[Federal Register: March 24, 2004 (Volume 69, Number 57)]
[Proposed Rules]
[Page 13769-13786]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr04-18]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 54
[REG-128309-03]
RIN 1545-BC26
Section 411(d)(6) Protected Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations providing guidance
on the conditions under which a plan amendment may eliminate or reduce
an early retirement benefit, a retirement-type subsidy, or an optional
form of benefit (section 411(d)(6)(B) protected benefits) with respect
to a participant's benefits attributable to service before the
amendment. The proposed regulations would also provide guidance
concerning how the notice requirements of section 4980F apply with
respect to such plan amendments. These proposed regulations would
generally affect plan sponsors of, and participants in, qualified
retirement plans.
DATES: Written or electronic comments must be received by June 22,
2004.
Requests to speak (with outlines of oral comments to be discussed)
at the public hearing scheduled for June 24, 2004, at 10 a.m. must be
received by June 3, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-128309-03), room
5203, Internal Revenue Service, POB 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-
128309-03), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically to the IRS Internet site at http://www.irs.gov/regs.
The public hearing will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Pamela R. Kinard at (202) 622-6060; concerning submissions of comments,
the hearing, and the requests to be placed on the building access list
to attend the hearing, contact Guy Traynor, (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR parts 1 and 54
under sections 411(d)(6) and 4980F of the Internal Revenue Code (Code)
and section 204(g) and (h) of the Employee Retirement Income Security
Act of 1974 (ERISA). These proposed regulations, when finalized, would
revise Treasury regulations Sec. 1.411(d)-3 to reflect changes to
section 411(d)(6) made by the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA).
These proposed regulations would also include rules relating to changes
to section 411(d)(6) made by the Retirement Equity Act of 1984, Public
Law 98-397 (98 Stat. 1426) (REA). In addition, these proposed
regulations would amend Sec. 54.4980F-1(b), Q&A-8, relating to the
notice requirement for certain plan amendments that reduce early
retirement benefits or retirement-type subsidies.
Section 411(d)(6)(A) provides that a plan is treated as not
satisfying the requirements of section 411 if the accrued benefit of a
participant is decreased by an amendment of the plan, other than an
amendment described in section 412(c)(8) of the Code or section 4281 of
ERISA. Section 411(a)(7) generally defines the term ``accrued benefit''
as meaning, for a defined benefit plan, the employee's accrued benefit
determined under the plan and, except as provided in section 411(c)(3),
expressed in the form of an annual benefit commencing at normal
retirement age. Under section 411(c)(3), if an employee's accrued
benefit under a defined benefit plan is to be determined as an amount
other than an annual benefit commencing at normal retirement age, the
employee's accrued benefit is the actuarial equivalent of such benefit.
Section 301(a) of REA amended section 411(d)(6) to add subparagraph
(B), which provides that a plan amendment that has the effect of
eliminating or reducing an early retirement benefit or a retirement-
type subsidy, or eliminating an optional form of benefit, with respect
to benefits attributable to service before the amendment is treated as
impermissibly reducing accrued benefits. For a retirement-type subsidy,
this protection applies only with respect to an employee who satisfies
the preamendment conditions for the subsidy (either before or after the
amendment). Section 411(d)(6)(B) also authorizes the Secretary to
provide, through regulations, that section 411(d)(6)(B) does not apply
to any plan amendment that eliminates optional forms of benefit (other
than a plan amendment that has the effect of eliminating or reducing an
early retirement benefit or a retirement-type subsidy).
On July 11, 1988, final regulations (TD 8212) under section
411(d)(6) were published in the Federal Register (53 FR 26050). Section
1.411(d)-4, Q&A-1(a), of the Regulations provides that section
411(d)(6) protects certain benefits, to the extent they have accrued,
so that such benefits cannot be reduced or eliminated by plan
amendment, except to the extent permitted by regulations. Section
1.411(d)-4 provides rules for when a plan may be amended to reduce or
eliminate a section 411(d)(6) protected benefit.
[[Page 13770]]
Section 4980F of the Code and section 204(h) of ERISA each require
that a plan administrator must give notice of a plan amendment to
affected plan participants and beneficiaries when the plan amendment
provides for a significant reduction in the rate of future benefit
accrual or the elimination or significant reduction in an early
retirement benefit or a retirement-type subsidy.
Section 645(b)(1) of EGTRRA amended section 411(d)(6)(B) of the
Code to direct the Secretary to issue regulations providing that
section 411(d)(6)(B) does not apply to any amendment that reduces or
eliminates early retirement benefits or retirement-type subsidies that
create significant burdens or complexities for the plan and plan
participants unless such amendment adversely affects the rights of any
participant in a more than de minimis manner. Section 645(b)(2) of
EGTRRA also amended section 204(g)(2) of ERISA to include a similar
directive for purposes of section 204(g) of ERISA, which provides a
rule parallel to section 411(d)(6) of the Code.
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 in these regulations for purposes of
ERISA, as well as the Code. Further, section 204(g) of ERISA authorizes
the Secretary of the Treasury to issue the regulations under section
204(g) of ERISA, relating to the permissible elimination of optional
forms of benefit. Thus, these proposed Treasury regulations issued
under sections 411(d)(6) and 4980F of the Code apply as well for
purposes of section 204(g) and (h) of ERISA, and respond to the EGTRRA
directive for purposes of both section 411(d)(6) of the Code and
section 204(g) of ERISA.
In Notice 2002-46 (2002-2 C.B. 96), Treasury and the IRS requested
comments regarding the possible approaches for eliminating optional
forms of benefit from defined benefit plans, including comments on
whether the retention of certain optional forms of benefit under a
defined benefit plan results in significant burdens or complexities for
plan sponsors and participants, and the conditions under which these
optional forms of benefit are of de minimis value to plan participants.
In Notice 2003-10 (2003-5 I.R.B. 369), Treasury and the IRS announced
that regulations would be proposed to provide general guidance relating
to early retirement benefits and retirement-type subsidies under
section 411(d)(6)(B). Comments were requested on the guidance that
should be provided with respect to early retirement benefits and
retirement-type subsidies, as well as whether the proposed regulations
should permit plan amendments that eliminate or reduce early retirement
benefits or retirement-type subsidies that are contingent on
unpredictable events. A number of helpful comments were received in
response to these notices and those comments were considered in
drafting these proposed regulations.
Explanation of Provisions
General Overview
The proposed regulations would implement the provisions of section
645(b)(1) of EGTRRA by permitting the elimination of early retirement
benefits, retirement-type subsidies, and optional forms of benefit
under a plan which create significant burdens or complexities for the
plan and its participants, but only if the elimination does not
adversely affect the rights of any participant in a more than de
minimis manner. These rules relating to the permissible elimination of
section 411(d)(6)(B) protected benefits are in addition to the rules
permitting elimination of section 411(d)(6) protected benefits under
Sec. 1.411(d)-4. These proposed regulations would also include general
guidance on section 411(d)(6), including the meaning of terms used
therein, the scope of the section 411(d)(6)(A) protection against plan
amendments decreasing a participant's accrued benefit, and the scope of
the section 411(d)(6)(B) protection for early retirement benefits,
retirement-type subsidies, and optional forms of benefit.
Scope of Section 411(d)(6) Protections
The proposed regulations would revise the existing final
regulations at Sec. 1.411(d)-3. The rules under those regulations
would generally be retained but would be updated to reflect statutory
changes such as the elimination of class-year vesting and the enactment
of section 411(d)(6)(B).
The proposed regulations also would take into account and respond
to judicial decisions interpreting section 411(d)(6) (or its parallel
provision at section 204(g) of ERISA).\1\ For example, the proposed
regulations would provide that section 411(d)(6) protection applies to
a participant's entire accrued benefit without regard to whether any
portion of that accrued benefit is accrued before a participant's
severance from employment or is included in the accrued benefit of the
participant pursuant to a plan amendment adopted after the
participant's severance from employment.\2\
---------------------------------------------------------------------------
\1\ See Bellas v. CBS, Inc., 221 F. 3d 517 (3rd Cir. 2000),
cert. denied, 531 U.S. 1104 (2001) (involuntary separation benefit
is both an early retirement benefit and a retirement-type subsidy to
the extent it provides for the payment of normal retirement benefits
that continue beyond normal retirement age), Board of Trustees of
the Sheet Metal Workers' National Pension Fund v. C.I.R., 318 F. 3d
599 (4th Cir. 2003) (a COLA benefit granted by a plan amendment is
not an accrued benefit for participants that retired before the
effective date of the amendment and, thus, the subsequent plan
amendment eliminating the COLA benefit did not violate the anti-
cutback rule of section 411(d)(6)), Michael v. Riverside Cement, 266
F. 3d 1023 (9th Cir. 2001) (a plan amendment providing for an
actuarial offset of early retirement benefits previously received by
a rehire upon subsequent retirement violates ERISA section 204(g),
even though the net effect of the amendment is an increase in the
early retirement benefit of the participant), and Heinz v. Central
Laborers' Pension Fund, 303 F. 3d 802 (7th Cir. 2002)), cert.
granted, 72 U.S.L.W. 3370 (U.S. Dec. 1, 2003) (a pension plan
offering fully subsidized early retirement benefits violated section
204(g) of ERISA when the plan was amended to expand the definition
of disqualifying employment for purposes of applying its suspension
of benefits rule).
\2\ This is contrary to the analysis in Board of Trustees of the
Sheet Metal Workers' National Pension Fund v. C.I.R.
---------------------------------------------------------------------------
The proposed regulations would retain the rules in the existing
regulations that provide that, for purposes of determining whether or
not any participant's accrued benefit is decreased, all plan amendments
affecting, directly or indirectly, the computation of accrued benefits
are taken into account, and that, in determining whether a reduction
has occurred, all amendments with the same applicable amendment date
(the later of the adoption date or the effective date) are treated as
one plan amendment, and would provide that these rules apply to section
411(d)(6)(B) protected benefits as well. Thus, for example, if there
are two amendments with the same applicable amendment date, and one
amendment increases accrued benefits and the other amendment decreases
the early retirement factors that are used to determine the early
retirement annuity, the amendments are treated as one amendment and
only violate section 411(d)(6) if the net dollar amount of the early
retirement annuity after the two amendments is lower at any point in
time than it would have been without the two amendments.\3\
---------------------------------------------------------------------------
\3\ This is contrary to the analysis in Michael v. Riverside
Cement.
---------------------------------------------------------------------------
The proposed regulations would also provide that a plan amendment
violates the requirements of section 411(d)(6) if it is one of a series
of plan amendments made at different times that, when taken together,
have the effect of reducing or eliminating a section 411(d)(6)
protected benefit in a manner that would otherwise be prohibited if
accomplished through a single amendment. The
[[Page 13771]]
proposed regulations, however, do not address the interaction of the
vesting rules in section 411(a) with section 411(d)(6). This topic,
which is currently before the Supreme Court in Central Laborers'
Pension Fund v. Heinz, No. 02-891, is instead reserved for future
guidance.
The proposed regulations also provide a number of clarifications
regarding section 411(d)(6)(B) protected benefits. The proposed
regulations would clarify that, if a plan amendment merely replaces an
optional form of benefit with another optional form of benefit that is
of inherently equal or greater value, the amendment is not to be
treated as eliminating an optional form of benefit, or eliminating or
reducing an early retirement benefit or retirement-type subsidy. For
example, a change in the method of calculating a joint and survivor
annuity from using a 90% adjustment factor on account of the
survivorship payment at particular ages on the annuity starting date to
using a 91% adjustment factor at the same ages on the annuity starting
date is not treated as an elimination of an optional form of benefit.
The proposed regulations would reflect the rules in the existing
regulation Sec. 1.411(d)-4, Q&A-1(d), that ancillary benefits, other
rights or features, and any other benefits not described in section
411(d)(6) are not benefits protected under section 411(d)(6). The
definitions of optional form of benefit, ancillary benefit, and other
right or feature have been drawn from the definitions in Sec.
1.401(a)(4)-4. In addition the proposed regulations would provide a
definition of early retirement benefit, retirement-type benefit, and
retirement-type subsidy. See the discussion in this preamble under the
heading Retirement-Type Subsidies and Contingent-Event Benefits.
Permitted Elimination of Benefits That Are Burdensome or Complex and of
De Minimis Value to Participants
Section 411(d)(6)(B) of the Code, as amended by EGTRRA, directs the
Secretary to issue regulations providing that section 411(d)(6)(B) does
not apply to any amendment that reduces or eliminates benefits or
subsidies that create significant burdens or complexities for the plan
and plan participants unless such amendment adversely affects the
rights of any participant in a more than de minimis manner.
