[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Proposed Rules]
[Pages 64197-64216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25942]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-132554-08]
RIN 1545-BI16
Additional Rules Regarding Hybrid Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations providing guidance
relating to certain provisions of the Internal Revenue Code (Code) that
apply to hybrid defined benefit pension plans. These regulations would
provide guidance on changes made by the Pension Protection Act of 2006,
as amended by the Worker, Retiree, and Employer Recovery Act of 2008.
These regulations would affect sponsors, administrators, participants,
and beneficiaries of hybrid defined benefit pension plans. This
document also provides a notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by Wednesday,
January 12, 2011. Outlines of topics to be discussed at the public
hearing scheduled for Wednesday, January 26, 2011, at 10 a.m. must be
received by Friday, January 14, 2011.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-132554-08), Room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
132554-08), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-132554-08).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Neil S.
Sandhu, Lauson C. Green, or Linda S.F. Marshall at (202) 622-6090;
concerning submissions of comments, the hearing, and/or being placed on
the building access list to attend the hearing, Regina Johnson, at
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 411(a)(13), 411(b)(1), and
411(b)(5) of the Code. Generally, a defined benefit pension plan must
satisfy the minimum vesting standards of section 411(a) and the accrual
requirements of section 411(b) in order to be qualified under section
401(a) of the Code. Sections 411(a)(13) and 411(b)(5), which modify the
minimum vesting standards of section 411(a) and the accrual
requirements of section 411(b), were added to the Code by section
701(b) of the Pension Protection Act of 2006, Public Law 109-280 (120
Stat. 780 (2006)) (PPA '06). Sections 411(a)(13) and 411(b)(5), as well
as certain effective date provisions related to these sections, were
subsequently amended by the Worker, Retiree, and Employer Recovery Act
of 2008, Public Law 110-458 (122 Stat. 5092 (2008)) (WRERA '08).
Section 411(a)(13)(A) provides that an applicable defined benefit
plan (which is defined in section 411(a)(13)(C)) is not treated as
failing to meet either (i) the requirements of section 411(a)(2)
(subject to a special vesting rule in section 411(a)(13)(B) with
respect to benefits derived from employer contributions) or (ii) the
requirements of section 411(a)(11), 411(c), or 417(e), with respect to
accrued benefits derived from employer contributions, merely because
the present value of the accrued benefit (or any portion thereof) of
any participant is, under the terms of the plan, equal to the amount
expressed as the balance of a hypothetical account or as an accumulated
percentage of the participant's final average compensation. Section
411(a)(13)(B) requires an applicable defined benefit plan to provide
that an employee who has completed at least 3 years of service has a
nonforfeitable right to 100 percent of the employee's accrued benefit
derived from employer contributions.
Under section 411(a)(13)(C)(i), an applicable defined benefit plan
is defined as a defined benefit plan under which the accrued benefit
(or any portion thereof) of a participant is calculated as the balance
of a hypothetical account maintained for the participant or as an
accumulated percentage of the participant's final average compensation.
Under section 411(a)(13)(C)(ii), the Secretary of the Treasury is to
issue regulations which include in the definition of an applicable
defined benefit plan any defined benefit plan (or portion of such a
plan) which has an effect similar to a plan described in section
411(a)(13)(C)(i).
Section 411(a) requires that a defined benefit plan satisfy the
requirements of section 411(b)(1). Section 411(b)(1) provides that a
defined benefit plan must satisfy one of the three accrual rules of
section 411(b)(1)(A), (B), and (C) with respect to benefits accruing
under the plan. The three accrual rules are the 3 percent method of
section 411(b)(1)(A), the 133\1/3\ percent rule of section
411(b)(1)(B), and the fractional rule of section 411(b)(1)(C).
Section 411(b)(1)(B) provides that a defined benefit plan satisfies
the requirements of the 133\1/3\ percent rule for a particular plan
year if, under the plan, the accrued benefit payable at the normal
retirement age is equal to the normal retirement benefit, and the
annual rate at which any individual who is or could be a participant
can accrue the retirement benefits payable at normal retirement age
under the plan
[[Page 64198]]
for any later plan year is not more than 133\1/3\ percent of the annual
rate at which the individual can accrue benefits for any plan year
beginning on or after such particular plan year and before such later
plan year.
For purposes of applying the 133\1/3\ percent rule, section
411(b)(1)(B)(i) provides that any amendment to the plan which is in
effect for the current year is treated as in effect for all other plan
years. Section 411(b)(1)(B)(ii) provides that any change in an accrual
rate which does not apply to any individual who is or could be a
participant in the current plan year is disregarded. Section
411(b)(1)(B)(iii) provides that the fact that benefits under the plan
may be payable to certain participants before normal retirement age is
disregarded. Section 411(b)(1)(B)(iv) provides that social security
benefits and all other relevant factors used to compute benefits are
treated as remaining constant as of the current plan year for all years
after the current year.
Section 411(b)(1)(H)(i) provides that a defined benefit plan fails
to comply with section 411(b) if, under the plan, an employee's benefit
accrual is ceased, or the rate of an employee's benefit accrual is
reduced, because of the attainment of any age. Section 411(b)(5), which
was added to the Code by section 701(b)(1) of PPA '06, provides
additional rules related to section 411(b)(1)(H)(i). Section
411(b)(5)(A) generally provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H)(i) if a participant's
accrued benefit, as determined as of any date under the terms of the
plan, would be equal to or greater than that of any similarly situated,
younger individual who is or could be a participant. For this purpose,
section 411(b)(5)(A)(iv) provides that the accrued benefit may, under
the terms of the plan, be expressed as an annuity payable at normal
retirement age, the balance of a hypothetical account, or the current
value of the accumulated percentage of the employee's final average
compensation. Section 411(b)(5)(G) provides that, for purposes of
section 411(b)(5), any reference to the accrued benefit of a
participant refers to the participant's benefit accrued to date.
Section 411(b)(5)(B) imposes certain requirements on an applicable
defined benefit plan in order for the plan to satisfy section
411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is
treated as failing to meet the requirements of section 411(b)(1)(H) if
the terms of the plan provide for an interest credit (or an equivalent
amount) for any plan year at a rate that is greater than a market rate
of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as
having an above-market rate merely because the plan provides for a
reasonable minimum guaranteed rate of return or for a rate of return
that is equal to the greater of a fixed or variable rate of return.
Section 411(b)(5)(B)(i)(II) provides that an applicable defined benefit
plan is treated as failing to meet the requirements of section
411(b)(1)(H) unless the plan provides that an interest credit (or an
equivalent amount) of less than zero can in no event result in the
account balance or similar amount being less than the aggregate amount
of contributions credited to the account. Section 411(b)(5)(B)(i)(III)
authorizes the Secretary of the Treasury to provide by regulation for
rules governing the calculation of a market rate of return for purposes
of section 411(b)(5)(B)(i)(I) and for permissible methods of crediting
interest to the account (including fixed or variable interest rates)
resulting in effective rates of return meeting the requirements of
section 411(b)(5)(B)(i)(I).
Sections 411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv)
contain additional requirements that apply if, after June 29, 2005, an
applicable plan amendment is adopted. Section 411(b)(5)(B)(v)(I)
defines an applicable plan amendment as an amendment to a defined
benefit plan which has the effect of converting the plan to an
applicable defined benefit plan. Under section 411(b)(5)(B)(ii), if,
after June 29, 2005, an applicable plan amendment is adopted, the plan
is treated as failing to meet the requirements of section 411(b)(1)(H)
unless the requirements of section 411(b)(5)(B)(iii) are met with
respect to each individual who was a participant in the plan
immediately before the adoption of the amendment. Section
411(b)(5)(B)(iii) specifies that, subject to section 411(b)(5)(B)(iv),
the requirements of section 411(b)(5)(B)(iii) are met with respect to
any participant if the accrued benefit of the participant under the
terms of the plan as in effect after the amendment is not less than the
sum of: (I) the participant's accrued benefit for years of service
before the effective date of the amendment, determined under the terms
of the plan as in effect before the amendment; plus (II) the
participant's accrued benefit for years of service after the effective
date of the amendment, determined under the terms of the plan as in
effect after the amendment. Section 411(b)(5)(B)(iv) provides that, for
purposes of section 411(b)(5)(B)(iii)(I), the plan must credit the
participant's account or similar amount with the amount of any early
retirement benefit or retirement-type subsidy for the plan year in
which the participant retires if, as of such time, the participant has
met the age, years of service, and other requirements under the plan
for entitlement to such benefit or subsidy.
Section 411(b)(5)(B)(v) sets forth certain provisions related to an
applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if
the benefits under two or more defined benefit plans of an employer are
coordinated in such a manner as to have the effect of adoption of an
applicable plan amendment, the plan sponsor is treated as having
adopted an applicable plan amendment as of the date the coordination
begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the
Treasury to issue regulations to prevent the avoidance of the purposes
of section 411(b)(5)(B) through the use of two or more plan amendments
rather than a single amendment.
Section 411(b)(5)(B)(vi) provides special rules for determining
benefits upon termination of an applicable defined benefit plan. Under
section 411(b)(5)(B)(vi)(I), an applicable defined benefit plan is not
treated as satisfying the requirements of section 411(b)(5)(B)(i)
(regarding permissible interest crediting rates) unless the plan
provides that, upon plan termination, if the interest crediting rate
under the plan is a variable rate, the rate of interest used to
determine accrued benefits under the plan is equal to the average of
the rates of interest used under the plan during the 5-year period
ending on the termination date. In addition, under section
411(b)(5)(B)(vi)(II), the plan must provide that, upon plan
termination, the interest rate and mortality table used to determine
the amount of any benefit under the plan payable in the form of an
annuity payable at normal retirement age is the rate and table
specified under the plan for this purpose as of the termination date,
except that if the interest rate is a variable rate, the rate used is
the average of the rates used under the plan during the 5-year period
ending on the termination date.
Section 411(b)(5)(C) provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H)(i) solely because the
plan provides offsets against benefits under the plan to the extent the
offsets are otherwise allowable in applying the requirements of section
401(a). Section 411(b)(5)(D) provides that a plan is not treated as
failing to meet the requirements of section 411(b)(1)(H) solely because
the
[[Page 64199]]
plan provides a disparity in contributions or benefits with respect to
which the requirements of section 401(l) (relating to permitted
disparity for Social Security benefits and related matters) are met.
Section 411(b)(5)(E) provides that a plan is not treated as failing
to meet the requirements of section 411(b)(1)(H) solely because the
plan provides for indexing of accrued benefits under the plan. Under
section 411(b)(5)(E)(iii), indexing means the periodic adjustment of
the accrued benefit by means of the application of a recognized
investment index or methodology. Section 411(b)(5)(E)(ii) requires
that, except in the case of a variable annuity, the indexing not result
in a smaller benefit than the accrued benefit determined without regard
to the indexing.
Section 701(a) of PPA '06 added provisions to the Employee
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829
(1974)) (ERISA), that are parallel to sections 411(a)(13) and 411(b)(5)
of the Code. The guidance provided in these regulations with respect to
sections 411(a)(13) and 411(b)(5) of the Code would also apply for
purposes of the parallel amendments to ERISA made by section 701(a) of
PPA '06, and the guidance provided in these regulations with respect to
section 411(b)(1) of the Code would also apply for purposes of section
204(b)(1) of ERISA.\1\
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\1\ Under section 101 of Reorganization Plan No. 4 of 1978 (43
FR 47713), the Secretary of the Treasury has interpretive
jurisdiction over the subject matter addressed by these regulations
for purposes of ERISA, as well as the Code.
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Section 701(c) of PPA '06 added provisions to the Age
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat.
602 (1967)), that are parallel to section 411(b)(5) of the Code.
Executive Order 12067 requires all Federal departments and agencies to
advise and offer to consult with the Equal Employment Opportunity
Commission (EEOC) during the development of any proposed rules,
regulations, policies, procedures, or orders concerning equal
employment opportunity. The Treasury Department and the IRS have
consulted with the EEOC prior to the issuance of these regulations.
Section 701(d) of PPA '06 provides that nothing in the amendments
made by section 701 should be construed to create an inference
concerning the treatment of applicable defined benefit plans or
conversions of plans into applicable defined benefit plans under
section 411(b)(1)(H), or concerning the determination of whether an
applicable defined benefit plan fails to meet the requirements of
section 411(a)(2), 411(c), or 417(e), as in effect before such
amendments, solely because the present value of the accrued benefit (or
any portion thereof) of any participant is, under the terms of the
plan, equal to the amount expressed as the balance of a hypothetical
account or as an accumulated percentage of the participant's final
average compensation.
Section 701(e) of PPA '06 sets forth the effective date provisions
with respect to amendments made by section 701 of PPA '06. Section
701(e)(1) specifies that the amendments made by section 701 generally
apply to periods beginning on or after June 29, 2005. Thus, the age
discrimination safe harbors under section 411(b)(5)(A) and section
411(b)(5)(E) are effective for periods beginning on or after June 29,
2005. Section 701(e)(2) provides that the special present value rules
of section 411(a)(13)(A) are effective for distributions made after
August 17, 2006 (the date PPA '06 was enacted).
Under section 701(e) of PPA `06, the 3-year vesting rule under
section 411(a)(13)(B) is generally effective for years beginning after
December 31, 2007, for a plan in existence on June 29, 2005, while,
pursuant to the amendments made by section 107(c) of WRERA '08, the
rule is generally effective for plan years ending on or after June 29,
2005, for a plan not in existence on June 29, 2005. The market rate of
return limitation under section 411(b)(5)(B)(i) is generally effective
for years beginning after December 31, 2007, for a plan in existence on
June 29, 2005, while the limitation is generally effective for periods
beginning on or after June 29, 2005, for a plan not in existence on
June 29, 2005. Section 701(e)(4) of PPA '06 contains special effective
date provisions for collectively bargained plans that modify these
effective dates.
Under section 701(e)(5) of PPA '06, as amended by WRERA '08,
sections 411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion
amendment that is adopted on or after, and takes effect on or after,
June 29, 2005.
Under section 701(e)(6) of PPA '06, as added by WRERA '08, the 3-
year vesting rule under section 411(a)(13)(B) does not apply to a
participant who does not have an hour of service after the date the 3-
year vesting rule would otherwise be effective.
