[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR54.4980F-1]

[Page 320-338]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 54_PENSION EXCISE TAXES--Table of Contents
 
Sec.  54.4980F-1  Notice requirements for certain pension plan amendments 
significantly reducing the rate of future benefit accrual.

    The following questions and answers concern the notification 
requirements imposed by 4980F of the Internal Revenue Code and section 
204(h) of ERISA relating to a plan amendment of an applicable pension 
plan that significantly reduces the rate of future benefit accrual or 
that eliminates or significantly reduces an early retirement benefit or 
retirement-type subsidy.

                            List of Questions

Q-1. What are the notice requirements of section 4980F(e) of the 
          Internal Revenue Code and section 204(h) of ERISA?
Q-2. What are the differences between section 4980F and section 204(h)?
Q-3. What is an ``applicable pension plan'' to which section 4980F and 
          section 204(h) apply?
Q-4. What is ``section 204(h) notice'' and what is a ``section 204(h) 
          amendment''?
Q-5. For which amendments is section 204(h) notice required?
Q-6. What is an amendment that reduces the rate of future benefit 
          accrual or reduces an early retirement benefit or retirement-
          type subsidy for purposes of determining whether section 
          204(h) notice is required?
Q-7. What plan provisions are taken into account in determining whether 
          an amendment is a section 204(h) amendment?
Q-8. What is the basic principle used in determining whether a reduction 
          in the rate of future benefit accrual or a reduction in an 
          early retirement benefit or retirement-type subsidy is 
          significant for purposes of section 4980F and section 204(h)?
Q-9. When must section 204(h) notice be provided?

[[Page 321]]

Q-10. To whom must section 204(h) notice be provided?
Q-11. What information is required to be provided in a section 204(h) 
          notice?
Q-12. What special rules apply if participants can choose between the 
          old and new benefit formulas?
Q-13. How may section 204(h) notice be provided?
Q-14. What are the consequences if a plan administrator fails to provide 
          section 204(h) notice?
Q-15. What are some of the rules that apply with respect to the excise 
          tax under section 4980F?
Q-16. How do section 4980F and section 204(h) apply when a business is 
          sold?
Q-17. How are amendments to cease accruals and terminate a plan treated 
          under section 4980F and section 204(h)?
Q-18. What are the effective dates of section 4980F, section 204(h), as 
          amended by EGTRRA, and these regulations?

                          Questions and Answers

    Q-1. What are the notice requirements of section 4980F(e) of the 
Internal Revenue Code and section 204(h) of ERISA?
    A-1. (a) Requirements of Internal Revenue Code section 4980F(e) and 
ERISA section 204(h). Section 4980F of the Internal Revenue Code 
(section 4980F) and section 204(h) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), 29 U.S.C. 1054(h) (section 
204(h)) each generally requires notice of an amendment to an applicable 
pension plan that either provides for a significant reduction in the 
rate of future benefit accrual or that eliminates or significantly 
reduces an early retirement benefit or retirement-type subsidy. The 
notice is required to be provided to plan participants and alternate 
payees who are applicable individuals (as defined in Q&A-10 of this 
section) and to certain employee organizations. The plan administrator 
must generally provide the notice before the effective date of the plan 
amendment. Q&A-9 of this section sets forth the time frames for 
providing notice, Q&A-11 of this section sets forth the content 
requirements for the notice, and Q&A-12 of this section contains special 
rules for cases in which participants can choose between the old and new 
benefit formulas.
    (b) Other notice requirements. Other provisions of law may require 
that certain parties be notified of a plan amendment. See, for example, 
sections 102 and 104 of ERISA, and the regulations thereunder, for 
requirements relating to summary plan descriptions and summaries of 
material modifications.
    Q-2. What are the differences between section 4980F and section 
204(h)?
    A-2. The notice requirements of section 4980F generally are parallel 
to the notice requirements of section 204(h), as amended by the Economic 
Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115 
Stat. 38) (2001) (EGTRRA). However, the consequences of the failure to 
satisfy the requirements of the two provisions differ: Section 4980F 
imposes an excise tax on a failure to satisfy the notice requirements, 
while section 204(h)(6), as amended by EGTRRA, contains a special rule 
with respect to an egregious failure to satisfy the notice requirements. 
See Q&A-14 and Q&A-15 of this section. Except to the extent specifically 
indicated, these regulations apply both to section 4980F and to section 
204(h).
    Q-3. What is an ``applicable pension plan'' to which section 4980F 
and section 204(h) apply?
    A-3. (a) In general. Section 4980F and section 204(h) apply to an 
applicable pension plan. For purposes of section 4980F, an applicable 
pension plan means a defined benefit plan qualifying under section 
401(a) or 403(a) of the Internal Revenue Code, or an individual account 
plan that is subject to the funding standards of section 412 of the 
Internal Revenue Code. For purposes of section 204(h), an applicable 
pension plan means a defined benefit plan that is subject to part 2 of 
subtitle B of title I of ERISA, or an individual account plan that is 
subject to such part 2 and to the funding standards of section 412 of 
the Internal Revenue Code. Accordingly, individual account plans that 
are not subject to the funding standards of section 412 of the Internal 
Revenue Code, such as profit-sharing and stock bonus plans and contracts 
under section 403(b) of the Internal Revenue Code, are not applicable 
pension plans to which section 4980F or section 204(h) apply. Similarly, 
a defined benefit plan that neither qualifies under section 401(a) or 
403(a) of the Internal Revenue Code nor