The EGTRRA Conference Report provides that it is intended that the
factors to be considered in determining whether a plan amendment has
more than a de minimis adverse effect on any participant will include:
(1) All of the participant's early retirement benefits, retirement-type
subsidies, and optional forms of benefit that are reduced or eliminated
by the amendment; (2) the extent to which early retirement benefits,
retirement-type subsidies, and optional forms of benefit in effect with
respect to a participant after the amendment's effective date provide
rights that are comparable to the rights that are reduced or eliminated
by the plan amendment; (3) the number of years before the participant
attains normal retirement age under the plan (or early retirement age,
as applicable); (4) the size of the participant's benefit that is
affected by the plan amendment, in relation to the amount of the
participant's compensation; and (5) the number of years before the plan
amendment is effective. H.R. Conf. Rep. 107-84, at 254 (2001).
The proposed regulations would generally permit an employer to
eliminate a section 411(d)(6)(B) protected benefit if the eliminated
optional form of benefit is redundant with respect to a retained
optional form of benefit. Additional rules would apply to an amendment
that, in addition to eliminating an optional form of benefit, also
eliminates an early retirement benefit or a retirement-type subsidy.
Alternatively, an employer would be permitted to eliminate a section
411(d)(6)(B) protected benefit if the plan amendment was not effective
for benefits that begin in the next four years and certain core options
are made available to plan participants.
The concepts of allowing an employer to eliminate a redundant
optional form of benefit and allowing an employer to eliminate all
optional forms of benefit that fall outside a list of core optional
forms of benefit were included in suggestions made by commentators who
suggested that the elimination of an optional form of benefit would not
adversely affect the right of a plan participant in more than a de
minimis manner as long as the plan offers other optional forms of
benefit that are sufficiently similar to the eliminated optional form
of benefit. These concepts also reflect factors identified in the
legislative history (e.g., the extent to which section 411(d)(6)(B)
protected benefits that are available to a participant after the
amendment's effective date provide rights that are comparable to the
rights of section 411(d)(6)(B) protected benefits that are reduced or
eliminated by the plan amendment).
The Treasury and IRS also received comments from practitioners
suggesting that the proposed regulations provide a utilization test,
which would permit the elimination of an optional form of benefit if
the employer can show that the benefit has been utilized rarely by plan
participants. These commentators suggested that the lack of utilization
is compelling evidence that the elimination of the optional form of
benefit would not adversely affect the rights of any plan participant
in more than a de minimis manner. The Treasury and IRS did not include
a utilization test in the proposed regulations because of, among other
reasons, the difficulty in applying a utilization standard in
situations where there are few retirements (e.g., a small plan).
Under the proposed regulations, the determination of whether the
optional forms of benefit that remain after an amendment are
sufficiently similar to an eliminated optional form of benefit such
that its elimination would not adversely affect the rights of any plan
participant in more than a de minimis manner depends on a number of
factors. These factors include the extent to which the remaining
optional forms of benefit provide the same essential characteristics as
the eliminated optional form of benefit; whether the remaining optional
forms of benefit are available on the same date and are actuarially
equivalent to the eliminated optional form of benefit; and the period
of time before the eliminated optional form of benefit could have
commenced.
The rules in the proposed regulations would require any amendment
eliminating an optional form of benefit to have a delayed effective
date. This requirement reflects some of the relevant factors listed in
the legislative history (i.e., the number of years until the
participant reaches retirement age and the number of years until the
amendment is effective). A participant's expectations as to which
optional forms of benefit will be available are more settled for a
participant who is closer to commencing benefits. Therefore, whether
any remaining optional form of benefit is sufficiently similar to an
eliminated optional form of benefit so that the substitution of one for
the other does not adversely affect the right of a plan participant in
more than a de minimis manner depends in part on how far in the future
the participant is expecting to commence benefits.
The Treasury and IRS believe that the proposed regulations would
assist plans that have accumulated numerous optional forms of benefits
by simplifying plan administration and reducing plan complexity for
participants. At the same time, the
[[Page 13772]]
proposed regulations would continue to protect the rights of plan
participants by not permitting plan amendments that eliminate or reduce
an early retirement benefit or a retirement-type subsidy by more than a
de minimis amount and by protecting the right to elect an optional form
of benefit that is most advantageous for a participant with substandard
mortality (through inclusion of that form of benefit as a required core
option). The rule regarding multiple amendments, discussed above, would
preclude the adoption of a series of amendments that, when taken
together, constitute an impermissible elimination of a section
411(d)(6)(B) protected benefit. This rule would apply, for example, if
a series of amendments were adopted that eliminated a benefit of more
than de minimis value when considered together, even though each
amendment by itself eliminated a benefit of de minimis value.
Elimination of Redundant Optional Forms of Benefit
The proposed regulations would provide that a plan may be amended
to eliminate an optional form of benefit for a participant with respect
to benefits attributable to service before the applicable amendment
date if the optional form of benefit is redundant with respect to a
retained optional form of benefit and certain other conditions are
satisfied. An optional form of benefit is considered redundant with
respect to a retained optional form of benefit if the retained optional
form of benefit is in the same family of optional forms of benefit as
the optional form of benefit being eliminated and the participant's
rights with respect to the retained optional form of benefit are not
subject to materially greater restrictions than applied to the optional
form of benefit being eliminated.
Under the proposed regulations, a plan would be permitted to be
amended to eliminate a redundant optional form of benefit for a
participant (with respect to benefits attributable to service before
the applicable amendment date) only if the plan amendment does not
apply to an optional form of benefit with an annuity starting date that
is earlier than 90 days after the date the amendment is adopted. In
addition, in cases in which the retained optional form of benefit for
the participant does not commence on the same annuity starting date as
the optional form of benefit that is being eliminated, or, as of the
applicable amendment date, the actuarial present value of the retained
optional form of benefit is less than the actuarial present value of
the optional form of benefit being eliminated, the plan amendment would
have to satisfy additional conditions described below.
The proposed regulations would describe 6 basic families of
optional forms of benefit--the 50% or more joint and contingent family,
the below 50% joint and contingent family, the 10 years or less term
certain and life annuity family, the greater than 10 years term certain
and life annuity family, the 10 years or less level installment family,
and the greater than 10 years level installment family. For this
purpose, the determination of whether two optional forms of benefit are
in one of the 6 basic families is made without regard to certain
differences among enumerated additional features, such as the actuarial
factors used to determine the amount of benefits under the optional
form of benefit, a social security leveling feature, a refund of
employee contributions feature, or a retroactive annuity starting date
feature.
Under the proposed regulations, not every optional form of benefit
will fit within one of the 6 families listed above. For example, a
single-sum distribution option will not be in one of the 6 families
listed above and, therefore, the right to receive a single-sum
distribution cannot be eliminated under the redundancy rule. However,
if there are two optional forms of benefit that do not fit within a
family listed above and the only differences between those optional
forms of benefit are differences that would be disregarded in
determining whether two optional forms of benefits are within the same
family (e.g., a single-sum distribution option with and without a
retroactive annuity starting date feature), the two optional forms of
benefit are treated as members of a separate family.
The proposed regulations would provide that the ability to
eliminate redundant optional forms of benefits generally would not
apply to optional forms of benefit that are core options (as described
below). However, an optional form of benefit that is a core option
could be eliminated in favor of a similar retained core option (where
the only differences between the eliminated optional form of benefit
and the retained optional form of benefit are differences that would be
disregarded in determining whether the two optional forms of benefits
are within the same family).
The proposed regulations would also provide that, to the extent an
optional form of benefit that is being eliminated includes either a
social security leveling feature or a refund of employee contributions
feature, the retained optional form of benefit must also include that
feature, and, to the extent that the optional form of benefit that is
being eliminated does not include a social security leveling feature or
a refund of employee contributions feature, the retained optional form
of benefit must not include that feature. Thus, a plan cannot eliminate
an optional form of benefit that includes a refund of employee
contributions feature in favor of an optional form of benefit that does
not include that feature. Similarly, a plan cannot eliminate an
optional form of benefit that includes a social security leveling
feature in favor of an optional form of benefit that does not include
that feature. However, the plan need not retain social security
leveling features that provide for assumed commencement of social
security benefits at more than one date.
In addition, the proposed regulations provide that, to the extent
an optional form of benefit that is being eliminated is payable without
a retroactive annuity starting date feature, the retained optional form
of benefit must be payable without that feature. Thus, a plan cannot
eliminate an optional form of benefit that is payable without a
retroactive annuity starting date feature in favor of an optional form
of benefit that is payable only with a retroactive annuity starting
date. However, the plan can eliminate an optional form of benefit
payable with a retroactive annuity starting date feature in favor of an
optional form of benefit that is payable without a retroactive annuity
starting date.
Permissible Elimination of Noncore Optional Forms of Benefit Where Core
Options Are Offered
As an alternative to the redundancy rule, the proposed regulations
would allow a plan amendment to eliminate an optional form of benefit
for plan participants with respect to benefits attributable to service
before the applicable amendment date if: (1) The plan, after the
amendment, offers a designated set of core options to plan participants
with respect to benefits attributable to service both before and after
the amendment; and (2) the amendment does not apply to participants
with annuity starting dates less than four years after the date the
amendment is adopted.
The core options are defined in the proposed regulations as a
straight life annuity, a 75% joint and contingent annuity, a 10-year
certain and life annuity, and the most valuable option for a
participant with a short life expectancy. The core options were
selected to define a minimum set of
[[Page 13773]]
optional forms of benefit that provide participants with a sufficiently
broad set of choices to meet participants' essential needs in a wide
range of personal circumstances. The 75% joint and contingent annuity
has been chosen as a required core option based on a recommendation
from the 1994-1996 report of the Advisory Council on Social
Security.\4\ In that report, the Council recommended that dependent
spousal benefits in Social Security be gradually increased to 75% of
the combined benefit that the surviving spouse and decedent spouse were
receiving when both of the spouses were alive. This recommendation was
based on statistical studies concluding that a retired surviving spouse
generally needs to receive at least 75% of the amount that the retired
couple was receiving in order for the surviving spouse to maintain his
or her standard of living.
---------------------------------------------------------------------------
\4\ See the Report of the 1994-1996 Advisory Council on Social
Security, available at http://www.ssa.gov/history/reports/adcouncil/report/findings.htm
.
---------------------------------------------------------------------------
The Treasury and IRS received comments emphasizing the importance
of ensuring that a core set of options include some forms of
distribution that would be particularly valuable to a participant whose
life expectancy differs from the life expectancy used by the plan for
actuarial adjustments. This includes providing an option of a life
annuity (valuable for a participant with an above-average life
expectancy) and the importance of retaining a single-sum payment option
(or the form providing the largest death benefit) for a participant
with a below-average life expectancy, such as a participant who retires
due to a mortal illness.
In light of the comments received, the proposed regulations would
include in the list of core options the most valuable option for a
participant with a short life expectancy. This is defined as the
optional form of benefit that is reasonably expected to result in
payments that have the largest actuarial present value in the case of a
participant who dies shortly after the annuity starting date. The
proposed regulations would provide a safe harbor method for determining
which optional form of benefit under the plan is the most valuable
option for a participant with a short life expectancy. Under this safe
harbor method, a plan may treat a single-sum distribution option with
an actuarial present value that is not less than the actuarial present
value of any optional form of benefit being eliminated as the most
valuable option for a participant with a short life expectancy. If a
plan does not offer such a single-sum distribution option, the plan may
treat a joint and contingent annuity with a continuation percentage of
at least as great as the highest continuation percentage available
before the amendment as the most valuable option for a participant with
a short life expectancy, provided that the continuation percentage is
at least 75%. In the event a plan has neither a single-sum distribution
option nor a joint and contingent annuity with a continuation
percentage of at least 75%, the plan may treat a term certain and life
annuity with a term certain period of at least 15 years as the most
valuable option for a participant with a short life expectancy.
In addition, an employer would not be permitted to use the core
options alternative to eliminate a single-sum distribution. An
exception applies for a single-sum distribution option with respect to
less than 25% of the participant's accrued benefit as of the date that
the single-sum distribution option is eliminated. This protection
against elimination of a single-sum distribution option is in addition
to any protection that might be afforded such option as the most
valuable option for a participant with a short life expectancy.
The proposed regulations also would provide that, to the extent an
optional form of benefit being eliminated includes either a social
security leveling feature or a refund of employee contributions
feature, at least one of the core options must also be available with
that feature. In addition, to the extent that an optional form of
benefit being eliminated does not include a social security leveling
feature or a refund of employee contributions feature, each of the core
options must be available without that feature.
As with the redundancy rule, if the core options do not commence on
the same annuity starting date as the optional form of benefit that is
being eliminated, or, as of the applicable amendment date, the
actuarial present value of the core option is less than the actuarial
present value of the optional form of benefit being eliminated, the
plan amendment would have to satisfy additional conditions described
below.