Section 702 of PPA '06 provides for regulations to be prescribed by
August 16, 2007, addressing the application of rules set forth in
section 701 of PPA '06 where the conversion of a defined benefit
pension plan into an applicable defined benefit plan is made with
respect to a group of employees who become employees by reason of a
merger, acquisition, or similar transaction.
Under section 1107 of PPA '06, a plan sponsor is permitted to delay
adopting a plan amendment pursuant to statutory provisions under PPA
'06 (or pursuant to any regulation issued under PPA '06) until the last
day of the first plan year beginning on or after January 1, 2009
(January 1, 2011, in the case of governmental plans). As described in
Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to
both interim and discretionary amendments that are made pursuant to PPA
'06 statutory provisions or any regulation issued under PPA `06. See
Sec. 601.601(d)(2)(ii)(b).
Section 1107 of PPA '06 also permits certain amendments to reduce
or eliminate section 411(d)(6) protected benefits. Except to the extent
permitted under section 1107 of PPA '06 (or under another statutory
provision, including section 411(d)(6) and Sec. Sec. 1.411(d)-3 and
1.411(d)-4), section 411(d)(6) prohibits a plan amendment that
decreases a participant's accrued benefits or that has the effect of
eliminating or reducing an early retirement benefit or retirement-type
subsidy, or eliminating an optional form of benefit, with respect to
benefits attributable to service before the amendment. However, an
amendment that eliminates or decreases benefits that have not yet
accrued does not violate section 411(d)(6), provided that the amendment
is adopted and effective before the benefits accrue. If section 1107 of
PPA '06 applies to an amendment of a plan, section 1107 provides that
the plan does not fail to meet the requirements of section 411(d)(6) by
reason of such amendment, except as provided by the Secretary of the
Treasury.
Section 1.411(b)-1(a)(1) of the Treasury Regulations provides that
a defined benefit plan is not a qualified plan unless the method
provided by the plan for determining accrued benefits satisfies at
least one of the alternative methods in Sec. 1.411(b)-1(b) for
determining accrued benefits with respect to all active participants
under the plan. Section 1.411(b)-1(b)(2)(i) provides that a defined
benefit plan satisfies the 133\1/3\ percent rule of section
411(b)(1)(B) for a particular plan year if (A) under the plan the
accrued benefit payable at the normal retirement age (determined under
the plan) is equal to the normal retirement benefit (determined under
the plan), and (B) the annual rate at which any individual who is or
could be a participant can
[[Page 64200]]
accrue the retirement benefits payable at normal retirement age under
the plan for any later plan year cannot be more than 133\1/3\ percent
of the annual rate at which the participant can accrue benefits for any
plan year beginning on or after such particular plan year and before
such later plan year. Section 1.411(b)-1(b)(2)(ii)(A) through (D) sets
forth a series of rules that correspond to the rules of section
411(b)(1)(B)(i) through (iv). Section 1.411(b)-1(b)(2)(ii)(D) provides
that, for purposes of the 133\1/3\ percent rule, for any plan year,
social security benefits and all relevant factors used to compute
benefits, e.g., consumer price index, are treated as remaining constant
as of the beginning of the current plan year for all subsequent plan
years.
Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and
411(b)(2) were published by the Treasury Department and the IRS in the
Federal Register on April 11, 1988 (53 FR 11876), as part of a package
of regulations that also included proposed regulations under sections
410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age
for participation, vesting, normal retirement age, and actuarial
adjustments after normal retirement age, respectively).\2\
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\2\ On December 11, 2002, the Treasury Department and the IRS
issued proposed regulations regarding the age discrimination
requirements of section 411(b)(1)(H) that specifically addressed
cash balance plans as part of a package of regulations that also
addressed section 401(a)(4) nondiscrimination cross-testing rules
applicable to cash balance plans (67 FR 76123). The 2002 proposed
regulations were intended to replace the 1988 proposed regulations.
In Ann. 2003-22 (2003-1 CB 847), see Sec. 601.601(d)(2)(ii)(b), the
Treasury Department and the IRS announced the withdrawal of the 2002
proposed regulations under section 401(a)(4), and in Ann. 2004-57
(2004-2 CB 15), see Sec. 601.601(d)(2)(ii)(b), the Treasury
Department and the IRS announced the withdrawal of the 2002 proposed
regulations relating to age discrimination.
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Notice 96-8 (1996-1 CB 359), see Sec. 601.601(d)(2)(ii)(b),
described the application of sections 411 and 417(e)(3) to a single-sum
distribution under a cash balance plan where interest credits under the
plan are frontloaded (that is, where future interest credits to an
employee's hypothetical account balance are not conditioned upon future
service and thus accrue at the same time that the benefits attributable
to a hypothetical allocation to the account accrue). Under the analysis
set forth in Notice 96-8, in order to comply with sections 411(a) and
417(e)(3) in calculating the amount of a single-sum distribution under
a cash balance plan, the balance of an employee's hypothetical account
must be projected to normal retirement age and converted to an annuity
under the terms of the plan, and then the employee must be paid at
least the present value of the projected annuity, determined in
accordance with section 417(e). Under that analysis, where a cash
balance plan provides frontloaded interest credits using an interest
rate that is higher than the section 417(e) applicable interest rate,
payment of a single-sum distribution equal to the current hypothetical
account balance as a complete distribution of the employee's accrued
benefit may result in a violation of the minimum present value
requirements of section 417(e) or a forfeiture in violation of section
411(a). In addition, Notice 96-8 proposed a safe harbor which provided
that, if frontloaded interest credits are provided under a plan at a
rate no greater than the sum of identified standard indices and
associated margins, no violation of section 411(a) or 417(e) would
result if the employee's entire accrued benefit were to be distributed
in the form of a single-sum distribution equal to the employee's
hypothetical account balance, provided the plan uses appropriate
annuity conversion factors. Since the issuance of Notice 96-8, four
Federal appellate courts have followed the analysis set out in the
Notice: Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert.
dismissed, 531 U.S. 1061 (2001); West v. AK Steel Corp. Ret.
Accumulation Pension Plan, 484 F.3d 395 (6th Cir. 2007), cert. denied,
129 S. Ct. 895 (2009); Berger v. Xerox Corp. Ret. Income Guarantee
Plan, 338 F.3d 755 (7th Cir. 2003), reh'g and reh'g en banc denied, No.
02-3674, 2003 U.S. App. LEXIS 19374 (7th Cir. Sept. 15, 2003); Lyons v.
Georgia-Pacific Salaried Employees Ret. Plan, 221 F.3d 1235 (11th Cir.
2000), cert. denied, 532 U.S. 967 (2001).
Notice 2007-6 (2007-1 CB 272), see Sec. 601.601(d)(2)(ii)(b),
provides transitional guidance with respect to certain requirements of
sections 411(a)(13) and 411(b)(5) and section 701(b) of PPA '06. Notice
2007-6 includes certain special definitions, including: accumulated
benefit, which is defined as a participant's benefit accrued to date
under a plan; lump sum-based plan, which is defined as a defined
benefit plan under the terms of which the accumulated benefit of a
participant is expressed as the balance of a hypothetical account
maintained for the participant or as the current value of the
accumulated percentage of the participant's final average compensation;
and statutory hybrid plan, which is defined as a lump sum-based plan or
a plan which has an effect similar to a lump sum-based plan. Notice
2007-6 provides guidance on a number of issues, including a rule under
which a plan that provides for indexed benefits described in section
411(b)(5)(E) is a statutory hybrid plan (because it has an effect
similar to a lump sum-based plan), unless the plan either solely
provides for post-retirement adjustment of the amounts payable to a
participant or is a variable annuity plan under which the assumed
interest rate used to determine adjustments is at least 5 percent.
Notice 2007-6 provides a safe harbor for applying the rules set forth
in section 701 of PPA '06 where the conversion of a defined benefit
pension plan into an applicable defined benefit plan is made with
respect to a group of employees who become employees by reason of a
merger, acquisition, or similar transaction. This transitional
guidance, along with the other guidance provided in Part III of Notice
2007-6, applies pending the issuance of further guidance and, thus,
does not apply for periods to which the 2010 final regulations (as
described later in this preamble) apply.
Proposed regulations (REG-104946-07) under sections 411(a)(13) and
411(b)(5) (2007 proposed regulations) were published by the Treasury
Department and the IRS in the Federal Register on December 28, 2007 (72
FR 73680). The Treasury Department and the IRS received written
comments on the 2007 proposed regulations and a public hearing was held
on June 6, 2008.
Proposed regulations (REG-100464-08) under section 411(b)(1)(B)
(2008 proposed backloading regulations) were published by the Treasury
Department and the IRS in the Federal Register on June 18, 2008 (73 FR
34665). The 2008 proposed backloading regulations would provide
guidance on the application of the accrual rule for defined benefit
plans under section 411(b)(1)(B) in cases where plan benefits are
determined on the basis of the greatest of two or more separate
formulas. The Treasury Department and the IRS received written comments
on the 2008 proposed backloading regulations and a public hearing was
held on October 15, 2008.
Announcement 2009-82 (2009-48 IRB 720) and Notice 2009-97 (2009-52
IRB 972) announced certain expected relief with respect to the
requirements of section 411(b)(5). In particular, Announcement 2009-82
stated that the rules in the regulations specifying permissible market
rates of return are not expected to go into effect before the first
plan year that begins on or after January 1, 2011. In addition, Notice
[[Page 64201]]
2009-97 stated that, once final regulations under sections 411(a)(13)
and 411(b)(5) are issued, it is expected that relief from the
requirements of section 411(d)(6) will be granted for a plan amendment
that eliminates or reduces a section 411(d)(6) protected benefit,
provided that the amendment is adopted by the last day of the first
plan year that begins on or after January 1, 2010, and the elimination
or reduction is made only to the extent necessary to enable the plan to
meet the requirements of section 411(b)(5).\3\ Notice 2009-97 also
extended the deadline for amending cash balance and other applicable
defined benefit plans, within the meaning of section 411(a)(13)(C), to
meet the requirements of section 411(a)(13) (other than section
411(a)(13)(A)) and section 411(b)(5), relating to vesting and other
special rules applicable to these plans. Under Notice 2009-97, the
deadline for these amendments is the last day of the first plan year
that begins on or after January 1, 2010.
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\3\ However, see footnote 6 in Section IV.C of this preamble.
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Final regulations (2010 final regulations) under sections
411(a)(13) and 411(b)(5) are being issued at the same time as these
proposed regulations. The 2010 final regulations adopt most of the
provisions of the 2007 proposed regulations, with certain
modifications, and also reserve a number of sections relating to issues
that are not addressed in those final regulations. These reserved
issues relate to the scope of relief provided under section
411(a)(13)(A), a potential alternative method of satisfying the
conversion protection requirements, additional rules with respect to
the market rate of return requirement, and the application of the
special plan termination rules. These proposed regulations generally
address these issues, as well as an issue under section 411(b)(1).
Explanation of Provisions
Overview
In general, these proposed regulations would provide guidance with
respect to certain issues under sections 411(a)(13) and 411(b)(5) that
are not addressed in the 2010 final regulations, as well as an issue
under section 411(b)(1) for hybrid defined benefit plans that adjust
benefits using a variable rate.
I. Section 411(a)(13): Scope of Relief of Section 411(a)(13)(A)
A. The 2010 Final Regulations
The 2010 final regulations define a lump sum-based benefit formula
as a benefit formula used to determine all or any part of a
participant's accumulated benefit under which the accumulated benefit
provided under the formula is expressed as the current balance of a
hypothetical account maintained for the participant or as the current
value of an accumulated percentage of the participant's final average
compensation. The 2010 final regulations provide that the relief of
section 411(a)(13)(A) applies to the benefits determined under a lump
sum-based benefit formula.
B. Limitations on the Relief of Section 411(a)(13)(A)
The proposed regulations would provide that the relief of section
411(a)(13)(A) does not apply with respect to the benefits determined
under a lump sum-based benefit formula unless certain requirements are
satisfied. In particular, the proposed regulations would provide that
the relief does not apply unless, at all times on or before normal
retirement age, the then-current hypothetical account balance or the
then-current accumulated percentage of the participant's final average
compensation is not less than the present value, determined using
reasonable actuarial assumptions, of the portion of the participant's
accrued benefit that is determined under the lump sum-based benefit
formula. However, the plan would be deemed to satisfy this requirement
for periods before normal retirement age if, upon attainment of normal
retirement age, the then-current balance of the hypothetical account or
the then-current value of the accumulated percentage of the
participant's final average compensation is actuarially equivalent
(using reasonable actuarial assumptions) to the portion of the
participant's accrued benefit that is determined under the lump sum-
based benefit formula. Thus, for periods before normal retirement age,
a statutory hybrid plan with a lump sum-based benefit formula that
meets the requirements of the preceding sentence need not project
interest credits to normal retirement age and discount the resulting
accrued benefit back in order to apply the relief of section
411(a)(13)(A) with respect to the benefit determined under the lump
sum-based benefit formula.
In addition, the proposed regulations would provide that the relief
of section 411(a)(13)(A) does not apply unless, as of each annuity
starting date after normal retirement age, the then-current balance of
the hypothetical account or the then-current value of the accumulated
percentage of the participant's final average compensation satisfies
the requirements of section 411(a)(2) or would satisfy those
requirements but for the fact that the plan suspends benefits in
accordance with section 411(a)(3)(B). Thus, for example, a plan that
expresses the accumulated benefit as the balance of a hypothetical
account and that does not comply with the suspension of benefit rules
may have difficulty obtaining the relief of section 411(a)(13)(A) if,
after normal retirement age, the plan credits interest at such a low
rate that the adjustments provided by the interest credits, together
with any principal credits, are insufficient to provide any required
actuarial increases.
The proposed regulations would also provide that the relief of
section 411(a)(13)(A) does not apply unless the balance of the
hypothetical account or the accumulated percentage of the participant's
final average compensation may not be reduced except as a result of one
of the specified reasons set forth in the regulations. Under the
proposed regulations, reductions would only be permissible as a result
of: (1) Benefit payments, (2) qualified domestic relations orders under
section 414(p), (3) forfeitures that are permitted under section 411(a)
(such as charges for providing a qualified preretirement survivor
annuity), (4) amendments that are permitted under section 411(d)(6),
and (5) adjustments resulting from the application of interest credits
(under the rules of Sec. 1.411(b)(5)-1) that are negative for a
period, for plans that express the accumulated benefit as the balance
of a hypothetical account.
