preceding paragraph, the proposed rules generally are similar to those
described in Notice 2007-6 but do not provide guidance on a number of
issues related to market rate of return. It is expected that these
issues will be addressed in the first part of 2008.
---------------------------------------------------------------------------
\5\ The requirement that an interest crediting rate change not
less frequently than annually is intended to distinguish these rates
from fixed rates, which are discussed later in this preamble. See
also Sec. 31.3121(v)(2)-1(d)(2)(i)(C)(2) of the Employment Tax
Regulations, which permits a rate to be fixed for up to 5 years.
\6\ Because this interest rate does not reflect the change in
the market value of an outstanding bond when an issuer becomes
higher risk or the bond goes into default, the bonds have been
limited to investment grade bonds in the top three quality levels
where the risk of default is small.
---------------------------------------------------------------------------
The proposed regulations would reflect the preservation of capital
rule in section 411(b)(5)(B)(i)(II) that requires a statutory hybrid
plan to provide that interest credits will not result in a hypothetical
account balance (or similar amount) being less than the aggregate
amount of the hypothetical allocations. Under the proposed regulations,
this requirement would be applied at the participant's annuity starting
date. In addition, the proposed regulations would provide that the
combination of this preservation of capital protection with a rate of
return which otherwise satisfies the market rate of return limitation
will not result in an effective interest crediting rate that is in
excess of a market rate of return.
While the second sentence of section 411(b)(5)(B)(i)(I) provides
that a statutory hybrid plan is not treated as having an above-market
rate merely because the plan provides for a reasonable minimum
guaranteed rate of return or for a rate of return that is equal to the
greater of a fixed or variable rate of return, these proposed
regulations do not provide guidance for these alternatives. Moreover,
the presence of a preservation of capital requirement indicates that
Congress considered that a rate of return that could be negative in
some years (such as a rate of return on an equity portfolio) could be
permissible. However, as discussed in the following paragraphs, the
Treasury Department and the IRS have concerns that the use of a minimum
guaranteed rate of return or the use of the greater of a fixed and a
variable rate could result in effective interest crediting rates that
are above market rates of return and are soliciting comments on how to
avoid that result.
Some commentators have suggested that it should be acceptable for a
plan to adopt a fixed interest crediting rate that would apply without
regard to changes in the interest rate environment. This is
particularly important where the plan provides for hypothetical
contributions that increase with age or service and the plan needs a
minimum interest crediting rate in order to satisfy the accrual rules
of section 411(b). While this issue is reserved under these proposed
regulations, the approach suggested by commentators could be
accomplished in two different ways. Under one possibility, the
regulations might set forth a specific interest crediting rate (such as
4 percent or 5 percent) that a plan may be permitted to use. Under an
alternative approach, the regulations might set forth a permitted
methodology under which a plan would be permitted to establish a fixed
interest crediting rate based on the then-applicable level of a
permissible rate, such as the 3rd segment rate. For example, if the 3rd
segment rate were 5.5 percent at the time the fixed rate is established
under the plan, then under the alternative approach the plan might be
permitted to fix the interest crediting rate at 5.5 percent. Comments
are requested on these alternatives. In particular, comments are
requested as to rules that the regulations could set forth that would
avoid the potential for the fixed rate to be established at a time when
interest rates are unusually high, such as occurred in the early 1980s.
With respect to the option for a plan to use an interest crediting
rate that is the greater of a fixed or variable interest rate, the
Treasury Department and the IRS believe that the interaction between
the two interest rates must be taken into account in determining
whether the effective interest crediting rate under a plan which
provides an interest crediting rate that is equal to the greater of a
fixed or variable interest rate is above a market rate of return.
Whether a statutory hybrid plan that is providing interest credits
based on the greater of a fixed or variable interest rate effectively
provides an interest crediting rate that exceeds a market rate of
return depends on a number of factors, including how high the fixed
interest rate is, how frequently the ``greater of'' determination is
applied, and the volatility of the variable interest rate.
As noted earlier, the proposed regulations would provide that
including the preservation of capital rule does not cause the plan's
effective interest crediting rate to be in excess of a market rate of
return. This rule reflects the fact that the minimum rate under the
preservation of capital rule is an interest rate of 0 percent which is
applied on a one-time basis at the annuity starting date, and is
premised on the expectation that the variable rate would rarely be
negative for extended periods of time (so that the inclusion of the
capital preservation rule should not significantly increase the
effective rate of return under the plan). If the variable rate is the
rate of interest on bonds that would be permitted under the proposed
regulations, then that expectation is easily met.
By contrast, if the variable interest rate is the rate of return on
an equity investment, the expectation that the capital preservation
rule does not significantly increase the effective interest crediting
rate is only applicable if the equity investment is a well-diversified
portfolio. This is because a well-diversified portfolio should have
sufficiently limited volatility so that the inclusion of the
preservation of capital rule should not significantly increase the
effective rate of return resulting from interest credits that are based
on that portfolio. Accordingly, if the regulations were to permit the
use of an interest crediting rate based on an asset portfolio as an
interest credit, the regulations might limit the choice of portfolio to
the actual plan assets (relying on the fiduciary rules to ensure that
the portfolio is adequately diversified). Of course, any such
regulations would only permit the use of an interest crediting rate
based on an asset portfolio if the use of such a rate is prospective
and is selected before the period during which the rate is determined.
[[Page 73688]]
Comments are requested on what other asset portfolios have
sufficiently constrained volatility that they should be permitted to
form the basis of a market rate of return for interest crediting under
a statutory hybrid plan and whether it is appropriate to base an
interest crediting rate on the value of an index. For example, are the
assets under a regulated investment company (RIC) described in section
851 sufficiently diversified such that a statutory hybrid plan will not
be treated as providing an effective interest crediting rate in excess
of a market rate of return where it credits interest based on the rate
of return on the RIC and also provides for the preservation of capital
(as required for a statutory hybrid plan under section
411(b)(5)(B)(i)(II))? Similarly, if a statutory hybrid plan credits
interest based on the rate of return on an equity index that is not a
narrow-based equity index (as defined under section 3(a)(55) of the
Securities Exchange Act of 1934) and which also provides for the
preservation of capital, is the plan providing an interest crediting
rate that is not in excess of a market rate of return?
If the determination of the greater of a fixed interest crediting
rate and a variable interest crediting rate is made more frequently
than required to comply with the capital preservation rule, the added
frequency is more likely to result in an effective interest crediting
rate that is in excess of a market rate of return. For example, if a
statutory hybrid plan were to credit interest each day based on the
greater of the actual rate of return on the plan assets for that day or
0 percent, the effective interest crediting rate would be far in excess
of a market rate of return.
The Treasury Department and the IRS are considering providing that
a plan will not have an effective interest crediting rate in excess of
a market rate of return merely because it provides annual interest
credits based on the greater of a reasonable fixed rate (such as 3
percent or 4 percent) and one of the rates of interest set forth in the
proposed regulations. However, if a statutory hybrid plan were to
provide interest credits based on the greater of a fixed rate
(including a fixed rate of 0 percent) and the rate of return on plan
assets or the value of an equity-based index, determined on an annual
basis, then the effective interest crediting rate would typically be in
excess of a market interest rate. Comments are requested on what types
of reductions to the variable rate would be appropriate in order to
ensure that the effective interest crediting rate under these
situations does not exceed a market rate of return. In addition,
comments are requested on whether regulations should establish
reductions in these situations where the determination of whether the
fixed or variable interest crediting rate is greater is made more
frequently than annually.
Pending issuance of guidance addressing this issue, plan sponsors
should be cautious in adopting interest crediting rates other than
those explicitly permitted in these proposed regulations. If such a
rate were adopted, and it did not satisfy the requirement not to be in
excess of a market rate of return under rules provided in future
guidance, the rate would have to be reduced in order to satisfy the
requirement.
The proposed regulations would provide that, to the extent that
interest credits (or equivalent amounts) have accrued under the terms
of a statutory hybrid plan, section 411(d)(6) is violated by a plan
amendment that changes the interest crediting rate if the revised rate
under any circumstances could result in a lower rate of return after
the applicable amendment date of the plan amendment. An exception is
provided that would permit certain changes in a plan's interest
crediting rate without violating section 411(d)(6). Under this
exception, the proposed regulations would permit an amendment to change
the plan's interest crediting rate for future periods from the safe
harbor market rates of interest (for example, rates based on eligible
cost-of-living indices, or rates based on Treasury bonds with the
margins specified in the proposed regulations) to the rate of interest
on long-term investment grade corporate bonds. Such a change would not
constitute a reduction in accrued benefits in violation of section
411(d)(6) because it is expected that the change would result in a
reduction only in rare and unusual circumstances, and the change would
be permitted only if the amendment is effective not less than 30 days
after adoption and, on the effective date of the amendment, the new
interest crediting rate is not less than the interest crediting rate
that would have applied in the absence of the amendment. In addition,
the IRS and the Treasury Department may provide additional guidance
regarding changes to the ongoing interest crediting rate under a plan
that would or would not constitute a reduction of accrued benefits in
violation of section 411(d)(6).
Pension Equity Plans (PEPs)
These proposed regulations do not include any rules specifically
relating to plans that are often referred to as pension equity plans,
or PEPs (other than defining a participant's accumulated benefit under
a PEP as the accumulated percentage of final average compensation).
Notice 2007-6 requested comments on the application of qualification
requirements other than sections 411(b)(1)(H) and 417(e) to such plans,
including the treatment of interest credited with respect to terminated
vested participants. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
The IRS and the Treasury Department have received a number of comments
pursuant to this request. These comments indicate that, apart from
determining the accumulated benefit as a percentage of final average
compensation, this design often provides explicit or implicit interest
credits by determining the normal retirement benefit to be: (1) The
accumulated percentage of final average compensation divided by a
deferred annuity factor (thus implicitly providing interest and
mortality credits for deferred benefits); or (2) The lesser of (a) the
current single sum benefit projected to normal retirement age and using
an interest rate set forth in the plan or (b) the projected single sum
benefit based on projected service to normal retirement age (taking
into account the plan's formula for the accumulated percentage of final
average compensation without salary increases), with the lesser of
these two amounts converted to an annuity. The right to future interest
credits under these designs is earned at the same time as the related
percentage of final average compensation; however, the comments
indicated that the interest typically commences only after active
participation ceases.