Elimination of Early Retirement Benefits and Retirement-Type Subsidies
The proposed regulations would set forth additional requirements
that a plan amendment must satisfy if the retained optional form of
benefit or each core option does not have the same annuity starting
date or has a lower actuarial present value than the optional form of
benefit that is being eliminated. Such an amendment would be permitted
only if the optional form of benefit creates significant burdens and
complexities for the plan and plan participants and the elimination
does not adversely affect the rights of any participant in more than a
de minimis manner. If the additional requirements are satisfied, a plan
may be amended to eliminate an optional form of benefit without regard
to whether the amendment has the effect of eliminating an early
retirement benefit or reducing a retirement-type subsidy. These
additional requirements would not apply to an amendment that eliminates
an optional form of benefit in a manner that is otherwise permissible
under these proposed regulations where both the annuity starting date
and the actuarial present value of the retained optional form of
benefit are the same as those features of the eliminated optional form
of benefit.
The determination of whether a plan amendment eliminates or reduces
section 411(d)(6)(B) protected benefits that create significant burdens
or complexities for the plan and its participants is based on facts and
circumstances. In the case of an amendment that eliminates an early
retirement benefit, relevant factors include whether the annuity
starting dates under the plan considered in the aggregate are
burdensome or complex (e.g., the number of categories of early
retirement benefits, whether the terms and conditions applicable to the
plan's early retirement benefits are difficult to summarize in a manner
that is concise and readily understandable to the average plan
participant, and whether those different early retirement benefits were
added to the plan as a result of plan mergers, acquisitions, or other
business transactions), and whether the effect of the plan amendment is
to reduce the number of categories of early retirement benefit.
Analogous factors apply in the case of a plan amendment eliminating a
retirement-type subsidy or changing actuarial factors.
The proposed regulations would provide a rebuttable presumption for
plan amendments that eliminate a set of annuity starting dates or
actuarial factors where the annuity starting dates or actuarial factors
under the plan considered in the aggregate are burdensome or complex.
If this is the case, then elimination of any one item of the relevant
category (i.e., annuity starting dates or actuarial factors) is
presumed to eliminate section 411(d)(6)(B) protected benefits that
create significant burdens or complexities for the plan and its
participants. However, if the effect of a plan amendment with respect
to a set of
[[Page 13774]]
optional forms of benefit is merely to substitute one set of annuity
starting dates for another set of annuity starting dates (or one set of
actuarial factors for another set of actuarial factors), without any
reduction in the number of different annuity starting dates (or
actuarial factors), then the plan amendment would not be permitted
under these regulations.
The generally applicable rules regarding multiple amendments apply
to a series of plan amendments that first create burdens and
complexities and then later eliminate them. In accordance with these
rules, for example, section 411(d)(6)(B) protected benefits are not
considered to create burdens and complexities for a plan and its
participants if the plan adds a retirement-type subsidy in order to
later eliminate another retirement-type subsidy, even if the
elimination of the other subsidy would not adversely affect the rights
of any plan participant in a more than de minimis manner as provided in
the regulations.
In the case of a plan amendment eliminating an optional form of
benefit under the redundancy rule, the proposed regulations would
provide that a plan amendment eliminating the optional form of benefit
does not adversely affect the rights of any participant in more than a
de minimis manner if the retained optional form of benefit has
substantially the same annuity starting date as the optional form of
benefit that is being eliminated and the actuarial present value of the
eliminated optional form of benefit does not exceed the actuarial
present value of the retained optional form of benefit by more than a
de minimis amount. In the case of a plan amendment eliminating an
optional form of benefit under the core options rule, the proposed
regulations would provide the plan amendment does not adversely affect
the rights of any participant in more than a de minimis manner if each
of the core options is available with substantially the same annuity
starting date as the optional form of benefit that is being eliminated
and the actuarial present value of the eliminated benefit does not
exceed the actuarial present value of any core benefit by more than a
de minimis amount. For these purposes, the proposed regulations would
provide that annuity starting dates are considered substantially the
same if they are within six months of each other.
The Conference Report to EGTRRA provides that the intent of the
provision authorizing regulations is solely to permit the elimination
of early retirement benefits, retirement-type subsidies, or optional
forms of benefit that have no more than a de minimis effect on any
participant but create disproportionate burdens and complexities for a
plan and its participants, and provides two examples illustrating this
intent. H.R. Conf. Rep. 107-84, at 254-55 (2001). These examples
involve a situation in which the acquisition of the employer and
subsequent merger of plans results in the maintenance of multiple
retirement-type subsidies (including early retirement subsidies) that
create disproportionate burdens and complexities for the plan and its
participants. Under the first example, for a 25-year-old participant
with compensation of $40,000, the Conference Report provides that
Treasury regulations could permit the participant's retirement-type
subsidy under the plan to be eliminated entirely. For this participant,
taking into account all relevant factors, including the value of the
benefit, the participant's compensation, and the number of years before
eligibility for the subsidy, the participant's subsidy, with a present
value of $75, is of de minimis value. Under the second example, for a
50-year-old participant with compensation of $40,000, the Conference
Report provides that Treasury regulations could permit the
participant's retirement-type subsidy with a present value of $10,000
to be replaced with another retirement-type subsidy with a present
value of $9,850. The Conference Report provides that the regulations
could permit replacement in the retirement-type subsidy (which reduces
the value of the participant's subsidy by $150) because the difference
in subsidies is de minimis. However, the $10,000 subsidy could not be
entirely eliminated. Id.
Based on these examples, the proposed regulations would provide
that a reduction in actuarial present value is of no more than a de
minimis amount (and hence, the rights of any participant are not
adversely affected in a more than de minimis manner) if the reduction
does not exceed the greater of 2% of the present value of the
retirement-type subsidy under the eliminated optional form of benefit
(if any) prior to the amendment or 1% of the participant's compensation
for the prior plan year (as defined in section 415(c)(3)).
In addition to this numerical test, the proposed regulations would
provide a de minimis test relating to changes in early retirement and
other actuarial adjustment factors. Under this rule, the elimination of
an optional form of benefit does not adversely affect the rights of any
participant in more than a de minimis manner if the amendment does not
apply to an annuity starting date before the end of the expected
transition period for that optional form of benefit. The expected
transition period for an optional form of benefit is the period by the
end of which it is reasonable to expect, taking into account future
accruals, that the section 411(d)(6)(B) protected benefit being
eliminated would be subsumed by another optional form of benefit if the
plan amendment limited the optional form of benefit being eliminated to
the participant's benefits attributable to service before the
applicable amendment date. The expected transition period is thus based
on the expected wearaway period.
For purposes of this expected transition rule, the expected
transition period must be determined in accordance with reasonable
actuarial assumptions about the future that are likely to result in the
longest reasonable expected transition period, such as the assumption
that the participant's compensation will not increase and that future
accruals will not exceed accruals in recent periods. If the plan is
subsequently amended to reduce the rate of future benefit accrual (or
otherwise to lengthen the expected transition period) before the end of
the previously determined expected transition period, the subsequent
plan amendment must provide that the elimination of the optional form
of benefit is void (or must provide for the effective date to be
further extended to a new expected transition date taking into account
the subsequent amendment). In addition, a plan amendment eliminating an
optional form of benefit using the expected transition rule must be
limited to participants who continue employment through the end of the
expected transition period.
Advance Notice to Participants
Section 4980F(e) of the Code and section 204(h) of ERISA require
notice of an amendment to an applicable pension plan that either
provides for a significant reduction in the rate of future benefit
accrual or that eliminates or significantly reduces an early retirement
benefit or a retirement-type subsidy. See Sec. 54.4980F-1 generally.
While Sec. 54.4980F-1(b), Q&A-7(b) and 8(c), generally provide that an
amendment eliminating an optional form of benefit as permitted under
these proposed regulations would not be a significant reduction for
which advance notice to participants is required, plan sponsors are
reminded that an amendment limiting an early retirement
[[Page 13775]]
benefit or retirement-type subsidy to service before the applicable
amendment date might be a significant reduction in future benefits for
which advance notice is required. Accordingly, advance notice may be
required for an amendment permitted under these rules.
These regulations include proposed amendments to the section 4980F
regulations clarifying that, for purposes of determining whether an
amendment reducing a retirement-type subsidy as permitted under the
expected transition period rule is a significant reduction for purposes
of section 4980F, the amendment is treated in the same manner as an
amendment that limits the retirement-type subsidy to benefits that
accrue before the applicable amendment date with respect to the
participants (and alternate payees) to whom the reduction is reasonably
expected to apply. The proposed changes to the section 4980F
regulations also include examples illustrating these rules and
clarifying that the effective date of the amendment for purposes of
section 4980F(e) of the Code and section 204(h) of ERISA is not the
same as the effective date of the reduction.
Retirement-Type Subsidies and Contingent-Event Benefits
Since section 411(d)(6)(B) was added to the Code in REA, questions
have arisen as to whether a benefit that is contingent on the
occurrence of an unpredictable event--such as a plant shutdown--is a
retirement-type subsidy and, thus, protected by section 411(d)(6). Some
courts have held that an unpredictable contingent-event benefit is
protected, while one has held that it is not.\5\
Notice 2003-10 requested comments on anticipated guidance regarding
early retirement benefits and retirement-type subsidies under section
411(d)(6)(B). Notice 2003-10 also stated that regulations addressing
subsidies provided upon a plant shutdown would be prospective and that
relief from disqualification would be provided.
---------------------------------------------------------------------------
\5\ Compare Bellas v. CBS, Inc., supra, at fn. 1; Richardson v.
Pension Plan of Bethlehem Steel Corp., 67 F. 3d 1462 (9th Cir.
1995), withdrawn, 91 F. 3d 1312 (9th Cir. 1996), modified, 112 F.3d
982 (9th Cir. 1997) (shutdown benefit is a retirement-type subsidy
protected under anticutback rule, opinion withdrawn and modified
because court later found plan amendment not valid); Harms v.
Cavenham Forest Industries, Inc., 984 F. 2d 686 (5th Cir.), cert.
denied, 510 U.S. 944 (1993) (involuntary separation benefit is a
retirement-type benefit protected under the anticutback rule); and
Arena v. ABB Power T&D Company, Inc., 2003 U.S. Dist. LEXIS 13166,
31 Employee Benefit Cas. (BNA) 1473 (S.D. Ind. July 22, 2003) (plant
shutdown benefit is a retirement-type subsidy protected by the
anticutback rule because the benefit continues beyond normal
retirement age and the amount of the benefit exceeds the actuarially
reduced normal retirement benefit); with Ross v. Pension Plan for
Hourly Employees of SKF Industries, Inc., 847 F. 2d 329 (6th Cir.
1988) (plant shutdown benefit is not a retirement-type subsidy).
---------------------------------------------------------------------------
After reviewing the legislative history, the analysis in the
relevant cases, and the submissions of the commentators, Treasury and
the IRS have concluded that, if a contingent-event benefit is a
retirement-type subsidy, the benefit cannot be reduced or eliminated
with respect to service prior to the applicable amendment date without
violating section 411(d)(6)(B). The proposed regulations would apply
this result without regard to whether the contingent event that
triggers the payment of the benefit has or has not occurred prior to
the amendment. Thus, the proposed regulations would require the
protection of contingent-event benefits that provide retirement-type
subsidies under section 411(d)(6)(B) even before the occurrence of the
contingency.
The rules under the proposed regulations for determining whether a
contingent-event benefit provides a retirement-type subsidy that is
protected under section 411(d)(6) or an ancillary benefit that is not
protected would be based on the legislative history of REA. The
legislative history provides that:
[T]he term ``retirement-type subsidy'' is to be defined by Treasury
regulations. The committee intends that under these regulations, a
subsidy that continues after retirement is generally to be
considered a retirement-type subsidy. The committee expects,
however, that a qualified disability benefit, a medical benefit, a
social security supplement, a death benefit (including life
insurance), or a plant shutdown benefit (that does not continue
after retirement age) will not be considered a retirement-type
subsidy. The committee expects that Treasury regulations will
prevent the recharacterization of retirement-type benefits as
benefits that are not protected [under section 411(d)(6)].\6\
---------------------------------------------------------------------------
\6\ S. Rep. No. 98-575, at 26 (1984).
The proposed regulations would provide that ancillary benefits are
the benefits listed in the legislative history and other similar
benefits that do not affect the payment of the accrued benefit. Thus,
if the contingent-event benefit is a plant-shutdown benefit that does
not continue beyond retirement age, then the proposed regulations would
include the benefit in the definition of ancillary benefits and the
contingent-event benefit could be reduced or eliminated without
violating section 411(d)(6).
By contrast, the proposed regulations would provide that the
payment of an accrued benefit in an optional form or the payment of any
other benefit that continues after retirement is a retirement-type
benefit (provided that it is not in the list of ancillary benefits set
forth in the regulations). Thus, the proposed regulations would provide
that if the contingent-event benefit continues beyond retirement (and
is not in the list of ancillary benefits set forth in the regulations),
the contingent-event benefit would be a retirement-type benefit. To the
extent that the retirement-type benefit has a present value in excess
of the present value of the accrued benefit, the contingent-event
benefit provides a retirement-type subsidy that is protected under
section 411(d)(6)(B).
Further, in accordance with the legislative history to REA, the
regulations would specifically prohibit an amendment that
recharacterizes a retirement-type benefit as an ancillary benefit.