C. Application of Section 411(A)(13)(A) to Distributions Other Than
Single Sums
The proposed regulations would provide that the relief under
section 411(a)(13)(A) (with respect to the requirements of sections
411(a)(2), 411(c), and 417(e)) extends to certain other forms of
benefit under a lump sum-based benefit formula, in addition to a
single-sum payment of the entire benefit. In particular, the proposed
regulations would clarify that the relief provided under section
411(a)(13)(A) extends to an optional form of benefit that is currently
payable with respect to a lump sum-based benefit formula if, under the
terms of the plan, the optional form of benefit is determined as of the
annuity starting date as the actuarial equivalent, determined using
reasonable actuarial assumptions, of the then-
[[Page 64202]]
current balance of the hypothetical account or the then-current value
of an accumulated percentage of the participant's final average
compensation.
In addition, the proposed regulations would create a special rule
that provides that the relief under section 411(a)(13)(A) also extends
to an optional form of benefit that is not subject to the minimum
present value requirements of section 417(e) and that is currently
payable with respect to a lump sum-based benefit formula if, under the
terms of the plan, this optional form of benefit is determined as of
the annuity starting date as the actuarial equivalent (using reasonable
actuarial assumptions) of the optional form of benefit that: (1)
Commences as of the same annuity starting date; (2) is payable in the
same generalized optional form (within the meaning of Sec. 1.411(d)-
3(g)(8)) as the accrued benefit; and (3) is the actuarial equivalent
(using reasonable actuarial assumptions) of the then-current balance of
the hypothetical account maintained for the participant or the then-
current value of an accumulated percentage of the participant's final
average compensation. This special rule would facilitate the payment of
an immediate annuity, such as a joint and survivor annuity or life
annuity with period certain, that is calculated as the actuarial
equivalent of the form of payment of the accrued benefit under the
plan, such as an immediately payable straight life annuity.
Finally, the proposed regulations would provide that the relief
under section 411(a)(13)(A) applies on a proportionate basis to a
payment of a portion of the benefit under a lump sum-based benefit
formula that is not paid in the form of an annuity, such as a payment
of a specified dollar amount or percentage of the then-current balance
of a hypothetical account maintained for the participant or then-
current value of an accumulated percentage of the participant's final
average compensation. Thus, for example, if a plan that expresses the
participant's entire accumulated benefit as the balance of a
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance, the plan is treated as satisfying
the requirements of section 411(a) and the minimum present value rules
of section 417(e) with respect to 40 percent of the participant's then-
current accrued benefit.
D. Application of Section 411(A)(13)(A) to Plans With Multiple Formulas
The proposed regulations would clarify that the relief provided
under section 411(a)(13)(A) does not apply to any portion of the
participant's benefit that is determined under a formula that is not a
lump sum-based benefit formula. Thus, for example, where the
participant's accrued benefit equals the greater of the benefit under a
hypothetical account formula and the benefit under a traditional
defined benefit formula, a single-sum payment of the participant's
entire benefit must equal the greater of the then-current balance of
the hypothetical account and the present value, determined in
accordance with section 417(e), of the benefit under the traditional
defined benefit formula. On the other hand, where the plan provides an
accrued benefit equal to the sum of the benefit under a hypothetical
account formula plus the excess of the benefit under a traditional
defined benefit formula over the benefit under the hypothetical account
formula, a single-sum payment of the participant's entire benefit must
equal the then-current balance of the hypothetical account plus the
excess of the present value, determined in accordance with section
417(e), of the benefit under the traditional defined benefit formula
over the present value, determined in accordance with section 417(e),
of the benefit under the hypothetical account formula. See the request
for comments under the heading ``Comments and Public Hearing'' on the
issue of determining the present value of a benefit determined, in
part, based on the benefit under a lump sum-based benefit formula.
E. Application of Section 411(A)(13)(A) to Pension Equity Plans
The preamble to the 2007 proposed regulations asked for comments on
plan formulas that calculate benefits as the current value of an
accumulated percentage of the participant's final average compensation
(often referred to as ``pension equity plans'' or ``PEPs''). Commenters
indicated that some of these plans never credit interest, directly or
indirectly, some explicitly credit interest after cessation of PEP
accruals, and some do not credit interest explicitly but provide for
specific amounts to be payable after cessation of PEP accruals (both
immediately and at future dates) based on actuarial equivalence using
specified actuarial factors applied upon cessation of PEP accruals.
The 2010 final regulations clarify that a formula is expressed as
the balance of a hypothetical account maintained for the participant if
it is expressed as a current single-sum dollar amount. Thus, a PEP
formula that credits interest after cessation of PEP accruals is
considered a formula that is expressed as the balance of a hypothetical
account after cessation of PEP accruals. As a result, such a formula is
a lump sum-based benefit formula that is subject to the rules of
section 411(a)(13)(A) set forth earlier in this preamble, as those
rules are applied to PEP formulas during the period of PEP accruals and
as those rules are applied to hypothetical account balance formulas
after cessation of PEP accruals.
Under these proposed regulations, any other PEP formula (including
those that do not credit interest, directly or indirectly, and those
that offer actuarially equivalent forms of payment using specified
actuarial factors applied after cessation of PEP accruals) would also
be subject to the rules of section 411(a)(13)(A), as explained earlier
in this preamble. Thus, for example, a PEP that does not explicitly
credit interest but, instead, calculates the annuity benefit commencing
at future ages as the actuarial equivalent of the PEP value as of
cessation of PEP accruals would be eligible for the relief of section
411(a)(13)(A) with respect to the PEP value as of every period before
cessation of PEP accruals. In addition, since the accrued benefit is
calculated as an annuity commencing at normal retirement age that is
actuarially equivalent to the PEP value as of cessation of PEP
accruals, the relief described above that applies to annuities that are
calculated as the actuarial equivalent of the then-current PEP value
would not apply.
II. Section 411(b)(1): Special Rule With Respect to Statutory Hybrid
Plans
Under the regulations with respect to the 133\1/3\ percent rule of
section 411(b)(1)(B), for any plan year, social security benefits and
all relevant factors used to compute benefits, e.g., consumer price
index, are treated as remaining constant as of the beginning of the
current plan year for all subsequent plan years. A number of commenters
on both the 2007 proposed regulations and the 2008 proposed backloading
regulations expressed concern that this rule might effectively preclude
statutory hybrid plans from using an interest crediting rate that is a
variable rate that could potentially be negative in a year, such as an
equity-based rate. This is because, if a plan treated an interest
crediting rate that was negative as remaining constant in all future
years for purposes of the backloading test of section 411(b)(1)(B), a
principal credit (such as a pay credit) that accrues in a later year
would result in a greater benefit accrual than an otherwise identical
principal credit that accrues in an earlier year
[[Page 64203]]
because the principal credit that accrues later is credited with
negative interest credits for fewer years. Thus, these commenters were
concerned that a plan that uses a variable rate could fail the
backloading rules of section 411(b)(1) even where both the pay
crediting and interest crediting formulas do not vary over time.
In response to these comments, the proposed regulations contain a
special rule regarding the application of the 133\1/3\; percent rule of
section 411(b)(1)(B) to a statutory hybrid plan that adjusts benefits
using a variable interest crediting rate that can potentially be
negative in any given year. Under this proposed rule, a plan that
determines any portion of the participant's accrued benefit pursuant to
a statutory hybrid benefit formula (as defined in Sec. 1.411(a)(13)-
1(d)(4)) that utilizes an interest crediting rate described in Sec.
1.411(b)(5)-1(d) that is a variable rate that was less than zero for
the prior plan year would not be treated as failing to satisfy the
requirements of the 133\1/3\ percent rule for the current plan year
merely because the section 411(b)(1)(B) backloading calculation is
performed assuming that the variable rate is zero for the current plan
year and all future plan years.
III. Section 411(b)(5): Special Conversion Protection Rule and
Additional Rules With Respect to the Market Rate of Return Limitation
A. Comparison at Effective Date of Conversion Amendment
In accordance with the requirements of section 411(b)(5)(B)(ii),
the 2010 final regulations provide that a participant whose benefits
are affected by a conversion amendment generally must be provided with
a benefit after the conversion that is at least equal to the sum of
benefits accrued through the date of conversion and benefits earned
after the conversion, with no permitted interaction between the two
portions. The 2010 final regulations provide for an alternative method
of satisfying the conversion protection requirements where an opening
hypothetical account balance or opening accumulated percentage of the
participant's final average compensation is established at the time of
the conversion and the plan provides for separate calculation of (1)
the benefit attributable to the opening hypothetical account balance
(including interest credits attributable thereto) or attributable to
the opening accumulated percentage of the participant's final average
compensation and (2) the benefit attributable to post-conversion
service under the post-conversion benefit formula. Under this
alternative, the plan must provide that, when a participant commences
benefits, the participant's benefit will be increased if the benefit
attributable to the opening hypothetical account or opening accumulated
percentage that is payable in the particular optional form of benefit
selected is less than the benefit accrued under the plan prior to the
date of conversion and that was payable in the same generalized
optional form of benefit (within the meaning of Sec. 1.411(d)-3(g)(8))
at the same annuity starting date.
The preamble to the 2007 proposed regulations requested comments on
another alternative method of satisfying the conversion protection
requirements that would not require this comparison at the annuity
starting date. In response to favorable comments related to this
alternative, these proposed regulations would provide that certain
plans may satisfy the conversion protection requirements of sections
411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) by
establishing an opening hypothetical account balance without a
subsequent comparison of benefits at the annuity starting date. While
testing at the annuity starting date would not be required under this
method, a number of requirements like those described in the preamble
to the 2007 proposed regulations would need to be satisfied in order to
ensure that the hypothetical account balance used to replicate the pre-
conversion benefit (the opening hypothetical account balance and
interest credits on that account balance) is reasonably expected in
most, but not necessarily all, cases to provide a benefit at least as
large as the pre-conversion benefit for all periods after the
conversion amendment.
This alternative method would be limited to situations where an
opening hypothetical account balance is established and would not be
available where an opening accumulated percentage of the participant's
final average compensation is established because these plans would be
unable to reliably replicate the pre-conversion benefit. This is
because the value of the opening accumulated percentage would only
increase as a result of unpredictable increases in compensation for
periods after the conversion amendment until cessation of PEP accruals,
rather than by application of an annual interest crediting rate.
This alternative would only be available where the participant
elects to receive payment in the form of a single-sum distribution
equal to the sum of the then-current balance of the hypothetical
account used to replicate the pre-conversion benefit and the benefit
attributable to post-conversion service under the post-conversion
benefit formula. Because of the limited availability of this
alternative, plans will still need to separately keep track of the pre-
conversion benefit in order to satisfy the conversion protection
requirements for all forms of distribution other than a single-sum
distribution. See the related request for comments in this preamble
under the heading ``Comments and Public Hearing.''
Under this alternative, in order to satisfy the requirements of
section 411(d)(6), the participant's benefit after the effective date
of the conversion amendment must not be less than the participant's
section 411(d)(6) protected benefit (as defined in Sec. 1.411(d)-
3(g)(14)) with respect to service before the effective date of the
conversion amendment (determined under the terms of the plan as in
effect immediately before the effective date of the amendment). Also,
the plan, as in effect immediately before the effective date of the
conversion amendment, either must not have provided a single-sum
payment option (for benefits that cannot be immediately distributed
under section 411(a)(11)) or must have provided a single-sum payment
option that was based solely on the present value of the benefit
payable at normal retirement age (or at date of benefit commencement,
if later) and which was not based on the present value of the benefit
payable commencing at any date prior to normal retirement age. This
condition ensures that the hypothetical account balance used to
replicate the pre-conversion benefit does not result in a single-sum
distribution that is less than would have been available under an early
retirement subsidy under the pre-conversion formula.
Under this alternative method of satisfying the conversion
protection requirements, the opening hypothetical account balance must
be established in accordance with the rules under which this opening
balance is not less than the present value, determined in accordance
with section 417(e), of the accrued benefit immediately prior to the
effective date of the conversion amendment. In addition, under this
alternative, the interest crediting rate under the plan as of the
effective date of the conversion amendment must be either the rate of
interest on long-term investment grade corporate bonds (the third
segment rate) or one of several specified safe harbor rates. Also, as
of that date, the value of the index used to determine the interest
crediting rate under the plan must be at least as great
[[Page 64204]]
for every participant or beneficiary as the interest rate that was used
to determine the opening hypothetical account balance. This requirement
is satisfied, for example, if each participant's opening hypothetical
account balance is determined using the applicable interest rate and
applicable mortality table under section 417(e)(3), the interest
crediting rate under the plan is the third segment rate, and, at the
effective date of the conversion amendment, the third segment rate is
the highest of the three segment rates. If, subsequent to the effective
date of the conversion amendment, the interest crediting rate changes
(whether by plan amendment or otherwise) with respect to a participant
who was a participant at the time of the effective date of the
conversion amendment from an interest crediting rate that is either the
rate of interest on long-term investment grade corporate bonds or one
of the specified safe harbor rates to a different interest crediting
rate that is not in all cases at least as great as the prior interest
crediting rate under the plan, then the new interest crediting rate
does not apply to the existing hypothetical account balance as of the
effective date of the change in interest crediting rates (or, if the
plan created a subaccount consisting of the opening hypothetical
account balance and interest credits on that subaccount, then the new
interest crediting rate does not apply to the subaccount).
Finally, either the plan must provide a death benefit after the
effective date of the conversion amendment which has a present value
that is at all times at least equal to the then-current balance of the
hypothetical account used to replicate the pre-conversion benefit or
the plan must not have applied a pre-retirement mortality decrement in
establishing the opening hypothetical account balance.
B. Market Rate of Return
The 2010 final regulations provide that a plan that credits
interest must specify how the plan determines interest credits and must
specify how and when interest credits are credited. In addition, the
2010 final regulations contain certain specific rules regarding the
method and timing of interest credits, including a requirement that
interest be credited at least annually.
The proposed regulations include a rule that would provide that a
plan is not treated as failing to meet the interest crediting
requirements merely because the plan does not provide for interest
credits on amounts distributed prior to the end of the interest
crediting period. Thus, if a plan credits interest at periodic
intervals, the plan would not be required to credit interest on amounts
that were distributed between the dates on which interest under the
plan is credited to the account balance.