The IRS and the Treasury Department will continue to evaluate
comments received regarding PEPs and are focusing on the following
questions in situations where the interest credit is credited only
after active participation ceases:
Are these designs properly treated as plans under which
the accrued benefit is expressed ``as an accumulated percentage of the
participant's final average compensation'' within the meaning of
section 411(a)(13)(A)? After the date on which interest credits
commence, should these designs be treated as plans under which the
accrued benefit is expressed ``as the balance of a hypothetical
account'' within the meaning of section 411(a)(13)(A)?
Do any of the designs in (1) or (2) of the preceding
paragraph provide for a lower rate of accrual for additional years of
service (because no interest is credited if service is continued)? See
[[Page 73689]]
section 411(b)(1)(G). Alternatively, can this issue be avoided by
treating the annual rate at which the normal retirement benefit accrues
as declining with each additional year of service?
How should the backloading rules of section 411(b)(1)(A)-
(C) apply to these designs and do they raise issues on which comments
were requested in Notice 2007-14 (2007-7 IRB 501)? See Sec.
601.601(d)(2)(ii)(b) of this chapter.
Section 1107 of PPA '06 and Code Section 411(d)(6)
Under section 1107 of PPA '06, a plan sponsor is permitted to delay
adopting a plan amendment pursuant to statutory provisions under PPA
'06 (or pursuant to any regulation issued under PPA '06) until the last
day of the first plan year beginning on or after January 1, 2009
(January 1, 2011 in the case of governmental plans). As described in
Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to
both interim and discretionary amendments that are made pursuant to PPA
'06 statutory provisions or any regulation issued under PPA '06. See
Sec. 601.601(d)(2)(ii)(b) of this chapter. If section 1107 of PPA '06
applies to an amendment of a plan, section 1107 provides that the plan
does not fail to meet the requirements of section 411(d)(6) by reason
of such amendment, except as provided by the Secretary of the
Treasury.\7\
---------------------------------------------------------------------------
\7\ Except to the extent permitted under section 411(d)(6) and
Sec. Sec. 1.411(d)-3 and 1.411(d)-4, or under a statutory provision
such as section 1107 of PPA '06, section 411(d)(6) prohibits a plan
amendment that decreases a participant's accrued benefits or that
has the effect of eliminating or reducing an early retirement
benefit or retirement-type subsidy, or eliminating an optional form
of benefit, with respect to benefits attributable to service before
the amendment. However, an amendment that eliminates or decreases
benefits that have not yet accrued does not violate section
411(d)(6), provided that the amendment is adopted and effective
before the benefits accrue.
---------------------------------------------------------------------------
The IRS and the Treasury Department are considering whether relief
from section 411(d)(6) should be provided for particular amendments
that would be made pursuant to section 701 of PPA '06 or these proposed
regulations. In the following provisions of this section of the
preamble, the IRS and the Treasury Department have set forth a
description of amendments that are and are not entitled to section
411(d)(6) relief. Comments are requested on whether section 411(d)(6)
relief is or is not appropriate for any additional amendments related
to section 701 of PPA '06 or these proposed regulations.
Until further guidance is provided by the IRS and the Treasury
Department, section 411(d)(6) relief is not available for the following
amendments that are described in section 1107 of PPA '06:
A conversion amendment where the effective date of the
reduction in benefits that a participant, but for the amendment, would
have accrued under a benefit formula that is not a statutory hybrid
benefit formula is earlier than the date of adoption of the reduction
amendment.
An amendment that reduces a participant's hypothetical
account balance or accumulated percentage of final average compensation
below the amount on the date the amendment is adopted.
An amendment to change the interest crediting rate from
one of the rates specified in Notice 96-8 using a margin that is less
than or equal to the maximum margin for that rate to the same or
another rate specified in Notice 96-8 with an associated margin where
the excess (if any) of the maximum margin under the second rate over
the margin used for that second rate exceeds the excess (if any) of the
maximum margin under the first rate over the margin used for that first
rate.
Until further guidance is provided by the IRS and the Treasury
Department, section 411(d)(6) is available for the following amendments
that are described in section 1107 of PPA '06:
As provided in Notice 2007-6, in the case of a plan that
provides for a single sum distribution to a participant that exceeds
the participant's hypothetical account balance or accumulated
percentage of final average compensation, the plan may be amended to
eliminate the excess for distributions made after August 17, 2006. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
An amendment to change the interest crediting rate from
one of the rates specified in Notice 96-8 using a margin that is less
than or equal to the maximum margin for that rate to one of the other
rates specified in Notice 96-8 with an associated margin where the
excess (if any) of the maximum margin under the second rate over the
margin used for that second rate does not exceed the excess (if any) of
the maximum margin under the first rate over the margin used for that
first rate.
These rules under section 1107 of PPA '06 will be reflected in
future guidance on the market rate of return rules under section
411(b)(5)(B)(i). The IRS and the Treasury Department expect that
section 411(d)(6) relief under section 1107 of PPA '06 will be
available in the case of an amendment pursuant to that future guidance
to change a plan's interest crediting rate (including credits on pre-
August 18, 2006 accruals) from an interest rate that is above a market
rate of return to an interest rate that constitutes a market rate of
return, provided that any retroactive change in the crediting rate does
not apply for periods before the date that section 411(b)(5)(B)(i)
first applies to the plan. In addition, to the extent permitted under
future guidance, the IRS and the Treasury Department expect that
section 411(d)(6) relief under section 1107 of PPA '06 will be
available in the case of an amendment to change the plan's interest
crediting rate to a rate that is expected to be higher than the plan's
current rate (such as an amendment to change to an equity-based rate of
return).
Effective/Applicability Dates
Pursuant to section 701(e)(1) of PPA '06, the amendments made by
section 701 of PPA '06 are generally effective for periods beginning on
or after June 29, 2005. However, sections 701(e)(2) through 701(e)(5)
of PPA '06 set forth a number of special effective/applicability date
rules that are described earlier in the Background section of the
preamble of these proposed regulations.
These proposed regulations reflect the statutory effective dates
set forth in section 701(e) of PPA '06. Thus, the proposed regulations
would reflect that section 411(a)(13)(A) applies to distributions made
after August 17, 2006. In addition, the proposed regulations would
reflect that, in the case of a plan that is in existence on June 29,
2005, section 411(a)(13)(B) applies to plan years beginning on or after
January 1, 2008. At the date of issuance of these proposed regulations,
bills have been introduced in the House of Representatives and the
Senate which provide that (1) section 411(a)(13)(B) only applies to a
participant who performs at least one hour of service on or after the
effective date of section 411(a)(13)(B) with respect to the plan, and
(2) in the case of a plan other than a plan described in section
701(e)(3) or 701(e)(4) of PPA '06, section 411(a)(13)(B) applies to
years ending on or after June 29, 2005.\8\ Proposed Sec. 1.411(a)(13)-
1(e)(1)(iii)(A)(2 ) and Sec. 1.411(a)(13)-1(e)(1)(iii)(B)(2 ) have
been reserved in order to accommodate these changes.
---------------------------------------------------------------------------
\8\ H.R. 3361 (Aug. 3, 2007) and S. 1974 (Aug. 2, 2007), at
section 8(3)(B)(iv).
---------------------------------------------------------------------------
These regulations are proposed to be effective for plan years
beginning on or after January 1, 2009 (or, if later, the date that
applies to certain collectively bargained plans pursuant to section
701(e)(4) of PPA '06). For periods after the statutory effective date
and before
[[Page 73690]]
the regulatory effective date set forth in the preceding sentence, a
plan must comply with sections 411(a)(13) and 411(b)(5). During these
periods, a plan is permitted to rely on the provisions set forth in the
proposed regulations for purposes of satisfying the requirements of
sections 411(a)(13) and 411(b)(5).
These regulations should not be construed to create any inference
concerning the applicable law prior to the effective dates of sections
411(a)(13) and 411(b)(5). See also section 701(d) of PPA '06.
Special Analyses
It has been determined that these proposed regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (one signed and eight (8)
copies) or electronic comments that are submitted timely to the IRS.
The IRS and the Treasury Department specifically request comments
on the clarity of the proposed regulations and how they may be made
easier to understand.
In addition to the comments requested under the ``Conversion
protection'' and ``Market rate of return limitation'' headings of this
preamble (and in Part V of Notice 2007-6), comments are also requested
on issues not addressed in these proposed regulations, including:
The application of the 3-year vesting requirement in
section 411(a)(13)(B) to a plan that is not a statutory hybrid plan
when the plan is part of a floor-offset arrangement with a plan that
includes a lump sum-based benefit formula.
Whether guidance should be issued under section 411(b)(5)
as to whether a characteristic is indirectly on account of age.
Whether the age discrimination safe harbor in section
411(b)(5)(A) should be available in the case of any plan that does not
express a participant's accumulated benefit as either an annuity
payable at normal retirement age (or current age, if later), the
balance of a hypothetical account, or the current value of the
accumulated percentage of a participant's final average compensation.
All comments will be available for public inspection and copying. A
public hearing will be scheduled if requested in writing by any person
who timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place of the public hearing will be
published in the Federal Register.
Drafting Information
The principal authors of these regulations are Lauson C. Green and
Linda S. F. Marshall, Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and the Treasury Department participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.411(a)(13)-1 also issued under 26 U.S.C. 411(a)(13).
Section 1.411(b)(5)-1 also issued under 26 U.S.C. 411(b)(5). * * *
Par. 2. Section 1.411(a)(13)-1 is added to read as follows:
Sec. 1.411(a)(13)-1 Statutory hybrid plans.