Thus, for example, a plan cannot be amended to recharacterize any
portion of an early retirement subsidy as a social security supplement
that is an ancillary benefit. See also Sec. 1.411(d)-4, Q&A-2(c), for
rules relating to serial amendments.
Proposed Effective Date
These regulations are proposed to be applicable to amendments
adopted on or after the date of the publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register. These proposed regulations cannot be relied upon until they
are adopted in final form. When these regulations are finalized, the
IRS, under its general authority in section 7805(b), will not treat a
plan as failing to satisfy the requirements of sections 401 and 411
merely because of a plan amendment that eliminates or reduces an early
retirement benefit or retirement-type subsidy that is conditioned on
the occurrence of an unpredictable contingent event (within the meaning
of section 412(l)) if the amendment is adopted and effective prior to
the occurrence of the contingent event and prior to the finalization of
these proposed regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
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. This notice
of proposed rulemaking does not impose a collection of information on
small entities, thus the Regulatory Flexibility
[[Page 13776]]
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, these proposed 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 Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. The Treasury and IRS specifically request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying.
Comments are also requested on the following issues:
Whether there should be additional families of
optional forms of benefit besides the six families listed in the
redundancy rule at Sec. 1.411(d)-3(c)(4);
Whether the core options, including the
specification of the most valuable option for a participant with a
short life expectancy, are sufficient to protect the value of benefit
distribution options in a broad range of personal circumstances, such
as for a participant with substandard mortality;
Whether the rules in Sec. 1.411(d)-3(e)
permitting the reduction of present value through changes in actuarial
factors are administrable and sufficiently protective of participants'
interests;
Whether the expected transition period rule
should be permitted to apply to a participant who severs employment
during the expected transition period (and who satisfies the pre-
amendment conditions for the optional form of benefit) if the optional
form of benefit being eliminated (or a comparable optional form of
benefit with at least the same present value) is available before the
end of the expected transition period and the former employee receives
written notice describing the effect of the amendment before the
amendment becomes applicable.
How to determine whether a benefit, including a
contingent-event benefit, continues after retirement (or retirement
age);
The extent to which plant-shutdown benefits that
do not continue after retirement age are permitted to be provided in a
qualified plan (e.g., whether such benefits are limited to payments
payable before the plan's earliest retirement age or are the benefits
limited to amounts that are less than the expected social security
benefit or, alternatively, the normal retirement benefit); and
What other benefits (e.g., involuntary
termination benefits) that do not continue after retirement age and
which are similar to the benefits listed as ancillary in the
legislative history should be considered ancillary and should be
permitted to be provided in a qualified plan.
A public hearing has been scheduled for June 24, 2004, beginning at
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the main entrance, located at 1111 Constitution
Avenue, NW. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will
not be admitted beyond the immediate entrance area more than 30 minutes
before the hearing starts. For information about having your name
placed on the building access list to attend the hearing, see the For
Further Information Contact portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written or electronic
comments and an outline of the topics to be discussed and time to be
devoted to each topic (signed original and eight (8) copies) by June 3,
2004. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving comments has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is Pamela R.
Kinard, Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities), Internal Revenue Service. However, personnel
from other offices of the Internal Revenue Service and Treasury
Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 54 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and
section 645(b) of the Economic Growth and Tax Relief Reconciliation
Act of 2001, Pub. L. 107-16 (115 Stat. 38).* * *
Par. 2. Section 1.411(d)-3 is revised to read as follows:
Sec. 1.411(d)-3 Section 411(d)(6) protected benefits.
(a) Protection of accrued benefits--(1) General rule. Under section
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a
part of such plan is not a qualified trust) if a plan amendment
decreases the accrued benefit of any plan participant, except as
provided in section 412(c)(8), section 4281 of the Employee Retirement
Income Security Act of 1974 as amended (ERISA), or other applicable law
(e.g., section 1541(a)(2) of the Taxpayer Relief Act of 1997 (Pub. L.
105-34, 111 Stat. 788, 1085)). For purposes of this section, a plan
amendment includes any changes to the terms of a plan and includes a
plan termination. The protection of section 411(d)(6) applies to a
participant's entire accrued benefit without regard to whether any
portion of that accrued benefit is accrued before a participant's
severance from employment or is included in the accrued benefit of the
participant pursuant to a plan amendment adopted after the
participant's severance from employment.
(2) Plan provisions taken into account--(i) Direct and indirect
reduction in accrued benefit. For purposes of determining whether or
not any participant's accrued benefit is decreased, amendments to all
the provisions of a plan affecting, directly or indirectly, the
computation of accrued benefits are taken into account. Plan provisions
indirectly affecting accrued benefits include, for example, provisions
relating to years of service and compensation.
(ii) Amendments effective on the same applicable amendment date. In
determining whether a reduction in accrued benefit has occurred, all
amendments with the same applicable amendment date are treated as one
plan amendment. Thus, if there are two
[[Page 13777]]
amendments with the same applicable amendment date, and one amendment,
standing alone, increases benefits and the other amendment, standing
alone, decreases benefits, the amendments are treated as one amendment
and will only violate section 411(d)(6) if the net effect is to
decrease the accrued benefit on that date for any participant.
(iii) Multiple amendments. A plan amendment violates the
requirements of section 411(d)(6) if it is one of a series of plan
amendments made at different times that, when taken together, have the
effect of reducing or eliminating a section 411(d)(6) protected benefit
in a manner that would be prohibited by section 411(d)(6) if
accomplished through a single amendment.
(3) Application of section 411(a) nonforfeitability provisions with
respect to section 411(d)(6) protected benefits. [Reserved].
(4) Examples. The following examples illustrate the application of
this paragraph (a):
Example 1. (i) Facts. Plan A provides an annual benefit of 2% of
career average pay times years of service commencing at normal
retirement age (age 65). Plan A is amended on November 1, 2004,
effective as of January 1, 2005, to provide for an annual benefit of
1.3% of final pay times years of service, with final pay computed as
the average of a participant's highest 3 consecutive years of
compensation. As of January 1, 2005, Participant M has 16 years of
service, his career average pay is $37,500, and the average of his
highest 3 consecutive years of compensation is $67,308. Thus, M's
accrued benefit as of the effective date of the amendment is
increased from $12,000 per year at normal retirement age (2% times
$37,500 times 16 years of service) to $14,000 per year at normal
retirement age (1.3% times $67,308 times 16 years of service). As of
January 1, 2005, Participant N has 6 years of service, his career
average pay is $50,000, and the average of his highest 3 consecutive
years of compensation is $51,282. Participant N's accrued benefit as
of the applicable amendment date is decreased from $6,000 per year
at normal retirement age (2% times $50,000 times 6 years of service)
to $4,000 per year at normal retirement age (1.3% times $51,282
times 6 years of service).
(ii) Conclusion. The plan amendment fails to satisfy the
requirements of section 411(d)(6)(A) because the amendment decreases
the accrued benefit of Participant N below the level of the accrued
benefit of Participant N immediately before the applicable amendment
date.
Example 2. (i) Facts. The facts are the same as Example 1 except
that Plan A includes a provision under which Participant N's accrued
benefit cannot be less than what it was immediately before the
amendment (so that Participant N's accrued benefit could not be less
than $6,000 per year at normal retirement age).
(ii) Conclusion. The amendment does not violate the requirements
of section 411(d)(6)(A) with respect to Participant N (although
Participant N would not accrue any benefits until the point in time
at which the new formula amount would exceed the amount payable
under the minimum provision, approximately 3 years after the
amendment becomes effective).
(b) Protection of section 411(d)(6)(B) protected benefits--(1)
General rule--(i) Prohibition against plan amendments eliminating or
reducing section 411(d)(6)(B) protected benefits. A plan is treated as
decreasing an accrued benefit if it is amended to eliminate or reduce a
section 411(d)(6)(B) protected benefit as defined in paragraph (f)(4)
of this section, except as provided in this section. This paragraph
(b)(1) applies to participants who satisfy (either before or after the
plan amendment) the pre-amendment conditions for the section
411(d)(6)(B) protected benefit.
(ii) Contingent benefits. The rule of paragraph (b)(1)(i) of this
section applies to participants who satisfy (either before or after the
plan amendment) the pre-amendment conditions for the section
411(d)(6)(B) protected benefit even if the condition on which the
eligibility for the section 411(d)(6)(B) protected benefit depends is
an unpredictable event (e.g., a plant shutdown).
(iii) Application of general rules. For purposes of determining
whether or not any participant's section 411(d)(6)(B) protected benefit
is eliminated or reduced, the rules of paragraph (a) of this section
apply to section 411(d)(6)(B) protected benefits in the same manner as
they apply to benefits described in section 411(d)(6)(A). As an example
of the application of paragraph (a)(2)(ii) of this section to section
411(d)(6)(B) protected benefits, if there are two amendments with the
same applicable amendment date, and one amendment increases accrued
benefits and the other amendment decreases the early retirement factors
that are used to determine the early retirement annuity, the amendments
are treated as one amendment and only violate section 411(d)(6) if the
net dollar amount of the early retirement annuity after the two
amendments is lower at any point in time than it would have been
without the two amendments. As an example of the application of
paragraph (a)(2)(iii) of this section to section 411(d)(6)(B) protected
benefits, a series of amendments that, when taken together, have the
effect of reducing or eliminating early retirement benefits or
retirement-type subsidies in a manner that adversely affects the rights
of any participant in more than a de minimis manner violates section
411(d)(6)(B) even if each amendment would be permissible pursuant to
paragraphs (c) through (e) of this section.
(2) Permissible elimination of section 411(d)(6)(B) protected
benefits--(i) In general. A plan may be amended to eliminate a section
411(d)(6)(B) protected benefit if the elimination is in accordance with
section 411(d)(6)(C), (D), or (E), paragraph (c) or (d) of this
section, or Sec. 1.411(d)-4.
(ii) Increases in payment amounts do not eliminate an optional form
of benefit. If a plan amendment merely replaces an optional form of
benefit with another optional form of benefit that is of inherently
equal or greater value (within the meaning of Sec. 1.401(a)(4)-
4(d)(4)(i)(A)), the amendment is not to be treated as eliminating an
optional form of benefit, or eliminating or reducing an early
retirement benefit or retirement-type subsidy. Thus, for example, a
change in the method of calculating a joint and survivor annuity from
using a 90% adjustment factor on account of the survivorship payment at
particular ages on the annuity starting date to using a 91% adjustment
factor at the same ages on the annuity starting date is not treated as
an elimination of an optional form of benefit.
(3) Permissible elimination of benefits that are not section
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does
not provide protection for benefits that are ancillary benefits, other
rights and features, or any other benefits that are not described in
section 411(d)(6). See Sec. 1.411(d)-4, Q&A-1(d). However, a plan may
not be amended to recharacterize a retirement-type benefit as an
ancillary benefit. Thus, for example, a plan amendment to
recharacterize any portion of an early retirement subsidy as a Social
Security supplement that is an ancillary benefit violates section
411(d)(6).
(ii) No protection for future benefit accruals. Section 411(d)(6)
only protects benefits that accrue before the applicable amendment
date. Thus, a plan may be amended to eliminate or reduce an early
retirement benefit, a retirement-type subsidy, or an optional form of
benefit with respect to benefits not yet accrued on the applicable
amendment date without violating section 411(d)(6). However, section
4980F(e) of the Internal Revenue Code and section 204(h) of ERISA
require notice of an amendment to an applicable pension plan that
either provides for a significant reduction in the rate of future
benefit accrual or that eliminates or significantly reduces an early
retirement benefit or a retirement-type subsidy. See Sec. 54.4980F-1
of this chapter generally, and see Sec. 54.4980F-
[[Page 13778]]
1(b), Q&A-7(b) and Q&A-8(c), with respect to whether such notice is
required for a reduction in an early retirement benefit or retirement-
type subsidy permitted under section 411(d)(6)(B).
(c) Permissible elimination of optional forms of benefit that are
redundant--(1) General rule. Except as otherwise provided in paragraph
(c)(5) of this section, a plan may be amended to eliminate an optional
form of benefit for a participant with respect to benefits accrued
before the applicable amendment date if--
(i) The optional form of benefit is redundant with respect to a
retained optional form of benefit, within the meaning of paragraph
(c)(2) of this section;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity starting date that is less
than 90 days after the date the amendment is adopted; and
(iii) In any case in which the retained optional form of benefit
for the participant does not commence on the same annuity starting date
as the optional form of benefit that is being eliminated or, as of the
applicable amendment date, the actuarial present value of the retained
optional form of benefit for the participant is less than the actuarial
present value of the optional form of benefit that is being eliminated,
the requirements of paragraph (e) of this section are satisfied.