[[Page 322]]

is subject to part 2 of subtitle B of title I of ERISA is not an 
applicable pension plan. Further, neither a governmental plan (within 
the meaning of section 414(d) of the Internal Revenue Code), nor a 
church plan (within the meaning of section 414(e) of the Internal 
Revenue Code) with respect to which no election has been made under 
section 410(d) of the Internal Revenue Code is an applicable pension 
plan.
    (b) Section 204(h) notice not required for small plans covering no 
employees. Section 204(h) notice is not required for a plan under which 
no employees are participants covered under the plan, as described in 
Sec.  2510.3-3(b) of the Department of Labor regulations, and which has 
fewer than 100 participants.
    Q-4. What is ``section 204(h) notice'' and what is a ``section 
204(h) amendment''?
    A-4. (a) Section 204(h) notice is notice that complies with section 
4980F(e) of the Internal Revenue Code, section 204(h)(1) of ERISA, and 
this section.
    (b) A section 204(h) amendment is an amendment for which section 
204(h) notice is required under this section.
    Q-5. For which amendments is section 204(h) notice required?
    A-5. (a) Significant reduction in the rate of future benefit 
accrual. Section 204(h) notice is required for an amendment to an 
applicable pension plan that provides for a significant reduction in the 
rate of future benefit accrual.
    (b) Early retirement benefits and retirement-type subsidies. Section 
204(h) notice is also required for an amendment to an applicable pension 
plan that provides for the significant reduction of an early retirement 
benefit or retirement-type subsidy. For purposes of this section, early 
retirement benefit and retirement-type subsidy mean early retirement 
benefits and retirement-type subsidies within the meaning of section 
411(d)(6)(B)(i).
    (c) Elimination or cessation of benefits. For purposes of this 
section, the terms reduce or reduction include eliminate or cease or 
elimination or cessation.
    (d) Delegation of authority to Commissioner. The Commissioner may 
provide in revenue rulings, notices, or other guidance published in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter) that 
section 204(h) notice need not be provided for plan amendments otherwise 
described in paragraph (a) or (b) of this Q&A-5 that the Commissioner 
determines to be necessary or appropriate, as a result of changes in the 
law, to maintain compliance with the requirements of the Internal 
Revenue Code (including requirements for tax qualification), ERISA, or 
other applicable federal law.
    Q-6. What is an amendment that reduces the rate of future benefit 
accrual or reduces an early retirement benefit or retirement-type 
subsidy for purposes of determining whether section 204(h) notice is 
required?
    A-6. (a) In general. For purposes of determining whether section 
204(h) notice is required, an amendment reduces the rate of future 
benefit accrual or reduces an early retirement benefit or retirement-
type subsidy only as provided in paragraph (b) or (c) of this Q&A-6.
    (b) Reduction in rate of future benefit accrual--(1) Defined benefit 
plans. For purposes of section 4980F and section 204(h), an amendment to 
a defined benefit plan reduces the rate of future benefit accrual only 
if it is reasonably expected that the amendment will reduce the amount 
of the future annual benefit commencing at normal retirement age (or at 
actual retirement age, if later) for benefits accruing for a year. For 
this purpose, the annual benefit commencing at normal retirement age is 
the benefit payable in the form in which the terms of the plan express 
the accrued benefit (or, in the case of a plan in which the accrued 
benefit is not expressed in the form of an annual benefit commencing at 
normal retirement age, the benefit payable in the form of a single life 
annuity commencing at normal retirement age that is the actuarial 
equivalent of the accrued benefit expressed under the terms of the plan, 
as determined in accordance with section 411(c)(3) of the Internal 
Revenue Code).
    (2) Individual account plans. For purposes of section 4980F and 
section 204(h), an amendment to an individual account plan reduces the 
rate of future benefit accrual only if it is reasonably expected that 
the amendment will reduce the amount of contributions or forfeitures 
allocated for any future

