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Bulletin No. 2010-48November 29, 2010
HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids
to the reader inidentifying the subject matter covered. They may
not berelied upon as authoritative interpretations.
INCOME TAX
Notice 2010–75, page 781.Credit for carbon dioxide
sequestration, 2010 section45Q inflation adjustment factor. The
notice publishes the in-flation adjustment factor for the credit
for carbon dioxide (CO2)sequestration under section 45Q of the Code
for calendar year2010. The amount of credit must be adjusted for
inflation fortaxable years beginning in a calendar year after
2009.
EMPLOYEE PLANS
T.D. 9505, page 755.Final regulations under sections 411(a)(13)
and 411(b)(5) of theCode, which were added by section 701(b) of the
Pension Pro-tection Act of 2006 (PPA ‘06), provide guidance
concerninghybrid defined benefit pension plans, including cash
balanceplans. The regulations under section 411(a)(13) generally
de-scribe the plans that are treated as statutory hybrid plans
andprovide special benefit calculation and vesting rules with
re-spect to those plans. The regulations under section
411(b)(5)provide rules for statutory hybrid plans to comply with
age dis-crimination requirements, including rules governing design
ofand conversion to a statutory hybrid plan, and rules
governingoperation of those plans, including providing interest
creditsthat do not exceed a market rate of return.
REG–132554–08, page 783.Proposed regulations under sections
411(a)(13) and 411(b)(5)of the Code, as well as section 411(b)(1),
provide additionalguidance concerning hybrid defined benefit
pension plans, in-cluding cash balance plans. In particular, these
proposed reg-ulations provide guidance as to the scope of relief
under sec-tion 411(a)(13)(A), contain a special rule regarding the
applica-tion of the 1331/3 percent rule under section 411(b)(1)(B)
to
statutory hybrid plans that credit interest using a variable
rate,provide an alternative method of satisfying the conversion
pro-tection requirements under section 411(b)(5)(B)(ii), and
provideadditional guidance with respect to the market rate of
returnrules under section 411(b)(5)(B)(i). A public hearing is
sched-uled for January 26, 2011.
ADMINISTRATIVE
Rev. Proc. 2010–41, page 781.This procedure describes the
procedures foreign persons andU.S. citizens without a social
security number, due to conscien-tious religious objection, must
follow to obtain a preparer taxidentification number (PTIN) and
provides temporary relief dur-ing the 2011 filing season for these
individuals who experiencedelay in obtaining PTINs.
Finding Lists begin on page ii.Index for July through November
begins on page iv.
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The IRS MissionProvide America’s taxpayers top-quality service
by helpingthem understand and meet their tax responsibilities and
en-
force the law with integrity and fairness to all.
IntroductionThe Internal Revenue Bulletin is the authoritative
instrument ofthe Commissioner of Internal Revenue for announcing
officialrulings and procedures of the Internal Revenue Service and
forpublishing Treasury Decisions, Executive Orders, Tax
Conven-tions, legislation, court decisions, and other items of
generalinterest. It is published weekly and may be obtained from
theSuperintendent of Documents on a subscription basis.
Bulletincontents are compiled semiannually into Cumulative
Bulletins,which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all
sub-stantive rulings necessary to promote a uniform application
ofthe tax laws, including all rulings that supersede, revoke,
mod-ify, or amend any of those previously published in the
Bulletin.All published rulings apply retroactively unless otherwise
indi-cated. Procedures relating solely to matters of internal
man-agement are not published; however, statements of
internalpractices and procedures that affect the rights and duties
oftaxpayers are published.
Revenue rulings represent the conclusions of the Service on
theapplication of the law to the pivotal facts stated in the
revenueruling. In those based on positions taken in rulings to
taxpayersor technical advice to Service field offices, identifying
detailsand information of a confidential nature are deleted to
preventunwarranted invasions of privacy and to comply with
statutoryrequirements.
Rulings and procedures reported in the Bulletin do not have
theforce and effect of Treasury Department Regulations, but theymay
be used as precedents. Unpublished rulings will not berelied on,
used, or cited as precedents by Service personnel inthe disposition
of other cases. In applying published rulings andprocedures, the
effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,and
Service personnel and others concerned are cautionedagainst
reaching the same conclusions in other cases unlessthe facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.This part includes rulings and decisions based
on provisions ofthe Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.This part is divided into
two subparts as follows: Subpart A,Tax Conventions and Other
Related Items, and Subpart B, Leg-islation and Related Committee
Reports.
Part III.—Administrative, Procedural, and Miscellaneous.To the
extent practicable, pertinent cross references to thesesubjects are
contained in the other Parts and Subparts. Alsoincluded in this
part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act
Administrative Rulings are issued bythe Department of the
Treasury’s Office of the Assistant Secre-tary (Enforcement).
Part IV.—Items of General Interest.This part includes notices of
proposed rulemakings, disbar-ment and suspension lists, and
announcements.
The last Bulletin for each month includes a cumulative indexfor
the matters published during the preceding months. Thesemonthly
indexes are cumulated on a semiannual basis, and arepublished in
the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be
reprinted freely. A citation of the Internal Revenue Bulletin as
the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402.
November 29, 2010 2010–48 I.R.B.
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Part I. Rulings and Decisions Under the Internal Revenue Codeof
1986Section 411.—MinimumVesting Standards26 CFR 1.411(a)(13)–1:
Statutory hybrid plans.
T.D. 9505
DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part
1
Hybrid Retirement Plans
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final Regulations.
SUMMARY: This document containsfinal regulations providing
guidance re-lating to certain provisions of the InternalRevenue
Code (Code) that apply to hy-brid defined benefit pension plans.
Theseregulations provide guidance on changesmade by the Pension
Protection Act of2006, as amended by the Worker, Retiree,and
Employer Recovery Act of 2008.These regulations affect sponsors,
admin-istrators, participants, and beneficiaries ofhybrid defined
benefit pension plans.
DATES: Effective Date: These regulationsare effective on October
19, 2010.
Applicability Date: These regulationsgenerally apply to plan
years that begin onor after January 1, 2011. However, seethe
“Effective/Applicability Dates” sec-tion in this preamble for
additional infor-mation regarding the applicability of
theseregulations.
FOR FURTHER INFORMATIONCONTACT: Neil S. Sandhu,Lauson C. Green,
or Linda S. F. Marshallat (202) 622–6090 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments tothe Income Tax Regulations
(26 CFR part1) under sections 411(a)(13) and 411(b)(5)of the Code.
Generally, a defined benefitpension plan must satisfy the
minimum
vesting standards of section 411(a) andthe accrual requirements
of section 411(b)in order to be qualified under section401(a) of
the Code. Sections 411(a)(13)and 411(b)(5), which modify the
mini-mum vesting standards of section 411(a)and the accrual
requirements of section411(b), were added to the Code by
section701(b) of the Pension Protection Act of2006, Public Law
109–280 (120 Stat. 780(2006)) (PPA ’06). Sections 411(a)(13)and
411(b)(5), as well as certain effec-tive date provisions related to
these sec-tions, were subsequently amended by theWorker, Retiree,
and Employer RecoveryAct of 2008, Public Law 110–458 (122Stat. 5092
(2008)) (WRERA ’08).
Section 411(a)(13)(A) provides that anapplicable defined benefit
plan (which isdefined in section 411(a)(13)(C)) is nottreated as
failing to meet either (i) therequirements of section 411(a)(2)
(sub-ject to a special vesting rule in section411(a)(13)(B) with
respect to benefits de-rived from employer contributions) or
(ii)the requirements of section 411(a)(11),411(c), or 417(e), with
respect to accruedbenefits derived from employer contribu-tions,
merely because the present value ofthe accrued benefit (or any
portion thereof)of any participant is, under the terms ofthe plan,
equal to the amount expressedas the balance of a hypothetical
accountor as an accumulated percentage of theparticipant’s final
average compensation.Section 411(a)(13)(B) requires an appli-cable
defined benefit plan to provide thatan employee who has completed
at least 3years of service has a nonforfeitable rightto 100 percent
of the employee’s accruedbenefit derived from employer
contribu-tions.
Under section 411(a)(13)(C)(i), anapplicable defined benefit
plan is de-fined as a defined benefit plan underwhich the accrued
benefit (or any por-tion thereof) of a participant is calculatedas
the balance of a hypothetical accountmaintained for the participant
or as an ac-cumulated percentage of the participant’sfinal average
compensation. Under sec-tion 411(a)(13)(C)(ii), the Secretary ofthe
Treasury is to issue regulations whichinclude in the definition of
an applicable
defined benefit plan any defined benefitplan (or portion of such
a plan) which hasan effect similar to a plan described insection
411(a)(13)(C)(i).
Section 411(b)(1)(H)(i) provides thata defined benefit plan
fails to complywith section 411(b) if, under the plan, anemployee’s
benefit accrual is ceased, orthe rate of an employee’s benefit
accrualis reduced, because of the attainment ofany age. Section
411(b)(5), which wasadded to the Code by section 701(b)(1)of PPA
’06, provides additional rules re-lated to section 411(b)(1)(H)(i).
Section411(b)(5)(A) generally provides that aplan is not treated as
failing to meet therequirements of section 411(b)(1)(H)(i) ifa
participant’s accrued benefit, as deter-mined as of any date under
the terms ofthe plan, would be equal to or greater thanthat of any
similarly situated, younger in-dividual who is or could be a
participant.For this purpose, section 411(b)(5)(A)(iv)provides that
the accrued benefit may, un-der the terms of the plan, be expressed
asan annuity payable at normal retirementage, the balance of a
hypothetical account,or the current value of the
accumulatedpercentage of the employee’s final aver-age
compensation. Section 411(b)(5)(G)provides that, for purposes of
section411(b)(5), any reference to the accruedbenefit of a
participant refers to the partic-ipant’s benefit accrued to
date.