(2) Similar types of optional forms of benefit are redundant--(i)
General rule. An optional form of benefit is redundant with respect to
a retained optional form of benefit if--
(A) The retained optional form of benefit is available to the
participant;
(B) The retained optional form of benefit is in the same family of
optional forms, within the meaning of paragraphs (c)(3) and (4) of this
section, as the optional form of benefit being eliminated; and
(C) A participant's rights with respect to the retained optional
form of benefit are not subject to materially greater restrictions
(such as conditions relating to eligibility, restrictions on a
participant's ability to designate the person who is entitled to
benefits following the participant's death, or restrictions on a
participant's right to receive an in-kind distribution) than applied to
the optional form of benefit being eliminated.
(ii) Special rule for core options. An optional form of benefit
that is a core option may not be eliminated as a redundant benefit
under the rules of this paragraph (c) unless the retained optional form
of benefit and the eliminated core option are identical except for
differences described in paragraph (c)(3)(ii) of this section. Thus,
for example, a particular 10-year certain and life annuity may not be
eliminated by plan amendment unless the retained optional form of
benefit is another 10-year certain and life annuity.
(3) Family of optional forms of benefit--(i) In general. Paragraph
(c)(4) of this section describes certain families of optional forms of
benefits. Not every optional form of benefit that is offered under a
plan necessarily fits within a family as described in paragraph (c)(4)
of this section. Each optional form of benefit that is not included in
any particular family listed in paragraph (c)(4) of this section is in
a separate family with other optional forms of benefit that would be
identical to that optional form of benefit but for differences that are
described in paragraph (c)(3)(ii) of this section.
(ii) Certain differences among optional forms of benefit--(A)
Differences in actuarial factors and annuity starting dates. The
determination of whether two optional forms of benefit are within a
family of optional forms of benefit is made without regard to the
actuarial factors that are used to determine the amount of the
distributions under those optional forms of benefit and without regard
to annuity starting dates. For example, if a plan has a single-sum
distribution option that is calculated using a 5% interest rate and a
specific mortality table and another single-sum distribution option
that is calculated using the applicable interest rate as defined in
section 417(e)(3)(A)(ii)(II) and the applicable mortality table as
defined in section 417(e)(3)(A)(ii)(I), both single-sum distribution
options are in the same family under the rules of paragraph (c)(3)(i)
of this section.
(B) Differences in Social Security leveling features, refund of
employee contributions features, and retroactive annuity starting date
features. Two optional forms of benefit that are identical except with
respect to Social Security leveling features, refund of employee
contributions features, or retroactive annuity starting date features
are treated as members of the same family of optional forms of benefit.
But see paragraph (c)(5) of this section for special rules relating to
Social Security leveling, refund of employee contributions, and
retroactive annuity starting date features in optional forms of
benefit.
(4) List of families. The following are families of optional forms
of benefit for purposes of this paragraph (c):
(i) Joint and contingent options with continuation percentages of
50% to 100%. An optional form of benefit is within the 50% or more
joint and contingent family if it provides a life annuity to the
participant and a survivor annuity to an individual that is at least
50% and no more than 100% of the annuity provided to the participant.
An optional form of benefit is within the 50% or more joint and
contingent family without regard to whether the form of benefit
includes a term certain provision, a pop-up provision (under which
payments increase upon the death of the beneficiary or another event
that causes the beneficiary not to be entitled to a survivor annuity),
or a cash refund feature (under which payment is provided upon the
death of the last annuitant in an amount equal to the excess of the
present value of the annuity at the annuity starting date over the
total of payments before the death of the last annuitant).
(ii) Joint and contingent options with continuation percentages
less than 50%. An optional form of benefit is within the below 50%
joint and contingent family if it provides a life annuity to the
participant and a survivor annuity to an individual that is no more
than 50% of the annuity provided to the participant. An optional form
of benefit is within the below 50% joint and contingent family without
regard to whether the form of benefit includes a term certain
provision, a pop-up provision (under which payments increase upon the
death of the beneficiary or another event that causes the beneficiary
not to be entitled to a survivor annuity), or a cash refund feature
(under which payment is provided upon the death of the last annuitant
in an amount equal to the excess of the present value of the annuity at
the annuity starting date over the total of payments before the death
of the last annuitant).
(iii) Term certain and life annuity options with a term of 10 years
or less. An optional form of benefit is within the 10 years or less
term certain and life family if it is a life annuity with a guarantee
that payments will continue to the participant's designated beneficiary
for the remainder of a fixed period that is not in excess of 10 years
if the participant dies before the end of the fixed period.
(iv) Term certain and life annuity options with a term in excess of
10 years. An optional form of benefit is within the greater than 10
years term certain and life family if it is a life annuity with a
guarantee that payments will continue to the participant's designated
beneficiary for the remainder of a fixed period that is in excess of 10
[[Page 13779]]
years if the participant dies before the end of the fixed period.
(v) Level installment payment options over a period of 10 years or
less. An optional form of benefit is within the 10 years or less
installment family if it provides for substantially level payments to
the participant for a fixed period of at least two years with a
guarantee that payments will continue to the participant's beneficiary
for the remainder of the fixed period not in excess of 10 years if the
participant dies before the end of the fixed period.
(vi) Level installment payment options over a period of more than
10 years. An optional form of benefit is within the greater than 10
years installment family if it provides for substantially level
payments to the participant for a fixed period with a guarantee that
payments will continue to the participant's beneficiary for the
remainder of a fixed period that is in excess of 10 years if the
participant dies before the end of the fixed period.
(5) Special rules for certain features included in optional forms
of benefit. For purposes of applying this paragraph (c), to the extent
an optional form of benefit that is being eliminated includes either a
social security leveling feature or a refund of employee contributions
feature, the retained optional form of benefit must also include that
feature, and to the extent that the optional form of benefit that is
being eliminated does not include a social security leveling feature or
a refund of employee contributions feature, the retained optional form
of benefit must not include that feature. For purposes of applying this
paragraph (c), to the extent an optional form of benefit that is being
eliminated does not include a retroactive annuity starting date
feature, the retained optional form of benefit must not include the
feature.
(d) Permissible elimination of noncore optional forms of benefit
where core options are offered--(1) General rule. Except as otherwise
provided in paragraph (d)(2) of this section, a plan may be amended to
eliminate an optional form of benefit for a participant with respect to
benefits attributable to service before the applicable amendment date
if--
(i) After the amendment, each of the core options described in
paragraph (f)(3) of this section is available to the participant with
respect to benefits attributable to service before and after the
amendment;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity starting date that is less
than four years after the date the amendment is adopted; and
(iii) In any case in which all of the core options are not
available commencing on the same annuity starting date as each optional
form of benefit that is being eliminated or, as of the applicable
amendment date, the actuarial present value of the benefit payable
under any of the core options with the same annuity starting date is
less than the actuarial present value of benefits payable under the
optional form of benefit that is being eliminated, the requirements of
paragraph (e) of this section are satisfied.
(2) Special rules--(i) Treatment of certain features included in
optional forms of benefit. For purposes of applying this paragraph (d),
to the extent an optional form of benefit that is being eliminated
includes either a social security leveling feature or a refund of
employee contributions feature, at least one of the core options must
also be available with that feature, and, to the extent that the
optional form of benefit that is being eliminated does not include a
social security leveling feature or a refund of employee contributions
feature, each of the core options must be available without that
feature. For purposes of applying this paragraph (d), to the extent an
optional form of benefit that is being eliminated does not include a
retroactive annuity starting date feature, each of the core options
must be available without that feature.
(ii) Eliminating the most valuable option for a participant with a
short life expectancy. For purposes of applying this paragraph (d), if
the most valuable option for a participant with a short life expectancy
as described in paragraph (f)(3)(i)(D) of this section is eliminated,
then, after the plan amendment, an optional form of benefit that is
identical, except for differences described in paragraph (c)(3)(ii) of
this section, must be available to the participant. However, such a
plan amendment cannot eliminate a refund of employee contributions
feature from the most valuable option for a participant with a short
life expectancy.
(iii) Single-sum distributions. A plan amendment is not treated as
satisfying this paragraph (d) if it eliminates an optional form of
benefit that includes a single-sum distribution that applies with
respect to at least 25% of the participant's accrued benefit as of the
date the optional form of benefit is eliminated. But see Sec.
1.411(d)-4, Q&A-2(b)(2)(v), relating to involuntary single-sum
distributions for benefits with a present value not in excess of the
maximum dollar amount in section 411(a)(11).
(e) Permissible plan amendments under paragraphs (c) and (d)
eliminating or reducing section 411(d)(6)(B) protected benefits that
are burdensome and of de minimis value--(1) In general. A plan
amendment that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of
this section, is required to satisfy this paragraph (e) satisfies this
paragraph (e) if--
(i) The amendment eliminates section 411(d)(6)(B) protected
benefits that create significant burdens or complexities for the plan
and its participants as described in paragraph (e)(2) of this section;
and
(ii) The amendment does not adversely affect the rights of any
participant in a more than de minimis manner as described in paragraph
(e)(3) of this section.
(2) Plan amendments eliminating section 411(d)(6)(B) protected
benefits that create significant burdens and complexities--(i) Facts
and circumstances analysis. The determination of whether a plan
amendment eliminates section 411(d)(6)(B) protected benefits that
create significant burdens or complexities for the plan and its
participants is based on facts and circumstances. In the case of an
amendment that eliminates an early retirement benefit, relevant factors
include whether the annuity starting dates under the plan considered in
the aggregate are burdensome or complex (e.g., the number of categories
of early retirement benefits, whether the terms and conditions
applicable to the plan's early retirement benefits are difficult to
summarize in a manner that is concise and readily understandable to the
average plan participant, and whether those different early retirement
benefits were added to the plan as a result of plan mergers,
acquisitions, or other business transactions), and whether the effect
of the plan amendment is to reduce the number of categories of early
retirement benefit. Similarly, in the case of a plan amendment
eliminating a retirement-type subsidy or changing actuarial factors,
relevant factors include whether the actuarial factors used for
determining benefit distributions available in otherwise identical
forms of benefit under the plan considered in the aggregate are
burdensome or complex (e.g., the number of different retirement-type
subsidies and other actuarial factors available under the plan, whether
the terms and conditions applicable to the plan's retirement-type
subsidies are difficult to summarize in a manner that is concise and
readily understandable to the average plan participant, and
[[Page 13780]]
whether those different retirement-type subsidies and other actuarial
factors were added to the plan as a result of plan mergers,
acquisitions, or other business transactions), and whether the effect
of the plan amendment is to reduce the number of categories of
retirement-type subsidies or other actuarial factors.
(ii) Presumption for certain amendments. If the annuity starting
dates under the plan considered in the aggregate are burdensome or
complex, then elimination of any one of the annuity starting dates is
presumed to eliminate section 411(d)(6)(B) protected benefits that
create significant burdens or complexities for the plan and its
participants. However, if the effect of a plan amendment with respect
to a set of optional forms of benefit is merely to substitute one set
of annuity starting dates for another set of annuity starting dates,
without any reduction in the number of different annuity starting
dates, then the plan amendment does not satisfy the requirements of
paragraph (e) of this section. Similarly, if the actuarial factors used
for determining benefit distributions available in otherwise identical
forms of benefit under the plan considered in the aggregate are
burdensome or complex, then elimination of any one set of actuarial
factors is presumed to eliminate section 411(d)(6)(B) protected
benefits that create significant burdens or complexities for the plan
and its participants. However, if the effect of a plan amendment with
respect to a set of optional forms of benefit is merely to substitute
one set of actuarial factors for another set of actuarial factors,
without any reduction in the number of different actuarial factors,
then the plan amendment does not satisfy the requirements of paragraph
(e) of this section.
(iii) Restrictions against creating burdens or complexities. See
paragraph (b)(1)(ii) of this section for general rules applicable to
multiple amendments. In accordance with these rules, for example,
section 411(d)(6)(B) protected benefits are not considered to create
burdens and complexities for a plan and its participants if the plan
adds a retirement-type subsidy in order to later eliminate another
retirement-type subsidy, even if the elimination of the other subsidy
would not adversely affect the rights of any plan participant in a more
than de minimis manner as provided in paragraph (e)(3) of this section.
(3) Elimination of early retirement benefits or retirement-type
subsidies that are de minimis--(i) Rules for retained optional forms of
benefit under paragraph (c) of this section. For purposes of paragraph
(c) of this section, the elimination of an optional form of benefit
does not adversely affect the rights of any participant in a more than
de minimis manner if--
(A) The retained optional form of benefit described in paragraph
(c) of this section has substantially the same annuity starting date as
the optional form of benefit that is being eliminated, as described in
paragraph (e)(4) of this section; and
(B) Either the actuarial present value of the benefit payable in
the optional form of benefit that is being eliminated does not exceed
the actuarial present value of the benefit payable in the retained
optional form of benefit by more than a de minimis amount, as described
in paragraph (e)(5) of this section, or the amendment satisfies the
requirements of paragraph (e)(6) of this section relating to a delayed
effective date.
(ii) Rules for core options under paragraph (d) of this section.