[[Page 323]]

year. Changes in the investments or investment options under an 
individual account plan are not taken into account for this purpose.
    (3) Determination of rate of future benefit accrual. The rate of 
future benefit accrual for purposes of this paragraph (b) is determined 
without regard to optional forms of benefit within the meaning of Sec.  
1.411(d)-4, Q&A-1(b) of this chapter (other than the annual benefit 
described in paragraph (b)(1) of this Q&A-6). The rate of future benefit 
accrual is also determined without regard to ancillary benefits and 
other rights or features as defined in Sec.  1.401(a)(4)-4(e) of this 
chapter.
    (c) Reduction of early retirement benefits or retirement-type 
subsidies. For purposes of section 4980F and section 204(h), an 
amendment reduces an early retirement benefit or retirement-type subsidy 
only if it is reasonably expected that the amendment will eliminate or 
reduce an early retirement benefit or retirement-type subsidy.
    Q-7. What plan provisions are taken into account in determining 
whether an amendment is a section 204(h) amendment?
    A-7. (a) Plan provisions taken into account---(1) In general. All 
plan provisions that may affect the rate of future benefit accrual, 
early retirement benefits, or retirement-type subsidies of participants 
or alternate payees must be taken into account in determining whether an 
amendment is a section 204(h) amendment. For example, plan provisions 
that may affect the rate of future benefit accrual include the dollar 
amount or percentage of compensation on which benefit accruals are 
based; the definition of service or compensation taken into account in 
determining an employee's benefit accrual; the method of determining 
average compensation for calculating benefit accruals; the definition of 
normal retirement age in a defined benefit plan; the exclusion of 
current participants from future participation; benefit offset 
provisions; minimum benefit provisions; the formula for determining the 
amount of contributions and forfeitures allocated to participants' 
accounts in an individual account plan; in the case of a plan using 
permitted disparity under section 401(l) of the Internal Revenue Code, 
the amount of disparity between the excess benefit percentage or excess 
contribution percentage and the base benefit percentage or base 
contribution percentage (all as defined in section 401(l) of the 
Internal Revenue Code); and the actuarial assumptions used to determine 
contributions under a target benefit plan (as defined in Sec.  
1.401(a)(4)-8(b)(3)(i) of this chapter). Plan provisions that may affect 
early retirement benefits or retirement-type subsidies include the right 
to receive payment of benefits after severance from employment and 
before normal retirement age and actuarial factors used in determining 
optional forms for distribution of retirement benefits.
    (2) Provisions incorporated by reference in plan. If all or a part 
of a plan's rate of future benefit accrual, or an early retirement 
benefit or retirement-type subsidy provided under the plan, depends on 
provisions in another document that are referenced in the plan document, 
a change in the provisions of the other document is an amendment of the 
plan.
    (b) Plan provisions not taken into account. Plan provisions that do 
not affect the rate of future benefit accrual of participants or 
alternate payees are not taken into account in determining whether there 
has been a reduction in the rate of future benefit accrual. Further, any 
benefit that is not a section 411(d)(6) protected benefit as described 
in Sec. Sec.  1.411(d)-3(g)(14) and 1.411(d)-4, Q&A-1(d) of this 
chapter, or that is a section 411(d)(6) protected benefit that may be 
eliminated or reduced as permitted under Sec.  1.411(d)-3 or Sec.  
1.411(d)-4, Q&A-2(a), or (b) of this chapter, is not taken into account 
in determining whether an amendment is a section 204(h) amendment. Thus, 
for example, provisions relating to the right to make after-tax 
deferrals are not taken into account.
    (c) Examples. The following examples illustrate the rules in this 
Q&A-7:

    Example 1. (i) Facts. A defined benefit plan provides a normal 
retirement benefit equal to 50% of highest 5-year average pay multiplied 
by a fraction (not in excess of one), the numerator of which equals the 
number of years of participation in the plan and the denominator of 
which is 20. A plan amendment