Section 411(b)(5)(B) imposes cer-tain requirements on an
applicable de-fined benefit plan in order for the planto satisfy
section 411(b)(1)(H). Section411(b)(5)(B)(i) provides that such a
plan istreated as failing to meet the requirementsof section
411(b)(1)(H) if the terms of theplan provide for an interest credit
(or anequivalent amount) for any plan year at arate that is greater
than a market rate ofreturn. Under section 411(b)(5)(B)(i)(I),
aplan is not treated as having an above- mar-ket rate merely
because the plan providesfor a reasonable minimum guaranteed rateof
return or for a rate of return that isequal to the greater of a
fixed or variablerate of return. Section
411(b)(5)(B)(i)(II)provides that an applicable defined benefitplan
is treated as failing to meet the re-quirements of section
411(b)(1)(H) unless
2010–48 I.R.B. 755 November 29, 2010
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the plan provides that an interest credit (oran equivalent
amount) of less than zero canin no event result in the account
balance orsimilar amount being less than the aggre-gate amount of
contributions credited tothe account. Section
411(b)(5)(B)(i)(III)authorizes the Secretary of the Treasury
toprovide by regulation for rules governingthe calculation of a
market rate of returnfor purposes of section 411(b)(5)(B)(i)(I)and
for permissible methods of creditinginterest to the account
(including fixedor variable interest rates) resulting ineffective
rates of return meeting the re-quirements of section
411(b)(5)(B)(i)(I).
Section 411(b)(5)(B)(ii), (iii), and (iv)contains additional
requirements that ap-ply if, after June 29, 2005, an applicableplan
amendment is adopted. Section411(b)(5)(B)(v)(I) defines an
applica-ble plan amendment as an amendmentto a defined benefit plan
which has theeffect of converting the plan to an appli-cable
defined benefit plan. Under section411(b)(5)(B)(ii), if, after June
29, 2005,an applicable plan amendment is adopted,the plan is
treated as failing to meet therequirements of section
411(b)(1)(H)unless the requirements of section411(b)(5)(B)(iii) are
met with respect toeach individual who was a participantin the plan
immediately before theadoption of the amendment.
Section411(b)(5)(B)(iii) specifies that, subject tosection
411(b)(5)(B)(iv), the requirementsof section 411(b)(5)(B)(iii) are
met withrespect to any participant if the accruedbenefit of the
participant under the termsof the plan as in effect after the
amendmentis not less than the sum of: (I) theparticipant’s accrued
benefit for years ofservice before the effective date of
theamendment, determined under the terms ofthe plan as in effect
before the amendment;plus (II) the participant’s accrued benefitfor
years of service after the effectivedate of the amendment,
determined underthe terms of the plan as in effect afterthe
amendment. Section 411(b)(5)(B)(iv)provides that, for purposes of
section411(b)(5)(B)(iii)(I), the plan must creditthe participant’s
account or similar amountwith the amount of any early
retirementbenefit or retirement-type subsidy forthe plan year in
which the participant
retires if, as of such time, the participanthas met the age,
years of service, andother requirements under the plan
forentitlement to such benefit or subsidy.
Section 411(b)(5)(B)(v) sets forthcertain provisions related to
an ap-plicable plan amendment. Section411(b)(5)(B)(v)(II) provides
that if thebenefits under two or more defined ben-efit plans of an
employer are coordinatedin such a manner as to have the effect
ofadoption of an applicable plan amend-ment, the plan sponsor is
treated as havingadopted an applicable plan amendmentas of the date
the coordination begins.Section 411(b)(5)(B)(v)(III) directs
theSecretary of the Treasury to issue regu-lations to prevent the
avoidance of thepurposes of section 411(b)(5)(B) throughthe use of
two or more plan amendmentsrather than a single amendment.
Section 411(b)(5)(B)(vi) provides spe-cial rules for determining
benefits upontermination of an applicable defined bene-fit plan.
Under section 411(b)(5)(B)(vi)(I),an applicable defined benefit
plan is nottreated as satisfying the requirements ofsection
411(b)(5)(B)(i) (regarding per-missible interest crediting rates)
unlessthe plan provides that, upon plan termi-nation, if the
interest crediting rate underthe plan is a variable rate, the rate
of in-terest used to determine accrued benefitsunder the plan is
equal to the average ofthe rates of interest used under the
planduring the 5-year period ending on thetermination date. In
addition, under sec-tion 411(b)(5)(B)(vi)(II), the plan mustprovide
that, upon plan termination, theinterest rate and mortality table
used todetermine the amount of any benefit underthe plan payable in
the form of an annuitypayable at normal retirement age is therate
and table specified under the plan forthis purpose as of the
termination date,except that if the interest rate is a
variablerate, the rate used is the average of therates used under
the plan during the 5-yearperiod ending on the termination
date.
Section 411(b)(5)(C) provides that aplan is not treated as
failing to meet therequirements of section 411(b)(1)(H)(i)solely
because the plan provides offsetsagainst benefits under the plan to
the ex-tent the offsets are otherwise allowable
in applying the requirements of section401(a). Section
411(b)(5)(D) providesthat a plan is not treated as failing to
meetthe requirements of section 411(b)(1)(H)solely because the plan
provides a dis-parity in contributions or benefits withrespect to
which the requirements of sec-tion 401(l) (relating to permitted
disparityfor Social Security benefits and relatedmatters) are
met.
Section 411(b)(5)(E) provides that aplan is not treated as
failing to meet the re-quirements of section 411(b)(1)(H)
solelybecause the plan provides for indexing ofaccrued benefits
under the plan. Undersection 411(b)(5)(E)(iii), indexing meansthe
periodic adjustment of the accruedbenefit by means of the
application of arecognized investment index or methodol-ogy.
Section 411(b)(5)(E)(ii) requires that,except in the case of a
variable annuity,the indexing not result in a smaller benefitthan
the accrued benefit determined with-out regard to the indexing.
Section 701(a) of PPA ’06 added pro-visions to the Employee
Retirement In-come Security Act of 1974, Public Law93–406 (88 Stat.
829 (1974)) (ERISA),that are parallel to sections 411(a)(13)
and411(b)(5) of the Code. The guidance pro-vided in these
regulations with respect tothe Code also applies for purposes of
theparallel amendments to ERISA made bysection 701(a) of PPA
’06.1
Section 701(c) of PPA ’06 added pro-visions to the Age
Discrimination inEmployment Act of 1967, Public Law90–202 (81 Stat.
602 (1967)) (ADEA),that are parallel to section 411(b)(5) of
theCode. Executive Order 12067 requiresall Federal departments and
agenciesto advise and offer to consult with theEqual Employment
Opportunity Commis-sion (EEOC) during the development ofany
proposed rules, regulations, policies,procedures, or orders
concerning equalemployment opportunity. The TreasuryDepartment and
the IRS have consultedwith the EEOC prior to the issuance ofthese
regulations.
Section 701(d) of PPA ’06 provides thatnothing in the amendments
made by sec-tion 701 should be construed to create aninference
concerning the treatment of ap-plicable defined benefit plans or
conver-
1 Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR
47713), the Secretary of the Treasury has interpretive jurisdiction
over the subject matter addressed by these regulations forpurposes
of ERISA, as well as the Code.
November 29, 2010 756 2010–48 I.R.B.
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sions of plans into applicable defined ben-efit plans under
section 411(b)(1)(H), orconcerning the determination of whetheran
applicable defined benefit plan fails tomeet the requirements of
section 411(a)(2),411(c), or 417(e), as in effect before
suchamendments, solely because the presentvalue of the accrued
benefit (or any por-tion thereof) of any participant is, underthe
terms of the plan, equal to the amountexpressed as the balance of a
hypotheticalaccount or as an accumulated percentageof the
participant’s final average compen-sation.
Section 701(e) of PPA ’06 sets forththe effective date
provisions with respectto amendments made by section 701 ofPPA ’06.
Section 701(e)(1) specifies thatthe amendments made by section
701generally apply to periods beginning onor after June 29, 2005.
Thus, the agediscrimination safe harbors under section411(b)(5)(A)
and section 411(b)(5)(E) areeffective for periods beginning on or
afterJune 29, 2005. Section 701(e)(2) pro-vides that the special
present value rulesof section 411(a)(13)(A) are effective
fordistributions made after August 17, 2006(the date PPA ’06 was
enacted).
Under section 701(e) of PPA ’06,the 3-year vesting rule under
section411(a)(13)(B) is generally effective foryears beginning
after December 31, 2007,for a plan in existence on June 29,
2005,while, pursuant to the amendments madeby section 107(c) of
WRERA ’08, thisvesting rule is generally effective for planyears
ending on or after June 29, 2005,for a plan not in existence on
June 29,2005. The market rate of return limitationunder section
411(b)(5)(B)(i) is generallyeffective for years beginning after
De-cember 31, 2007, for a plan in existenceon June 29, 2005, while
the limitation isgenerally effective for periods beginningon or
after June 29, 2005, for a plan notin existence on June 29, 2005.
Section701(e)(4) of PPA ’06 contains specialeffective date
provisions for collectivelybargained plans that modify these
effectivedates.
Under section 701(e)(5) of PPA ’06,as amended by WRERA ’08,
sections
411(b)(5)(B)(ii), (iii), and (iv) apply toa conversion amendment
that is adoptedon or after, and takes effect on or after,June 29,
2005.
Under section 701(e)(6) of PPA ’06, asadded by WRERA ’08, the
3-year vestingrule under section 411(a)(13)(B) does notapply to a
participant who does not havean hour of service after the date the
3-yearvesting rule would otherwise be effective.