(a) In general. This section sets forth certain rules that apply to
statutory hybrid plans under section 411(a)(13). Paragraph (b) of this
section describes special rules for certain statutory hybrid plans that
determine benefits under a lump sum-based benefit formula. Paragraph
(c) of this section describes the vesting requirement for statutory
hybrid plans. Paragraphs (d) and (e) of this section contain
definitions and effective/applicability dates, respectively.
(b) Calculation of benefit by reference to hypothetical account
balance or accumulated percentage. Pursuant to section 411(a)(13)(A), a
statutory hybrid plan that determines any portion of a participant's
benefits under a lump sum-based benefit formula is not treated as
failing to meet the requirements of section 411(a)(2), or the
requirements of section 411(c) or 417(e) with respect to the
participant's accrued benefit derived from employer contributions,
solely because, with respect to benefits determined under that formula,
the present value of those benefits is, under the terms of the plan,
equal to the balance of the hypothetical account maintained for the
participant or to the current value of the accumulated percentage of
the participant's final average compensation under that formula.
(c) Three-year vesting requirement--(1) In general. Pursuant to
section 411(a)(13)(B), if any portion of the participant's accrued
benefit under a defined benefit plan is determined under a statutory
hybrid benefit formula, the plan is not treated as meeting the
requirements of section 411(a)(2) unless the plan provides that the
participant has a nonforfeitable right to 100 percent of the
participant's accrued benefit if the participant has 3 or more years of
service. Thus, this 3-year vesting requirement applies with respect to
the entire accrued benefit of a participant under a defined benefit
plan even if only a portion of the participant's accrued benefit under
the plan is determined under a statutory hybrid benefit formula.
Similarly, if the participant's accrued benefit under a defined benefit
plan is, under the plan's terms, the larger of two (or more) benefit
amounts, where each amount is determined under a different benefit
formula (including a benefit determined pursuant to an offset among
formulas within the plan) and at least one of those formulas is a
statutory hybrid benefit formula, the participant's entire accrued
benefit under the defined benefit plan is subject to the 3-year vesting
rule of section 411(a)(13)(B) and this paragraph (c). The rule
described in the preceding sentence applies even if the larger benefit
is ultimately the benefit determined under a formula that is not a
statutory hybrid benefit formula.
(2) Floor-offset arrangements involving a statutory hybrid plan.
[Reserved]
(3) Examples. The provisions of this paragraph (c) are illustrated
by the following examples:
Example 1. Employer M sponsors Plan X, pursuant to which each
participant's accrued benefit is equal to the sum of the benefit
provided under two benefit formulas. The first benefit formula is a
statutory hybrid benefit formula, and the second formula is not.
Because a portion of each participant's
[[Page 73691]]
accrued benefit provided under Plan X is determined under a
statutory hybrid benefit formula, the 3-year vesting requirement
described in paragraph (c)(1) of this section applies to each
participant's entire accrued benefit provided under Plan X.
Example 2. The facts are the same as in Example 1, except that
the benefit formulas described in Example 1 only apply to
participants for service performed in Division A of Employer M and a
different benefit formula applies to participants for service
performed in Division B of Employer M. Pursuant to the terms of Plan
X, the accrued benefit of a participant attributable to service
performed in Division B is equal to the benefit provided by a
benefit formula that is not a statutory hybrid benefit formula.
Therefore, the 3-year vesting requirement described in paragraph
(c)(1) of this section does not apply to a participant with an
accrued benefit under Plan X if the participant's benefit is solely
attributable to service performed in Division B.
(d) Definitions--(1) In general. The definitions in this paragraph
(d) apply for purposes of this section.
(2) Lump sum-based benefit formula. The term lump sum-based benefit
formula means a lump sum-based benefit formula as defined in Sec.
1.411(b)(5)-1(e)(3).
(3) Statutory hybrid benefit formula--(i) In general. A statutory
hybrid benefit formula means a benefit formula that is either a lump
sum-based benefit formula or a formula that is not a lump sum-based
benefit formula but that has an effect similar to a lump sum-based
benefit formula.
(ii) Effect similar to a lump sum-based benefit formula. Except as
provided in paragraph (d)(3)(iii) of this section, a benefit formula
under a defined benefit plan that is not a lump sum-based benefit
formula has an effect similar to a lump sum-based benefit formula if
the formula provides that a participant's accumulated benefit (within
the meaning of Sec. 1.411(b)(5)-1(e)(2)) payable at normal retirement
age (or benefit commencement, if later) is expressed as a benefit that
includes the right to periodic adjustments (including a formula that
provides for indexed benefits under Sec. 1.411(b)(5)-1(b)(2)) that are
reasonably expected to result in a larger annual benefit at normal
retirement age (or benefit commencement, if later) for the participant
than for a similarly situated, younger individual (within the meaning
of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the
plan. A benefit formula that does not include periodic adjustments is
treated as a formula with an effect similar to a lump sum-based benefit
formula if the formula is otherwise described in the preceding sentence
and the adjustments are provided pursuant to a pattern of repeated plan
amendments. See Sec. 1.411(d)-4, A-1(c)(1).
(iii) Exceptions--(A) Post-retirement benefit adjustments. Post-
annuity starting date adjustments of the amounts payable to a
participant (such as cost-of-living increases) are disregarded in
determining whether a benefit formula under a defined benefit plan has
an effect similar to a lump sum-based benefit formula.
(B) Certain variable annuity benefit formulas. If the assumed
interest rate used for purposes of the adjustment of amounts payable to
a participant under a variable annuity benefit formula is at least 5
percent, then the adjustments under the variable annuity benefit
formula are not treated as being reasonably expected to result in a
larger annual benefit at normal retirement age (or benefit
commencement, if later) for the participant than for a similarly
situated, younger individual (within the meaning of Sec. 1.411(b)(5)-
1(b)(5)) who is or could be a participant in the plan, and thus such a
variable annuity benefit formula does not have an effect similar to a
lump sum-based benefit formula.
(C) Contributory plans. A benefit formula under a defined benefit
plan that provides for a benefit equal to the benefit properly
attributable to after-tax employee contributions does not have an
effect similar to a lump sum-based benefit formula. See section
411(c)(2) for rules for determining benefits attributable to after-tax
employee contributions.
(4) Variable annuity benefit formula. A variable annuity benefit
formula means any benefit formula under a defined benefit plan which
provides that the amount payable is periodically adjusted by reference
to the difference between the rate of return of plan assets (or
specified market indices) and a specified assumed interest rate.
(e) Effective/applicability date--(1) Statutory effective/
applicability date--(i) In general. Except as provided in paragraphs
(e)(1)(ii) and (e)(1)(iii) of this section, section 411(a)(13) applies
for periods beginning on or after June 29, 2005.
(ii) Calculation of benefits. Section 411(a)(13)(A) applies to
distributions made after August 17, 2006.
(iii) Vesting--(A) Plans in existence on June 29, 2005--(1) General
rule. In the case of a plan that is in existence on June 29, 2005
(regardless of whether the plan is a statutory hybrid plan on that
date), section 411(a)(13)(B) applies to plan years beginning on or
after January 1, 2008.
(2) Hour of service required. [Reserved]
(3) Exception for plan sponsor election. See Sec. 1.411(b)(5)-
1(f)(1)(iii)(A)(2) for a special election for early application of
section 411(a)(13)(B).
(B) Plans not in existence on June 29, 2005--(1) In general. In the
case of a plan not in existence on June 29, 2005, section 411(a)(13)(B)
applies for periods beginning on or after June 29, 2005.
(2) Hour of service required. [Reserved]
(C) Collectively bargained plans. Notwithstanding paragraphs
(e)(1)(iii)(A) and (B) of this section, in the case of a collectively
bargained plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified on or before August 17, 2006, the requirements of section
411(a)(13)(B) do not apply for plan years beginning before the earlier
of--
(1) The later of--
(i) The date on which the last of those collective bargaining
agreements terminates (determined without regard to any extension
thereof on or after August 17, 2006), or
(ii) January 1, 2008; or
(2) January 1, 2010.
(D) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan where a
collective bargaining agreement applies to some, but not all, of the
plan participants, the plan is considered a collectively bargained plan
for purposes of paragraph (e)(1)(iii)(C) of this section if at least 25
percent of the participants in the plan are members of collective
bargaining units for which the benefit levels under the plan are
specified under a collective bargaining agreement.
(2) Effective/applicability date of regulations. This section
applies for plan years beginning on or after January 1, 2009 (or, if
later, the date applicable under paragraph (e)(1)(iii)(C) of this
section). For the periods after the statutory effective date set forth
in paragraph (e)(1) of this section and before the regulatory effective
date set forth in the preceding sentence, a plan must comply with
section 411(a)(13). During these periods, a plan is permitted to rely
on the provisions of this section for purposes of satisfying the
requirements of section 411(a)(13).
Par. 3. Section 1.411(b)(5)-1 is added to read as follows:
Sec. 1.411(b)(5)-1 Reduction in rate of benefit accrual under a
defined benefit plan.
(a) In general. This section sets forth certain rules related to
reduction in the rate of benefit accrual under a defined
[[Page 73692]]
benefit plan. Paragraph (b) of this section describes certain plan
design-based safe harbors (including statutory hybrid plans) that are
deemed to satisfy the age discrimination rules under section
411(b)(1)(H). Paragraph (c) of this section describes rules relating to
statutory hybrid plan conversion amendments. Paragraph (d) of this
section describes rules restricting interest credits (or equivalent
amounts) under a statutory hybrid plan to a market rate of return.
Paragraphs (e) and (f) of this section contain definitions and
effective/applicability dates, respectively.