[[Page 324]]

is adopted that changes the numerator or denominator of that fraction.
    (ii) Conclusion. The plan amendment must be taken into account in 
determining whether there has been a reduction in the rate of future 
benefit accrual.
    Example 2. (i) Facts. Plan C is a multiemployer defined benefit plan 
subject to several collective bargaining agreements. The specific 
benefit formula under Plan C that applies to an employee depends on the 
hourly rate of contribution of the employee's employer, which is set 
forth in the provisions of the collective bargaining agreements that are 
referenced in the Plan C document. Collective Bargaining Agreement A 
between Employer B and the union representing employees of Employer B is 
renegotiated to provide that the hourly contribution rate for an 
employee of B who is subject to the Collective Bargaining Agreement A 
will decrease. That decrease will result in a decrease in the rate of 
future benefit accrual for employees of B.
    (ii) Conclusion. Under paragraph (a)(2) of this Q&A-7, the change to 
Collective Bargaining Agreement A is a plan amendment that is a section 
204(h) amendment if the reduction in the rate of future benefit accrual 
is significant.

    Q-8. What is the basic principle used in determining whether a 
reduction in the rate of future benefit accrual or a reduction in an 
early retirement benefit or retirement-type subsidy is significant for 
purposes of section 4980F and section 204(h)?
    A-8. (a) General rule. Whether an amendment reducing the rate of 
future benefit accrual or reducing an early retirement benefit or 
retirement-type subsidy provides for a reduction that is significant for 
purposes of section 4980F and section 204(h) is determined based on 
reasonable expectations taking into account the relevant facts and 
circumstances at the time the amendment is adopted.
    (b) Application for determining significant reduction in the rate of 
future benefit accrual. For a defined benefit plan, the determination of 
whether an amendment provides for a significant reduction in the rate of 
future benefit accrual is made by comparing the amount of the annual 
benefit commencing at normal retirement age (or at actual retirement 
age, if later), as determined under Q&A-6(b)(1) of this section, under 
the terms of the plan as amended with the amount of the annual benefit 
commencing at normal retirement age (or at actual retirement age, if 
later), as determined under Q&A-6(b)(1) of this section, under the terms 
of the plan prior to amendment. For an individual account plan, the 
determination of whether an amendment provides for a significant 
reduction in the rate of future benefit accrual is made in accordance 
with Q&A-6(b)(2) of this section by comparing the amounts to be 
allocated in the future to participants' accounts under the terms of the 
plan as amended with the amounts to be allocated in the future to 
participants' accounts under the terms of the plan prior to amendment. 
An amendment to convert a money purchase pension plan to a profit-
sharing or other individual account plan that is not subject to section 
412 of the Internal Revenue Code is, in all cases, deemed to be an 
amendment that provides for a significant reduction in the rate of 
future benefit accrual.
    (c) Application to certain amendments reducing early retirement 
benefits or retirement-type subsidies. Section 204(h) notice is not 
required for an amendment that reduces an early retirement benefit or 
retirement-type subsidy if the amendment is permitted under the third 
sentence of section 411(d)(6)(B) of the Internal Revenue Code and 
paragraphs (c), (d), and (f) of Sec.  1.411(d)-3 of this chapter 
(relating to the elimination or reduction of benefits or subsidies which 
create significant burdens or complexities for the plan and plan 
participants unless the amendment adversely affects the rights of any 
participant in a more than de minimis manner). However, in determining 
whether an amendment reducing a retirement-type subsidy constitutes a 
significant reduction because it reduces a retirement-type subsidy as 
permitted under Sec.  1.411(d)-3(e)(6) of this chapter, the amendment is 
treated in the same manner as an amendment that limits the retirement-
type subsidy to benefits that accrue before the applicable amendment 
date (as defined at Sec.  1.411(d)-3(g)(4) of this chapter) with respect 
to each participant or alternate payee to whom the reduction is 
reasonably expected to apply.
    (d) Examples. The following examples illustrate the rules in this 
Q&A-8:


[[Page 325]]