Section 702 of PPA ’06 provides forregulations to be prescribed
by August 16,2007, addressing the application of rulesset forth in
section 701 of PPA ’06 wherethe conversion of a defined benefit
pensionplan into an applicable defined benefit planis made with
respect to a group of employ-ees who become employees by reason of
amerger, acquisition, or similar transaction.
Under section 1107 of PPA ’06, a plansponsor is permitted to
delay adopting aplan amendment pursuant to statutory pro-visions
under PPA ’06 (or pursuant to anyregulation issued under PPA ’06)
until thelast day of the first plan year beginningon or after
January 1, 2009 (January 1,2011, in the case of governmental
plans).As described in Rev. Proc. 2007–44,2007–2 C.B 54), this
amendment dead-line applies to both interim and discre-tionary
amendments that are made pur-suant to PPA ’06 statutory provisions
orany regulation issued under PPA ’06.
See§601.601(d)(2)(ii)(b).
Section 1107 of PPA ’06 also permitscertain amendments to reduce
or eliminatesection 411(d)(6) protected benefits. Ex-cept to the
extent permitted under section1107 of PPA ’06 (or under another
statu-tory provision, including section 411(d)(6)and §§1.411(d)–3
and 1.411(d)–4), section411(d)(6) prohibits a plan amendment
thatdecreases a participant’s accrued benefitsor that has the
effect of eliminating or re-ducing an early retirement benefit or
re-tirement-type subsidy, or eliminating anoptional form of
benefit, with respect tobenefits attributable to service before
theamendment. However, an amendment thateliminates or decreases
benefits that havenot yet accrued does not violate
section411(d)(6), provided that the amendment isadopted and
effective before the benefits
accrue. If section 1107 of PPA ’06 appliesto an amendment of a
plan, section 1107provides that the plan does not fail to meetthe
requirements of section 411(d)(6) byreason of such amendment,
except as pro-vided by the Secretary of the Treasury.
Proposed regulations (EE–184–86) un-der sections 411(b)(1)(H)
and 411(b)(2)were published by the Treasury Depart-ment and the IRS
in the Federal Reg-ister on April 11, 1988 (53 FR 11876),as part of
a package of regulations thatalso included proposed regulations
undersections 410(a), 411(a)(2), 411(a)(8), and411(c) (relating to
the maximum age forparticipation, vesting, normal retirementage,
and actuarial adjustments after normalretirement age,
respectively).2
Notice 96–8, 1996–1 C.B. 359, see§601.601(d)(2)(ii)(b),
described the ap-plication of sections 411 and 417(e) to
asingle-sum distribution under a cash bal-ance plan where interest
credits under theplan are frontloaded (that is, where theright to
future interest credits with respectto an employee’s hypothetical
accountbalance is not conditioned upon future ser-vice and thus
accrues at the same time thatthe benefits attributable to a
hypotheticalallocation to the account accrue). Underthe analysis
set forth in Notice 96–8, inorder to comply with sections 411(a)
and417(e) in calculating the amount of a sin-gle-sum distribution
under a cash balanceplan, the balance of an employee’s
hy-pothetical account must be projected tonormal retirement age and
converted to anannuity under the terms of the plan, andthen the
employee must be paid at leastthe present value of the projected
annuity,determined in accordance with section417(e). Under that
analysis, where a cashbalance plan provides frontloaded
interestcredits using an interest rate that is higherthan the
section 417(e) applicable interestrate, payment of a single-sum
distributionequal to the current hypothetical accountbalance as a
complete distribution of theemployee’s accrued benefit may result
ina violation of section 417(e) or a forfeiturein violation of
section 411(a). In addition,Notice 96–8 proposed a safe harbor
whichprovided that, if frontloaded interest cred-
2 On December 11, 2002, the Treasury Department and the IRS
issued proposed regulations regarding the age discrimination
requirements of section 411(b)(1)(H) that specifically
addressedcash balance plans as part of a package of regulations
that also addressed section 401(a)(4) nondiscrimination
cross-testing rules applicable to cash balance plans (67 FR 76123).
The 2002proposed regulations were intended to replace the 1988
proposed regulations. In Ann. 2003–22, 2003–1 C.B. 846), see
§601.601(d)(2)(ii)(b), the Treasury Department and the IRS
announcedthe withdrawal of the 2002 proposed regulations under
section 401(a)(4), and in Ann. 2004–57, 2004–2 C.B. 15, see
§601.601(d)(2)(ii)(b), the Treasury Department and the IRS
announcedthe withdrawal of the 2002 proposed regulations relating
to age discrimination.
2010–48 I.R.B. 757 November 29, 2010
-
its are provided under a plan at a rate nogreater than the sum
of identified standardindices and associated margins, no vio-lation
of section 411(a) or 417(e) wouldresult if the employee’s entire
accruedbenefit were to be distributed in the formof a single-sum
distribution equal to theemployee’s hypothetical account
balance,provided the plan uses appropriate annuityconversion
factors. Since the issuance ofNotice 96–8, four Federal appellate
courtshave followed the analysis set out in theNotice: Esden v.
Bank of Boston, 229F.3d 154 (2d Cir. 2000), cert. dismissed,531
U.S. 1061 (2001); West v. AK SteelCorp. Ret. Accumulation Pension
Plan,484 F.3d 395 (6th Cir. 2007), cert. denied,129 S. Ct. 895
(2009); Berger v. XeroxCorp. Ret. Income Guarantee Plan, 338F.3d
755 (7th Cir. 2003), reh’g and reh’gen banc denied, No. 02–3674,
2003 U.S.App. LEXIS 19374 (7th Cir. Sept. 15,2003); Lyons v.
Georgia-Pacific SalariedEmployees Ret. Plan, 221 F.3d 1235
(11thCir. 2000), cert. denied, 532 U.S. 967(2001).
Notice 2007–6, 2007–1 C.B. 272, see§601.601(d)(2)(ii)(b),
provides transi-tional guidance with respect to certainrequirements
of sections 411(a)(13) and411(b)(5) and section 701(b) of PPA
’06.Notice 2007–6 includes certain specialdefinitions, including:
accumulated ben-efit, which is defined as a participant’sbenefit
accrued to date under a plan; lumpsum-based plan, which is defined
as adefined benefit plan under the terms ofwhich the accumulated
benefit of a par-ticipant is expressed as the balance of
ahypothetical account maintained for theparticipant or as the
current value of theaccumulated percentage of the partici-pant’s
final average compensation; andstatutory hybrid plan, which is
defined asa lump sum-based plan or a plan whichhas an effect
similar to a lump sum-basedplan. Notice 2007–6 provides guidance
ona number of issues, including a rule underwhich a plan that
provides for indexedbenefits described in section 411(b)(5)(E)is a
statutory hybrid plan (because it has aneffect similar to a lump
sum-based plan),unless the plan either solely provides
forpost-retirement adjustment of the amountspayable to a
participant or is a variableannuity plan under which the assumed
in-
terest rate used to determine adjustments isat least 5 percent.
Notice 2007–6 providesa safe harbor for applying the rules setforth
in section 701 of PPA ’06 where theconversion of a defined benefit
pensionplan into an applicable defined benefitplan is made with
respect to a group ofemployees who become employees byreason of a
merger, acquisition, or similartransaction. This transitional
guidance,along with the other guidance provided inPart III of
Notice 2007–6, applies pendingthe issuance of further guidance and,
thus,does not apply for periods to which thesefinal regulations
apply.
Proposed regulations (REG–104946–07,2008–1 C.B. 596) under
sections411(a)(13) and 411(b)(5) (2007 proposedregulations) were
published by theTreasury Department and the IRS in theFederal
Register on December 28, 2007(72 FR 73680). The Treasury
Departmentand the IRS received written commentson the 2007 proposed
regulations and apublic hearing was held on June 6, 2008.
Announcement 2009–82, 2009–48I.R.B. 720 and Notice 2009–97,
2009–52I.R.B. 972, see §601.601(d)(2)(ii)(b),announced certain
expected relief withrespect to the requirements of
section411(b)(5). In particular, Announcement2009–82 stated that
the rules in the reg-ulations specifying permissible marketrates of
return are not expected to go intoeffect before the first plan year
that beginson or after January 1, 2011. In addition,Notice 2009–97
stated that, once finalregulations under sections 411(a)(13)
and411(b)(5) are issued, it is expected thatrelief from the
requirements of section411(d)(6) will be granted for a plan
amend-ment that eliminates or reduces a section411(d)(6) protected
benefit, provided thatthe amendment is adopted by the last dayof
the first plan year that begins on orafter January 1, 2010, and the
eliminationor reduction is made only to the extentnecessary to
enable the plan to meetthe requirements of section 411(b)(5).3
Notice 2009–97 also extended the deadlinefor amending cash
balance and otherapplicable defined benefit plans, within
themeaning of section 411(a)(13)(C), to meetthe requirements of
section 411(a)(13)(other than section 411(a)(13)(A)) andsection
411(b)(5), relating to vesting and
other special rules applicable to theseplans. Under Notice
2009–97, the deadlinefor these amendments is the last day ofthe
first plan year that begins on or afterJanuary 1, 2010.
After consideration of the commentsreceived in response to the
2007 proposedregulations, these final regulations gen-erally adopt
the provisions of the 2007proposed regulations with certain
modi-fications as described under the heading“Explanation of
Provisions.” In addition,the Treasury Department and the IRSare
issuing proposed regulations (2010proposed regulations) that
address cer-tain issues under sections 411(a)(13) and411(b)(5) that
have not been addressed inthese final regulations (and that are
gen-erally indicated as “RESERVED” in thesefinal regulations), and
that also addressa related issue under section 411(b)(1).The 2010
proposed regulations are beingissued at the same time as these
final reg-ulations.