(b) Safe harbors for certain plan designs--(1) Accumulated benefit
testing--(i) In general. Pursuant to section 411(b)(5)(A), and subject
to paragraph (b)(1)(ii) of this section, a plan is not treated as
failing to meet the requirements of section 411(b)(1)(H)(i) if, as of
any date, the accumulated benefit of a participant would not be less
than the accumulated benefit of any similarly situated, younger
participant. This test requires a comparison of the accumulated benefit
of each individual who is or could be a participant in the plan with
the accumulated benefit of each other similarly situated, younger
individual who is or could be a participant in the plan. See paragraph
(b)(5) of this section for rules regarding whether each younger
individual who is or could be a participant is similarly situated to a
participant. The comparison described in this paragraph (b)(1)(i) is
based on--
(A) The annuity payable at normal retirement age (or current age,
if later) if the accumulated benefit of the participant under the terms
of the plan is expressed as an annuity payable at normal retirement age
(or current age, if later);
(B) The balance of a hypothetical account if the accumulated
benefit of the participant under the terms of the plan is expressed as
a hypothetical account balance; or
(C) The current value of an accumulated percentage of the
participant's final average compensation if the accumulated benefit of
the participant under the terms of the plan is expressed as an
accumulated percentage of final average compensation.
(ii) Benefit formulas for comparison--(A) In general. The safe
harbor provided by section 411(b)(5)(A) and paragraph (b)(1)(i) of this
section does not apply to a plan if the accumulated benefit of a
participant under the plan is not described in paragraph (b)(1)(i)(A),
(B), or (C) of this section. In addition, except as provided in
paragraph (b)(1)(ii)(B) of this section, that safe harbor also does not
apply to a plan if the comparison required under paragraph (b)(1)(i) of
this section involves comparing accumulated benefits that are described
in different subparagraphs of paragraph (b)(1)(i) of this section.
Thus, for example, if a plan provides an accumulated benefit that is
expressed under the terms of the plan as an annuity payable at normal
retirement age as described in paragraph (b)(1)(i)(A) of this section
for participants who are age 55 or over, and the plan provides an
accumulated benefit that is expressed as the balance of a hypothetical
account as described in paragraph (b)(1)(i)(B) of this section for
participants who are younger than age 55, the safe harbor described in
section 411(b)(5)(A) and paragraph (b)(1)(i) of this section does not
apply to the plan.
(B) Greater-of and sum-of benefit formulas. If a plan provides that
a participant's accumulated benefit is equal to the sum of accumulated
benefits that are described in different subparagraphs of paragraph
(b)(1)(i) of this section, then the plan is deemed to satisfy paragraph
(b)(1)(i) of this section if the plan satisfies the comparison
described in paragraph (b)(1)(i) of this section separately for each of
the different accumulated benefits. Similarly, if a plan provides that
a participant's accumulated benefit is equal to the greater of
accumulated benefits that are described in different subparagraphs of
paragraph (b)(1)(i) of this section, then the plan is deemed to satisfy
paragraph (b)(1)(i) of this section if the plan satisfies the
comparison described in paragraph (b)(1)(i) of this section separately
for each of the different accumulated benefits. For purposes of this
paragraph (b)(1)(ii)(B), a similarly situated, younger participant is
treated as having an accumulated benefit of zero under a benefit
formula if the benefit formula does not apply to the participant.
(iii) Disregard of certain subsidized benefits. For purposes of
paragraph (b)(1)(i) of this section, any subsidized portion of any
early retirement benefit that is included in a participant's
accumulated benefit is disregarded. For this purpose, the subsidized
portion of an early retirement benefit is the retirement-type subsidy
within the meaning of Sec. 1.411(d)-3(g)(6) that is contingent on a
participant's severance from employment and commencement of benefits
before normal retirement age.
(2) Indexed benefits--(i) In general. Except as provided in
paragraph (b)(2)(iv) of this section, pursuant to section 411(b)(5)(E)
and this paragraph (b)(2)(i), a defined benefit plan is not treated as
failing to meet the requirements of section 411(b)(1)(H) solely because
a benefit formula under the plan (other than a lump sum-based benefit
formula) provides for the periodic adjustment of accrued benefits under
the plan, but only if the adjustment is by means of the application of
a recognized investment index or methodology described in paragraph
(b)(2)(ii) of this section and the plan satisfies paragraph (b)(2)(iii)
of this section. A statutory hybrid plan that is not treated as failing
to satisfy section 411(b)(1)(H) pursuant to the preceding sentence must
nevertheless satisfy the qualification requirements otherwise
applicable to statutory hybrid plans, including the requirements of
Sec. 1.411(a)(13)-1(c) (relating to minimum vesting standards),
paragraph (c) of this section (relating to plan conversion amendments),
and paragraph (d) of this section (relating to market rates of return).
(ii) Recognized investment index or methodology. An adjustment is
made pursuant to a recognized investment index or methodology if it is
made pursuant to--
(A) An eligible cost-of-living index as described in Sec.
1.401(a)(9)-6, A-14(b);
(B) The rate of return on the aggregate assets of the plan; or
(C) The rate of return on the annuity contract for the employee
issued by an insurance company licensed under the laws of a State.
(iii) Similarly situated participant test. A plan satisfies this
paragraph (b)(2)(iii) if the aggregate periodic adjustments of each
participant's accrued benefit under the plan (determined as a
percentage of the unadjusted accrued benefit) would not be less than
the aggregate periodic adjustments of any similarly situated younger
participant. This test requires a comparison of the aggregate periodic
adjustments of each individual who is or could be a participant in the
plan for any specified period with the aggregate periodic adjustments
of each other similarly situated, younger individual who is or could be
a participant in the plan for the same period. See paragraph (b)(5) of
this section for rules regarding whether each younger individual who is
or could be a participant is similarly situated to a participant.
(iv) Protection against loss--(A) In general. Paragraph (b)(2)(i)
of this section does not apply unless the plan satisfies section
411(b)(5)(E)(ii) and paragraph (d)(2)(ii) of this section (relating to
preservation of capital).
(B) Exception for variable annuity benefit formulas. The
requirement to
[[Page 73693]]
satisfy section 411(b)(5)(E)(ii) and paragraph (d)(2)(ii) of this
section does not apply in the case of a benefit provided under a
variable annuity benefit formula, but only if the adjustments under the
variable annuity benefit formula are based on the rate of return on the
aggregate assets of the plan or the rate of return on the annuity
contract for the employee issued by an insurance company licensed under
the laws of a State.
(3) Certain offsets permitted. A plan is not treated as failing to
meet the requirements of section 411(b)(1)(H) solely because the plan
provides offsets against benefits under the plan to the extent the
offsets are allowable in applying the requirements of section 401(a)
and the applicable requirements of the Employee Retirement Income
Security Act of 1974, Public Law 93-406 (88 Stat. 829), and the Age
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat.
602).
(4) Permitted disparities in plan contributions or benefits. A plan
is not treated as failing to meet the requirements of section
411(b)(1)(H) solely because the plan provides a disparity in
contributions or benefits with respect to which the requirements of
section 401(l) are met.
(5) Definition of similarly situated. For purposes of paragraphs
(b)(1) and (b)(2) of this section, an individual is similarly situated
to another individual if the individual is identical to that other
individual in every respect that is relevant in determining a
participant's benefit under the plan (including period of service,
compensation, position, date of hire, work history, and any other
respect) except for age. In determining whether an individual is
similarly situated to another individual, any characteristic that is
relevant for determining benefits under the plan and that is based
directly or indirectly on age is disregarded. For example, if a
particular benefit formula applies to a participant on account of the
participant's age, an individual to whom the benefit formula does not
apply and who is identical to the participant in all other respects is
similarly situated to the participant. By contrast, an individual is
not similarly situated to a participant if a different benefit formula
applies to the individual and the application of the different formula
is not based directly or indirectly on age.
(c) Special rules for plan conversion amendments--(1) In general.
Pursuant to section 411(b)(5)(B)(ii), (iii), and (iv), if there is a
conversion amendment within the meaning of paragraph (c)(4) of this
section with respect to a defined benefit plan, then the plan is
treated as failing to meet the requirements of section 411(b)(1)(H)
unless the plan, after the amendment, satisfies the requirements of
paragraph (c)(2) of this section.
(2) Separate calculation of post-conversion benefit--(i) In
general. A statutory hybrid plan satisfies the requirements of this
paragraph (c)(2) if the plan provides that, in the case of an
individual who was a participant in the plan immediately before the
date of adoption of the conversion amendment, the participant's benefit
at any subsequent annuity starting date is not less than the sum of:
(A) The participant's section 411(d)(6) protected benefit (as
defined in Sec. 1.411(d)-3(g)(14)) with respect to service before the
effective date of the conversion amendment, determined under the terms
of the plan as in effect immediately before the effective date of the
amendment; and
(B) The participant's section 411(d)(6) protected benefit with
respect to service on and after the effective date of the conversion
amendment, determined under the terms of the plan as in effect after
the effective date of the amendment.
(ii) Rules of application. For purposes of this paragraph (c)(2),
except as provided in paragraph (c)(3) of this section, the benefits
under paragraph (c)(2)(i)(A) and (B) of this section must each be
determined in the same manner as if they were provided under separate
plans that are independent of each other (for example, without any
benefit offsets), and, except to the extent permitted under Sec.
1.411(d)-3 or Sec. 1.411(d)-4 (or other applicable law), each optional
form of payment provided under the terms of the plan with respect to a
participant's section 411(d)(6) protected benefit as in effect before
the amendment must be available thereafter to the extent of the plan's
benefits for service prior to the effective date of the amendment.
(3) Establishment of opening hypothetical account balance--(i) In
general. Provided that the requirements of paragraph (c)(3)(ii) of this
section are satisfied, a statutory hybrid plan under which an opening
hypothetical account balance or opening accumulated percentage of the
participant's final average compensation is established as of the
effective date of the conversion amendment does not fail to satisfy the
requirements of paragraph (c)(2) of this section merely because
benefits attributable to that opening hypothetical account balance or
opening accumulated percentage (that is, benefits that are not
described in paragraph (c)(2)(i)(B) of this section) are substituted
for benefits described in paragraph (c)(2)(i)(A) of this section.