Furthermore, the proposed regulations include a rule that would
allow plans to credit interest taking into account increases or
decreases to the participant's accumulated benefit that occur during
the period. In particular, the rule would provide that a plan is not
treated as failing to meet the market rate of return limitations merely
because the plan calculates increases or decreases to the participant's
accumulated benefit by applying a rate of interest or rate of return
(including a rate of increase or decrease under an index) to the
participant's adjusted accumulated benefit (or portion thereof) for the
period. For this purpose, the participant's adjusted accumulated
benefit equals the participant's accumulated benefit as of the
beginning of the period, adjusted for debits and credits (other than
interest credits) made to the accumulated benefit prior to the end of
the interest crediting period, with appropriate weighting for those
debits and credits based on their timing within the period. For plans
that calculate increases or decreases to the participant's accumulated
benefit by applying a rate of interest or rate of return to the
participant's adjusted accumulated benefit (or portion thereof) for the
period, interest credits include these increases and decreases, to the
extent provided under the terms of the plan at the beginning of the
period and to the extent not conditioned on current service and not
made on account of imputed service, and the interest crediting rate
with respect to a participant equals the total amount of interest
credits for the period divided by the participant's adjusted
accumulated benefit for the period.
The proposed regulations would provide that the preservation of
capital requirement is applied only at an annuity starting date on
which a distribution of the participant's entire benefit as of that
date under the plan's statutory hybrid benefit formula commences. The
proposed regulations would also provide special rules to ensure that
prior distributions are taken into account in determining the guarantee
provided by the preservation of capital requirement with respect to a
current distribution to which the rule applies.
These proposed regulations would broaden the list of permitted
interest crediting rates from those permitted under the 2010 final
regulations. A number of commenters on the 2007 proposed regulations
requested that the rate of return on plan assets be treated as a market
rate of return for all types of statutory hybrid plans, and not just
indexed plans. In response to these comments, the proposed regulations
would permit the use of the rate of return on plan assets as a market
rate of return for statutory hybrid plans generally if the plan's
assets are diversified so as to minimize the volatility of returns.
Like the 2010 final regulations, the proposed regulations would provide
that this requirement that plan assets be diversified so as to minimize
the volatility of returns does not require greater diversification than
is required under section 404(a)(1)(C) of Title I of the Employee
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829
(1974)) with respect to defined benefit pension plans.
The preamble to the 2007 proposed regulations asked for comments
about the possibility of allowing an interest credit to be determined
by reference to a rate of return on a regulated investment company
(RIC) described in section 851. The preamble focused on whether such an
investment has sufficiently constrained volatility that the existence
of the capital preservation rule would not result in an above market
rate of return. In response to comments received on the 2007 proposed
regulations, these proposed regulations would provide that an interest
crediting rate is not in excess of a market rate of return if it is
equal to the rate of return on a RIC, as defined in section 851, that
is reasonably expected to be not significantly more volatile than the
broad United States equities market or a similarly broad international
equities market. For example, a RIC that has most of its assets
invested in securities of issuers (including other RICs) concentrated
in an industry sector or a country other than the United States, that
uses leverage, or that has significant investment in derivative
financial products, for the purpose of achieving returns that amplify
the returns of an unleveraged investment, generally would not meet this
requirement. Thus, a RIC that has most of its investments concentrated
in the semiconductor industry or that uses leverage in order to provide
a rate of return that is twice the rate of return on the Standard &
Poor's 500 index (S&P 500) would not meet this requirement. On the
other hand, a RIC whose investments track the rate of return on the S&P
500, a broad-based ``small-cap'' index (such as the Russell 2000
index), or a broad-based international equities index would meet this
requirement. The requirement that
[[Page 64205]]
the RIC's investments not be concentrated in an industry sector or a
specific international country is intended to limit the volatility of
the returns, as well as the risk inherent in non-diversified
investments. Similarly, the requirement that the RIC not provide
leveraged returns is intended both to ensure that rates provided by the
RIC do not exceed an unleveraged market rate as well as to limit the
volatility of the returns provided. Subject to these requirements, the
proposed rule is intended to provide plan sponsors with greater
flexibility in choosing an equity-based rate than would be provided if
the regulations were to list particular equity-based rates that satisfy
the market rate of return requirement.
The preamble to the 2007 proposed regulations requested comments as
to how to implement a rule that provides that interest credits are
determined under the greater of two or more interest crediting rates
without violating the market rate of return limitation. In response to
such comments, these proposed regulations would provide that in certain
limited circumstances a plan can provide interest credits based on the
greater of two or more interest crediting rates without exceeding a
market rate of return.
The Treasury Department and the IRS have modeled the historical
distribution of rates of interest on long-term investment grade
corporate bonds and have determined that those rates have only
infrequently been lower than 4 percent and, when lower, were generally
lower by small amounts and for limited durations. Therefore, the
increase in the effective rate of return resulting from adding an
annual 4 percent floor to one of these bond rates has historically been
small enough that the effective rate of return is not in excess of a
market rate of return. As a result, the proposed rules would provide
that it is permissible for a plan to utilize an annual floor of 4
percent in conjunction with a permissible bond rate. Specifically, the
proposed regulations would provide that a plan does not provide an
interest crediting rate that is in excess of a market rate of return
merely because the plan provides that the interest crediting rate for
an interest crediting period equals the greater of the rate of interest
on long-term investment grade corporate bonds (or one of the safe
harbor rates that, under the regulations, are deemed not to be in
excess of that rate) and an annual interest rate of 4 percent.
This rule permitting a plan to utilize an annual floor of 4 percent
in conjunction with a permissible bond-based rate would also permit
plans that credit interest more frequently than annually using a
permissible bond-based rate to also utilize a periodic floor that is a
pro rata portion of an annual 4 percent floor. Thus, plans that credit
interest more frequently than annually could provide an effective
annual floor that is greater than 4 percent, both due to the effect of
compounding because the floor would be applied more frequently than
annually and because the floor would be applied in any period that the
bond-based rate was below the floor, even if the annual rate exceeded 4
percent for the plan year. However, given the nature of bond-based
rates, including the serial correlation of rates from one period to the
next, as well as the fact that 4 percent is not expected to exceed a
permissible bond-based rate except infrequently, by small amounts, and
for limited durations, in most instances a periodic floor that is based
on a 4 percent annual floor will not provide a floor that is
significantly different than an annual floor of 4 percent.
In contrast, because of the volatility of equity-based rates,
adding an annual floor to an equity-based rate often provides a
cumulative rate of return that far exceeds the rate of return provided
by the equity-based rate without such floor. It should also be noted
that commenters on the 2007 proposed regulations generally did not
request that such an annual floor be permitted (perhaps in recognition
that a minimum guaranteed annual return when applied to equity-based
rates could have a significant impact on funding). Accordingly, the
proposed regulations would not allow the use of an annual floor in
conjunction with the rate of return on plan assets or on a permissible
RIC.
On the other hand, if, instead of applying a floor on each year's
rate of return, a cumulative floor is applied to an equity-based rate,
the effective rate of return is not necessarily substantially greater
than the rate of return provided without the floor. Specifically, the
Treasury Department and the IRS have determined that, based on the
modeling of long-term historical returns, a 3 percent floor that
applies cumulatively (in the aggregate from the date of each principal
credit until the annuity starting date, without a floor on the rate of
return provided in any interim period) could be combined with any
permissible rate (including a permissible equity-based rate), without
increasing the effective rate of return to such an extent that the
effective rate of return would be in excess of a market rate of return.
As a result, the proposed rule would provide that a plan that
determines interest credits using any particular interest crediting
rate that satisfies the market rate of return limitation does not
provide an effective interest crediting rate in excess of a market rate
of return merely because the plan provides that the participant's
benefit, as of the participant's annuity starting date, is equal to the
greater of the benefit determined using the interest crediting rate and
the benefit determined as if the plan had used a fixed annual interest
crediting rate equal to 3 percent (or a rate not in excess of 3
percent) for principal credits in all years. This rule in the proposed
regulations that allows for plans to utilize a cumulative floor of up
to 3 percent would also allow plans some additional flexibility in
design. Thus, for example, a plan that utilizes annual ceilings in
conjunction with a permissible rate could also provide a cumulative
floor of up to 3 percent.
Similar to the rules with respect to application of the
preservation of capital requirement, the proposed regulations would
provide that the determination of the guarantee provided by any
cumulative floor with respect to the participant's benefit is made only
at an annuity starting date on which a distribution of the
participant's entire benefit as of that date under the plan's statutory
hybrid benefit formula commences. The proposed regulations would also
provide special rules to ensure that prior distributions are taken into
account in determining whether the guarantee exceeds the benefit
otherwise provided under the plan.
In addition to permitting certain fixed floors to be applied to
variable rates, the proposed regulations would also permit a standalone
fixed rate of interest to be used for interest crediting purposes.
While the statutory language at section 411(b)(5)(B)(i)(I) does not
explicitly reference a fixed interest crediting rate, the reference to
``a reasonable minimum guaranteed rate of return'' and the reference to
``the greater of a fixed or variable rate of return'' necessarily mean
that some fixed rate must also be permissible. Further, the statutory
language at section 411(b)(5)(B)(i)(III) specifically authorizes the
Treasury Department to issue regulations permitting a fixed rate of
interest under the rules relating to a market rate of return. However,
reconciling a fixed interest crediting rate with the statutory
requirement that an interest crediting rate ``for any plan year shall
be at a rate which is not greater than a market rate of return''
[emphasis added] presents unique challenges because, by definition,
fixed rates do not adjust with the market. As a result, the use of any
[[Page 64206]]
fixed rate will result in an interest crediting rate that is above a
then-current market rate of interest during any period in which the
current market rate falls below the fixed rate.
In light of this fact, the Treasury Department and the IRS believe
that, in order to satisfy the market rate of return requirement, any
fixed interest crediting rate allowed under the rules must not be
expected to exceed future market rates of interest, except
infrequently, by small amounts, and for limited durations. Based on the
historical modeling described above, the Treasury Department and the
IRS have determined that a 5 percent fixed rate satisfies these
criteria and that any higher fixed rate would result in an effective
rate of return that is in excess of a market rate of return.
Specifically, the proposed rules would provide that an annual
interest crediting rate of a fixed 5 percent is a safe harbor rate
deemed to be not in excess of the rate of interest on long-term
investment grade corporate bonds. As a result, an interest crediting
rate of a fixed 5 percent would satisfy the market rate of return
limitation. In addition, the special section 411(d)(6) rule set forth
in the 2010 final regulations with respect to certain changes in
interest crediting rates would apply to an interest crediting rate of a
fixed 5 percent and, as a result, a plan amendment that changes the
interest crediting rate under the plan to the third segment rate from a
fixed 5 percent is deemed to satisfy the requirements of section
411(d)(6), provided certain requirements are met.
The 2010 final regulations provide that Sec. Sec. 1.411(b)(5)-
1(d)(1)(iii), 1.411(b)(5)-1(d)(1)(vi), and 1.411(b)(5)-1(d)(6), which
provide that the regulations set forth the exclusive list of interest
crediting rates and combinations of interest crediting rates that
satisfy the market rate of return requirement under section 411(b)(5),
apply to plan years that begin on or after January 1, 2012. For plan
years that begin before January 1, 2012, statutory hybrid plans may
utilize a rate that is permissible under the 2010 final regulations or
these proposed regulations for purposes of satisfying the statutory
market rate of return requirement.
C. Plan Termination
The proposed regulations would provide guidance with respect to the
application of the rules of section 411(b)(5)(B)(vi), which require
special plan provisions relating to interest crediting rates and
annuity conversion rates that apply when the plan is terminated. Under
the proposed regulations, a statutory hybrid plan is treated as meeting
the market rate of return requirements only if the terms of the plan
satisfy the rules in the regulations relating to section
411(b)(5)(B)(vi). Title IV of ERISA also imposes special rules that
apply when a single employer pension plan is terminated (including
special rules relating to plan amendments). See regulations of the
Pension Benefit Guaranty Corporation for additional rules that apply
when a pension plan is terminated.
These proposed regulations reflect the statutory requirement that a
plan provide that, if the interest crediting rate used to determine a
participant's accumulated benefit (or a portion thereof) varied (that
is, was not a constant fixed rate) during the 5-year period ending on
the plan termination date, then the interest crediting rate used to
determine the participant's accumulated benefit under the plan after
the date of plan termination is equal to the average of the rates used
under the plan during the 5-year period ending on the plan termination
date. If the interest crediting rate used to determine a participant's
accumulated benefit (or a portion thereof) was instead a single fixed
rate for all periods during the 5-year period ending on the plan
termination date, then the interest crediting rate used to determine
the participant's accumulated benefit after the date of plan
termination would be equal to that fixed rate.
Under this rule, the interest crediting rate used after plan
termination would be based on the average of the rates that applied
under the plan during the 5-year period preceding plan termination,
without regard to whether this average rate exceeds then-current market
rates of return (but, in determining the average rate, a rate would
only be taken into account to the extent that the rate did not exceed a
market rate of return when the rate actually applied). For purposes of
this calculation, the proposed regulations would provide that, subject
to certain other rules described in this preamble, the average of the
rates used under the plan during the 5-year period ending on the
termination date is determined with respect to a participant as the
arithmetic average, expressed as an annual rate, of the applicable
interest crediting rates that applied in the 5-year period. In
determining this average, each interest crediting period for which the
interest crediting date is within the 5-year period ending on the plan
termination date would be taken into account, with interest crediting
rates for periods that are less than a year in length adjusted and
weighted proportionately. However, under this rule, if a period begins
on or before the date that is 5 years before the termination date and
ends within the 5-year period ending on the plan termination date, the
period would be weighted as though the entire period were within the 5-
year period ending on the plan termination date.