Explanation of Provisions
Overview
In general, these final regulations incor-porate the
transitional guidance providedunder Notice 2007–6 as well as the
pro-visions of the 2007 proposed regulations.The regulations adopt
the terminologyused in the proposed regulations (suchas “statutory
hybrid benefit formula” and“lump sum-based benefit formula”) to
takeinto account situations where plans pro-vide more than one
benefit formula. Theseregulations also provide additional guid-ance
with respect to sections 411(a)(13)and 411(b)(5), taking into
account com-ments received in response to the 2007proposed
regulations and also reflectingthe enactment of WRERA ’08.
I. Section 411(a)(13): Applicabledefinitions, relief of section
411(a)(13)(A),and special vesting rules for applicabledefined
benefit plans
A. Definitions
The regulations under section411(a)(13) contain certain
definitions thatapply both for purposes of the regulations
3 However, see footnote 6 in the preamble to the 2010 proposed
regulations described in the next paragraph.
November 29, 2010 758 2010–48 I.R.B.
-
under section 411(a)(13) and the regu-lations under section
411(b)(5). Section411(b)(5)(G) provides that, for purposesof
section 411(b)(5), any reference to theaccrued benefit means the
benefit accruedto date. The final regulations refer tothis as the
“accumulated benefit”, whichis distinct from the participant’s
accruedbenefit under section 411(a)(7) (an an-nuity beginning at
normal retirement agethat is actuarially equivalent to the
par-ticipant’s accumulated benefit). As in the2007 proposed
regulations, the regulationsuse the term “statutory hybrid plan”
torefer to an applicable defined benefit plandescribed in section
411(a)(13)(C). Underthe regulations, a statutory hybrid plan is
adefined benefit plan that contains a statu-tory hybrid benefit
formula, and a “statu-tory hybrid benefit formula” is a
benefitformula that is either a lump sum-basedbenefit formula or a
formula that has aneffect similar to a lump sum-based
benefitformula.
The regulations define a “lump sum-based benefit formula” as a
benefit for-mula used to determine all or any partof a
participant’s accumulated benefit un-der which the accumulated
benefit pro-vided under the formula is expressed asthe current
balance of a hypothetical ac-count maintained for the participant
or asthe current value of the accumulated per-centage of the
participant’s final averagecompensation. The final regulations
adoptthe rules of the 2007 proposed regulationswhereby the
determination as to whether abenefit formula is a lump sum-based
bene-fit formula is made based on how the ac-cumulated benefit of a
participant is ex-pressed under the terms of the plan, anddoes not
depend on whether the plan pro-vides an optional form of benefit in
theform of a single-sum payment. Similarly,a formula does not fail
to be a lump sum-based benefit formula merely because theplan’s
terms state that the participant’s ac-crued benefit is an annuity
at normal re-tirement age that is actuarially equivalentto the
balance of a hypothetical accountmaintained for the
participant.
The preamble to the 2007 proposed reg-ulations asked for
comments on plan for-mulas that calculate benefits as the cur-rent
value of an accumulated percentage ofthe participant’s final
average compensa-tion (often referred to as “pension equityplans”
or “PEPs”). Commenters indicated
that some of these plans never credit inter-est, directly or
indirectly, some explicitlycredit interest after cessation of PEP
ac-cruals, and some do not credit interest ex-plicitly but provide
for specific amounts tobe payable after cessation of accruals
(bothimmediately and at future dates) based onactuarial equivalence
using specified actu-arial factors applied after cessation of
ac-cruals.
In response to these comments, the finalregulations clarify that
a benefit formula isexpressed as the balance of a
hypotheticalaccount maintained for the participant if itis
expressed as a current single-sum dollaramount. A lump sum-based
benefit for-mula that credits interest is subject to themarket rate
of return rules, so that in anycase in which a PEP formula provides
forinterest credits after cessation of PEP ac-cruals, the interest
credits are subject to themarket rate of return rules.
The 2007 proposed regulations con-tained a rule whereby a
benefit formulawould not have been treated as a lumpsum-based
benefit formula with respectto a participant merely because the
par-ticipant is entitled to a benefit that is notless than the
benefit properly attributableto after-tax employee contributions.
In re-sponse to comments received that this rulebe broadened, the
final regulations providethat the benefit properly attributable
toafter-tax employee contributions, rollovercontributions, and
other similar employeecontributions is disregarded when
deter-mining whether a benefit formula is alump sum-based benefit
formula with re-spect to a participant. Thus, for example,a plan is
not a statutory hybrid plan witha lump sum-based benefit formula
withrespect to a participant merely because theplan provides that
the participant’s benefitis equal to the sum-of or greater-of
thebenefit properly attributable to employeecontributions and the
benefit under a tra-ditional defined benefit formula.
The regulations provide that a benefit isnot properly
attributable to employee con-tributions if such contributions are
creditedwith interest at a rate that exceeds a rea-sonable rate of
interest or if the conversionfactors used to calculate the benefit
basedon such employee contributions are not ac-tuarially
reasonable. The regulations clar-ify that section 411(c) merely
provides anexample of an acceptable methodology forpurposes of
determining the benefit that is
properly attributable to employee contri-butions.
The 2007 proposed regulations pro-vided that a benefit formula
under a de-fined benefit plan has an effect similarto a lump
sum-based benefit formula ifthe formula provides that a
participant’saccumulated benefit payable at normalretirement age
(or at benefit commence-ment, if later) is expressed as a benefit
thatincludes periodic adjustments (including aformula that provides
for indexed benefitsdescribed in section 411(b)(5)(E)) that
arereasonably expected to result in a smallerannual benefit at
normal retirement age(or at benefit commencement, if later) forthe
participant, when compared to a sim-ilarly situated, younger
individual who isor could be a participant in the plan. Anumber of
commenters suggested that therule in the 2007 proposed regulations
wastoo broad generally and also suggestedthat certain types of
plans, such as plansdescribed in section 411(b)(5)(E), be ex-empted
entirely. However, the TreasuryDepartment and the IRS believe that
akey purpose of sections 411(a)(13) and411(b)(5) is to address
defined benefitplan formulas where younger participantsreceive a
larger annual benefit at normalretirement age when compared to
similarlysituated, older participants. Therefore, thefinal
regulations do not significantly nar-row the definition of a
benefit formula thathas an effect similar to a lump
sum-basedbenefit formula.
The regulations clarify that a benefitformula under a defined
benefit plan hasan effect similar to a lump sum-basedbenefit
formula if the formula providesthat a participant’s accumulated
benefit isexpressed as a benefit that includes adjust-ments
(including a formula that providesfor indexed benefits described in
section411(b)(5)(E)) for a future period and thetotal dollar amount
of the adjustments isreasonably expected to be smaller for
theparticipant, when compared to a similarlysituated, younger
individual who is orcould be a participant in the plan. Thus,
aformula that provides that a participant’saccumulated benefit is
expressed as abenefit that includes the right to
periodicadjustments is treated as having an ef-fect similar to a
lump sum-based benefitformula based on a comparison of theexpected
total dollar amount of the adjust-ments through benefit
commencement,
2010–48 I.R.B. 759 November 29, 2010
-
rather than the expected total accumulatedbenefit after
application of these adjust-ments.
As in the 2007 proposed regulations,the regulations provide that
a benefit for-mula under a plan has an effect similar toa lump
sum-based benefit formula wherethe right to future adjustments
accrues atthe same time as the benefit that is sub-ject to those
adjustments. In addition, theregulations provide that a benefit
formulathat does not include adjustments is never-theless treated
as a formula with an effectsimilar to a lump sum-based benefit
for-mula where benefits are adjusted pursuantto a pattern of
repeated plan amendmentsand the total dollar amount of those
adjust-ments is reasonably expected to be smallerfor the
participant than for any similarlysituated, younger individual who
is orcould be a participant. See §1.411(d)–4,A–1(c)(1).
Like the 2007 proposed regulations, theregulations provide that
certain benefitsare disregarded when determining whethera benefit
formula has an effect similar toa lump sum-based benefit formula.
Forexample, the regulations provide that, forpurposes of
determining whether a bene-fit formula has an effect similar to a
lumpsum-based benefit formula, indexing thatapplies to adjust
benefits after the annuitystarting date (for example,
cost-of-livingincreases) is disregarded. In addition, ben-efits
properly attributable to certain em-ployee contributions that are
disregardedfor purposes of determining whether a par-ticipant is
treated as having a lump-sumbased benefit formula are also
disregardedfor purposes of determining whether a for-mula has an
effect similar to a lump sum-based benefit formula.
The regulations include an example thatillustrates that a
defined benefit formula isnot treated as a statutory hybrid benefit
for-mula merely because the formula providesfor actuarial increases
after normal retire-ment age. This is because actuarial in-creases
after normal retirement age do notprovide smaller adjustments for
older par-ticipants when compared to similarly situ-ated, younger
participants.
The 2007 proposed regulations pro-vided that variable annuity
benefit formu-las with assumed interest rates (sometimesreferred to
as “hurdle rates”) of at least 5percent are not treated as having
an effect
similar to a lump sum-based benefit for-mula. A number of
commenters requestedthat the regulations extend this rule
tovariable annuity plans with lower hurdlerates. However, plans
with lower hurdlerates are more likely to provide
positiveadjustments for future periods than planswith higher hurdle
rates and, as a result,younger participants are more likely
toreceive a meaningfully larger total dollaramount of adjustments
than older partic-ipants under these plans. The TreasuryDepartment
and the IRS are concernedthat exempting these plans would meanthat
participants would lose the protectionsafforded to participants in
statutory hybridplans (including 3-year vesting and con-version
protection). Therefore, the finalregulations retain the rule
whereby ad-justments under a variable annuity do nothave an effect
similar to a lump sum-basedbenefit formula if the assumed interest
rateused to determine the adjustments is 5 per-cent or higher. Such
an annuity does nothave an effect similar to a lump
sum-basedbenefit formula even if post-annuity start-ing date
adjustments are made using aspecified assumed interest rate that is
lessthan 5 percent.