(ii) Comparison of benefits--(A) Testing requirement. For any
optional form of benefit payable at an annuity starting date where
there was an optional form of benefit within the same generalized
optional form of benefits (within the meaning of Sec. 1.411(d)-
3(g)(8)) that would have been available to the participant at that
annuity starting date under the terms of the plan as in effect
immediately before the effective date of the conversion amendment, the
requirements of this paragraph (c)(3)(ii) are satisfied only if the
plan provides that the amount of the benefit under that optional form
of benefit available to the participant under the lump sum-based
formula that is attributable to the opening hypothetical account
balance or opening accumulated percentage as described in paragraph
(c)(3)(i) of this section, determined under the terms of the plan as of
the annuity starting date (including actuarial conversion factors), is
not less than the benefit under that optional form of benefit described
in paragraph (c)(2)(i)(A) of this section. To satisfy this requirement,
if the benefit under an optional form attributable to the opening
hypothetical account balance or opening accumulated percentage is less
than the benefit described in paragraph (c)(2)(i)(A) of this section,
then the benefit attributable to the opening hypothetical account
balance or opening accumulated percentage must be increased to the
extent necessary to provide the minimum benefit described in this
paragraph (c)(3)(ii)(A). Thus, if a plan is using the option under this
paragraph (c)(3) to satisfy paragraph (c)(2) of this section with
respect to a participant, the participant must receive a benefit equal
to not less than the sum of:
(1) The greater of the benefit attributable to the opening
hypothetical account balance as described in this paragraph (c)(3)(ii)
and the benefit described in paragraph (c)(2)(i)(A) of this section,
and
(2) The benefit described in paragraph (c)(2)(i)(B) of this
section.
(B) Special rule for post-conversion optional forms of benefit. If
an optional form of benefit is available on the annuity starting date
with respect to the benefit attributable to the opening hypothetical
account balance or opening accumulated percentage, but no optional form
within the same generalized optional form of benefit (within the
meaning of Sec. 1.411(d)-3(g)(8)) was available at that annuity
starting date under the terms of a plan as in effect immediately prior
to the effective date of the conversion
[[Page 73694]]
amendment, then, for purposes of this paragraph (c)(3)(ii), the plan is
treated as if such an optional form of benefit were available
immediately prior to the effective date of the conversion amendment. In
that event, paragraph (c)(3)(ii)(A) of this section must be applied by
taking into account the optional form of benefit that is treated as if
it were available on the annuity starting date under the terms of the
plan as in effect immediately prior to the effective date of the
conversion amendment. Thus, for example, if a single sum optional form
of payment is not available under the plan terms applicable to the
accrued benefit described in paragraph (c)(2)(i)(A) of this section,
but a single sum form of payment is available with respect to the
benefit attributable to the opening hypothetical account balance or
opening accumulated percentage as of the annuity starting date, then,
for purposes of paragraph (c)(3)(ii)(A) of this section, the plan is
treated as if a single sum (to which section 417(e)(3) applies) were
available under the terms of the plan as in effect immediately prior to
the effective date of the conversion amendment.
(4) Conversion amendment--(i) In general. An amendment is a
conversion amendment that is subject to the requirements of this
paragraph (c) with respect to a participant if--
(A) The amendment reduces or eliminates the benefits that, but for
the amendment, the participant would have accrued after the effective
date of the amendment under a benefit formula that is not a statutory
hybrid benefit formula (and under which the participant was accruing
benefits prior to the amendment); and
(B) After the effective date of the amendment, all or a portion of
the participant's benefit accruals under the plan are determined under
a statutory hybrid benefit formula.
(ii) Rules of application--(A) In general. Paragraphs (c)(4)(iii),
(iv), and (v) of this section describe special rules that treat certain
arrangements as conversion amendments. The rules described in those
paragraphs apply both separately and in combination. Thus, for example,
in an acquisition described in Sec. 1.410(b)-2(f), if the buyer adopts
an amendment under which a participant's benefits under the seller's
plan that is not a statutory hybrid plan are coordinated with a
separate plan of the buyer that is a statutory hybrid plan, such as
through an offset of the participant's benefit under the buyer's plan
by the participant's benefit under the seller's plan, the seller and
buyer are treated as a single employer under paragraph (c)(4)(iv) of
this section and they are treated as having adopted a conversion
amendment under paragraph (c)(4)(iii) of this section. However,
pursuant to paragraph (c)(4)(iii) of this section, if there is no
coordination between the two plans, there is no conversion amendment.
(B) Covered amendments. Only amendments that eliminate or reduce
accrued benefits described in section 411(a)(7), or a retirement-type
subsidy described in section 411(d)(6)(B)(i), that would otherwise
accrue as a result of future service are treated as amendments
described in paragraph (c)(4)(i)(A) of this section.
(C) Operation of plan terms treated as covered amendment. If, under
the terms of a plan, a change in the conditions of a participant's
employment results in a reduction of the participant's benefits that
would have accrued in the future under a benefit formula that is not a
statutory hybrid benefit formula, the plan is treated for purposes of
this paragraph (c)(4) as if such plan terms constitute an amendment
that reduces the participant's benefits that would have accrued after
the effective date of the change under a benefit formula that is not a
statutory hybrid benefit formula. Thus, for example, if a participant
transfers from an operating division that is covered by a non-statutory
hybrid benefit formula to an operating division that is covered by a
statutory hybrid benefit formula, there has been a conversion amendment
as of the date of the transfer.
(iii) Multiple plans. An employer is treated as having adopted a
conversion amendment if the employer adopts an amendment under which a
participant's benefits under a plan that is not a statutory hybrid plan
are coordinated with a separate plan that is a statutory hybrid plan,
such as through a reduction (offset) of the benefit under the plan that
is not a statutory hybrid plan.
(iv) Multiple employers. If the employer of an employee changes as
a result of a transaction described in Sec. 1.410(b)-2(f), then the
two employers are treated as a single employer for purposes of this
paragraph (c)(4).
(v) Multiple amendments--(A) In general--(1) General rule. For
purposes of this paragraph (c)(4), a conversion amendment includes
multiple amendments that result in a conversion amendment even if the
amendments are not conversion amendments individually. For example, an
employer is treated as having adopted a conversion amendment if the
employer first adopts an amendment described in paragraph (c)(4)(i)(A)
of this section and, at a later date, adopts an amendment that adds a
benefit under a statutory hybrid benefit formula as described in
paragraph (c)(4)(i)(B) of this section, if they are consolidated under
paragraph (c)(4)(v)(A)(2) of this section.
(2) Delay between plan amendments. In the case of an amendment to
provide a benefit under a statutory hybrid benefit formula that is
adopted within three years after adoption of an amendment to reduce
non-statutory hybrid benefit formula benefits, those amendments are
consolidated in determining whether a conversion amendment has been
adopted. Thus, the later adoption of the statutory hybrid benefit
formula will cause the earlier amendment to be treated as a conversion
amendment. In the case of an amendment to provide a benefit under a
statutory hybrid benefit formula that is adopted more than three years
after adoption of an amendment to reduce benefits under a non-statutory
hybrid benefit formula, there is a presumption that the amendments are
not consolidated unless the facts and circumstances indicate that
adoption of the amendment to provide a benefit under a statutory hybrid
benefit formula was intended at the time of reduction in the non-
statutory hybrid benefit formula.
(B) Multiple conversion amendments. If an employer adopts multiple
amendments reducing benefits described in paragraph (c)(4)(i)(A) of
this section, each amendment is treated as a separate conversion
amendment, provided that paragraph (c)(4)(i)(B) of this section is
applicable at the time of the amendment (taking into account the rules
of this paragraph (c)(4)).
(vi) Effective date of a conversion amendment. The effective date
of a conversion amendment is, with respect to a participant, the date
as of which the reduction of the participant's benefits described in
paragraph (c)(4)(i)(A) of this section occurs. In accordance with
section 411(d)(6), the date of a reduction of those benefits cannot be
earlier than the date of adoption of the conversion amendment.
(5) Examples. The following examples illustrate the application of
paragraph (c) of this section:
Example 1. (i) Facts where plan does not establish opening
hypothetical account balance for participants and participant elects
life annuity at normal retirement age. Employer N sponsors Plan E, a
defined benefit plan that provides an accumulated benefit, payable
as a straight life annuity commencing at age 65 (which is Plan E's
normal retirement age), based on a percentage of highest average
compensation
[[Page 73695]]
times the participant's years of service. Plan E permits any
participant who has had a severance from employment to elect payment
in the following optional forms of benefit (with spousal consent if
applicable), with any payment not made in a straight life annuity
converted to an equivalent form based on reasonable actuarial
assumptions: a straight life annuity; and a 50 percent, 75 percent,
or 100 percent joint and survivor annuity. The payment of benefits
may commence at any time after attainment of age 55, with an
actuarial reduction if the commencement is before normal retirement
age. In addition, the plan offers a single sum payment after
attainment of age 55 equal to the present value of the normal
retirement benefit using the applicable interest rate and mortality
table under section 417(e)(3) in effect under the terms of the plan
on the annuity starting date.
(ii) Facts relating to the conversion amendment. On January 1,
2010, Plan E is amended to eliminate future accruals under the
highest average compensation benefit formula and to base future
benefit accruals on a hypothetical account balance. For service on
or after January 1, 2010, each participant's hypothetical account
balance is credited monthly with a pay credit equal to a specified
percentage of the participant's compensation during the month and
also with interest based on the third segment rate described in
section 430(h)(2)(C)(iii). With respect to benefits under the
hypothetical account balance attributable to service on and after
January 1, 2010, a participant is permitted to elect (with spousal
consent) payment in the same generalized optional forms of benefit
(even though different actuarial factors apply) as under the terms
of the plan in effect before January 1, 2010, and also as a single
sum distribution. The plan provides for the benefits attributable to
service before January 1, 2010, to be determined under the terms of
the plan as in effect immediately before the effective date of the
amendment, and the benefits attributable to service on and after
January 1, 2010 to be determined separately, under the terms of the
plan as in effect after the effective date of the amendment, with
neither benefit offsetting the other in any manner. Thus, each
participant's benefits are equal to the sum of the benefits
attributable to service before January 1, 2010 (to be determined
under the terms of the plan as in effect immediately before the
effective date of the amendment), plus the benefits attributable to
the participant's hypothetical account balance.