For purposes of paragraph (d) of this section, the elimination of an
optional form of benefit does not adversely affect the rights of any
participant in a more than de minimis manner if, with respect to each
of the core options--
(A) The core option is available after the amendment with
substantially the same annuity starting date as the optional form of
benefit that is being eliminated, as described in paragraph (e)(4) of
this section; and
(B) Either the actuarial present value of the benefit payable in
the optional form of benefit that is being eliminated does not exceed
the actuarial present value of the benefit payable under the core
option by more than a de minimis amount, as described in paragraph
(e)(5) of this section, or the amendment satisfies the requirements of
paragraph (e)(6) of this section.
(4) Definition of substantially the same annuity starting dates.
For purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this
section, annuity starting dates are considered substantially the same
if they are within six months of each other.
(5) Definition of de minimis difference in actuarial present value.
For purposes of applying paragraphs (e)(3)(i)(B) and (ii)(B) of this
section, a difference in actuarial present value between the optional
form of benefit being eliminated and the retained optional form of
benefit or core option is of no more than a de minimis amount if, as of
the applicable amendment date, the difference between the actuarial
present value of the eliminated optional form of benefit and the
actuarial present value of the retained optional form of benefit or
core option is not more than the greater of--
(i) 2% of the present value of the retirement-type subsidy under
the eliminated optional form of benefit (if any) prior to the
amendment; or
(ii) 1% of the participant's compensation for the prior plan year
(as defined in section 415(c)(3)).
(6) Delayed effective date--(i) General rule. For purposes of
applying paragraph (e)(3) of this section, an amendment that eliminates
an optional form of benefit satisfies the requirements of this
paragraph (e)(6) if the elimination of the optional form of benefit is
not applicable to any annuity starting date before the end of the
expected transition period for that optional form of benefit.
(ii) Determination of expected transition period. The expected
transition period for an optional form of benefit is the period that
begins when the amendment is adopted and ends when it is reasonable to
expect, with respect to a section 411(d)(6)(B) protected benefit (i.e.
not taking into account future service), that the form being eliminated
would be subsumed by another optional form of benefit (after taking
into account expected future accruals). For this purpose, the expected
transition period must be determined in accordance with reasonable
actuarial assumptions about the future that are likely to result in the
longest period of time until the eliminated optional form of benefit
would be subsumed, such as the assumption that the participant's
compensation will not increase and that future accruals will not exceed
accruals in recent periods. In addition, if the plan is subsequently
amended to reduce the rate of future benefit accrual (or otherwise to
lengthen the expected transition period) before the end of the
previously determined expected transition period, the later plan
amendment must provide that the elimination of the optional form of
benefit is void (or must provide for the effective date to be further
extended to a new expected transition date that satisfies this
paragraph (e)(6) taking into account the subsequent amendment).
(iii) Applicability of the delayed effective date rule limited to
employees who continue to accrue benefits through the end of expected
transition period. An amendment eliminating an optional form of benefit
under this paragraph (e)(6) must be limited to participants who
continue to accrue benefits under the plan through the end of the
expected transition period. Thus, for example, the plan amendment may
not apply to any participant who has a severance from
[[Page 13781]]
employment during the expected transition period.
(iv) Special rule for section 204(h) notice. See Sec. 54.4980F-
1(b), Q&A-8(c), of this chapter for a special rule relating to this
paragraph (e)(6).
(f) Definitions and use of terms--(1) Ancillary benefit. An
ancillary benefit means a social security supplement (other than a
QSUPP as defined in Sec. 1.401(a)(4)-12), a disability benefit not in
excess of a qualified disability benefit described in section
411(a)(9), an ancillary life insurance or health insurance benefit, a
death benefit under a defined contribution plan, a preretirement death
benefit under a defined benefit plan, a plant shutdown benefit that
does not continue past retirement age, or any other similar benefit
that does not affect the payment of the accrued benefit. See Sec. Sec.
1.401-1(b)(1)(i), (ii), and (iii) and 1.401(a)(4)-4(e)(2).
(2) Applicable amendment date. The term applicable amendment date
means, with respect to a plan amendment, the later of the effective
date of the amendment or the date the amendment is adopted.
(3) Core options--(i) General rule. The core options in a plan
are--
(A) A straight life annuity under which the participant is entitled
to a level life annuity with no benefit payable after the participant's
death;
(B) A joint and contingent annuity under which the participant is
entitled to a life annuity with a survivor annuity for the individual
designated by the participant (whether or not the participant's spouse)
that is 75% of the amount payable during the participant's life;
(C) A 10-year certain and life annuity under which the participant
is entitled to a life annuity with a guarantee that payments will
continue to any person designated by the participant for the remainder
of a fixed period of 10 years if the participant dies before the end of
the 10-year period; and
(D) The most valuable option for a participant with a short life
expectancy (as defined in paragraph (f)(3)(iv) of this section).
(ii) Treatment of similar core options with different actuarial
factors and annuity starting dates. Except for core options described
in paragraph (f)(3)(i)(D) of this section, whether an option is a core
option is determined without regard to the actuarial factors that are
used to determine the amount of the distributions under those optional
forms and without regard to annuity starting dates. Thus, two core
options that are described in paragraph (f)(3)(i)(A), or (B) or (C) of
this section are not different core options solely because the core
options start on different annuity starting dates.
(iii) Modification of core options to satisfy other requirements.
An annuity does not fail to be a joint and contingent annuity described
in paragraph (f)(3)(i)(B) of this section or a 10-year certain and life
annuity described in paragraph (f)(3)(i)(C) of this section as a result
of differences to comply with applicable law, such as limitations on
death benefits to comply with the incidental benefit requirement of
Sec. 1.401-1(b)(1)(i) or on account of the spousal consent rules of
section 417.
(iv) The most valuable option for a participant with a short life
expectancy--(A) General definition. Except as provided in paragraph
(f)(3)(iv)(B) of this section, the most valuable option for a
participant with a short life expectancy means the optional form of
benefit, for each annuity starting date, that is reasonably expected to
result in payments that have the largest actuarial present value in the
case of a participant who dies shortly after the annuity starting date,
taking into account both payments due to the participant prior to the
participant's death and any payments due after the participant's death.
For this purpose, a plan is permitted to assume that the spouse of the
participant is the same age as the participant. In addition, a plan is
permitted to assume that the optional form of benefit that is the most
valuable option for a participant with a short life expectancy when the
participant is age 70\1/2\ also is the most valuable option for a
participant with a short life expectancy at all older ages, and that
the most valuable option for a participant with a short life expectancy
at age 55 is the most valuable option for a participant with a short
life expectancy at all younger ages.
(B) Safe harbor hierarchy--(1) A plan may treat a single-sum
distribution option with an actuarial present value that is not less
than the actuarial present value of any optional form of benefit
eliminated by the plan amendment as the most valuable option for a
participant with a short life expectancy for each annuity starting date
if it is available at all annuity starting dates, without regard to
whether the option was available before the plan amendment.
(2) If a plan before the amendment does not offer a single-sum
distribution option as described in paragraph (f)(3)(iv)(B)(1) of this
section, a plan may treat a joint and contingent annuity with a
continuation percentage that is at least 75% and that is at least as
great as the highest continuation percentage available before the
amendment as the most valuable option for a participant with a short
life expectancy for each annuity starting date if it is available at
all annuity starting dates, without regard to whether the option was
available before the plan amendment.
(3) If the plan before the amendment offers neither a single-sum
distribution option as described in paragraph (f)(3)(iv)(B)(1) of this
section nor a joint and contingent annuity with a continuation
percentage as described in paragraph (f)(3)(iv)(B)(2) of this section,
a plan may treat a term certain and life annuity with a term certain
period no less than 15 years as the most valuable option for a
participant with a short life expectancy for each annuity starting date
if it is available at all annuity starting dates, without regard to
whether the option was available before the plan amendment.
(4) Definitions of types of section 411(d)(6)(B) protected
benefits--(i) Early retirement benefit. An early retirement benefit
means the right, under the terms of a plan, to commence distribution of
a retirement-type benefit at a particular date after severance from
employment with the employer and before normal retirement age.
Different early retirement benefits result from differences in terms
relating to timing.
(ii) Optional form of benefit. An optional form of benefit means a
distribution alternative (including the normal form of benefit) that is
available under the plan with respect to benefits described in section
411(d)(6)(A) or a distribution alternative with respect to a
retirement-type benefit. Different optional forms of benefit exist if a
distribution alternative is not payable on substantially the same terms
as another distribution alternative. The relevant terms include all
terms affecting the value of the optional form, such as the method of
benefit calculation and the actuarial assumptions used to determine the
amount distributed. Thus, for example, different optional forms of
benefit may result from differences in terms relating to the payment
schedule, timing, commencement, medium of distribution (e.g., in cash
or in kind), election rights, differences in eligibility requirements,
or the portion of the benefit to which the distribution alternative
applies. Differences in the normal retirement ages of employees or in
the form in which the accrued benefit of employees is payable at normal
retirement age under a plan are taken into account in determining
whether a distribution alternative constitutes one or more optional
forms of benefit.
[[Page 13782]]
(iii) Retirement-type benefit. A retirement-type benefit means the
payment of a distribution alternative with respect to an accrued
benefit or the payment of any other benefit that continues after
retirement that is not an ancillary benefit (including a QSUPP as
defined in Sec. 1.401(a)(4)-12).
(iv) Retirement-type subsidy. A retirement-type subsidy means the
excess, if any, of the actuarial present value of a retirement-type
benefit, over the actuarial present value of the accrued benefit
commencing at normal retirement age or at actual commencement date, if
later, with both such actuarial present values determined as of the
date the retirement-type benefit commences. Examples of retirement-type
subsidies include a subsidized early retirement benefit and a
subsidized qualified joint and survivor annuity as described in Sec.
1.415-3(c)(2)(i).
(v) Subsidized early retirement benefit or early retirement
subsidy. A subsidized early retirement benefit or an early retirement
subsidy means the right, under the terms of a plan, to commence
distribution of a retirement-type benefit at a particular date after
severance from employment with the employer and before normal
retirement age where the actuarial present value of the optional forms
of benefit available to the participant under the plan at that annuity
starting date exceeds the actuarial present value of the accrued
benefit commencing at normal retirement age (with such actuarial
present values determined as of the annuity starting date). Thus, an
early retirement subsidy is an early retirement benefit that provides a
retirement-type subsidy.
(5) Eliminate; elimination; reduce; reduction. The terms eliminate
or elimination when used in connection with a section 411(d)(6)(B)
protected benefit mean to eliminate or the elimination of an optional
form of benefit or an early retirement benefit and to reduce or a
reduction in a retirement-type subsidy. The terms reduce and reduction
when used in connection with a retirement-type subsidy mean to reduce
or a reduction in the amount of the subsidy. For purposes of this
section, an elimination includes a reduction and a reduction includes
an elimination.
(6) Retirement. In general, for purposes of this section, the date
of retirement refers to the annuity starting date. Thus, the term
preretirement refers to the time period before the annuity starting
date.
(7) Other rights and features. The term other right or feature
generally means any right or feature applicable to employees under a
plan. Different rights or features exist if a right or feature is not
available on substantially the same terms as another right or feature.
For exceptions to the definition of other right or feature, see Sec.
1.401(a)(4)-4(e)(3)(ii).
(8) Actuarial present value. For purposes of this section, the term
actuarial present value means actuarial present value (within the
meaning of Sec. 1.401(a)(4)-12) determined using reasonable actuarial
assumptions.
(9) Refund of employee contributions feature. A refund of employee
contributions features means a feature with respect to an optional form
of benefit that provides for employee contributions and interest
thereon to be paid in a single sum at the annuity starting date with
the remainder to be paid in another form beginning on that date.
(10) Retroactive annuity starting date feature. A retroactive
annuity starting date feature means a feature with respect to an
optional form of benefit under which the annuity starting date for the
distribution occurs prior to the date the participant is furnished the
notice described in section 417(a)(3).
(11) Section 411(d)(6)(B) protected benefit. The term section
411(d)(6)(B) protected benefit means the portion of an early retirement
benefit, a retirement-type subsidy, or an optional form of benefit
attributable to the service of a participant before the applicable
amendment date.
(12) Social security leveling feature. A social security leveling
feature means a feature with respect to an optional form of benefit
which is designed to provide an approximately level amount annually
when the participant's estimated old age benefits from Social Security
are taken into account.
(g) Examples. The following examples illustrate the application of
paragraphs (b) through (f) of this section:
Example 1. (i) Facts involving amendments to an early retirement
subsidy. Plan A provides an annual benefit of 2% of career average
pay times years of service commencing at normal retirement age (age
65). Plan A is amended on November 1, 2004, effective as of January
1, 2005, to provide for an annual benefit of 1.3% of final pay times
years of service, with final pay computed as the average of a
participant's highest 3 consecutive years of compensation.