Section 411(b)(5)(B)(vi) does not explicitly provide rules with
respect to plans that determine interest credits based on equity-based
rates of return that may involve potential losses. Since the trailing
5-year average of an equity-based rate of return may have little, if
any, correlation to the actual future equity-based rate of return, the
Treasury Department and the IRS do not believe it is appropriate to
provide that the trailing 5-year average of such rate of return be used
to determine benefits after plan termination. In such cases, the
Treasury Department and the IRS believe that it is appropriate to apply
a bond-based rule instead. Thus, the proposed regulations would provide
that, with respect to an interest crediting rate used to determine a
participant's accumulated benefit for an interest crediting period
during the 5-year period ending on the termination date that is not a
fixed interest rate or a bond-based rate of interest (or is based on a
variable rate that is not permissible under the regulations), the terms
of the plan must provide that, for purposes of determining the average
upon plan termination, the interest crediting rate for the interest
crediting period is deemed to be equal to the third segment rate for
the last calendar month ending before the beginning of the interest
crediting period, as adjusted for any actual applicable floors and
ceilings that applied to the rate of return in the period, but without
regard to any reductions that applied to the rate of return in the
period. Thus, for example, if the actual interest crediting rate in an
interest crediting period was equal to the rate of return on plan
assets, but not greater than 5 percent, then for purposes of
determining the plan's average interest crediting rate, the interest
crediting rate for that interest crediting period would be deemed to
equal to the lesser of the applicable third segment rate for the period
and 5 percent. However, if the actual interest crediting rate in an
interest crediting period was equal to the rate of return on plan
assets minus 200 basis points, then for purposes of determining the
plan's average interest crediting rate, the interest crediting rate for
that interest crediting period would be deemed to
[[Page 64207]]
equal the third segment rate (not the third segment rate minus 200
basis points). See the request for comments in this preamble under the
heading ``Comments and Public Hearing'' regarding the application of
floors, ceilings, and reductions for purposes of the plan termination
provisions when the third segment rate is substituted for an equity-
based rate.
As provided in section 411(b)(5)(B)(i), the regulations require
that the terms of the plan also provide that the interest rate and
mortality table (including tabular adjustment factors) used on and
after plan termination for purposes of determining the amount of any
benefit under the plan payable in the form of an annuity (commencing at
or after normal retirement age) be based on the interest rate and
mortality table specified under the plan for that purpose as of the
termination date, except that if the interest rate is a variable rate,
the interest rate is instead based on the rules described in the
preceding paragraphs of this preamble using a 5-year average.
A number of special rules apply for purposes of determining the
interest crediting rate that applies after plan termination. In
particular, for purposes of determining the average rate during the
five-year period ending on plan termination, the interest crediting
rate that applied for each interest crediting period is generally the
ongoing interest crediting rate that was specified under the plan in
that period, without regard to any section 411(d)(6) protected benefit
using an old interest crediting rate. However, if, at the end of the
last interest crediting period prior to plan termination, the
participant's accumulated benefit is based on a section 411(d)(6)
protected benefit that results from a prior amendment to change the
rate of interest crediting applicable under the plan, then, for
purposes of determining the average rate, the pre-amendment interest
crediting rate is treated as having applied for each interest crediting
period after the date of the interest crediting rate change. In
addition, the proposed regulations would provide that if the plan
determines a participant's interest credits in any interest crediting
period by applying different rates to different predetermined portions
of the accumulated benefit as permissible under the regulations, then
the participant's interest crediting rate for the interest crediting
period is assumed for purposes of the plan termination provisions to be
the weighted average of the fixed interest rates, determined under the
plan termination rules, that apply to each portion of the accumulated
benefit.
Furthermore, to reduce the administrative burden and to determine
the average rate for each participant based on 5 years of interest
crediting data, if the plan provided for interest credits for any
interest crediting period in which, pursuant to the terms of the plan,
the individual was not eligible to receive interest credits (because
the individual was not a participant or beneficiary in the relevant
interest crediting period or otherwise), then, for purposes of
determining the interest crediting rate that applies after plan
termination, the individual is treated as though the individual
received interest credits in that period using the interest crediting
rate that applied in that period under the terms of the plan to
determine the benefit of a similarly situated participant or
beneficiary who was eligible to receive interest credits. However, if,
under the terms of the plan, the individual was not eligible to receive
any interest credits during the entire 5-year period ending on the plan
termination date, then the rules fixing the interest crediting rate do
not apply to determine the individual's benefit after plan termination.
The proposed regulations include examples to illustrate the
application of these plan termination rules, including how these rules
would apply where a plan bases its interest crediting rate on a
weighted average of more than one rate, how these rules would apply
where the plan's ongoing interest crediting rate is an equity-based
rate of return, and how these rules would apply to a participant whose
benefits are determined where the plan had switched interest crediting
rates in the past and where the interest credit prior to termination
was determined by applying the old rate to the benefit attributable to
principal credits before the applicable amendment date.
D. Special Rule With Respect to Changes in Interest Crediting Rates
Where Plan Provides Section 411(d)(6) Protection
An inherent tension exists between the requirement not to reduce a
participant's accrued benefit and the requirement that an interest
crediting rate not be in excess of a market rate of return that makes
changes in interest crediting rates difficult to implement for
statutory hybrid plans in many circumstances. This is because, in order
to satisfy section 411(d)(6), a participant's benefit can never be less
than the pre-amendment benefit increased for periods after the
amendment using the pre-amendment interest crediting rate, thereby
effectively requiring a minimum interest crediting rate. In light of
this tension, the proposed regulations would create a special market
rate of return rule that applies in the case of an amendment to change
the plan's interest crediting rate.
In particular, the proposed rule would provide that, in the case of
an amendment to change a plan's interest crediting rate for periods
after the applicable amendment date from one interest crediting rate
(the old rate) that is not in excess of a market rate of return to
another interest crediting rate (the new rate) that is not in excess of
a market rate of return, the plan's effective interest crediting rate
is not in excess of a market rate of return merely because the plan
provides for the benefit of any participant who is benefiting under the
plan on the applicable amendment date to never be less than what it
would be if the old rate had continued but without taking into account
any principal credits after the applicable amendment date. A pattern of
repeated plan amendments each of which provides for a prospective
change in the plan's interest crediting rate with respect to the
benefit as of the applicable amendment date will be treated as
resulting in the ongoing plan terms providing that the interest
crediting rate equals the greater of each of the interest crediting
rates, so that the special rule in the preceding sentence would not
apply. See Sec. 1.411(d)-4, A-1(c)(1). Thus, in such cases the plan
will be treated as providing a rate of return that is in excess of a
market rate of return, unless the resulting greater-of rate satisfies
the market rate of return rules.
E. Special Rule With Respect to Interest Crediting Rate After Normal
Retirement Age
In coordination with the rules under section 411(a)(13)(A) (as
described in section I of this preamble) that apply with respect to the
benefit determined as of each annuity starting date after normal
retirement age, the proposed regulations would provide that a statutory
hybrid plan is not treated as providing an effective interest crediting
rate that is in excess of a market rate of return merely because the
plan provides that the participant's benefit, as of each annuity
starting date after normal retirement age, is equal to the greater of
the benefit determined using an interest crediting rate that is not
otherwise in excess of a market rate of return and the benefit that
satisfies the requirements of section 411(a)(2). Thus, for example, a
cash balance plan would not be treated as providing an effective
interest
[[Page 64208]]
crediting rate in excess of a market rate of return merely because the
plan credits interest after normal retirement age at a rate that is
sufficient to provide any required actuarial increases.
IV. Changes in Interest Crediting Rates and Code Section 411(d)(6)
A. Background
An amendment to change a plan's interest crediting rate that only
applies with respect to benefits that have not yet accrued (such as
where the plan establishes a second hypothetical account balance for
future principal credits to which a different interest crediting rate
is applied) would not result in a reduction in accrued benefits
attributable to service before the applicable amendment date and,
therefore, such a change would not violate section 411(d)(6).\4\
However, except to the extent permitted under section 1107 of PPA '06
or as otherwise described in section IV of this preamble, an amendment
to change a plan's future interest crediting rate with respect to
benefits that have already accrued (in other words, with respect to an
existing account balance) must satisfy section 411(d)(6) if the change
could result in interest credits that are smaller as of any date after
the applicable amendment date than the interest credits that would be
credited without regard to the amendment.\5\
---------------------------------------------------------------------------
\4\ However, see section 204(h) of ERISA and section 4980F of
the Code for notice requirements relating to amendments that provide
for a significant reduction in the rate of future benefit accrual.
\5\ Except to the extent permitted under section 411(d)(6) and
Sec. Sec. 1.411(d)-3 and 1.411(d)-4, another Code provision, or
another statutory provision such as section 1107 of PPA '06, section
411(d)(6) prohibits a plan amendment that decreases a participant's
accrued benefits or that has the effect of eliminating or reducing
an early retirement benefit or retirement-type subsidy, or
eliminating an optional form of benefit, with respect to benefits
attributable to service before the amendment.
---------------------------------------------------------------------------
B. Special Section 411(d)(6) Rule With Respect to Changes in Future
Interest Crediting Rates
Under the 2010 final regulations, a plan is not treated as
providing smaller interest credits after the applicable amendment date
merely because the amendment changes the plan's future interest
crediting rate with respect to benefits that have already accrued to
the rate of interest on long-term investment grade corporate bonds (the
third segment rate under section 430(h)(2)(C)(iii)) from one of the
other bond-based safe harbor rates permitted under the 2010 final
regulations (for example, a rate based on Treasury bonds with any of
the margins specified in the regulations or an eligible cost-of-living
index). However, the change is permitted only if: (1) The effective
date of the amendment is at least 30 days after adoption, (2) the new
interest crediting rate only applies to interest to be credited after
the effective date of the amendment, and (3) on the effective date of
the amendment, the new interest crediting rate is not lower than the
interest crediting rate that would have applied in the absence of the
amendment.
C. Changes That Would Otherwise Violate Section 411(d)(6) But That Are
Made to the Extent Necessary To Satisfy Section 411(b)(5)
After these proposed regulations under sections 411(a)(13) and
411(b)(5) are issued as final regulations, it is expected that relief
from the requirements of section 411(d)(6) will be granted for a plan
amendment that eliminates or reduces a section 411(d)(6) protected
benefit, provided that the amendment is adopted before those final
regulations apply to the plan, and the elimination or reduction is made
only to the extent necessary to enable the plan to meet the
requirements of section 411(b)(5).\6\ It is expected that this section
411(d)(6) relief will be available in the case of an amendment that
reduces the future interest crediting rate with respect to benefits
that have already accrued from a rate that is in excess of a market
rate of return under the final market rate of return rules to the
extent necessary to constitute a permissible rate under the final
market rate of return rules. However, it is expected that this relief
would not permit a plan with an interest crediting rate within the list
of permitted rates under the final market rate of return rules to
change to another permitted rate because the change would not be
necessary to enable the plan to satisfy the requirements of section
411(b)(5). Similarly, it is expected that this relief would not permit
a plan with an interest crediting rate that is impermissible under the
final market rate of return rules to change to a permissible rate using
less than the maximum permitted margin for that rate because the
reduction would be more than necessary to enable the plan to satisfy
the requirements of section 411(b)(5). For purposes of the preceding
sentence, a rate without an associated margin is treated as having a
maximum permitted margin of zero. See the request for comments, under
the heading ``Comments and Public Hearing'' in this preamble, regarding
limitations on the scope of this anticipated relief under Sec.
1.411(d)-4, A-2(b)(2)(i) because the relief must be limited to
amendments that change a plan's interest crediting rate only to the
extent necessary to enable the plan to satisfy the requirements of
section 411(b)(5).
---------------------------------------------------------------------------
\6\ Announcement 2009-82 and Notice 2009-97 stated that the IRS
and the Treasury Department expected to provide such relief. While
Notice 2009-97 indicated the relief would only apply if the
amendment is adopted by the last day of the first plan year that
begins on or after January 1, 2010, this preamble supersedes that
applicability date to provide that it is expected that this relief
would apply if the amendment is adopted before final regulations
that finalize these proposed regulations apply to the plan.
---------------------------------------------------------------------------
Proposed Effective/Applicability Dates
The specific rules that would be implemented under the proposed
regulations generally would apply to plan years that begin on or after
January 1, 2012. However, as stated in the preamble to the 2010 final
regulations, a plan is permitted to rely on the provisions of these
proposed regulations, as well as the 2010 final regulations, the 2007
proposed regulations, and Notice 2007-6, for purposes of satisfying the
requirements of sections 411(a)(13) and 411(b)(5) for periods before
the regulatory effective date.
Special Analyses
It has been determined that these proposed regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these regulations have
been 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 (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury Department and the IRS specifically request comments
on the clarity of the proposed regulations and how they may be made
easier to understand.
In addition to comments on issues addressed in these proposed
regulations, the Treasury Department
[[Page 64209]]
and the IRS specifically request comments on the following issues:
Should a defined benefit plan that expresses a
participant's accumulated benefit as a current single-sum dollar amount
and that does not provide for interest credits be excluded from the
definition of a statutory hybrid plan?
In the case of a statutory hybrid plan that credits
interest using an interest crediting rate equal to the rate of return
on a RIC, how does section 411(d)(6) apply if the underlying RIC
subsequently ceases to exist?
The proposed regulations permit certain fixed interest
crediting rates (a fixed 5 percent rate for any year, the greater of 4
percent or certain bond-based indices for any year, and a cumulative
minimum 3 percent annual rate). Comments regarding these specific
proposed rules should take into account how any general legal standard
for a market rate of return would be applied in different economic
circumstances with variable interest rate markets, as well as the
related ability that would generally be available under these proposed
regulations at Sec. 1.411(b)(5)-1(e)(3)(iii) for the plan sponsor to
change the crediting rate on an existing hypothetical account balance
for active participants from one interest crediting rate to another,
including the risk that whatever fixed rate is permitted might allow a
plan's interest credits to exceed market rates of interest either
frequently, by an amount that might be large, or for an extended
duration. Commenters recommending any additional types of rates of
return than those in these proposed regulations should justify how
those rates meet a market rate of return, taking into account the
minimum guarantee rules.
Should a statutory hybrid plan be able to offer
participants a menu of hypothetical investment options (including a
life-cycle investment option, whereby participants are automatically
transitioned incrementally at certain ages from a blended rate that is
more heavily equity-weighted to a rate that is more heavily bond-
weighted) and, if so, what plan qualification issues (i.e., forfeiture,
section 411(d)(6), market rate of return, and other section 411(b)(5)
issues) arise under such a plan design? In particular, do the following
events raise issues: (1) A participant elects to switch from one
investment option to another; (2) a bond index or RIC underlying one of
the investment options ceases to exist; (3) the plan is amended to
eliminate an investment option; (4) a participant elects to switch from
an investment option with a cumulative minimum to an investment option
without a cumulative minimum (or vice versa); or (5) the plan is
terminated and, pursuant to the special rules that apply upon plan
termination, the interest crediting rate that applies to determine a
participant's benefit after plan termination must be fixed?