(iii) Facts relating to an affected participant. Participant A
is age 62 on January 1, 2010 and, on December 31, 2009, A's benefit
for years of service before January 1, 2010, payable as a straight
life annuity commencing at A's normal retirement age (age 65) which
is January 1, 2013, is $1,000 per month. Participant A has a
severance from employment on January 1, 2013, and, on January 1,
2013, the hypothetical account balance, with pay credits and
interest from January 1, 2010, to January 1, 2013, has become
$11,000. Using the conversion factors under the plan as amended on
January 1, 2013, that balance is equivalent to a straight life
annuity of $100 per month commencing on January 1, 2013. This
benefit is in addition to the benefit attributable to service before
January 1, 2010. Participant A elects (with spousal consent) a
straight life annuity of $1,100 per month commencing January 1,
2013.
(iv) Conclusion. Participant A's benefit satisfies the
requirements of paragraph (c)(3)(ii)(A) of this section because
Participant A's benefit is not less than the sum of Participant A's
section 411(d)(6) protected benefit (as defined in Sec. 1.411(d)-
3(g)(14)) with respect to service before the effective date of the
conversion amendment, determined under the terms of the plan as in
effect immediately before the effective date of the amendment, and
Participant A's section 411(d)(6) protected benefit with respect to
service on and after the effective date of the conversion amendment,
determined under the terms of the plan as in effect after the
effective date of the amendment.
Example 2. (i) Facts involving plan's establishment of opening
hypothetical account balance and payment of pre-conversion
accumulated benefit in life annuity at normal retirement age. The
facts in this Example 2 are the same as the facts under paragraph
(i) of Example 1.
(ii) Facts relating to the conversion amendment. On January 1,
2010, Plan E is amended to eliminate future accruals under the
highest average compensation benefit formula and to base future
benefit accruals on a hypothetical account balance. An opening
hypothetical account balance is established for each participant,
and, under the plan's terms, that balance is equal to the present
value of the participant's accumulated benefit on December 31, 2009
(payable as a straight life annuity at normal retirement age or
immediately, if later), using the applicable interest rate and
applicable mortality table under section 417(e)(3) on January 1,
2010. Under Plan E, the account based on this opening hypothetical
account balance is maintained as a separate account from the account
for accruals on or after January 1, 2010. The hypothetical account
balance maintained for each participant for accruals on or after
January 1, 2010, is credited monthly with a pay credit equal to a
specified percentage of the participant's compensation during the
month. A participant's hypothetical account balance (including both
of the separate accounts) is credited monthly with interest based on
the third segment rate described in section 430(h)(2)(C)(iii).
(iii) Facts relating to optional forms of benefit. Following
severance from employment and attainment of age 55, a participant is
permitted to elect (with spousal consent) payment in the same
generalized optional forms of benefit as under the plan in effect
prior to January 1, 2010, with the amount payable calculated based
on the hypothetical account balance on the annuity starting date and
the applicable interest rate and applicable mortality table on the
annuity starting date. The single sum distribution is equal to the
hypothetical account balance.
(iv) Facts relating to conversion protection. The plan provides
that, as of a participant's annuity starting date, the plan will
determine whether the benefit attributable to the opening
hypothetical account payable in the particular optional form of
benefit selected is greater than or equal to the benefit accrued
under the plan through the date of conversion and payable in the
same generalized optional form of benefit with the same annuity
starting date. If the benefit attributable to the opening
hypothetical account balance is greater, the plan provides that such
benefit is paid in lieu of the pre-conversion benefit, together with
the benefit attributable to post-conversion contribution credits. If
the benefit attributable to the opening hypothetical account balance
is less, the plan provides that such benefit is increased
sufficiently to provide the pre-conversion benefit, together with
the benefit attributable to post-conversion contribution credits.
(v) Facts relating to an affected participant. On January 1,
2010, the opening hypothetical account balance established for
Participant A is $80,000, which is the present value of Participant
A's straight life annuity of $1,000 per month commencing at January
1, 2013, using the applicable interest rate and applicable mortality
table under section 417(e)(3) in effect on January 1, 2010. On
January 1, 2010, the applicable interest rate for Participant A is
equivalent to a level rate of 5.5 percent. Thereafter, Participant's
A's hypothetical account balance for subsequent accruals is credited
monthly with a pay credit equal to a specified percentage of the
participant's compensation during the month. In addition,
Participant A's hypothetical account balance (including both of the
separate accounts) is credited monthly with interest based on the
third segment rate described in section 430(h)(2)(C)(iii).
(vi) Facts relating to calculation of the participant's benefit.
Participant A has a severance from employment on January 1, 2013 at
age 65, and elects (with spousal consent) a straight life annuity
commencing January 1, 2013. On January 1, 2013, the opening
hypothetical account balance, with interest credits from January 1,
2010, to January 1, 2013, has become $95,000, which, using the
conversion factors under the plan on January 1, 2013, is equivalent
to a straight life annuity of $1,005 per month commencing on January
1, 2013 (which is greater than the $1,000 a month payable at age 65
under the terms of the plan in effect before January 1, 2010). This
benefit is in addition to the benefit determined using the
hypothetical account balance for service after January 1, 2010.
(vii) Conclusion. The benefit satisfies the requirements of
paragraph (c)(3)(ii)(A) of this section with respect to Participant
A because A's benefit is not less than the sum of (A) the greater of
Participant A's benefits attributable to the opening hypothetical
account balance and A's section 411(d)(6) protected benefit (as
defined in Sec. 1.411(d)-3(g)(14)) with respect to service before
the effective date of the conversion amendment, determined under the
terms of the plan as in effect immediately before the effective date
of the amendment, and (B) Participant A's section 411(d)(6)
protected benefit with respect to service on and after the effective
date of the conversion amendment, determined under the terms of the
plan as in effect after the effective date of the amendment.
[[Page 73696]]
Example 3. (i) Facts involving a subsequent decrease in interest
rates. The facts are the same as in Example 2, except that, because
of a decrease in bond rates after January 1, 2010, and before
January 1, 2013, the rate of interest credited in that period
averages less than 5.5 percent, and, on January 1, 2013, the
effective applicable interest rate under section 417(e)(3) under the
plan's terms is 4.7 percent. As a result, Participant A's opening
hypothetical account balance plus attributable interest credits has
increased to only $87,000 on January 1, 2013, and, using the
conversion factors under the plan on January 1, 2013, is equivalent
to a straight life annuity commencing on January 1, 2013, of $775
per month. Under the terms of Plan E, the benefit attributable to
A's opening account balance is increased so that A's straight life
annuity commencing on January 1, 2013, is $1,000 per month. This
benefit is in addition to the benefit attributable to the
hypothetical account balance for service after January 1, 2010.
(ii) Conclusion. The benefit satisfies the requirements of
paragraph (c)(3)(ii)(A) of this section with respect to Participant
A because A's benefit is not less than the sum of (A) the greater of
A's benefits attributable to the opening hypothetical account
balance and A's section 411(d)(6) protected benefit (as defined in
Sec. 1.411(d)-3(g)(14)) with respect to service before the
effective date of the conversion amendment, determined under the
terms of the plan as in effect immediately before the effective date
of the amendment, and (B) A's section 411(d)(6) protected benefit
with respect to service on and after the effective date of the
conversion amendment, determined under the terms of the plan as in
effect after the effective date of the amendment.
Example 4. (i) Facts involving payment of a subsidized early
retirement benefit. The facts are the same as in Example 2, except
that under the terms of Plan E on December 31, 2009, a participant
who retires before age 65 and after age 55 with 30 years of service
has only a 3 percent per year actuarial reduction. Participant A has
a severance from employment on January 1, 2011, when A is age 63 and
has 30 years of service. On January 1, 2011, A's opening
hypothetical account balance, with interest from January 1, 2010, to
January 1, 2011, has become $86,000, which, using the conversion
factors under the plan (as amended) on January 1, 2011, is
equivalent to a straight life annuity commencing on January 1, 2011,
of $850 per month.
(ii) Facts relating to calculation of the participant's benefit.
Under the terms of Plan E on December 31, 2009, Participant A is
entitled to a straight life annuity commencing on January 1, 2011,
equal to at least $940 per month ($1,000 reduced by 3 percent for
each of the 2 years that A's benefits commence before normal
retirement age). Under the terms of Plan E, the benefit attributable
to A's opening account balance is increased so that A is entitled to
a straight life annuity of $940 per month commencing on January 1,
2013. This benefit is in addition to the benefit determined using
the hypothetical account balance for service after January 1, 2010.
(iii) Conclusion. The benefit satisfies the requirements of
paragraph (c)(3)(ii)(A) of this section with respect to Participant
A because A's benefit is not less than the sum of (A) the greater of
Participant A's benefits attributable to the opening hypothetical
account balance (increased by attributable interest credits) and A's
section 411(d)(6) protected benefit (as defined in Sec. 1.411(d)-
3(g)(14)) with respect to service before the effective date of the
conversion amendment, determined under the terms of the plan as in
effect immediately before the effective date of the amendment, and
(B) Participant A's section 411(d)(6) protected benefit with respect
to service on and after the effective date of the conversion
amendment, determined under the terms of the plan as in effect after
the effective date of the amendment.