B. Relief under section 411(a)(13)(A)
The regulations reflect new section411(a)(13)(A) by providing
that a statu-tory hybrid plan is not treated as fail-ing to meet
the requirements of section411(a)(2), or, with respect to the
par-ticipant’s accrued benefit derived fromemployer contributions,
the requirementsof sections 411(a)(11), 411(c), or 417(e),merely
because the plan provides that thepresent value of benefits as
determinedunder a lump sum-based benefit formulais equal to the
then-current balance of thehypothetical account maintained for
theparticipant or the then-current value ofthe accumulated
percentage of the partic-ipant’s final average compensation
underthat formula. However, section 411(a)(13)does not alter the
definition of the accruedbenefit under section 411(a)(7)(A)
(whichgenerally defines the participant’s accruedbenefit as the
annual benefit commencingat normal retirement age), nor does it
alterthe definition of the normal retirementbenefit under section
411(a)(9) (whichgenerally defines the participant’s
normalretirement benefit as the benefit under the
plan commencing at normal retirementage).
Section 411(a)(13)(A) applies onlywith respect to a benefit
provided under alump sum-based benefit formula. A statu-tory hybrid
plan that provides benefitsunder a benefit formula that is a
statutoryhybrid benefit formula other than a lumpsum-based benefit
formula (such as a planthat provides for indexing as described
insection 411(b)(5)(E)) must comply withthe present value rules of
section 417(e)with respect to an optional form of ben-efit that is
subject to the requirements ofsection 417(e).
The regulations do not provide guid-ance as to how section
411(a)(13)(A) ap-plies with respect to payments that are notmade in
the form of a single-sum distri-bution of the hypothetical account
balanceor accumulated percentage of final averagecompensation, such
as payments made inthe form of an annuity. That issue is be-ing
addressed in the 2010 proposed regu-lations.
C. Special vesting rules for applicabledefined benefit plans
Pursuant to section 411(a)(13)(B), theregulations provide that,
in the case of aparticipant whose accrued benefit (or anyportion
thereof) under a defined benefitplan is determined under a
statutory hy-brid benefit formula, the plan is treated asfailing to
satisfy the requirements of sec-tion 411(a)(2) unless the plan
provides thatthe participant has a nonforfeitable rightto 100
percent of the participant’s accruedbenefit derived from employer
contribu-tions if the participant has 3 or more yearsof service. As
in the 2007 proposed reg-ulations, the final regulations provide
thatthis requirement applies on a participant-by-participant basis
and applies to the par-ticipant’s entire benefit derived from
em-ployer contributions under a statutory hy-brid plan (not just
the portion of the par-ticipant’s benefit that is determined undera
statutory hybrid benefit formula). Fur-thermore, the regulations
retain the ruleunder which, if a participant is entitledto the
greater of two (or more) benefitamounts under a plan, where each
amountis determined under a different benefit for-mula (including a
benefit determined pur-suant to an offset among formulas withinthe
plan or a benefit determined as the
November 29, 2010 760 2010–48 I.R.B.
-
greater of a protected benefit under section411(d)(6) and
another benefit amount), atleast one of which is a benefit
calculatedunder a statutory hybrid benefit formula,the 3-year
vesting requirement applies tothat participant’s entire accrued
benefit un-der the plan even if the participant’s benefitunder the
statutory hybrid benefit formulais ultimately smaller than under
the otherformula.
The 2007 proposed regulations re-quested comments regarding the
appli-cation of the 3-year vesting requirementto a floor plan that
is not a statutory hy-brid plan but that is part of a
floor-offsetarrangement with an independent planthat is a statutory
hybrid plan. A num-ber of commenters suggested that the3-year
vesting requirement should applyon a plan-by-plan basis, without
regardto whether a plan is part of a floor-offsetarrangement. In
contrast, one commentersuggested that the 3-year vesting
require-ment should apply to both plans that arepart of a
floor-offset arrangement even ifonly one of the plans is a
statutory hybridplan, because the commenter felt that de-termining
the amount of the offset in anarrangement involving plans with
differ-ent vesting schedules would be inherentlydifficult. However,
this concern is miti-gated because, in the view of the
TreasuryDepartment and the IRS, a floor-offsetarrangement where the
benefit payableunder a floor plan is reduced by the benefitpayable
under an independent plan is onlypermissible if the arrangement
limits theoffset to amounts that are vested under theindependent
plan.4 Therefore, the regula-tions retain the rule whereby the
3-yearvesting requirement is limited to plans thatcontain a
statutory hybrid benefit formulaand provide an example illustrating
thisrule with respect to a floor-offset arrange-ment where the
benefit payable under afloor plan that does not include a
statutoryhybrid benefit formula is reduced by thevested accrued
benefit payable under anindependent plan that includes a
statutoryhybrid benefit formula.
II. Section 411(b)(5): Safe harbor for agediscrimination,
conversion protection,and market rate of return limitation
A. Safe harbor for age discrimination
The regulations reflect new section411(b)(5)(A), which provides
that a planis not treated as failing to meet the re-quirements of
section 411(b)(1)(H)(i) withrespect to certain benefit formulas if,
asdetermined as of any date, a participant’saccumulated benefit
expressed under oneof those formulas would not be less thanany
similarly situated, younger partic-ipant’s accumulated benefit
expressedunder the same formula. A plan that doesnot satisfy this
test is required to satisfy thegeneral age discrimination rule of
section411(b)(1)(H)(i).
As in the 2007 proposed regulations,the regulations provide that
the safe har-bor standard under section 411(b)(5)(A) isavailable
only where a participant’s accu-mulated benefit under the terms of
the planis expressed as an annuity payable at nor-mal retirement
age (or current age, if later),the current balance of a
hypothetical ac-count, or the current value of the accumu-lated
percentage of the employee’s finalaverage compensation. For this
purpose,if the accumulated benefit of a participantis expressed as
an annuity payable at nor-mal retirement age (or current age, if
later)under the plan terms, then the comparisonof benefits is made
using such an annu-ity. Similarly, if the accumulated benefitof a
participant is expressed under the planterms as the current balance
of a hypothet-ical account or the current value of an ac-cumulated
percentage of the participant’sfinal average compensation, then the
com-parison of benefits is made using the cur-rent balance of a
hypothetical account orthe current value of the accumulated
per-centage of the participant’s final averagecompensation,
respectively.
The regulations require a comparisonof the accumulated benefit
of each possi-ble participant in the plan to the accumu-lated
benefit of each other similarly situ-ated, younger individual who
is or couldbe a participant in the plan. For this pur-pose, as in
the 2007 proposed regulations,the regulations provide that an
individualis similarly situated to another individual
if the individual is identical to that otherindividual in every
respect that is relevantin determining a participant’s benefit
un-der the plan (including, but not limitedto, period of service,
compensation, posi-tion, date of hire, work history, and anyother
respect) except for age. In determin-ing whether an individual is
similarly situ-ated to another individual, any characteris-tic that
is relevant for determining benefitsunder the plan and that is
based directly orindirectly on age is disregarded. For ex-ample, if
a particular benefit formula ap-plies to a participant on account
of the par-ticipant’s age, an individual to whom thebenefit formula
does not apply and whois identical to a participant in all
respectsother than age is similarly situated to theparticipant. By
contrast, an individual isnot similarly situated to a participant
if adifferent benefit formula applies to the in-dividual and the
application of the differentformula is based neither directly nor
indi-rectly on age. For example, if the benefitformula under a plan
is changed from onetype to another for employees hired afterthe
effective date of the change, employ-ees hired after the relevant
date would notbe similarly situated with employees hiredbefore that
date because the benefit for-mula for new hires is not based
directly norindirectly on age.
The comparison of accumulated bene-fits is made without regard
to any subsi-dized portion of any early retirement ben-efit that is
included in a participant’s accu-mulated benefit. For this purpose,
the sub-sidized portion of an early retirement bene-fit is the
retirement-type subsidy within themeaning of §1.411(d)–3(g)(6) that
is con-tingent on a participant’s severance fromemployment and
commencement of bene-fits before normal retirement age.
In addition, like the 2007 proposed reg-ulations, the
regulations provide that thesafe harbor is generally not available
withrespect to a participant if the benefit ofany similarly
situated, younger individualis expressed in a different form than
theparticipant’s benefit. Thus, for example,the safe harbor is not
available for com-paring the accumulated benefit of a partic-ipant
expressed as an annuity at normal re-tirement age with the
accumulated benefitof a similarly situated, younger participant
4 See Rev. Rul. 76–259, 1976–2 C.B. 111, see
§601.601(d)(2)(ii)(b).
2010–48 I.R.B. 761 November 29, 2010
-
expressed as the current balance of a hypo-thetical account.
Like the 2007 proposed regulations, theregulations generally
permit a plan thatprovides the sum-of or the greater-of ben-efits
that are expressed in two or more dif-ferent forms of benefit to
satisfy the safeharbor if the plan would separately sat-isfy the
safe harbor for each separate formof benefit. For purposes of the
safe har-bor comparisons involving greater-of andsum-of benefit
formulas, the 2007 pro-posed regulations contained a rule wherea
similarly situated, younger participantwould be treated as having
an accumu-lated benefit of zero under a benefit for-mula that does
not apply to the participant.While the sum-of and greater-of
provi-sions are organized differently in these reg-ulations, the
regulations effectively retainthis rule because sum-of and
greater-of for-mulas are eligible for the safe harbor evenwhere
older participants receive benefitsexpressed in a different form
than the ben-efits of similarly situated, younger partic-ipants, as
long as younger participants arenot entitled to benefits expressed
in a dif-ferent form than the benefits of similarlysituated, older
participants.