How does a statutory hybrid plan that provides benefits
under a statutory hybrid benefit formula other than a lump sum-based
benefit formula (such as a plan that provides for indexing as described
in section 411(b)(5)(E))--a plan to which section 411(a)(13)(A) does
not apply--ensure compliance with the minimum present value rules of
section 417(e)?
How does a statutory hybrid plan determine the section
417(e) minimum present value of the participant's benefit where a
portion of the benefit is determined based partly on the benefit under
a lump sum-based benefit formula, although that portion is not
determined under a lump sum-based benefit formula? For example, where a
portion of the accrued benefit is equal to the excess of the benefit
under a traditional defined benefit formula over the benefit under a
hypothetical account formula, how is the present value of that portion
of the accrued benefit determined?
Should the proposed alternative method of satisfying the
conversion protection requirements that does not require a comparison
of benefits at the annuity starting date be broadened to apply to forms
of distribution other than a single-sum distribution? If this rule
should be broadened, what rules would ensure that the benefit
attributable to the opening hypothetical account balance is not less
than the benefit available under the same generalized optional form
under the pre-conversion formula (which may include subsidized early
retirement benefits and other retirement-type subsidies) consistent
with the goal of having a simplified alternative?
How does a statutory hybrid plan that uses a variable
interest crediting rate that may potentially be negative satisfy the
fractional rule of section 411(b)(1)(C) if the 133\1/3\ percent rule of
section 411(b)(1)(B) is not satisfied?
For purposes of the plan termination rules, should a
floor, ceiling, or reduction that applied to an equity-based rate in an
interest crediting period be treated as applying in the same manner to
the third segment rate or is it appropriate for such an adjustment to
be disregarded or otherwise modified for purposes of such rules?
Under the relief to be provided pursuant to Sec.
1.411(d)-4, A-2(b)(2)(i), which authorizes amendments that reduce a
section 411(d)(6) protected benefit only to the extent necessary to
satisfy the requirements of section 411(b)(5), should a statutory
hybrid plan with an interest crediting rate that is impermissible under
the final market rate of return rules be permitted to be amended to
change the future interest crediting rate with respect to benefits that
have already accrued to any permissible rate using the maximum
permitted margin for that rate or should that be dependent upon the
reasons that the pre-amendment rate exceeded a market rate of return?
Thus, for example, should a plan with an impermissible bond-based rate
(without a fixed component) be permitted to switch to any permissible
rate, bond-based or otherwise, using the maximum permitted margin for
that rate? Should a plan with an impermissibly high standalone fixed
rate be permitted to switch to the maximum rate of any type, should it
be permitted to switch to the maximum permitted bond-based rate with
the maximum permitted floor for that rate (the third segment rate with
a fixed 4 percent floor), or must it switch to the maximum permitted
standalone fixed rate (a fixed rate of 5 percent)? Should a plan with a
permissible bond-based rate but with an impermissibly high fixed floor
be permitted to switch to the maximum rate of any type, should it be
permitted to retain the pre-amendment bond-based rate while reducing
the floor to the maximum permitted floor for that rate (a fixed 4
percent floor), should it be permitted to switch to the maximum
permitted standalone fixed rate (a fixed rate of 5 percent), or must it
switch to the maximum permitted bond-based rate with the maximum
permitted floor for that rate (the third segment rate with a fixed 4
percent floor)?
All comments will be available for public inspection and copying. A
public hearing has been scheduled for Wednesday, January 26, 2011,
beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. 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 section of this preamble.
[[Page 64210]]
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by Wednesday, January 12, 2011, and an outline of
topics to be discussed and the amount of time to be devoted to each
topic (a signed original and eight (8) copies) by Friday, January 14,
2011. 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 outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Neil S. Sandhu,
Lauson C. Green, and Linda S. F. Marshall, Office of Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and the Treasury Department participated
in the development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411(a)(13)-1 is amended by revising paragraphs
(b)(2), (b)(3), (b)(4), and (e)(2)(ii) to read as follows:
Sec. 1.411(a)(13)-1 Statutory hybrid plans.
* * * * *
(b) * * *
(2) Requirements that lump sum-based benefit formula must satisfy
to obtain relief--(i) In general. The relief of paragraph (b)(1) of
this section does not apply with respect to benefits determined under a
lump sum-based benefit formula unless the requirements of paragraphs
(b)(2)(ii) through (iv) of this section are satisfied.
(ii) Benefit on or before normal retirement age. A plan satisfies
this paragraph (b)(2)(ii) only if, at all times on or before normal
retirement age, the then-current balance of the hypothetical account or
the then-current value of the accumulated percentage of the
participant's final average compensation is not less than the present
value, determined using reasonable actuarial assumptions, of the
portion of the participant's accrued benefit that is determined under
the lump sum-based benefit formula. However, a plan is deemed to
satisfy the requirement in the preceding sentence for periods before
normal retirement age if, upon attainment of normal retirement age, the
then-current balance of the hypothetical account or the then-current
value of the accumulated percentage of the participant's final average
compensation is actuarially equivalent (using reasonable actuarial
assumptions) to the portion of the participant's accrued benefit that
is determined under the lump sum-based benefit formula.
(iii) Benefit after normal retirement age. A plan satisfies this
paragraph (b)(2)(iii) only if, as of each annuity starting date after
normal retirement age, the then-current balance of the hypothetical
account or the then-current value of the accumulated percentage of the
participant's final average compensation--
(A) Satisfies the requirements of section 411(a)(2); or
(B) Would satisfy the requirements of section 411(a)(2) but for the
fact that the plan suspends benefits in accordance with section
411(a)(3)(B).
(iv) Reductions limited. A plan satisfies this paragraph (b)(2)(iv)
only if the balance of the hypothetical account or accumulated
percentage of the participant's final average compensation may not be
reduced except as a result of--
(A) Benefit payments under paragraph (b)(3) of this section;
(B) Qualified domestic relations orders under section 414(p);
(C) Forfeitures that are permitted under section 411(a) (such as
charges for providing a qualified preretirement survivor annuity);
(D) Amendments that are permitted under section 411(d)(6); or
(E) Adjustments resulting from the application of interest credits
(under the rules of Sec. 1.411(b)(5)-1) that are negative for a
period, for plans that express the accumulated benefit as the balance
of a hypothetical account.
(3) Alternative forms of distribution under a lump sum-based
benefit formula--(i) Payment of current account balance or current
value. The relief of paragraph (b)(1) of this section applies with
respect to a single-sum payment equal to the then-current balance of a
hypothetical account maintained for the participant or the then-current
value of an accumulated percentage of the participant's final average
compensation.
(ii) Payment of benefits that are actuarially equivalent to current
account balance or current value. With respect to the benefits under a
lump sum-based benefit formula, the relief of paragraph (b)(1) of this
section applies to an optional form of benefit that is determined as of
the annuity starting date as the actuarial equivalent, using reasonable
actuarial assumptions, of the then-current balance of a hypothetical
account maintained for the participant or the then-current value of an
accumulated percentage of the participant's final average compensation.
(iii) Payment of benefits based on immediate annuity. With respect
to the benefits under a lump sum-based benefit formula, the relief of
paragraph (b)(1) of this section applies to an optional form of benefit
that is not subject to the minimum present value requirements of
section 417(e) and that is determined under the plan as of the annuity
starting date as the actuarial equivalent (using reasonable actuarial
assumptions) of the optional form of benefit that--
(A) Commences as of the same annuity starting date;
(B) Is payable in the same generalized optional form (within the
meaning of Sec. 1.411(d)-3(g)(8)) as the accrued benefit; and
(C) Is the actuarial equivalent (using reasonable actuarial
assumptions) of the then-current balance of a hypothetical account
maintained for the participant or the then-current value of an
accumulated percentage of the participant's final average compensation.
(iv) Payment of portion of current account balance or current
value. The relief of paragraph (b)(1) of this section applies on a
proportionate basis to a payment of a portion of the benefit under a
lump sum-based benefit formula that is not paid in a form otherwise
described in this paragraph (b)(3), such as a payment of a specified
dollar amount or percentage of the then-current balance of a
hypothetical account maintained for the participant or then-current
value of an accumulated percentage of the participant's final average
compensation. Thus, for example, if a plan that expresses the
participant's entire accumulated benefit as the balance of a
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance in a single payment, the plan is
treated as satisfying the requirements of section 411(a) and the
minimum present value rules of section 417(e) with respect to 40
percent of the participant's then-current accrued
[[Page 64211]]
benefit. See paragraph (b)(3)(ii) or (iii) of this section for relief
applicable with respect to a distribution with respect to the remainder
(60 percent) of the participant's accumulated benefit.
(v) Conditions for applicability. This paragraph (b)(3) applies to
a payment of benefits under a lump sum-based benefit formula only if
the requirements of paragraph (b)(2) of this section are also
satisfied.
(4) Rules of application. The relief of paragraph (b)(1) of this
section applies only to the portion of the participant's benefit that
is determined under a lump sum-based benefit formula and does not apply
to any portion of the participant's benefit that is determined under a
formula that is not a lump sum-based benefit formula. Thus, the
following rules apply:
(i) Greater-of formulas. Where the participant's accrued benefit
equals the greater of the benefit under a lump sum-based benefit
formula and the benefit under another formula, a single-sum payment of
the participant's entire benefit must equal the greater of the then-
current accumulated benefit under the lump sum-based benefit formula
and the present value, determined in accordance with section 417(e), of
the benefit under the other formula. Applying this rule where the non-
lump sum-based benefit formula provides a benefit equal to a pro rata
portion of the benefit determined by projecting a future hypothetical
account balance (including future principal credits), a single-sum
payment of the participant's entire benefit must equal the greater of
the then-current balance of the hypothetical account and the present
value, determined in accordance with section 417(e), of the pro-rata
benefit determined by projecting the future hypothetical account
balance.
(ii) ``Sum-of'' formulas. Where the accrued benefit equals the sum
of the benefit under a lump sum-based benefit formula plus the excess
of the benefit under another formula over the benefit under the lump
sum-based benefit formula, a single-sum payment of the participant's
entire benefit must equal the then-current accumulated benefit under
the lump sum-based benefit formula plus the excess of the present
value, determined in accordance with section 417(e), of the benefit
under the other formula over the present value, determined in
accordance with section 417(e), of the benefit under the lump sum-based
benefit formula.
* * * * *
(e) * * *
(2) * * *
(ii) Special effective date. Paragraphs (b)(2), (b)(3), and (b)(4)
of this section apply to plan years that begin on or after January 1,
2012.
* * * * *
Par. 3. Section 1.411(b)-1 is amended by adding paragraph
(b)(2)(ii)(G) and (b)(2)(ii)(H) to read as follows:
Sec. 1.411(b)-1 Accrued benefit requirements.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(G) Special rule for multiple formulas. [Reserved]
(H) Variable interest crediting rate under a statutory hybrid
benefit formula. For plan years that begin on or after January 1, 2012,
a plan that determines any portion of the participant's accrued benefit
pursuant to a statutory hybrid benefit formula (as defined in Sec.
1.411(a)(13)-1(d)(4)) that utilizes an interest crediting rate
described in Sec. 1.411(b)(5)-1(d) that is a variable rate that was
less than zero for the prior plan year is not treated as failing to
satisfy the requirements of paragraph (b)(2) of this section for the
current plan year merely because the plan assumes for purposes of
paragraph (b)(2) of this section that the variable rate is zero for the
current plan year and all future plan years.
* * * * *
Par. 4. Section 1.411(b)(5)-1 is amended by:
1. Revising paragraph (c)(3)(iii).
2. Adding Example 8 to paragraph (c)(5).
3. Revising paragraphs (d)(1)(iv)(D), (d)(2)(ii), (d)(4)(iv),
(d)(5)(ii), (d)(5)(iv), (d)(6)(ii), (d)(6)(iii), (e)(2), (e)(3)(iii),
(e)(4), and (f)(2)(i)(B).
The revisions and addition read as follows:
Sec. 1.411(b)(5)-1 Reduction in rate of benefit accrual under a
defined benefit plan.
* * * * *
(c) * * *
(3) * * *
(iii) Comparison of benefits at effective date of conversion
amendment--(A) In general. A plan satisfies the requirements of this
paragraph (c)(3)(iii) with respect to a participant only if an opening
hypothetical account balance is established to replicate the pre-
conversion benefit and the requirements of paragraphs (c)(3)(iii)(B)
through (c)(3)(iii)(G) of this section are each satisfied.
(B) Single-sum payment. At the annuity starting date, the
participant elects to receive payment in the form of a single-sum
distribution equal to the sum of the then-current balance of the
hypothetical account used to replicate the pre-conversion benefit and
the benefit attributable to post-conversion service under the post-
conversion benefit formula.
(C) Not less than pre-conversion benefit. In accordance with
section 411(d)(6), the aggregate benefit payable at the annuity
starting date after the effective date of the conversion amendment is
not less than the benefit described in paragraph (c)(2)(i)(A) of this
section.
(D) Form of pre-conversion benefit. The plan, as in effect
immediately prior to the effective date of the conversion amendment,
either did not provide a single-sum payment option (for benefits that
cannot be immediately distributed under section 411(a)(11)) or provided
a single-sum payment option that was based solely on the present value
of the benefit payable at normal retirement age (or at date of benefit
commencement, if later), and which was not based on the present value
of the benefit payable commencing at any date prior to normal
retirement age.
(E) Minimum opening account balance. The plan provides for the
opening hypothetical account balance under paragraph (c)(3)(i) of this
section to be established in accordance with rules under which the
amount of this opening balance will not be less than the present value,
determined in accordance with section 417(e), of the participant's
accrued benefit under the plan immediately prior to the effective date
of the conversion amendment.
(F) Interest credits--(1) Requirement as of effective date of
conversion amendment. As of the effective date of the conversion
amendment, the interest crediting rate under the plan is an interest
crediting rate described in paragraph (d)(3) or (d)(4) of this section.
In addition, as of that date, the value of the index used to determine
the interest crediting rate under the plan is at least as great for
every participant or beneficiary as the interest rate that was used
pursuant to paragraph (c)(3)(iii)(E) of this section to determine the
opening hypothetical account balance. This requirement is satisfied,
for example, if each participant's opening hypothetical account balance
is determined using the applicable interest rate and applicable
mortality table under section 417(e)(3), the interest crediting rate
under the plan is the third segment rate, and, at the effective date of
the conversion amendment, the third segment rate is the highest of the
three segment rates.