Participant M is age 50, he has 16 years of service, his career
average pay is $37,500, and the average of his highest 3 consecutive
years of compensation is $67,308. Thus, M's accrued benefit as of
the effective date of the amendment is increased from $12,000 per
year at normal retirement age (2% times $37,500 times 16 years of
service) to $14,000 per year at normal retirement age (1.3% times
$67,308 times 16 years of service). (These facts are similar to the
facts in Example 1 in paragraph (a)(4) of this section.) Before the
amendment, Plan A permitted a former employee to commence
distribution of benefits as early as age 55 and, for a participant
with at least 15 years of service, actuarially reduced the amount
payable in the form of a straight life annuity commencing before
normal retirement age by 3% per year from age 60 to age 65 and by 7%
per year from age 55 through age 59. Thus, before the amendment, the
amount of M's early retirement benefit that would be payable for
commencement at age 55 was $6,000 per year ($12,000 per year minus
3% for 5 years and minus 7% for 5 more years). The amendment also
alters the actuarial reduction factor so that, for a participant
with at least 15 years of service, the amount payable in a straight
life annuity commencing before normal retirement age is reduced by
6% per year. As a result, the amount of M's early retirement benefit
at age 55 becomes $5,600 per year after the amendment ($14,000 minus
6% for 10 years).
(ii) Conclusion. The straight life annuity payable under Plan A
at age 55 is an optional form of benefit that is an early retirement
subsidy. The plan amendment fails to satisfy the requirements of
section 411(d)(6)(B) because the amendment decreases the optional
form of benefit payable to Participant M below the level that
Participant M was entitled to receive immediately before the
effective date of the amendment. If instead Plan A had included a
provision under which M's straight life annuity payable at any age
could be not be less than what it was immediately before the
amendment (so that M's straight life annuity payable at age 55 could
not be less than $6,000 per year), then the amendment would not fail
to satisfy the requirements of section 411(d)(6)(B) with respect to
M's straight life annuity payable at age 55 (although the straight
life annuity payable to M at age 55 would not increase until the
point in time at which the new formula amount with the new actuarial
reduction factors exceeds the amount payable under the minimum
provision, approximately 14 months after the amendment becomes
effective).
Example 2. (i) Facts involving contingent-event benefits. Plan B
permits participants who have a severance from employment before
normal retirement age to commence distributions at any time after
age 55 with the amount payable to be actuarially reduced using
reasonable actuarial assumptions regarding interest and mortality,
but provides that the annual reduction for any participant who has
at least 20 years of service and who has a severance from employment
after age 55 is only 3% per year (which is a smaller reduction than
would apply under reasonable actuarial reductions). Plan B also
provides two plant shutdown benefits to participants who have a
severance of employment as a result of a plant shutdown. First, the
favorable 3% actuarial reduction will apply for commencement of
benefits after age 55 and before age 65 for any participant who has
a severance from employment as a result of a plant shutdown
[[Page 13783]]
and who has at least 10 years of service. Second, all participants
who have at least 20 years of service and who have a severance from
employment after age 55 (and before retirement age) as a result of a
plant shutdown will receive a supplement. Under the supplement, an
additional amount equal to the participant's estimated old-age
insurance benefit under the Social Security Act is payable until age
65. The supplement is not a QSUPP, as defined in Sec. 1.401(a)(4)-
12, because the plan's terms do not state that the supplement is
treated as an early retirement benefit that is protected under
section 411(d)(6).
(ii) Conclusion. The benefit payable with the 3% annual
reduction is a retirement-type benefit. The excess of the actuarial
present value of the early retirement benefit using the 3% annual
reduction over the actuarial present value of the normal retirement
benefit is a retirement-type subsidy and the right to receive
payments of the subsidy at age 55 is an early retirement benefit.
Thus, the right to receive the retirement-type subsidy for
participants with at least 10 years of service at the time of a
plant shutdown is an early retirement benefit that provides a
retirement-type subsidy and is a section 411(d)(6)(B) protected
benefit (even though no plant shutdown has occurred). Therefore, a
plan amendment cannot eliminate this benefit with respect to service
before the applicable amendment date, even before the occurrence of
the plant shutdown. Because the plan provides that the supplement
cannot exceed the OASDI benefit (Social Security), the supplement is
a social security supplement, which is an ancillary benefit that is
not a section 411(d)(6)(B) protected benefit.
Example 3. (i) Facts involving elimination of optional forms of
benefit as redundant. Plan C is a defined benefit plan under which
employees may elect to commence distributions at any time after the
later of termination of employment or attainment of age 55. At each
potential annuity starting date, Plan C permits employees to select,
with spousal consent where required, a straight life annuity or any
of a number of actuarially equivalent alternative forms of payment,
including a straight life annuity with cost-of-living increases and
a joint and contingent annuity with the participant having the right
to select any beneficiary and any continuation percentage from 1% to
100%, subject to modification to the extent necessary to satisfy the
requirements of the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i). The amount of any alternative payment is determined as
the actuarial equivalent of the straight life annuity payable at the
same age using reasonable actuarial assumptions. On September 2,
2004, Plan C is amended to delete all continuation percentages for
joint and contingent options other than 25%, 50%, 75% or 100%,
effective with respect to annuity starting dates that are on or
after January 1, 2005.
(ii) Conclusion. (A) Categorization of family members under the
redundancy rule. The optional forms of benefit described in
paragraph (i) of this Example 3 are members of four families: a
straight life annuity; a straight life annuity with cost-of-living
increases; joint and contingent options with continuation
percentages of less than 50%; and joint and contingent options with
continuation percentages of 50% or more. The amendment does not
affect either of the first two families, but affects the two
families relating to joint and contingent options.
(B) Conclusion for elimination of optional forms of benefit as
redundant. The amendment satisfies the requirements of paragraph (c)
of this section. First, the eliminated optional forms of benefit are
redundant with respect to the retained optional forms of benefit
because each eliminated joint and contingent annuity option with a
continuation percentage of less than 50% is redundant with respect
to the 25% continuation option and each eliminated joint and
contingent annuity option with a continuation percent of 50% or
higher is redundant with respect to any one of the retained 50%,
75%, or 100% continuation options. In addition, to the extent that
the optional form of benefit that is being eliminated does not
include a social security leveling feature, return of employee
contribution feature, or retroactive annuity starting date feature,
the retained optional form of benefit does not include that feature.
Second, the amendment is not effective with respect to annuity
starting dates that are less than 90 days from the date of the
amendment. Third, the plan amendment does not eliminate any
available core options, including the most valuable option for a
participant with a short life expectance, treating a joint and
contingent annuity with a 100% continuation percentage as this
optional form of benefit pursuant to paragraph (f)(3)(iv)(B)(2) of
this section. Finally, the amendment need not satisfy the
requirements of paragraph (e) of this section because the retained
optional forms of benefit are available on the same annuity starting
dates and have the same actuarial present value as the optional
forms of benefit that are being eliminated.
Example 4. (i) Facts involving elimination of optional forms of
benefit as redundant if additional restrictions are imposed. The
facts are the same as Example 3, except that the plan amendment also
restricts the class of beneficiaries that may be elected under the
four retained joint and contingent annuities to the employee's
spouse.
(ii) Conclusion. The amendment fails to satisfy the requirements
of paragraph (c)(2)(i)(C) of this section because the retained joint
and contingent annuities have materially greater restrictions on the
beneficiary designation than did the eliminated joint and contingent
annuities. Thus, the joint and contingent annuities being eliminated
are not redundant with respect to the retained joint and contingent
annuities. In addition, the amendment fails to satisfy the
requirements of the core option rules in paragraph (d) of this
section because the amendment fails to be limited to annuity
starting dates that are at least 4 years after the date the
amendment is adopted, the amendment fails to include the core option
in paragraph (f)(3)(i)(B) of this section because the participant
does not have the right to designate any beneficiary, and the
amendment fails to include the core option described in paragraph
(f)(3)(i)(C) of this section because the plan does not provide a 10-
year certain and life annuity.
Example 5. (i) Facts involving elimination of a social security
leveling feature and a period certain annuity as redundant. Plan D
is a defined benefit plan under which participants may elect to
commence distributions in the following actuarially equivalent
forms, with spousal consent if applicable: a straight life annuity;
a 50%, 75%, or 100% joint and contingent annuity; a 5-year, 10-year,
or a 15-year period certain and life annuity; and an installment
refund annuity (i.e., an optional form of benefit that provides a
period certain, the duration of which is based on the participant's
age), with the participant having the right to select any
beneficiary. In addition, each annuity offered under the plan, if
payable to a participant who is less than age 65, is available both
with and without a social security leveling feature. The social
security leveling feature provides for an assumed commencement of
social security benefits at any age selected by the participant
between age 62 and 65. Plan D is amended on September 1, 2004,
effective as of January 1, 2005, to eliminate the installment refund
form of benefit and to restrict the social security leveling feature
to an assumed social security commencement age of 65.
(ii) Conclusion. The amendment satisfies the requirements of
paragraph (c) of this section. First, the installment refund annuity
option is redundant with respect to the 15-year certain and life
annuity (except for advanced ages where, because of shorter life
expectancies, the installment refund annuity option is redundant
with respect to the 5-year certain and life annuity and also
redundant with respect to the 10-year certain and life annuity).
Second, with respect to restricting the social security leveling
feature to an assumed social security commencement age of 65, under
paragraph (c)(3)(ii) of this section, straight life annuities with
social security leveling features that have different social
security commencement ages are treated as members of the same family
as straight life annuities without social security leveling
features. To the extent an optional form of benefit that is being
eliminated includes a social security leveling feature, the retained
optional form of benefit must also include that feature, but it is
permitted to have a different assumed age for commencement of social
security benefits. Third, to the extent that the optional form of
benefit that is being eliminated does not include a social security
leveling feature, a return of employee contribution feature, or
retroactive annuity starting date feature, the retained optional
form of benefit must not include that feature. Fourth, the plan
amendment does not eliminate any available core options, including
the most valuable option for a participant with a short life
expectance, treating a joint and contingent annuity with a 100%
continuation percentage as this optional form of benefit pursuant to
paragraph (f)(3)(iv)(B)(2) of this section. Fifth, the amendment is
not effective with respect to annuity starting dates that are less
than 90 days from the date the amendment is adopted. The amendment
[[Page 13784]]
need not satisfy the requirements of paragraph (e) of this section
because the retained optional forms of benefit are available on the
same annuity starting dates and have the same actuarial present
value as the optional forms of benefit that are being eliminated.
Example 6. (i) Facts involving elimination of noncore options.
Employer N sponsors Plan E, a defined benefit plan that permits
every participant to elect payment in the following actuarially
equivalent optional forms of benefit (Plan E's uniformly available
options), with spousal consent if applicable: a straight life
annuity, a 50%, 75%, or 100% joint and contingent annuity with no
restrictions on designation of beneficiaries, and a 5-, 10-, or 15-
year period certain and life annuity. In addition, each can be
elected in conjunction with a social security leveling feature, with
the participant permitted to select a social security commencement
age from age 62 to age 67. None of Plan E's uniformly available
options include a single-sum distribution. The plan has been in
existence for over 30 years, during which time Employer N has
acquired a large number of other businesses, including merging over
20 defined benefit plans of acquired entities into Plan E. Many of
the merged plans offered optional forms of benefit that were not
among Plan E's uniformly available options, including some plans
funded through insurance products, often offering all of the
insurance annuities that the insurance carrier offers, and with some
of the merged plans offering single-sum distributions. In
particular, under the XYZ acquisition, the XYZ acquired plan offered
a single-sum distribution option that was frozen at the time of the
acquisition. On April 1, 2005, each single-sum distribution option
applies to less than 25% of the XYZ acquired participants' accrued
benefits. Employer N has generally, but not uniformly, followed the
practice of limiting the optional forms of benefit for an acquired
unit to an employee's service before the date of the merger, and has
uniformly followed this practice with respect to each of the early
retirement subsidies in the acquired unit's plan. As a result, as of
April 1, 2005, Plan E includes a large number of optional forms of
benefit which are not members of families identified in paragraph
(c)(4) of this section, but there are no participants who are
entitled to any early retirement subsidies because any subsidies
have been subsumed by the actuarially reduced accrued benefit. Plan
E is amended in April of 2005 to eliminate all of the optional forms
of benefit that Plan E offers other than Plan E's uniformly
available options, except that the amendment does not eliminate any
single-sum distribution option except with respect to XYZ acquired
participants and permits any commencement date that was permitted
under Plan E before the amendment. Plan E also eliminates the
single-sum distribution option for XYZ acquired participants.
Further, each of Plan E's uniformly available options has an
actuarial present value that is not less than the actuarial present
value of any optional form of benefit offered before the amendment.
The amendment is effective with respect to annuity starting dates
that are on or after May 1, 2009.