Several commenters requested that theregulations clarify that
the safe harbor isalso available to plans that allow older
par-ticipants to choose, at the time a new statu-tory hybrid
benefit formula goes into ef-fect, whether to receive a benefit
under thestatutory hybrid benefit formula or underthe pre-existing
traditional defined bene-fit formula. In response to such
com-ments, the regulations adopt similar rulesas the sum-of and
greater-of rules for plansthat provide participants with the choice
ofbenefits that are expressed in two or moredifferent forms.
As part of the sum-of, greater-of, andchoice-of rules, the
regulations reflect thefact that the sum of benefits expressed
intwo or more forms is never less than thegreater of the same
benefits and that thegreater of benefits expressed in two ormore
forms is never less than the choiceof the same benefits. As a
result, the reg-ulations provide that in order for the safeharbor
to be available with respect to a par-ticipant who is provided with
the greater ofbenefits expressed in two or more differentforms, the
plan must not provide any simi-larly situated, younger participant
with thesum of the same benefits. Similarly, the
regulations provide that in order for thesafe harbor to be
available with respect to aparticipant who is provided with the
choiceof benefits expressed in two or more dif-ferent forms, the
plan must not provideany similarly situated, younger
participantwith either the sum of or the greater of thesame
benefits. In addition, in order for thesafe harbor to be available,
the plan cannotprovide for any other relationship betweenbenefits
expressed in different forms otherthan sum-of, greater-of, or
choice-of ben-efits.
The regulations reflect new section411(b)(5)(C), which provides
that a planis not treated as failing to meet the re-quirements of
section 411(b)(1)(H) solelybecause the plan provides offsets of
ben-efits under the plan to the extent suchoffsets are allowable in
applying the re-quirements under section 401 and theapplicable
requirements of ERISA andADEA. The regulations incorporate
theprovisions of section 411(b)(5)(D) (relat-ing to permitted
disparity under section401(l)) without providing additional
guid-ance. These rules are unchanged from the2007 proposed
regulations.
The regulations contain a number ofnew examples that illustrate
the applica-tion of the safe harbor under various factpatterns. One
of these examples illustratesthat the safe harbor is not satisfied
in thecase of a plan that contains a suspensionof benefits
provision that reduces or elim-inates interest credits for
participants whocontinue in service after normal retirementage.
The regulations also reflect new section411(b)(5)(E), which
provides for the dis-regard of certain indexing of benefits
forpurposes of the age discrimination rulesof section 411(b)(1)(H).
As in the 2007proposed regulations, the regulations limitthe
disregard of indexing to formulas un-der defined benefit plans
other than lumpsum-based formulas. In addition, the reg-ulations
clarify that the disregard of index-ing is limited to situations in
which the ex-tent of the indexing for a participant wouldnot be
less than the indexing applicable toa similarly situated, younger
participant.Thus, the disregard of indexing is onlyavailable if the
indexing is neither termi-nated nor reduced on account of the
attain-ment of any age.
Section 411(b)(5)(E) requires that theindexing be accomplished
by applica-
tion of a recognized investment indexor methodology. The 2007
proposedregulations limited a recognized invest-ment index or
methodology to an eligi-ble cost-of-living index as described
in§1.401(a)(9)–6, A–14(b), the rate of re-turn on the aggregate
assets of the plan, orthe rate of return on the annuity contractfor
the employee issued by an insurancecompany licensed under the laws
of aState. The final regulations expand the listof what constitutes
a recognized index ormethodology by treating any rate of returnthat
satisfies the market rate of return rulesunder these regulations as
a recognizedindex or methodology.
As under the 2007 proposed regula-tions, the section
411(b)(5)(E)(ii) protec-tion against loss (“no-loss”)
requirementfor an indexed plan (which requires thatthe indexing not
result in a smaller accruedbenefit than if no indexing had applied)
isimplemented under the final regulationsby applying the
“preservation of capital”rule of section 411(b)(5)(B)(i)(II) to
in-dexed plans. (The preservation of capitalrule is discussed in
section II. C. of thispreamble.) The final regulations clarifythat
variable annuity benefit formulas (asdefined in the regulations)
are exemptfrom the no-loss and preservation of capi-tal rules.
B. Conversion protection
The regulations provide guidance onthe new conversion
protections under sec-tion 411(b)(5)(B)(ii), (iii), and (iv)
whichis similar to the 2007 proposed regula-tions. Under the
regulations, a participantwhose benefits are affected by a
conver-sion amendment that was both adopted andeffective on or
after June 29, 2005, mustgenerally be provided with a benefit
af-ter the conversion that is at least equal tothe sum of the
benefits accrued through thedate of the conversion and benefits
earnedafter the conversion, with no permitted in-teraction between
these two portions. Thisassures participants that there will be
no“wear-away” as a result of a conversion,both with respect to the
participant’s ac-crued benefits and any early retirementsubsidy to
which the participant is entitledbased on the pre-conversion
benefits.
The 2007 proposed regulations in-cluded an alternative mechanism
underwhich a plan could provide for the es-
November 29, 2010 762 2010–48 I.R.B.
-
tablishment of an opening hypotheticalaccount balance or opening
accumulatedpercentage of the participant’s final aver-age
compensation as part of the conversionand keep separate track of
(1) the benefitattributable to the opening hypotheticalaccount
balance (including interest creditsattributable thereto) or
attributable to theopening accumulated percentage of
theparticipant’s final average compensationand (2) the benefit
attributable to post-con-version service under the
post-conversionbenefit formula. Comments on this rulewere favorable
and it is retained under thefinal regulations. A variety of
examplesillustrating application of the alternativeare included in
the regulations. Under thisalternative, when a participant
commencesbenefits, it must be determined whetherthe benefit
attributable to the opening hy-pothetical account or attributable
to theopening accumulated percentage that ispayable in the
particular optional form ofbenefit selected is greater than or
equal tothe benefit accrued under the plan priorto the date of
conversion and that waspayable in the same generalized optionalform
of benefit (within the meaning of§1.411(d)–3(g)(8)) at the same
annuitystarting date. If the benefit attributableto the opening
hypothetical account bal-ance or opening accumulated percentageis
greater, then the plan must provide thatsuch benefit is paid in
lieu of the pre-con-version benefit, in addition to the
benefitattributable to post-conversion service un-der the
post-conversion benefit formula.If the benefit attributable to the
openinghypothetical account balance or openingaccumulated
percentage is less, then theplan must provide that such benefit
willbe increased sufficiently to provide thepre-conversion benefit,
in addition to thebenefit attributable to post-conversionservice
under the post-conversion benefitformula.
As in the 2007 proposed regulations,the final regulations
provide under this al-ternative that, if an optional form of
bene-fit is available on the annuity starting datewith respect to
the benefit attributable tothe opening hypothetical account
balanceor opening accumulated percentage, but nooptional form (such
as a single-sum dis-tribution) within the same generalized
op-tional form of benefit was available at thatannuity starting
date under the terms of aplan as in effect immediately prior to
the
effective date of the conversion amend-ment, then the comparison
must still bemade by assuming that the pre-conversionplan had such
an optional form of benefit.
The preamble to the 2007 proposed reg-ulations asked for
comments on another al-ternative means of satisfying the
conver-sion requirements that would involve es-tablishing an
opening hypothetical accountbalance, but would not require a
compari-son of benefits at the annuity starting dateif certain
requirements are met. Com-ments on this alternative were
favorable,but some commenters requested that thealternative only be
available where therewas sufficient protection to ensure that
par-ticipants’ benefits would not be less thanwould apply under the
rules in the 2007proposed regulations. While these finalregulations
do not permit this additional al-ternative, it is included in the
2010 pro-posed regulations.
The regulations also provide guid-ance that is unchanged from
the 2007proposed regulations on what constitutesa conversion
amendment under section411(b)(5)(B)(v). Under the final
reg-ulations, whether an amendment is aconversion amendment is
determined ona participant-by-participant basis. Theregulations
provide that an amendment(including multiple amendments) is
aconversion amendment with respect toa participant if it meets two
criteria: (1)the amendment reduces or eliminates thebenefits that,
but for the amendment, theparticipant would have accrued after
theeffective date of the amendment under abenefit formula that is
not a statutory hy-brid benefit formula and under which
theparticipant was accruing benefits prior tothe amendment; and (2)
after the effectivedate of the amendment, all or a portionof the
participant’s benefit accruals underthe plan are determined under a
statutoryhybrid benefit formula.
The regulations clarify that onlyamendments that reduce or
eliminateaccrued benefits described in section411(a)(7), or
retirement-type subsidiesdescribed in section 411(d)(6)(B)(i),
thatwould otherwise accrue as a result of fu-ture service are
treated as amendmentsthat reduce or eliminate the
participant’sbenefits that would have accrued after theeffective
date of the amendment undera benefit formula that is not a
statutoryhybrid benefit formula. As under the 2007
proposed regulations, a plan is treated ashaving been amended
for this purpose if,under the terms of the plan, a change inthe
conditions of a participant’s employ-ment results in a reduction or
eliminationof the benefits that the participant wouldhave accrued
in the future under a benefitformula that is not a statutory hybrid
ben-efit formula (for example, a job transferfrom an operating
division covered by anon-statutory hybrid defined benefit planto an
operating division that is coveredby a formula expressed as the
balanceof a hypothetical account). However, inthe absence of
coordination between theformulas, the special requirements
forconversion amendments typically will besatisfied
automatically.
A number of commenters recom-mended that the effective date of a
con-version amendment generally be the dateaccruals begin under a
statutory hybridbenefit formula, rather than the date thatfuture
accruals are reduced under thenon-statutory hybrid benefit formula.