Example 5. (i) Facts involving addition of a single sum payment
option. The facts are the same as in Example 2, except that, before
January 1, 2010, Plan E did not offer payment in a single sum
distribution for amounts in excess of $5,000. Plan E, as amended on
January 1, 2010, offers payment in any of the available annuity
distribution forms commencing at any time following severance from
employment as were provided under Plan E before January 1, 2010. In
addition, Plan E, as amended on January 1, 2010, offers payment in
the form of a single sum attributable to service before January 1,
2010, which is the greater of the opening hypothetical account
balance (increased by attributable interest credits) or a single sum
distribution of the straight life annuity payable at age 65 using
the same actuarial factors as are used for mandatory cashouts for
amounts equal to $5,000 or less under the terms of the plan on
December 31, 2009. Participant B is age 40 on January 1, 2010, and
B's opening hypothetical account balance (increased by attributable
interest credits) is $33,000 (which is the present value, using the
conversion factors under the plan (as amended) on January 1, 2010,
of Participant B's straight life annuity of $1,000 per month
commencing at January 1, 2035, which is when B will be age 65).
Participant B has a severance from employment on January 1, 2013,
and elects (with spousal consent) an immediate single sum
distribution. Participant B's opening hypothetical account balance
(increased by attributable interest) on January 1, 2013, is $45,000.
The present value, on January 1, 2013, of Participant B's benefit of
$1,000 per month, commencing immediately using the actuarial factors
for mandatory cashouts under the terms of the plan on December 31,
2009, would result in a single sum payment of $44,750. Participant B
is paid a single sum distribution equal to the sum of $45,000 plus
an amount equal to B's January 1, 2013, hypothetical account balance
for benefit accruals for service after January 1, 2010.
(ii) Conclusion. Because, under Plan E, Participant B is
entitled to the sum of (A) The greater of the $45,000 opening
hypothetical account balance (increased by attributable interest
credits) and $44,750 (present value of the benefit with respect to
service prior to January 1, 2010, using the actuarial factors for
mandatory cashout distributions under the terms of the plan on
December 31, 2009), plus (B) An amount equal to B's hypothetical
account balance for benefit accruals for service after January 1,
2010, the benefit satisfies the requirements of paragraph
(c)(3)(ii)(A) of this section with respect to Participant B. If
Participant B's hypothetical account balance under Plan E was
instead less than $44,750 on January 1, 2013, Participant B would be
entitled to a single sum payment equal to the sum of $44,750 and an
amount equal to B's hypothetical account balance for benefit
accruals for service after January 1, 2010.
Example 6. (i) Facts involving addition of new annuity optional
form of benefit. The facts are the same as in Example 2, except
that, after December 31, 2009, and before January 1, 2013, Plan E is
amended to offer payment in a 5-, 10-, or 15-year term certain and
life annuity, using the same actuarial assumptions that apply for
other optional forms of distribution. When Participant A has a
severance from employment on January 1, 2013, A elects (with spousal
consent) a 5-year term certain and life annuity commencing
immediately equal to $935 per month. Application of the same
actuarial assumptions to Participant A's benefit of $1,000 per month
(under Plan E as in effect on December 31, 2009), commencing
immediately on January 1, 2013, would result in a 5-year term
certain and life annuity commencing immediately equal to $955 per
month. Under the terms of Plan E, the benefit attributable to A's
opening account balance is increased so that, using the conversion
factors under the plan (as amended) on January 1, 2013, A's opening
hypothetical account balance (increased by attributable interest
credits) produces a 5-year term certain and life annuity commencing
immediately equal to $955 per month commencing on January 1, 2013.
This benefit is in addition to the benefit determined using the
January 1, 2013, hypothetical account balance for service after
January 1, 2010.
(ii) Conclusion. This benefit satisfies the requirements of
paragraph (c)(3)(ii)(A) of this section with respect to Participant
A.
Example 7. (i) Facts involving addition of distribution option
before age 55. The facts are the same as in Example 5, except that
Participant B (age 43) elects (with spousal consent) a straight life
annuity. Under Plan E, the straight life annuity attributable to
Participant B's opening hypothetical account balance at age 43 is
$221 per month. Application of the same actuarial assumptions to
Participant B's benefit of $1,000 per month (under Plan E as in
effect on December 31, 2009), commencing immediately on January 1,
2013, would result in a straight life annuity at age 43 equal to
$219 per month.
(ii) Conclusion. Because, under its terms, Plan E provides that
Participant B is entitled to an amount not less than the present
value (using the same actuarial assumptions as apply on January 1,
2013, in converting the $45,000 hypothetical account balance
attributable to the opening hypothetical account balance to the $221
straight life annuity) of Participant B's straight life annuity of
$1,000 per month commencing at January 1, 2035, and the $221
straight life annuity is in addition to the benefit accruals for
service after January 1, 2010, payment of
[[Page 73697]]
the $221 monthly annuity would satisfy the requirements of paragraph
(c)(3)(ii)(A) of this section with respect to Participant B.
(d) Market rate of return--(1) In general--(i) Basic test. Subject
to paragraph (d)(3) of this section, a statutory hybrid plan satisfies
the requirements of section 411(b)(1)(H) and this paragraph (d) only
if, for any plan year, the interest crediting rate under the terms of
the plan is no greater than a market rate of return.
(ii) Definition of interest crediting rate and interest credit. For
purposes of this paragraph (d), a plan's interest crediting rate means
the rate by which a participant's benefit is increased under the
ongoing terms of the plan to the extent the amount of the increase is
not conditioned on current service, regardless of how the amount of
that increase is calculated. The amount of such an increase is an
interest credit. Thus, whether the amount is an interest credit for
this purpose is determined without regard to whether the amount is
calculated by reference to a rate of interest, a rate of return, an
index, or otherwise.
(iii) Single rates. Except as is otherwise provided in this
paragraph (d)(1), an interest crediting rate is not in excess of a
market rate of return only if the plan provides an interest credit for
the year at a rate that is equal to one of the following rates that is
specified in the terms of the plan:
(A) The interest rate on long-term investment grade corporate bonds
(as described in paragraph (d)(4) of this section);
(B) An interest rate that is deemed to be not in excess of a market
rate of return under paragraph (d)(5) of this section; or
(C) An interest rate that is described in paragraph (d)(6) of this
section.
(iv) Timing rules--(A) In general. A plan must specify the timing
for determining the plan's interest crediting rate that will apply for
each plan year (or portion of a plan year) using either of the methods
described in paragraph (d)(1)(iv)(B) of this section and must specify
the frequency of interest crediting under the plan pursuant to
paragraph (d)(1)(iv)(C) of this section.
(B) Methods to determine interest crediting rate. A plan is
permitted to provide daily interest credits using a daily interest
crediting rate based on the permitted rates specified in paragraph
(d)(1)(iii) of this section. Alternatively, a plan is permitted to
provide an interest credit for a stability period that is based on the
interest crediting rate for a specified lookback month with respect to
that stability period. The stability period and lookback month must
satisfy the rules for selecting the stability period and lookback month
under Sec. 1.417(e)-1(d)(4). (However, the interest rates can be any
of the rates in paragraph (d)(1)(iii) of this section and the stability
period and lookback month need not be the same as those used under the
plan for purposes of section 417(e)(3).)
(C) Frequency of interest crediting. Interest credits under a plan
must be made on an annual or more frequent periodic basis. If a plan
provides for the crediting of interest more frequently than annually
(for example, monthly or quarterly), then the interest credit for that
period must be a pro rata portion of the annual interest credit. Thus,
for example, if a plan's terms provide for interest to be credited
monthly and for the interest crediting rate to be equal to the interest
rate on long-term investment grade corporate bonds (as described in
paragraph (d)(4) of this section), and that interest rate for a plan
year is 6 percent, the accumulated benefits at the beginning of each
month would be increased by 0.5 percent per month during the plan year.
Interest credits under the terms of a plan are not treated as creating
an effective rate of return that is in excess of a market rate of
return merely because an otherwise permissible interest crediting rate
is compounded more frequently than annually.
(v) Lesser rates. An interest crediting rate is not in excess of a
market rate of return if the plan provides an interest crediting rate
that, under all circumstances, is always less than one of the rates
described in paragraph (d)(1)(iii) of this section.
(vi) Greater-of rates. If a statutory hybrid plan provides for an
interest credit that is equal to the interest credits determined under
the greater of 2 or more different interest crediting rates, the
effective interest crediting rate is not in excess of a market rate of
return only if each of the different rates satisfies the requirements
of paragraph (d)(1)(ii) of this section and the additional requirements
of paragraph (d)(7) of this section are satisfied.
(2) Preservation of capital requirement--(i) In general. A
statutory hybrid plan is treated as failing to meet the requirements of
section 411(b)(1)(H) if the requirements of paragraph (d)(2)(ii) of
this section are not satisfied.
(ii) Preservation of capital defined--(A) In general. The
requirements of this paragraph (d)(2)(ii) are satisfied if the plan
provides that, as of the participant's annuity starting date, the
participant's benefit under the plan is no less than the benefit
determined as of that date based on the sum of the hypothetical
contributions credited under the plan (or the accumulated percentage of
the participant's final average compensation, or the participant's
accrued benefits determined without regard to any indexing under
section 411(b)(5)(E), as applicable).
(B) Hypothetical contributions defined. For purposes of this
paragraph (d)(2)(ii), a hypothetical contribution is any amount
credited under a statutory hybrid plan other than an interest credit
(as defined in paragraph (d)(1)(ii) of this section). Thus, if an
opening hypothetical account balance or opening accumulated percentage
of the participant's final average compensation is established pursuant
to paragraph (c)(3) of this section, that opening hypothetical account
balance or opening accumulated percentage as of the date established is
treated as a hypothetical contribution and, thus, is taken into account
for purposes of the preservation of capital requirement of this
paragraph (d)(2)(ii).
(3) Plan termination--(i) In general. Except as provided in
paragraph (d)(3)(ii) of this section, a statutory hybrid plan is
treated as meeting the requirements of paragraph (d)(1) of this section
only if the terms of the plan provide that, upon termination of the
plan, a participant's benefit as of the termination is determined using
the interest rate and mortality table otherwise applicable for
determining that benefit under the plan (without regard to termination
of the plan).