(ii) Conclusion. The amendment satisfies the requirements of
paragraph (d) of this section. First, Plan E, as amended, does not
eliminate any single-sum distribution option as provided in
paragraph (d)(2)(iii) of this section except for single-sum
distribution options that apply to less than 25% of a plan
participant's accrued benefit as of the date the option is
eliminated (May 1, 2009). Second, Plan E, as amended, includes each
of the core options as defined in paragraph (f)(3) of this section,
including offering the most valuable option for a participant with a
short life expectancy (treating the 100% joint and contingent
annuity as this benefit, under paragraph (f)(3)(iv)(B)(2) of this
section). The grandfathered single-sum distribution options are not
the most valuable option for a participant with a short life
expectancy because these distributions are not available with
respect to a participant's entire accrued benefit. In addition, as
required under paragraph (d)(2) of this section, to the extent an
optional form of benefit that is being eliminated includes either a
social security leveling feature or a refund of employee
contributions feature, at least one of the core options is available
with that feature and, to the extent that the optional form of
benefit that is being eliminated does not include a social security
leveling feature or a refund of employee contributions feature, each
of the core options is available without that feature. Third, the
amendment is not effective with respect to annuity starting dates
that are less than 4 years after the date the amendment is adopted.
Finally, the amendment need not satisfy the requirements of
paragraph (e) of this section because the retained optional forms of
benefit are available on the same annuity starting date and have the
same actuarial present value as the optional forms of benefit that
are being eliminated.
Example 7. (i) Facts involving reductions in actuarial present
value. (A) Plan F is a defined benefit plan providing an accrued
benefit of 1% of the average of a participant's highest 3
consecutive years' pay times years of service, payable as a straight
life annuity beginning at age 65. Plan F permits employees to elect
to commence reduced distributions at any time after the later of
termination of employment or attainment of age 55. At each potential
annuity starting date, Plan F permits employees to select, with
spousal consent, either a straight life annuity, a joint and
contingent annuity with the participant having the right to select
any beneficiary and a continuation percent of 50%, 66\2/3\%, 75%, or
100%, or a 10-year certain and life annuity with the participant
having the right to select any beneficiary, subject to modification
to the extent necessary to satisfy the requirements of the
incidental benefit requirement of Sec. 1.401-1(b)(1)(i). The amount
of any joint and contingent annuity and the 10-year certain and life
annuity is determined as the actuarial equivalent of the straight
life annuity payable at the same age using reasonable actuarial
assumptions. The plan covers employees at four divisions, one of
which, division X, was acquired on January 1, 1999. The plan
provides for distributions before normal retirement age to be
actuarially reduced, but, if a participant retires after attainment
of age 55 and completion of 10 years of service, the applicable
early retirement reduction factor is 3% per year for the years
between age 65 and 62 and 6% per year for the ages from 62 to 55 for
all employees at any division, except for employees who were in
division X on January 1, 1999, for whom the early retirement
reduction factor for retirement after age 55 and 10 years of service
is 5% for each year before age 65. On December 2, 2004, effective
January 1, 2005, Plan F is amended to change the early retirement
reduction factors for all employees of division X to be the same as
for other employees, effective with respect to annuity starting
dates that are on or after January 1, 2006, but only with respect to
participants who are employees on or after January 1, 2006 and only
if Plan F continues accruals at the current rate through January 1,
2006 (or the effective date of the change in reduction factors is
delayed to reflect the change in the accrual rate). For purposes of
this Example 7, it is assumed that an actuarially equivalent early
retirement factor would have a reduction shown in column 4 of the
following table, which compares the reduction factors for division X
before and after the amendment:
----------------------------------------------------------------------------------------------------------------
Old Actuarially Column 3
Age division X New factor equivalent minus
factor factor column 2
----------------------------------------------------------------------------------------------------------------
1 2 3 4 5
-------------------------------------------------------------
65.......................................................... NA NA NA NA
64.......................................................... 95 97 91.1 +2
63.......................................................... 90 94 83.2 +4
62.......................................................... 85 91 76.1 +5
61.......................................................... 80 85 69.8 +5
60.......................................................... 75 79 64.1 +4
59.......................................................... 70 73 59.0 +3
[[Page 13785]]
58.......................................................... 65 67 54.3 +2
57.......................................................... 60 61 50.1 +1
56.......................................................... 55 55 46.3 0
55.......................................................... 50 49 42.8 -1
----------------------------------------------------------------------------------------------------------------
(B) On January 1, 2005, the employee with the largest number of
years of service is Employee E, who is age 54 and has 20 years of
service. For 2004, Employee E's compensation is $80,000 and E's
highest 3 consecutive years of pay on January 1, 2005 is $75,000.
Employee E's accrued benefit as of the effective date of the
amendment is a life annuity of $15,000 per year at normal retirement
age (1% times $75,000 times 20 years of service) and E's early
retirement benefit commencing at age 55 has a present value of
$91,397 as of January 1, 2005. It is assumed for purposes of this
example that the longest expected transition period for any active
employee does not exceed 5 months (20 years and 5 months, times 1%
times 49% exceeds 20 years times 1% times 50%). Finally, it is
assumed for purposes of this example that the amendment reduces
optional forms of benefit which are burdensome or complex.
(ii) Conclusion concerning application of section 411(d)(6)(B).
The amendment reducing the early retirement factors has the effect
of eliminating the existing optional forms of benefit (where the
amount of the benefit is based on preamendment early retirement
factors in any case where the new factors result in a smaller amount
payable) and adding new optional forms of benefit (where the amount
of benefit is based on the different early retirement factors).
Accordingly, the elimination must satisfy the requirements of
paragraph (c) or (d) of this section if the amount payable at any
date is less than would have been payable under the plan before the
amendment.
(iii) Conclusion concerning application of redundancy rules. The
amendment satisfies the requirements of paragraph (c)(1)(i) and (ii)
of this section (see paragraphs (iv) through (vi) of this Example 7
for the requirements of paragraph (c)(1)(iii) of this section).
First, with respect to each eliminated optional form of benefit
(i.e., with respect to each optional form of benefit with the Old
Division X Factor), after the amendment there is a retained optional
form of benefit that is in the same family of optional forms of
benefit (i.e., the optional form of benefit with the New Factor).
Second, the amendment is not effective with respect to annuity
starting dates that are less than 90 days from the date the
amendment is adopted. Third, to the extent that the plan amendment
eliminates the most valuable option for a participant with a short
life expectancy, the retained optional form of benefit is identical
except for differences in actuarial factors.
(iv) Conclusion concerning application of the requirements under
paragraph (e) of this section. The plan amendment must satisfy the
requirements of paragraph (e) of this section because, as of the
applicable amendment date, the actuarial present value of the early
retirement subsidy is less than the actuarial present value of the
early retirement subsidy being eliminated. The plan amendment
satisfies the requirements under paragraph (e)(1)(i) of this section
because the amendment eliminates optional forms of benefit that
create significant burdens or complexities for the plan and its
participants. See below for the de minimis requirement under
paragraph (e)(1)(ii) of this section.
(v) Conclusion concerning application of de minimis rules under
paragraph (e)(5) of this section. The amendment does not satisfy the
requirements of paragraph (e)(5) of this section because the
reduction in the actuarial present value is more than a de minimis
amount under paragraph (e)(5) of this section. For example, for
Employee E, the amount of the joint and contingent annuity payable
at age 55 is reduced from $7,500 (50% of $15,000) to $7,350 (49% of
$15,000) and the reduction in present value as a result of the
amendment is $1,828 ($91,397-$89,569). In this case, the retirement-
type subsidy at age 55 is the excess of the present value of the 50%
early retirement benefit over the present value of the deferred
payment of the accrued benefit, or $13,921 ($97,269-$83,348) and the
present value at age 54 of the retirement-type subsidy is $13,081.
The reduction in present value is more than the greater of 2% of the
present value of the retirement-type subsidy and 1% of E's
compensation because the reduction in present value exceeds $800
(the greater of $262, which is 2% of the present value of the
retirement-type subsidy for the benefit being eliminated, and $800,
which is 1% of E's compensation of $80,000).
(vi) Conclusion involving application of de minimis rules under
paragraph (e)(6) relating to expected transition period. The
amendment satisfies the requirements of paragraph (e)(6) of this
section and, thus, satisfies the requirements of paragraph (c) of
this section, including the requirement in paragraph (c)(1)(iii) of
this section that paragraph (e) of this section be satisfied. First,
it is presumed that the amendment reduces optional forms of benefit
that are burdensome or complex. Second, the plan amendment is not
effective for annuity starting dates before January 1, 2006, and
that date is not earlier than the longest expected transition period
for any participant in Plan F on the date of the amendment. Third,
the amendment does not apply to any participant who has a severance
from employment during the transition period. If, however, a later
plan amendment reduces accruals under Plan F, the initial amendment
will no longer satisfy the requirements of paragraph (e)(6) of this
section (and must be voided) unless, as part of the later amendment,
the expected transition period is extended to reflect the reduction
in accruals under Plan F.
(h) Effective date. The rules of this section apply to amendments
adopted on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
PART 54--PENSION EXCISE TAXES
Par. 3. The authority citation for part 54 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * * 54.4980F-1 also issued under 26
U.S.C. 4980F. * * *
Par. 4. Section 54.4980F-1(b) is amended by:
1. Revising paragraph (c) of A-8.
2. Revising paragraph (d) of A-8.
The revisions read as follows:
Sec. 54.4980F-1 Notice requirements for certain pension plan
amendments significantly reducing the rate of future benefit accrual.
* * * * *
A-8. * * *
(c) Application to certain amendments reducing early retirement
benefits or retirement-type subsidies. Section 204(h) notice is not
required for an amendment that reduces an early retirement benefit or
retirement-type subsidy if the amendment is permitted under the third
sentence of section 411(d)(6)(B) of the Internal Revenue Code and
regulations thereunder (relating to the elimination or reduction of
benefits or subsidies which create significant burdens or complexities
for the plan and plan participants unless the amendment adversely
affects the rights of any participant in a more than de minimis
manner). However, in determining whether an amendment provides for a
significant reduction for purposes of this section with respect to an
amendment that has an effective date on or after these rules are
adopted as final regulations and that reduces a retirement-type subsidy
as permitted under Sec. 1.411(d)-3(e)(6) of this chapter,
[[Page 13786]]
the amendment is treated in the same manner as an amendment that limits
the retirement-type subsidy to benefits that accrue before the
applicable amendment date (as defined at Sec. 1.411(d)-3(f)(2) of this
chapter) with respect to each participant or alternate payee to whom
the reduction is reasonably expected to apply.
(d) Example. The following examples illustrate the rules in this
Q&A-8:
Example 1. (i) Facts. Pension Plan A is a defined benefit plan
that provides a rate of benefit accrual of 1% of highest-five years'
pay multiplied by years of service, payable annually for life
commencing at normal retirement age (or at actual retirement age, if
later). Plan A is amended on August 1, 2007, effective January 1,
2008, to provide that any participant who separates from service
after December 31, 2007, and before January 1, 2013, will have the
same number of years of service he or she would have had if his or
her service continued to December 31, 2012.
(ii) Conclusion. While the amendment will result in a reduction
in the annual rate of future benefit accrual from 2009 through 2012
(because under the amendment, benefits based upon an additional five
years of service accrue on January 1, 2008, and no additional
service is credited after January 1, 2008 until January 1, 2013),
the amendment does not result in a reduction that is significant
because the amount of the annual benefit commencing at normal
retirement age (or at actual retirement age, if later) under the
terms of the plan as amended is not under any conditions less than
the amount of the annual benefit commencing at normal retirement age
(or at actual retirement age, if later) to which any participant
would have been entitled under the terms of the plan had the
amendment not been made.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that the 2008 amendment does not alter the plan provisions
relating to a participant's number of years of service, but instead
amends the plan's provisions relating to early retirement benefits.
Before the amendment, the plan provides for distributions before
normal retirement age to be actuarially reduced, but, if a
participant retires after attainment of age 55 and completion of 10
years of service, the applicable early retirement reduction factor
is 3% per year for the years between age 65 and 62 and 6% per year
for the ages from 62 to 55. The amendment changes these provisions
so that an actuarial reduction applies in all cases, but, in
accordance with section 411(d)(6)(B), provides that no participant's
early retirement benefit will be less than the amount provided under
the plan as in effect on December 31, 2007 with respect to service
before January 1, 2008. For participant X, the reduction is
significant.
(ii) Conclusion. The amendment will result in a reduction in a
retirement-type subsidy provided under Plan A (i.e., Plan A's early
retirement subsidy). Section 204(h) notice must be provided to
participant X and any other participant for whom the reduction is
significant and the notice must be provided at least 45 days before
January 1, 2008 (or by such other date as may apply under Q&A-9 of
this section).
Example 3. (i) Facts. The facts are the same as in Example 2,
except that, for participant X, the change does not go into effect
for any annuity starting date before January 1, 2009. Participant X
continues employment through January 1, 2009.
(ii) Conclusion. The conclusion is the same as in Example 2.
Taking into account the rule in the second sentence of Q&A-8(c) of
this section, the reduction that occurs for participant X on January
1, 2009, is treated as the same reduction that occurs under Example
2. Accordingly, section 204(h) notice must be provided to
participant X at least 45 days before January 1, 2008 (or by such
other date as may apply under Q&A-9 of this section).
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-6220 Filed 3-23-04; 8:45 am]
BILLING CODE 4830-01-P