Sev-eral commenters suggested that, if thisrecommendation was not
implementedgenerally, it should nevertheless apply atthe effective
date of an amendment whichprovides participants with the greater
ofbenefits under the prior formula and astatutory hybrid benefit
formula for a pe-riod of time before benefit accruals ceaseunder
the prior formula, especially if theamendment applies to a subgroup
of exist-ing older, long service employees. How-ever, some comments
expressed concernthat such a change in the proposed defini-tion of
the effective date of a conversionamendment would allow plans to
delaythe statutory anti-wearaway protections byadding a less
valuable cash balance benefitfor the grandfathered group at a date,
eventhough “the effect of converting” (withinthe meaning of section
411(b)(5)(B)(v)(I))their traditional benefit into a cash
balancebenefit would occur for them at the laterdate when their
benefit accruals cease un-der the prior formula.
The Treasury Department and the IRSare concerned that the
requested changein the proposed rule would circumvent akey purpose
behind the conversion protec-tion requirements by allowing for a
de-layed wear-away that would occur at thetime accruals cease under
the prior for-mula. For example, if a plan were gener-ally
converted to a cash balance plan, but
2010–48 I.R.B. 763 November 29, 2010
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the plan were to provide for some classof participants, such as
participants whoare age 55 or older, to receive the greaterof
accruals under the prior formula or thenew cash balance formula for
a period of5 years, the change requested in the com-ments would
define the effective date ofthe conversion amendment for all
partic-ipants to be the date the cash balance for-mula went into
effect (rather than apply-ing a participant by participant rule).
As aresult, 5 years after the cash balance for-mula went into
effect, the hypothetical ac-count balance for these older
participantscould provide benefits that are less thanthe frozen
amount under the prior formula,a circumstance that would produce no
ad-ditional accruals for some period of timeafter the end of the
5-year period. There-fore, the approach suggested by these
com-ments would allow the type of wear-awaythe statute was intended
to prevent. Ac-cordingly, like the 2007 proposed regula-tions, the
regulations adopt a rule wherebythe effective date of a conversion
amend-ment is, with respect to a participant, thedate as of which
the reduction occurs in thebenefits that the participant would have
ac-crued after the effective date of the amend-ment under a benefit
formula that is nota statutory hybrid benefit formula. In
ac-cordance with section 411(d)(6), the reg-ulations provide that
the date future ben-efit accruals are reduced cannot be earlierthan
the date of adoption of the conversionamendment.
The regulations provide rules, similarto those in the 2007
proposed regula-tions, prohibiting the avoidance of theconversion
protections through the use ofmultiple plans or multiple employers.
Un-der these rules, an employer is treated ashaving adopted a
conversion amendmentif the employer adopts an amendment un-der
which a participant’s benefits undera plan that is not a statutory
hybrid planare coordinated with a separate plan thatis a statutory
hybrid plan, such as througha reduction (offset) of the benefit
underthe plan that is not a statutory hybrid plan.In addition, if
an employee’s employerchanges as a result of a merger,
acqui-sition, or other transaction described in§1.410(b)–2(f), then
the employee’s oldand new employers would be treated as asingle
employer for this purpose. Thus,for example, in an acquisition, if
the buyer
adopts an amendment to its statutoryhybrid plan under which a
participant’sbenefits under the seller’s plan (that isnot a
statutory hybrid plan) are coordi-nated with benefits under the
buyer’s plan,such as through a reduction (offset) of thebuyer’s
plan benefits, the seller and buyerwould be treated as a single
employer andas having adopted a conversion amend-ment. However, if
there is no coordinationbetween the plans, there is no
conversionamendment.
The regulations retain the rule from the2007 proposed
regulations under which aconversion amendment also includes
mul-tiple amendments that result in a conver-sion amendment, even
if the amendmentswould not be conversion amendments in-dividually.
If an amendment to providea benefit under a statutory hybrid
bene-fit formula is adopted within 3 years afteradoption of an
amendment to reduce ben-efits under a non-statutory hybrid bene-fit
formula, then those amendments wouldbe consolidated in determining
whether aconversion amendment has been adopted.In the case of an
amendment to providea benefit under a statutory hybrid
benefitformula that is adopted more than 3 yearsafter adoption of
an amendment to reducenon-statutory hybrid benefit formula
bene-fits, there is a presumption that the amend-ments are not
consolidated unless the factsand circumstances indicate that
adoptionof an amendment to provide a benefit un-der a statutory
hybrid benefit formula wasintended at the time of the reduction in
thenon-statutory hybrid benefit formula ben-efits.
A number of commenters expressedconcern that the interaction
betweenemployee transfers and the conversionprotection effective
date provisions wasunclear under the 2007 proposed regu-lations. In
response to such comments,the regulations clarify that a
conversionamendment must be both adopted onor after June 29, 2005,
and be effectiveon or after June 29, 2005, in order forthe
conversion protection provisions toapply to such amendment.
Therefore, ifa transfer provision was adopted beforeJune 29, 2005,
an employee transferis not treated as part of a conversionamendment
to which the conversionprotection provisions apply, even if
thetransfer occurs on or after June 29, 2005.
C. Market rate of return limitation
The regulations reflect the rule in sec-tion 411(b)(5)(B)(i)(I)
under which a statu-tory hybrid plan is treated as failing to
sat-isfy section 411(b)(1)(H) if it provides aninterest crediting
rate with respect to ben-efits determined under a statutory
hybridbenefit formula that is in excess of a mar-ket rate of
return. Several commenterssuggested that the definition of
interestcrediting rate in the 2007 proposed regula-tions be revised
to exclude not only adjust-ments conditioned on current service
butalso adjustments made as a result of pastand imputed service as
well as ad hoc ad-justments. In response to the comments,the
regulations expand the exclusions fromthe definition of interest
credit to also ex-clude adjustments made as a result of im-puted
service, as well as certain one-timeadjustments.
The final regulations provide that an in-terest credit generally
means any increaseor decrease for a period to a
participant’saccumulated benefit under a statutory hy-brid benefit
formula, under the terms of theplan at the beginning of the period,
that iscalculated by applying a rate of interest orrate of return
(including a rate of increaseor decrease under an index) to the
partic-ipant’s accumulated benefit (or a portionthereof) as of the
beginning of the period,to the extent the increase or decrease is
notconditioned on current service and is notmade on account of
imputed service; aswell as any other increase for a period toa
participant’s accumulated benefit undera statutory hybrid benefit
formula, underthe terms of the plan at the beginning ofthe period,
to the extent the increase is notconditioned on current service and
is notmade on account of imputed service.
Under the regulations, notwithstandingthe general rule described
in the previousparagraph, an increase to a participant’s
ac-cumulated benefit is not treated as an inter-est credit to the
extent the increase is madeas a result of a plan amendment
provid-ing for a one-time adjustment to the partic-ipant’s
accumulated benefit. However, apattern of repeated plan amendments
eachof which provides for a one-time adjust-ment to a participant’s
accumulated benefitwill cause such adjustments to be treatedas
provided on a permanent basis under theterms of the plan.
November 29, 2010 764 2010–48 I.R.B.
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The interest crediting rate for a periodwith respect to a
participant generallyequals the total amount of interest creditsfor
the period divided by the participant’saccumulated benefit at the
beginning ofthe period.
Under the regulations, a principal creditmeans any increase to a
participant’s ac-cumulated benefit under a statutory hy-brid
benefit formula that is not an interestcredit. As a result, a
principal credit in-cludes an increase to a participant’s
accu-mulated benefit to the extent the increaseis conditioned on
current service or madeon account of imputed service. Thus,
forexample, even if the plan denominates anincrease to a
hypothetical account balanceas an interest credit, the increase is
treatedas a principal credit to the extent the in-crease is
conditioned on current service.Similarly, a principal credit
includes an in-crease to the current value of an accumu-lated
percentage of the participant’s finalaverage compensation. For
indexed bene-fits, a principal credit includes an increaseto the
participant’s accrued benefit otherthan an increase provided by
indexing. Inaddition, pursuant to the rule set forth ear-lier, a
principal credit generally includesan increase to a participant’s
accumulatedbenefit to the extent the increase is made asa result of
a plan amendment providing fora one-time adjustment to the
participant’saccumulated benefit. Thus, for example,a principal
credit includes an opening hy-pothetical account balance or opening
ac-cumulated percentage of the participant’sfinal average
compensation.
Consistent with the requirement un-der §1.401–1(b)(1)(i) that a
pension planprovide definitely determinable benefits,a plan that
credits interest must specifyhow the plan determines interest
creditsand must specify how and when interestcredits are credited.
Under the regulations,a plan must determine the plan’s
interestcrediting rate that will apply for each planyear (or
portion of a plan year) using oneof two permitted methods — either
usingthe applicable periodic interest creditingrate that applies
over the current period or,for certain rates, using the rate that
appliedin a specified lookback month with respectto a stability
period. For this purpose, theplan’s lookback month and stability
pe-riod must satisfy the rules for selecting thelookback month and
stability period under§1.417(e)–1(d)(4). However, the stability
period and lookback month need not bethe same as those used
under the plan forpurposes of section 417(e)(3).