(2) Requirement for later interest crediting rate changes. If,
subsequent to the effective date of the conversion amendment, the
interest crediting rate
[[Page 64212]]
changes (whether by plan amendment or otherwise) with respect to a
participant who was a participant at the time of the effective date of
the conversion amendment from a particular interest crediting rate
described in paragraph (d)(3) or (d)(4) of this section to a different
interest crediting rate that is not in all cases at least as great as
the prior interest crediting rate under the plan, then the new interest
crediting rate does not apply to the existing hypothetical account
balance as of the effective date of the change in interest crediting
rates (or, if the plan created a subaccount consisting of the opening
hypothetical account balance and interest credits on that subaccount,
then the new interest crediting rate does not apply to the subaccount).
(G) Death benefits. The plan either--
(1) Provides a death benefit after the effective date of the
conversion amendment which has a present value that is at all times at
least equal to the then-current balance of the hypothetical account
used to replicate the pre-conversion benefit; or
(2) Applied no pre-retirement mortality decrement in establishing
the opening hypothetical account balance under paragraph (c)(3)(iii)(E)
of this section.
* * * * *
(c) * * *
(5) * * *
Example 8. (i) Facts where plan establishes opening
hypothetical account balance under paragraph (c)(3)(iii) of this
section. Employer O sponsors Plan F, a defined benefit plan that
provides an accumulated benefit, payable as a straight life annuity
commencing at age 65 (which is Plan F's normal retirement age),
based on a percentage of highest average compensation times the
participant's years of service. Plan F permits any participant who
has had a severance from employment to elect payment in the
following optional forms of benefit (with spousal consent if
applicable), with any payment not made in a straight life annuity
converted to an equivalent form based on reasonable actuarial
assumptions: A straight life annuity; and a 50 percent, 75 percent,
or 100 percent joint and survivor annuity. The payment of benefits
may commence at any time after attainment of age 55, with an
actuarial reduction if the commencement is before normal retirement
age. In addition, the plan offers a single-sum payment after
attainment of age 55 equal to the present value of the normal
retirement benefit using the applicable interest rate and mortality
table under section 417(e)(3) in effect under the terms of the plan
on the annuity starting date. (These facts are the same as those in
paragraph (i) of Example 1.)
(ii) Facts relating to the conversion amendment and
establishment of opening balance. On January 1, 2012, Plan F is
amended to eliminate future accruals under the highest average
compensation benefit formula and to base future benefit accruals on
a hypothetical account balance. As of January 1, 2012, the plan
establishes an opening hypothetical account balance for each
individual who was a participant in the plan on December 31, 2011,
equal to the present value of the participant's accumulated
benefits, payable as a straight life annuity commencing at age 65,
based on the actuarial assumptions then applicable under section
417(e)(3). New participants begin with a hypothetical account
balance of zero on their date of participation. For service on or
after January 1, 2012, each participant's hypothetical account
balance is credited monthly with a pay credit equal to a specified
percentage of the participant's compensation during the month and
also with interest based on the third segment rate described in
section 430(h)(2)(C)(iii). With respect to benefits under the
hypothetical account balance, a participant is permitted to elect
(with spousal consent) payment in the same generalized optional
forms of benefit (even though different actuarial factors apply) as
under the terms of the plan in effect before January 1, 2012, and
also as a single-sum distribution. The plan provides that in no
event will the benefit payable be less than the benefits
attributable to service before January 1, 2012, to be determined
under the terms of the plan as in effect immediately before the
effective date of the amendment. In the event of death prior to the
annuity starting date, the plan provides a death benefit equal to
the hypothetical account balance (and allows a surviving spouse to
elect payment in the form of an actuarially equivalent life
annuity).
(iii) Conclusion. Plan F satisfies the requirements of paragraph
(c)(3)(iii) of this section for participants who elect to receive
payment in the form of a single-sum distribution equal to the
hypothetical account balance in accordance with the requirements of
paragraph (c)(3)(iii)(B) of this section for the following reasons.
First, Plan F satisfies the requirements of paragraph (c)(3)(iii)(C)
of this section because the benefit payable can never be less than
the pre-conversion benefit, in accordance with the requirements of
section 411(d)(6). Second, Plan F satisfies the requirements of
paragraph (c)(3)(iii)(D) of this section because prior to conversion
it provided for a single-sum payment option that was based solely on
the present value of the benefit payable at normal retirement age.
Third, Plan F satisfies the requirements of paragraph (c)(3)(iii)(E)
of this section because the amount of the opening balance is not
less than the present value of the participant's accrued benefit
under the plan immediately prior to the effective date of the
conversion amendment, as determined in accordance with section
417(e). Fourth, Plan F satisfies the requirements of paragraph
(c)(3)(iii)(F) of this section because it provides for interest
credits that are described in paragraph (d)(3) of this section on
the opening balance and the interest credits are reasonably expected
to be no lower than the interest rate used to determine the opening
balance. This is the case because interest is credited at least
annually after the effective date of the conversion amendment and
the interest rate used to establish the opening balance (which is
based on the first, second, and third segment rates described in
section 430(h)(2)(C) referenced under section 417(e)(3)) is not
greater than the interest rate applicable under the third segment
rate described in section 430(h)(2)(C)(iii) which the plan uses to
determine interest for all future periods after the effective date
of the conversion amendment. Fifth, Plan F satisfies the
requirements of paragraph (c)(3)(iii)(G) of this section because it
provides a death benefit after the effective date of the conversion
amendment which has a present value that is at all times at least
equal to the hypothetical account balance at the date of death.
* * * * *
(d) * * *
(1) * * *
(iv) * * *
(D) Debits and credits during the interest crediting period. A plan
is not treated as failing to meet the requirements of this paragraph
(d) merely because the plan does not provide for interest credits on
amounts distributed prior to the end of the interest crediting period.
Furthermore, a plan is not treated as failing to meet the requirements
of this paragraph (d) merely because the plan calculates increases or
decreases to the participant's accumulated benefit by applying a rate
of interest or rate of return (including a rate of increase or decrease
under an index) to the participant's adjusted accumulated benefit (or
portion thereof) for the period. For this purpose, the participant's
adjusted accumulated benefit equals the participant's accumulated
benefit as of the beginning of the period, adjusted for debits and
credits (other than interest credits) made to the accumulated benefit
prior to the end of the interest crediting period, with appropriate
weighting for those debits and credits based on their timing within the
period. For plans that calculate increases or decreases to the
participant's accumulated benefit by applying a rate of interest or
rate of return to the participant's adjusted accumulated benefit (or
portion thereof) for the period, interest credits include these
increases and decreases, to the extent provided under the terms of the
plan at the beginning of the period and to the extent not conditioned
on current service and not made on account of imputed service (as
defined in Sec. 1.401(a)(4)-11(d)(3)(ii)(B)), and the interest
crediting rate with respect to a participant equals the total amount of
interest credits for the period divided by
[[Page 64213]]
the participant's adjusted accumulated benefit for the period.
* * * * *
(2) * * *
(ii) Application to multiple annuity starting dates--(A) In
general. Paragraph (d)(2)(i) of this section applies only at an annuity
starting date, within the meaning of Sec. 1.401(a)-20, A-10(b), on
which a distribution of the participant's entire benefit under the
plan's statutory hybrid benefit formula as of that date commences. For
a participant who has more than one annuity starting date, paragraph
(d)(2)(ii)(B) of this section provides rules for the application of
paragraph (d)(2)(i) of this section, taking into account prior
distributions. If the comparison under paragraph (d)(2)(ii)(B) of this
section results in the sum of principal credits exceeding the sum of
the amounts described in paragraphs (d)(2)(ii)(B)(1) through
(d)(2)(ii)(B)(3) of this section, then the participant's benefit to be
distributed at the current annuity starting date is increased by an
amount equal to the excess.
(B) Comparison to reflect prior distributions. For a participant
who has more than one annuity starting date, the sum of all principal
credits credited to the participant under the plan, as of the current
annuity starting date, is compared to the sum of--
(1) The participant's benefit as of the current annuity starting
date;
(2) The amount of the offset to the participant's benefit under the
statutory hybrid benefit formula that is attributable to any prior
distribution of the participant's benefit under that formula; and
(3) The amount of any increase to the participant's benefit as a
result of the application of paragraph (d)(2)(i) of this section to a
prior distribution.
* * * * *
(4) * * *
(iv) Fixed rate of interest. An annual interest crediting rate
equal to a fixed 5 percent is deemed to be not in excess of the
interest rate described in paragraph (d)(3) of this section.
* * * * *
(5) * * *
(ii) Actual rate of return on plan assets. An interest crediting
rate equal to the actual rate of return on the aggregate assets of the
plan, including both positive returns and negative returns, is not in
excess of a market rate of return if the plan's assets are diversified
so as to minimize the volatility of returns. This requirement that plan
assets be diversified so as to minimize the volatility of returns does
not require greater diversification than is required under section
404(a)(1)(C) of Title I of the Employee Retirement Income Security Act
of 1974, Public Law 93-406 (88 Stat. 829 (1974)) with respect to
defined benefit pension plans.
* * * * *
(iv) Rate of return on certain RICs. An interest crediting rate is
not in excess of a market rate of return if it is equal to the rate of
return on a regulated investment company (RIC), as defined in section
851, that is reasonably expected to be not significantly more volatile
than the broad United States equities market or a similarly broad
international equities market. For example, a RIC that has most of its
assets invested in securities of issuers (including other RICs)
concentrated in an industry sector or a country other than the United
States, that uses leverage, or that has significant investment in
derivative financial products, for the purpose of achieving returns
that amplify the returns of an unleveraged investment, generally would
not meet this requirement. Thus, a RIC that has most of its investments
concentrated in the semiconductor industry or that uses leverage in
order to provide a rate of return that is twice the rate of return on
the Standard & Poor's 500 index (S&P 500) would not meet this
requirement. On the other hand, a RIC whose investments track the rate
of return on the S&P 500, a broad-based ``small-cap'' index (such as
the Russell 2000 index), or a broad-based international equities index
would meet this requirement.
* * * * *
(6) * * *
(ii) Annual or more frequent floor applied to bond-based rates. An
interest crediting rate under a plan does not fail to be described in
paragraph (d)(3) or (d)(4) of this section for an interest crediting
period merely because the plan provides that the interest crediting
rate for that interest crediting period equals the greater of--
(A) An interest crediting rate described in paragraph (d)(3) or
(d)(4) of this section; and
(B) An annual interest rate of 4 percent (or a pro rata portion of
an annual interest rate of 4 percent for plans that provide interest
credits more frequently than annually).
(iii) Cumulative floor applied to equity-based or bond-based
rates--(A) In general. A plan that determines interest credits under a
statutory hybrid benefit formula using a particular interest crediting
rate described in paragraph (d)(3), (d)(4), or (d)(5) of this section
(or an interest crediting rate that can never be in excess of a
particular interest crediting rate described in paragraph (d)(3),
(d)(4), or (d)(5) of this section) does not provide an effective
interest crediting rate in excess of a market rate of return merely
because the plan provides that the participant's benefit under the
statutory hybrid benefit formula determined as of the participant's
annuity starting date is equal to the greater of--
(1) The benefit determined using the interest crediting rate; and
(2) The benefit determined as if the plan had used a fixed annual
interest crediting rate equal to 3 percent (or a lower rate) for all
principal credits that are made during the guarantee period (minimum
guarantee amount).
(B) Guarantee period defined. The guarantee period is the
prospective period which begins on the date on which the cumulative
floor described in this paragraph (d)(6)(iii) begins to apply to the
participant's benefit and which ends on the date on which that
cumulative floor ceases to apply to the participant's benefit.
(C) Application to multiple annuity starting dates. The
determination under paragraph (d)(6)(iii)(A) of this section is made
only at an annuity starting date, within the meaning of Sec. 1.401(a)-
20, A-10(b), on which a distribution of the participant's entire
benefit under the plan's statutory hybrid benefit formula as of that
date commences. For a participant who has more than one annuity
starting date, paragraph (d)(6)(iii)(D) of this section provides rules
for the application of paragraph (d)(6)(iii)(A) of this section, taking
into account any prior distributions. If the comparison under paragraph
(d)(6)(iii)(D) of this section results in the minimum guarantee amount
exceeding the sum of the amounts described in paragraphs
(d)(6)(iii)(D)(1) through (d)(6)(iii)(D)(3) of this section, then the
participant's benefit to be distributed at the current annuity starting
date is increased by an amount equal to the excess.
(D) Comparison to reflect prior distributions. For a participant
who has more than one annuity starting date, the minimum guarantee
amount (described in paragraph (d)(6)(iii)(A)(2) of this section), as
of the current annuity starting date, is compared to the sum of--
(1) The participant's benefit, as of the current annuity starting
date, to which a minimum guaranteed rate described in paragraph
(d)(6)(iii)(A)(2) of this section applies;
(2) The amount of the offset to the participant's benefit under the
statutory hybrid benefit formula that is attributable to any prior
distribution of
[[Page 64214]]
the participant's benefit under that formula and to which a minimum
guaranteed rate described in paragraph (d)(6)(iii)(A)(2) of this
section applied, together with interest at that minimum guaranteed rate
annually from the prior annuity starting date to the current annuity
starting date; and
(3) The amount of any increase to the participant's benefit as a
result of the application of paragraph (d)(6)(iii)(A) of this section
to any prior distribution, together with interest annually at the
minimum guaranteed rate that applied to the prior distribution from the
prior annuity starting date to the current annuity starting date.
(E) Application to portion of participant's benefit. A cumulative
floor described in this paragraph (d)(6)(iii) may be applied to a
portion of a participant's benefit, provided the requirements of this
paragraph (d)(6)(iii) are satisfied with respect to that portion of the
benefit. If a cumulative floor described in this paragraph (d)(6)(iii)
applies to a portion of a participant's benefit, only the principal
credits that are attributable to that portion of the participant's
benefit are taken into account in determining the amount of the
guarantee described in paragraph (d)(6)(iii)(A)(2) of this section.
* * * * *
(e) * * *
(2) Plan termination--(i) In general--(A) Interest crediting rates.