(ii) Variable interest rates. A statutory hybrid plan is treated as
meeting the requirements of paragraph (d)(1) of this section only if
the terms of the plan provide that, upon termination of the plan, any
interest rate used to determine a participant's benefits under the plan
(including any interest crediting rate and any interest rate used to
determine annuity benefits) that is a variable rate is determined as
the average of the rates of interest used under the plan for that
purpose during the 5-year period ending on the termination date.
(4) Long-term investment grade corporate bonds. For purposes of
this paragraph (d), the rate of interest on long-term investment grade
corporate bonds means the third segment rate described in section
430(h)(2)(C)(iii) (determined with or without regard to the transition
rules of section 430(h)(2)(G)), provided that such rate floats on a
periodic basis not less frequently than annually. However, for plan
years beginning prior to January 1, 2008, the rate of interest on long-
term investment grade corporate bonds means the rate described in
section
[[Page 73698]]
412(b)(5)(B)(ii)(II) prior to amendment by the Pension Protection Act
of 2006, Public Law 109-280 (120 Stat. 780) (PPA '06).
(5) Safe harbor rates of interest--(i) Rates based on Treasury
bonds with margins. An interest crediting rate is deemed to be not in
excess of a market rate of return if the rate is adjusted at least
annually and is equal to the sum of any of the following rates of
interest for Treasury bonds and the associated margin for that interest
rate:
------------------------------------------------------------------------
Treasury bond interest rates Associated margin
------------------------------------------------------------------------
The discount rate on 3-month Treasury 175 basis points.
Bills.
The discount rate on 12-month or shorter 150 basis points.
Treasury Bills.
The yield on 1-year Treasury Constant 100 basis points.
Maturities.
The yield on 3-year or shorter Treasury 50 basis points.
bonds.
The yield on 7-year or shorter Treasury 25 basis points.
bonds.
The yield on 30-year or shorter Treasury 0 basis points.
bonds.
------------------------------------------------------------------------
(ii) Eligible cost-of-living indices. An interest crediting rate is
deemed to be not in excess of a market rate of return if the rate is
adjusted no less frequently than annually and is equal to the rate of
increase with respect to an eligible cost-of-living index described in
Sec. 1.401(a)(9)-6, A-14(b), except that for purposes of this
paragraph (d)(5)(ii), the eligible cost-of-living index described in
Sec. 1.401(a)(9)-6, A-14(b)(2), is increased by 300 basis points.
(iii) Additional safe harbors. The Commissioner may, in guidance of
general applicability, specify additional interest crediting rates that
are deemed to be not in excess of a market rate of return. See Sec.
601.601(d)(2)(ii)(b) of this chapter.
(6) Other interest rates--(i) Reasonable minimum guaranteed rate of
return. [Reserved]
(ii) Equity-based rates. [Reserved]
(7) Combinations of rates of return--(i) In general. If a plan
provides an interest crediting rate that is equal to the interest
credits determined under the greater of 2 or more different interest
crediting rates where each of the different rates satisfies the
requirements of paragraph (d)(1)(iii) of this section, then the
interest credits provided by the plan satisfy this paragraph (d)(7)
only if one or more of the different interest crediting rates under the
plan are adjusted as provided in paragraphs (d)(7)(iii) or (d)(7)(iv)
of this section in order to provide that the effective interest
crediting rate resulting from the use of the greater of 2 or more rates
does not exceed a market rate of return. This paragraph (d)(7) provides
the exclusive rules that may be used for this purpose and, therefore, a
plan does not satisfy the requirements of this paragraph (d) if the
plan provides for interest credits determined using the greater of 2 or
more interest crediting rates and that combination of interest
crediting rates is not specifically permitted by this paragraph (d)(7).
(ii) Coordination with preservation of capital rule. No adjustment
under this paragraph (d)(7) is required merely because the plan
satisfies the requirements of paragraph (d)(2) of this section.
(iii) Combination of fixed and variable interest rates. [Reserved]
(iv) Other combinations. [Reserved]
(8) Section 411(d)(6)--(i) General rule. Except as provided in this
paragraph (d)(8), to the extent that benefits have accrued under the
terms of a statutory hybrid plan that entitle the participant to future
interest credits, an amendment to the plan to change the interest
crediting rate for such interest credits violates section 411(d)(6) if
the revised rate under any circumstances could result in a lower
interest crediting rate as of any date after the applicable amendment
date of the amendment (within the meaning of Sec. 1.411(d)-3(g)(4))
changing the interest crediting rate. For additional rules, see Sec.
1.411(d)-3(a)(1).
(ii) Adoption of long-term investment grade corporate bond rate or
safe harbor rate. An amendment to a statutory hybrid plan to change the
interest crediting rate for future periods from an interest crediting
rate described in paragraph (d)(5) of this section to the interest
crediting rate described in paragraph (d)(4) of this section does not
constitute a decrease of an accrued benefit and, therefore, does not
violate section 411(d)(6). However, an amendment described in this
paragraph (d)(8)(ii) cannot be effective less than 30 days after
adoption and, on the effective date of the amendment, the new interest
crediting rate cannot be less than the interest crediting rate that
would have applied in the absence of the amendment.
(iii) Other changes not treated as prohibited reduction of accrued
benefit. [Reserved].
(e) Definitions--(1) In general. The definitions in this paragraph
(e) apply for purposes of this section.
(2) Accumulated benefit. A participant's accumulated benefit at any
date means the participant's benefit, as expressed under the terms of
the plan, accrued to that date. For this purpose, the accumulated
benefit of a participant may be expressed under the terms of the plan
as either the balance of a hypothetical account or the current value of
an accumulated percentage of the participant's final average
compensation, even if the plan defines the participant's accrued
benefit as an annuity beginning at normal retirement age that is
actuarially equivalent to that balance or value.
(3) Lump sum-based benefit formula--(i) In general. A lump sum-
based benefit formula means a benefit formula used to determine all or
any part of a participant's accumulated benefit under a defined benefit
plan under which the benefit provided under the formula is expressed as
the balance of a hypothetical account maintained for the participant or
as the current value of the accumulated percentage of the participant's
final average compensation. Whether a benefit formula is a lump sum-
based benefit formula is determined based on how the accumulated
benefit of a participant is expressed under the terms of the plan, and
does not depend on whether the plan provides an optional form of
benefit in the form of a single sum payment.
(ii) Exception for contributory plans. A participant is not treated
as having a lump sum-based benefit formula merely because the
participant is entitled to a benefit under a defined benefit plan that
is equal to the greater of the otherwise applicable benefit formula and
the benefit properly attributable to after-tax employee contributions.
(4) Statutory hybrid benefit formula. A statutory hybrid benefit
formula means a statutory hybrid benefit formula as defined in Sec.
1.411(a)(13)-1(d)(3).
(5) Statutory hybrid plan. A statutory hybrid plan means a defined
benefit plan that contains a statutory hybrid benefit formula.
(6) Variable annuity benefit formula. A variable annuity benefit
formula means a variable annuity benefit formula as defined in Sec.
1.411(a)(13)-1(d)(4).
(f) Effective/applicability date--(1) Statutory effective/
applicability dates--(i) In general. Except as provided in paragraph
(f)(1)(iii) of this section, section 411(b)(5) applies for periods
beginning on or after June 29, 2005.
(ii) Conversion amendments. The requirements of section
411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion amendment (as
defined in paragraph (c)(4) of this section) that is adopted after, and
takes effect after, June 29, 2005.
[[Page 73699]]
(iii) Market rate of return--(A) Plans in existence on June 29,
2005--(1) In general. In the case of a plan that is in existence on
June 29, 2005 (regardless of whether the plan is a statutory hybrid
plan on that date), section 411(b)(5)(B)(i) only applies to plan years
beginning on or after January 1, 2008.
(2) Exception for plan sponsor election. Notwithstanding paragraph
(f)(1)(iii)(A)(1) of this section, a plan sponsor of a plan that is in
existence on June 29, 2005 (regardless of whether the plan is a
statutory hybrid plan on that date) may elect to have the requirements
of section 411(a)(13)(B) and section 411(b)(5)(B)(i) apply for any
period after June 29, 2005, and before the first plan year beginning
after December 31, 2007. In accordance with section 1107 of the PPA
'06, an employer is permitted to adopt an amendment to make this
election as late as the last day of the first plan year that begins on
or after January 1, 2009 (January 1, 2011, in the case of a
governmental plan as defined in section 414(d)) if the plan operates in
accordance with the election.
(B) Plans not in existence on June 29, 2005. In the case of a plan
not in existence on June 29, 2005, section 411(b)(5)(B)(i) applies to
the plan on and after the later of June 29, 2005, and the date the plan
becomes a statutory hybrid plan.
(2) Effective/applicability date of regulations. This section
applies for plan years beginning on or after January 1, 2009 (or, if
later, the date applicable under paragraph (f)(3) of this section). For
the periods after the statutory effective date set forth in paragraph
(f)(1) or (f)(3) of this section and before the regulatory effective
date set forth in the preceding sentence, a plan must comply with
section 411(b)(5). During these periods, a plan is permitted to rely on
the provisions of this section for purposes of satisfying the
requirements of section 411(b)(5).
(3) Collectively bargained plans--(i) In general. Notwithstanding
paragraph (f)(1)(iii) of this section, in the case of a collectively
bargained plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified on or before August 17, 2006, the requirements of section
411(b)(5)(B)(i) do not apply to plan years beginning before the earlier
of--
(A) The later of--
(1) The date on which the last of those collective bargaining
agreements terminates (determined without regard to any extension
thereof on or after August 17, 2006), or
(2) January 1, 2008; or
(B) January 1, 2010.
(ii) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan where a
collective bargaining agreement applies to some, but not all, of the
plan participants, the plan is considered a collectively bargained plan
for purposes of paragraph (f)(3)(i) of this section if at least 25
percent of the participants in the plan are members of collective
bargaining units for which the benefit levels under the plan are
specified under the collective bargaining agreement.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-25025 Filed 12-27-07; 8:45 am]
BILLING CODE 4830-01-P