In addition, the regulations require in-terest credits under a
plan to be providedon an annual or more frequent periodic ba-sis
and also require interest credits for eachperiod to be credited as
of the end of theperiod. If, under a plan, interest is cred-ited
more frequently than annually (for ex-ample, daily, monthly or
quarterly) basedon one of the permissible annual interestrates,
then the plan does not provide anabove market rate of return if the
periodicinterest credits are provided under an in-terest crediting
rate that is no greater thana pro rata portion of the applicable
annualinterest crediting rate. However, the reg-ulations provide a
special rule whereby aplan that credits interest daily based on
oneof these annual rates may credit interest ata rate which is
1/360th of the applicable an-nual rate (instead of 1/365th) without
vi-olating the general rule of the precedingsentence. In addition,
the regulations pro-vide that interest credits based on one ofthese
annual rates are not treated as cre-ating an effective rate of
return in excessof a market rate of return merely becausean
otherwise permissible interest creditingrate for a plan year is
compounded morefrequently than annually. Thus, for exam-ple, if a
plan’s terms provide for interestto be credited monthly and for the
interestcrediting rate to be equal to the interest rateon long-term
investment grade corporatebonds and the applicable annual rate
onthese bonds for the plan year is 6 percent,then the accumulated
benefit at the begin-ning of each month could be increased asa
result of interest credits by as much as0.5 percent per month
during the plan yearwithout resulting in an interest creditingrate
that is in excess of a market rate of re-turn. These rules are
similar to those in the2007 proposed regulations.
The 2007 proposed regulations pro-vided that an interest
crediting rate is notin excess of a market rate of return if itis
always less than a particular interestcrediting rate that meets the
market rateof return limitation. A number of com-menters suggested
that this rule be revisedto clarify that rates that may
sometimesequal but are never greater than anotherpermissible rate
are also permissible. Inresponse to these comments, the final
reg-ulations provide that an interest crediting
rate is not in excess of a market rate ofreturn if it can never
be in excess of aparticular rate that meets the market rateof
return limitation. Thus, a rate that is apercentage (no greater
than 100 percent)of a particular rate that meets the marketrate of
return limitation is not in excess ofa market rate of return and a
rate that is afixed amount less than a particular rate thatmeets
the market rate of return limitationis also not in excess of a
market rate ofreturn. Similarly, an interest crediting rateis not
in excess of a market rate of return ifit always equals the lesser
of two or morerates where at least one of the rates meetsthe market
rate of return limitation.
In addition, the regulations clarify thata statutory hybrid plan
does not provide aneffective interest crediting rate that is
inexcess of a market rate of return merelybecause the plan
determines an interestcredit by applying different rates to
dif-ferent predetermined portions of the accu-mulated benefit,
provided each rate wouldseparately satisfy the market rate of
returnlimitations if the rate applied to the en-tire accumulated
benefit. Thus, under thisrule, statutory hybrid plans may, in
effect,provide participants with rates that are ablend of two or
more rates and may alsoapply different rates to portions of the
ben-efit attributable to different principal cred-its. However, as
in the 2007 proposed reg-ulations, the final regulations provide
thatinterest credits that are determined by ap-plying the greater
of two or more rates gen-erally exceed a market rate of return
exceptunder certain limited circumstances.
The regulations provide that an interestcrediting rate for a
plan year is not in ex-cess of a market rate of return if it is
basedon the rate of interest provided under oneof several specified
indices. Like the 2007proposed regulations, these rates includethe
rate of interest on long-term investmentgrade corporate bonds (as
described in sec-tion 412(b)(5)(B)(ii)(II) prior to amend-ment by
PPA ’06 for plan years beginningbefore January 1, 2008, and the
third seg-ment rate used under section 430(h) forsubsequent plan
years), the interest rateon 30-year Treasury securities, the
inter-est rates on shorter term Treasuries withthe associated
margins that were safe har-bor rates described in Notice 96–8, as
wellas certain cost-of-living indices. Severalcommenters on the
2007 proposed regula-tions suggested that this list be expanded
2010–48 I.R.B. 765 November 29, 2010
-
to also include all of the interest rates per-missible under
section 417(e). The Trea-sury Department and the IRS agree withthis
suggestion and, as a result, the regu-lations expand the list of
safe-harbor ratesto include the first and second segmentrates, as
defined in either section 417(e)or 430(h) and whether calculated
with orwithout regard to the transition rules ofsection 417(e)(3)
or 430(h)(2)(G).
The regulations provide that an interestcrediting rate based on
a specified indexmust be adjusted on at least an annual ba-sis.
These rates are market yields to matu-rity on outstanding bonds
and, as a result,these rates do not reflect defaults nor dothese
rates reflect the change in the mar-ket value of an outstanding
bond as a re-sult of future changes in the interest rateenvironment
or in a bond issuer’s risk pro-file. Because the interest rate does
not re-flect the change in the market value of anoutstanding bond
when an issuer becomeshigher risk or the bond goes into default,the
bonds have been limited to investmentgrade bonds in the top three
quality levelswhere the risk of default is relatively small.
The regulations also set forth certaininterest crediting rates
that satisfy thestatutory market rate of return requirementbut that
are not safe harbor rates. Theregulations provide that, in the case
ofindexed benefits as described in section411(b)(5)(E), an interest
crediting rateequal to the actual rate of return on theaggregate
assets of the plan, includingboth positive returns and negative
returns,is not in excess of a market rate of returnif the plan’s
assets are diversified so asto minimize the volatility of returns.
Theregulations further provide that this re-quirement that plan
assets be diversifiedso as to minimize the volatility of
returnsdoes not require greater diversificationthan is required
under section 404(a)(1)(C)of Title I of the Employee Retirement
In-come Security Act of 1974, Public Law93–406 (88 Stat. 829
(1974)) with respectto defined benefit pension plans. Further-more,
the regulations provide that the rateof return on the annuity
contract for theemployee issued by an insurance companylicensed
under the laws of a State is not inexcess of a market rate of
return, subjectto an anti-abuse rule. The 2010 proposed
regulations provide that certain additionalinterest crediting
rates satisfy the marketrate of return limitation.
The regulations reflect the preser-vation of capital rule in
section411(b)(5)(B)(i)(II) that requires a statu-tory hybrid plan
to provide that interestcredits will not result in a
hypotheticalaccount balance (or similar amount) be-ing less than
the aggregate amount of thehypothetical allocations. Under the
2007proposed regulations, this requirement ap-plied at the
participant’s annuity startingdate. In addition, the 2007 proposed
reg-ulations provided that the combination ofthis preservation of
capital protection witha rate of return that otherwise satisfies
themarket rate of return limitation will notresult in an effective
interest crediting ratethat is in excess of a market rate of
return.Responses to these rules were favorableand they are retained
in these regulations.Hypothetical allocations are referred toas
principal credits in the regulations, asdescribed earlier in this
preamble. Theregulations clarify that the preservation ofcapital
requirement applies to all principalcredits that were credited
under the planas of the annuity starting date, includingprincipal
credits that were credited beforethe statutory effective date of
the preserva-tion of capital requirement under
section411(b)(5)(b)(i)(II).
These regulations do not address sec-tion 411(b)(5)(B)(vi),
which requires thata plan’s provisions reflect special rules
ap-plicable upon plan termination. These plantermination rules are
addressed in the 2010proposed regulations.
Section 123 of WRERA ’08 amendedADEA to provide that, in the
case of a gov-ernmental plan that is described in the firstsentence
of section 414(d) of the Code,5
a rate of return or a method of creditinginterest established
pursuant to any pro-vision of Federal, State, or local law
istreated as a market rate of return for cer-tain purposes under
ADEA as long as suchrate or method does not violate any
otherrequirement of ADEA. No changes havebeen made to these
regulations as a resultof section 123 of WRERA ’08 because
thatprovision does not amend the Internal Rev-enue Code.
III. Section 411(d)(6): Changes in aplan’s interest crediting
rate
The 2007 proposed regulations pro-vided that, to the extent that
benefits haveaccrued under the terms of a statutoryhybrid plan that
entitle the participant tofuture interest credits, an amendment
tothe plan to change the interest creditingrate for such interest
credits violates sec-tion 411(d)(6) if the revised rate underany
circumstances could result in a lowerinterest crediting rate as of
any date af-ter the applicable amendment date of theamendment
changing the interest creditingrate. Several commenters on the 2007
pro-posed regulations requested clarificationof this rule. In
particular, one commenternoted that there are several
circumstancesin which an amendment that results in alower interest
credit for a particular periodafter amendment than would have
beenprovided for the same period under the oldrate may not result
in a reduction undersection 411(d)(6), such as where the
plan’saggregate interest credits after the applica-ble amendment
date but before the periodat issue exceeded the interest credits
thatwould have been provided under the oldrate or where the plan
was also amended toincrease benefits under other provisions,such as
providing for larger principal cred-its than were provided before
the changein interest crediting rates.
In response to these comments, the reg-ulations clarify that the
right to interestcredits in the future that are not condi-tioned on
future service constitutes a sec-tion 411(d)(6) protected benefit.
Thus, tothe extent that benefits have accrued underthe terms of a
statutory hybrid plan that en-title the participant to future
interest cred-its, an amendment to the plan to change theinterest
crediting rate must comply withsection 411(d)(6) if the revised
rate underany circumstances could result in interestcredits that
are smaller as of any date af-ter the applicable amendment date of
theplan amendment than the interest creditsthat would have been
provided without re-gard to the amendment.
The regulations retain the rule in the2007 proposed regulations
under which aplan is not treated as providing smallerinterest
credits in the future for purposesof section 411(d)(6) merely
because of an
5 A governmental plan in the first sentence of section 414(d)
means a plan that is established and maintained for its employees
by the Government of the United States, by the government ofany
State or political subdivision thereof, or by an agency or
instrumentality of any of the foregoing.
November 29, 2010 766 2010–48 I.R.B.
-
amendment that changes the plan’s interestcrediting rate with
respect to future interestcredits from one of the safe harbor
marketrates of interest (for example, a rate basedon an eligible
cost-of-living index or a ratebased on Treasury bonds with the
mar-gins specified in the regulations) to the rateof interest on
long-term investment gradecorporate bonds (the third segment rate
un-der section 417(e) or 430(h)), if certain re-quirements are