    Example 1. (i) Facts. Pension Plan A is a defined benefit plan that 
provides a rate of benefit accrual of 1% of highest-5 years pay 
multiplied by years of service, payable annually for life commencing at 
normal retirement age (or at actual retirement age, if later). An 
amendment to Plan A is adopted on August 1, 2009, effective January 1, 
2010, to provide that any participant who separates from service after 
December 31, 2009, and before January 1, 2015, will have the same number 
of years of service he or she would have had if his or her service 
continued to December 31, 2014.
    (ii) Conclusion. In this example, the effective date of the plan 
amendment is January 1, 2010. While the amendment will result in a 
reduction in the annual rate of future benefit accrual from 2011 through 
2014 (because, under the amendment, benefits based upon an additional 5 
years of service accrue on January 1, 2010, and no additional service is 
credited after January 1, 2010 until January 1, 2015), the amendment 
does not result in a reduction that is significant because the amount of 
the annual benefit commencing at normal retirement age (or at actual 
retirement age, if later) under the terms of the plan as amended is not 
under any conditions less than the amount of the annual benefit 
commencing at normal retirement age (or at actual retirement age, if 
later) to which any participant would have been entitled under the terms 
of the plan had the amendment not been made.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the 2009 amendment does not alter the plan provisions relating to a 
participant's number of years of service, but instead amends the plan's 
provisions relating to early retirement benefits. Before the amendment, 
the plan provides for distributions before normal retirement age to be 
actuarially reduced, but, if a participant retires after attainment of 
age 55 and completion of 10 years of service, the applicable early 
retirement reduction factor is 3% per year for the years between the 
ages 65 and 62 and 6% per year for the ages from 62 to 55. The amendment 
changes these provisions so that an actuarial reduction applies in all 
cases, but, in accordance with section 411(d)(6)(B), provides that no 
participant's early retirement benefit will be less than the amount 
provided under the plan as in effect on December 31, 2009 with respect 
to service before January 1, 2010. For participant X, the reduction is 
significant.
    (ii) Conclusion. The amendment will result in a reduction in a 
retirement-type subsidy provided under Plan A (i.e., Plan A's early 
retirement subsidy). Section 204(h) notice must be provided to 
participant X and any other participant for whom the reduction is 
significant and the notice must be provided at least 45 days before 
January 1, 2010 (or by such other date as may apply under Q&A-9 of this 
section).
    Example 3. (i) Facts. The facts are the same as in Example 2, except 
that, for participant X, the change does not go into effect for any 
annuity commencement date before January 1, 2011. Participant X 
continues employment through January 1, 2011.
    (ii) Conclusion. The conclusion is the same as in Example 2. Taking 
into account the rule in the second sentence of Q&A-8(c) of this 
section, the reduction that occurs for participant X on January 1, 2011, 
is treated as the same reduction that occurs under Example 2. 
Accordingly, assuming that the reduction is significant, section 204(h) 
notice must be provided to participant X at least 45 days before the 
January 1, 2010 effective date of the amendment (or by such other date 
as may apply under Q&A-9 of this section).

    Q-9. When must section 204(h) notice be provided?
    A-9. (a) 45-day general rule. Except as described in paragraphs (b), 
(c), and (d) of this Q&A-9, section 204(h) notice must be provided at 
least 45 days before the effective date of any section 204(h) amendment. 
See paragraph (e) of this Q&A-9 for special rules for amendments 
permitting participant choice.
    (b) 15-day rule for small plans. Except for amendments described in 
paragraph (d)(2) of this Q&A-9, section 204(h) notice must be provided 
at least 15 days before the effective date of any section 204(h) 
amendment in the case of a small plan. For purposes of this section, a 
small plan is a plan that the plan administrator reasonably expects to 
have, on the effective date of the section 204(h) amendment, fewer than 
100 participants who have an accrued benefit under the plan.
    (c) 15-day rule for multiemployer plans. Except for amendments 
described in paragraph (d)(2) of this Q&A-9, section 204(h) notice must 
be provided at least 15 days before the effective date of any section 
204(h) amendment in the case of a multiemployer plan. For purposes of 
this section, a multiemployer plan means a multiemployer plan as defined 
in section 414(f) of the Internal Revenue Code.
    (d) Special timing rule for business transactions--(1) 15-day rule 
for section 204(h) amendment in connection with an acquisition or 
disposition. Except for amendments described in paragraph (d)(2) of this 
Q&A-9, if a section 204(h) amendment is adopted in connection