If the interest crediting rate used to determine a participant's
accumulated benefit (or a portion thereof) has been a variable rate
during the interest crediting periods in the 5-year period ending on
the plan termination date (including any case in which the rate was not
the same fixed rate during all such periods), then a statutory hybrid
plan is treated as meeting the requirements of section 411(b)(5)(B)(i)
and paragraph (d)(1) of this section only if the terms of the plan
satisfy the requirements of paragraph (e)(2)(ii) of this section. See
regulations of the Pension Benefit Guaranty Corporation for additional
rules that apply when a pension plan is terminated.
(B) Annuity conversion factors. A statutory hybrid plan is treated
as meeting the requirements of section 411(b)(5)(B)(i) and paragraph
(d)(1) of this section only if the terms of the plan provide that the
interest rate and mortality table (including tabular adjustment
factors) used on and after plan termination for purposes of determining
the amount of any benefit under the plan payable in the form of an
annuity commencing at or after normal retirement age are the interest
rate and mortality table specified under the plan for that purpose as
of the termination date, except that if the interest rate is a variable
rate (as described in paragraph (e)(2)(i) of this section), then the
interest rate for that purpose is determined pursuant to the rules of
paragraph (e)(2)(ii) of this section.
(ii) Interest crediting rates that are variable--(A) General rule.
Subject to the other rules in this paragraph (e)(2), a plan satisfies
this paragraph (e)(2)(ii) only if the terms of the plan provide that,
on the plan termination date, if the interest crediting rate used to
determine a participant's accumulated benefit has been a variable rate
as described in paragraph (e)(2)(i) of this section, then the interest
crediting rate used to determine the participant's accumulated benefit
under the plan after the date of plan termination is equal to the
average of the interest crediting rates used under the plan during the
5-year period ending on the plan termination date. For this purpose, an
interest crediting rate is used under the plan if the rate applied
under the terms of the plan during an interest crediting period for
which the interest crediting date is within the 5-year period ending on
the plan termination date and the average is determined as the
arithmetic average of the rates used, with each rate adjusted to
reflect the length of the interest crediting period and the average
rate expressed as an annual rate.
(B) Variable interest crediting rates that are based on interest
rates. With respect to an interest crediting rate that was a variable
interest rate described in paragraph (d)(3) or (d)(4) of this section
(taking into account the rules of paragraph (d)(6)(ii) of this
section), a variable interest rate that can never be in excess of a
rate described in paragraph (d)(3) or (d)(4) of this section, or a
fixed interest rate that has not been the same rate during the entire
5-year period ending on the plan termination date, the actual interest
rate that applied under the plan for the interest crediting period is
used for purposes of determining the average interest crediting rate.
For this purpose, the rate that applied for the interest crediting
period takes into account minimums, maximums, and other reductions that
applied in the period, other than cumulative floors under paragraph
(d)(6)(iii) of this section.
(C) Variable interest crediting rates that are other rates of
return. With respect to any interest crediting rate not described in
paragraph (e)(2)(ii)(B) of this section (that is, a variable rate
described in paragraph (d)(5) of this section), the interest crediting
rate that applied for the interest crediting period for purposes of
determining the average interest crediting rate is deemed to be equal
to the third segment rate under section 430(h)(2)(C)(iii) for the last
calendar month ending before the beginning of the interest crediting
period, as adjusted to account for any minimums or maximums that
applied in the period (other than cumulative floors under paragraph
(d)(6)(iii) of this section), but without regard to other reductions
that applied in the period. Thus, for example, if the actual interest
crediting rate in an interest crediting period was equal to the rate of
return on plan assets, but not greater than 5 percent, then for
purposes of determining the plan's average interest crediting rate, the
interest crediting rate for that interest crediting period would be
deemed to equal the lesser of the applicable third segment rate for the
period and 5 percent. However, if the actual interest crediting rate in
an interest crediting period was equal to the rate of return on plan
assets minus 200 basis points, then for purposes of determining the
plan's average interest crediting rate, the interest crediting rate for
that interest crediting period would be deemed to equal the third
segment rate.
(iii) Rules of application--(A) Section 411(d)(6) protected
benefits. In general, for purposes of determining the average interest
crediting rate under paragraph (e)(2)(ii) of this section, the interest
crediting rate that applied for each interest crediting period is the
ongoing interest crediting rate that was specified under the plan in
that period, without regard to any section 411(d)(6) protected benefit
using an interest crediting rate that applied under the plan prior to
amendment. However, if, at the end of the last interest crediting
period prior to plan termination, the participant's accumulated benefit
is based on a section 411(d)(6) protected benefit that results from a
prior amendment to change the rate of interest crediting applicable
under the plan, then, for purposes of determining the average interest
crediting rate under paragraph (e)(2)(ii) of this section, the pre-
amendment interest crediting rate is treated as having applied for each
interest crediting period after the date of the interest crediting rate
change.
(B) Weighted averages. If the plan determines the interest credit
in any interest crediting period by applying different rates to
different predetermined portions of the accumulated benefit under
paragraph (d)(1)(vii) of this section, then, for purposes of
determining the average interest crediting rate under paragraph
(e)(2)(ii) of this section, the interest
[[Page 64215]]
crediting rate that applied for the interest crediting period is the
weighted average of the relevant interest rates that apply, under the
rules of paragraph (e)(2)(ii) of this section, to each portion of the
accumulated benefit.
(C) Participants with less than five years of interest credits upon
plan termination. If the plan provided for interest credits for any
interest crediting period in which, pursuant to the terms of the plan,
the individual was not eligible to receive interest credits (because
the individual was not a participant or beneficiary in the relevant
interest crediting period or otherwise), then, for purposes of
determining the individual's average interest crediting rate under
paragraph (e)(2)(ii) of this section, the individual is treated as
though the individual received interest credits in that period using
the interest crediting rate that applied in that period under the terms
of the plan to a similarly situated participant or beneficiary who was
eligible to receive interest credits. However, if, under the terms of
the plan, the individual was not eligible to receive any interest
credits during the entire 5-year period ending on the plan termination
date, then the rules under paragraph (e)(2)(ii) do not apply to
determine the individual's benefit after plan termination.
(iv) Examples. The following examples illustrate the rules of this
paragraph (e)(2). In each case, it is assumed that the plan is
terminated in a standard termination.
Example 1. (i) Facts. Plan A is a defined benefit plan with a
calendar plan year that expresses each participant's accumulated
benefit in the form of a hypothetical account balance to which
principal credits are made at the end of each calendar quarter and
to which interest is credited at the end of each calendar quarter
based on the balance at the beginning of the quarter. Interest
credits under Plan A are based on a rate of interest fixed at the
beginning of each plan year equal to the third segment rate for the
preceding December, except that the plan used the rate of interest
on 30-year Treasury bonds (instead of the third segment rate) for
plan years before 2012. The plan is terminated on March 3, 2016. The
third segment rate credited under Plan A from January 1, 2012,
through December 31, 2015, is assumed to be: 6 percent annually for
each of the four quarters in 2015 (1.5 percent quarterly); 6.5
percent annually for each of the four quarters in 2014 (1.625
percent quarterly); 6 percent annually for each of the four quarters
in 2013 (1.5 percent quarterly); and 5.5 percent annually for each
of the four quarters in 2012 (1.375 percent quarterly). The rate of
interest on 30-year Treasury bonds credited under Plan A for each of
the four quarters in 2011 is assumed to be 4.4 percent annually (1.1
percent quarterly).
(ii) Conclusion. Pursuant to paragraph (e)(2)(ii)(B) of this
section, the interest crediting rate used to determine accrued
benefits under the plan on and after the date of plan termination is
5.68 percent. This is determined by calculating the average
quarterly rate of 1.42 percent (the sum of 1.5 percent times 4,
1.625 times 4, 1.5 times 4, 1.375 times 4, and 1.1 percent times 4,
divided by the 20 quarters that end in the 5-year period from March
4, 2011 to March 3, 2016) and multiplying such rate by 4 to
determine the average annual rate.
Example 2. (i) Facts. The facts are the same as Example 1,
except that Participant B commenced participation in Plan A on April
17, 2013.
(ii) Conclusion. Pursuant to paragraph (e)(2)(iii)(C) of this
section, the interest crediting rate used to determine Participant B's
accrued benefits under Plan A on and after the date of plan termination
is 5.68 percent, which is the same rate that would have applied to
Participant B if Participant B had participated in the plan during the
5-year period preceding the date of plan termination, as described in
Example 1.
Example 3. (i) Facts. Plan C is a defined benefit plan with a
calendar plan year that expresses each participant's accumulated
benefit in the form of a hypothetical account balance to which
principal credits are made at the end of each calendar year and to
which interest is credited at the end of each calendar year based on
the balance at the end of the preceding year. The plan is terminated
on January 27, 2014. The plan's interest crediting rate for each
calendar year during the entire 5-year period ending on the plan
termination date is equal to (A) 50 percent of the greater of the
rate of interest on 3-month Treasury Bills for the preceding
December and an annual rate of 4 percent, plus (B) 50 percent of the
rate of return on plan assets. The rate of interest on 3-month
Treasury Bills credited under Plan C is assumed to be: 3.4 percent
for 2013; 4 percent for 2012; 4.5 percent for 2011; 3.5 percent for
2010; and 4.2 percent for 2009. Each of these rates applied under
Plan C for interest credited during this period for purposes of the
interest credits described in clause (A) of this paragraph (i),
except that the 4 percent minimum rate applied for 2013 and 2010.
For purposes of the interest credits described in clause (B) of this
paragraph (i), the rate of interest on the third segment rate in the
prior years (based on the rate for the preceding December) is
assumed to be: 6 percent for 2013; 6.5 percent for 2012; 6 percent
for 2011; 5.5 percent for 2010; and 6 percent for 2009.
(ii) Conclusion. Pursuant to paragraph (e)(2)(ii) of this
section, the interest crediting rate used to determine accrued
benefits under the plan on and after the date of plan termination is
5.07 percent. This number is equal to the sum of 50 percent of 4.14
percent (which is the sum of 4 percent, 4 percent, 4.5 percent, 4
percent, and 4.2 percent, divided by 5), and 50 percent of 6 percent
(which is the average third segment rate for the 5 interest
crediting periods ending within the 5-year period).
Example 4. (i) Facts. The facts are the same as in Example 3,
except that the plan had credited interest before January 1, 2012,
using the rate of return on a RIC and was amended effective January
1, 2012, to base interest credits for all plan years after 2011 on
the interest rate formula described in Example 3(i). In order to
comply with section 411(d)(6), the plan provides that, for each
participant or beneficiary who was a participant on December 31,
2011, the benefits at any date are based on either the ongoing
hypothetical account balance on that date (which is based on the
December 31, 2011 balance, with interest credited thereafter at the
rate described in the first sentence of Example 3(i) and taking
principal credits after 2011 into account) or a special hypothetical
account balance (the pre-2012 balance) on that date, whichever
balance is greater. For each participant, the pre-2012 balance is a
hypothetical account balance equal to the participant's December 31,
2011, balance, with interest credited thereafter at the RIC rate of
return, but with no principal credits after 2011. There are 10
participants for whom his or her pre-2012 balance exceeded his or
her ongoing hypothetical account balance at the end of 2013.
(ii) Conclusion. Since Plan C credited interest prior to 2012
using the rate of return on a RIC (a rate not described in paragraph
(d)(3) or (d)(4) of this section), for purposes of determining the
average interest crediting rate upon plan termination, the interest
crediting rate used to determine accrued benefits under Plan C for
all participants during those periods (for the calendar years 2009,
2010, and 2011) is deemed to be equal to the third segment rate for
the preceding December. In addition, since the pre-2012 balances
exceeded the ongoing hypothetical account balance for 10
participants in the last interest crediting period prior to plan
termination, for purposes of determining the average interest
crediting rate upon plan termination, the interest crediting rate
used to determine accrued benefits under Plan C for 2012 and 2013
for those participants is deemed to be equal to the third segment
rate for the month of December preceding 2012 and the month of
December preceding 2013, respectively. For all other participants,
for purposes of determining the average interest crediting rate upon
plan termination, the interest crediting rate used to determine
accrued benefits under Plan C for 2012 and 2013 is based on the
ongoing interest crediting rate (the formula described in Example
3).
(3) * * *
(iii) Coordination of section 411(d)(6) and market rate of return
limitation--(A) In general. An amendment to a statutory hybrid plan
that preserves a section 411(d)(6) protected benefit is subject to the
rules under paragraph (d) of this section relating to market rate of
return. However, in the case of an amendment to change a plan's
interest crediting rate for periods after the applicable amendment date
from one interest crediting rate (the old rate) that satisfies the
requirements of paragraph
[[Page 64216]]
(d) of this section to another interest crediting rate (the new rate)
that satisfies the requirements of paragraph (d) of this section, the
plan's effective interest crediting rate is not in excess of a market
rate of return for purposes of paragraph (d) of this section merely
because the plan provides for the benefit of any participant who is
benefiting under the plan (within the meaning of Sec. 1.410(b)-3(a))
on the applicable amendment date to never be less than what it would be
if the old rate had continued but without taking into account any
principal credits (as defined in paragraph (d)(1)(ii)(D) of this
section) after the applicable amendment date.
(B) Multiple amendments. A pattern of repeated plan amendments each
of which provides for a prospective change in the plan's interest
crediting rate with respect to the benefit as of the applicable
amendment date will be treated as resulting in the ongoing plan terms
providing that the interest crediting rate equals the greater of each
of the interest crediting rates, so that the rule in paragraph
(e)(3)(iii)(A) of this section would not apply. See Sec. 1.411(d)-4,
A-1(c)(1).
(4) Actuarial increases after normal retirement age. A statutory
hybrid plan is not treated as providing an effective interest crediting
rate that is in excess of a market rate of return for purposes of
paragraph (d) of this section merely because the plan provides that the
participant's benefit, as of each annuity starting date after normal
retirement age, is equal to the greater of--
(i) The benefit determined using an interest crediting rate that is
not in excess of a market rate of return under paragraph (d) of this
section; and
(ii) The benefit that satisfies the requirements of section
411(a)(2).
* * * * *
(f) * * *
(2) * * *
(i) * * *
(B) Special effective date. Paragraphs (c)(3)(iii), (d)(1)(iii),
(d)(1)(iv)(D), (d)(1)(vi), (d)(2)(ii), (d)(4)(iv), (d)(5)(iv), (d)(6),
(e)(2), (e)(3)(iii), and (e)(4) of this section apply to plan years
that begin on or after January 1, 2012.
* * * * *
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2010-25942 Filed 10-18-10; 8:45 am]
BILLING CODE 4830-01-P