[[Page 326]]

with an acquisition or disposition, section 204(h) notice must be 
provided at least 15 days before the effective date of the section 
204(h) amendment.
    (2) Later notice permitted for a section 204(h) amendment 
significantly reducing early retirement benefit or retirement-type 
subsidies in connection with certain plan transfers, mergers, or 
consolidations. If a section 204(h) amendment is adopted with respect to 
liabilities that are transferred to another plan in connection with a 
transfer, merger, or consolidation of assets or liabilities as described 
in section 414(l) of the Internal Revenue Code and Sec.  1.414(l)-1 of 
this chapter, the amendment is adopted in connection with an acquisition 
or disposition, and the amendment significantly reduces an early 
retirement benefit or retirement-type subsidy, but does not 
significantly reduce the rate of future benefit accrual, then section 
204(h) notice must be provided no later than 30 days after the effective 
date of the section 204(h) amendment.
    (3) Definition of acquisition or disposition. For purposes of this 
paragraph (d), see Sec.  1.410(b)-2(f) of this chapter for the 
definition of acquisition or disposition.
    (e) Timing rule for amendments permitting participant choice. In 
general, section 204(h) notice of a section 204(h) amendment that 
provides applicable individuals with a choice between the old and the 
new benefit formulas (as described in Q&A-12 of this section) must be 
provided in accordance with the time period applicable under paragraphs 
(a) through (d) of this Q&A-9. See Q&A-12 of this section for additional 
guidance regarding section 204(h) notice in connection with participant 
choice.
    Q-10. To whom must section 204(h) notice be provided?
    A-10. (a) In general. Section 204(h) notice must be provided to each 
applicable individual and to each employee organization representing 
participants who are applicable individuals. A special rule is provided 
in paragraph (d) of this Q&A-10.
    (b) Applicable individual. Applicable individual means each 
participant in the plan, and any alternate payee, whose rate of future 
benefit accrual under the plan is reasonably expected to be 
significantly reduced, or for whom an early retirement benefit or 
retirement-type subsidy under the plan may reasonably be expected to be 
significantly reduced, by the section 204(h) amendment. The 
determination is made with respect to individuals who are reasonably 
expected to be participants or alternate payees in the plan at the 
effective date of the section 204(h) amendment.
    (c) Alternate payee. Alternate payee means a beneficiary who is an 
alternate payee (within the meaning of section 414(p)(8) of the Internal 
Revenue Code) under an applicable qualified domestic relations order 
(within the meaning of section 414(p)(1)(A) of the Internal Revenue 
Code).
    (d) Designees. Section 204(h) notice may be provided to a person 
designated in writing by an applicable individual or by an employee 
organization representing participants who are applicable individuals, 
instead of being provided to that applicable individual or employee 
organization. Any designation of a representative made through an 
electronic method that satisfies standards similar to those of Q&A-
13(c)(1) of this section satisfies the requirement that a designation be 
in writing.
    (e) Facts and circumstances test. Whether a participant or alternate 
payee is an applicable individual is determined on a typical business 
day that is reasonably proximate to the time the section 204(h) notice 
is provided (or at the latest date for providing section 204(h) notice, 
if earlier), based on all relevant facts and circumstances.
    (f) Examples. The following examples illustrate the rules in this 
Q&A-10:

    Example 1. (i) Facts. A defined benefit plan requires an individual 
to complete 1 year of service to become a participant who can accrue 
benefits, and participants cease to accrue benefits under the plan at 
severance from employment with the employer. There are no alternate 
payees and employees are not represented by an employee organization. On 
November 18, 2004, the plan is amended effective as of January 1, 2005 
to reduce significantly the rate of future benefit accrual. Section 
204(h) notice is provided on November 1, 2004.
    (ii) Conclusion. Section 204(h) notice is only required to be 
provided to individuals who, based on the facts and circumstances on 
November 1, 2004, are reasonably expected to

[[Page 327]]

have completed at least 1 year of service and to be employed by the 
employer on January 1, 2005.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the sole effect of the plan amendment is to alter the pre-amendment 
plan provisions under which benefits payable to an employee who retires 
after 20 or more years of service are unreduced for commencement before 
normal retirement age. The amendment requires 30 or more years of 
service in order for benefits commencing before normal retirement age to 
be unreduced, but the amendment only applies for future benefit 
accruals.
    (ii) Conclusion. Section 204(h) notice is only required to be 
provided to individuals who, on January 1, 2005, have completed at least 
1 year of service but less than 30 years of service, are employed by the 
employer, have not attained normal retirement age, and will have 
completed 20 or more years of service before normal retirement age if 
their employment continues to normal retirement age.
    Example 3. (i) Facts. A plan is amended to reduce significantly the 
rate of future benefit accrual for all current employees who are 
participants. Based on the facts and circumstances, it is reasonable to 
expect that the amendment will not reduce the rate of future benefit 
accrual of former employees who are currently receiving benefits or of 
former employees who are entitled to deferred vested benefits.
    (ii) Conclusion. The plan administrator is not required to provide 
section 204(h) notice to any former employees.
    Example 4. (i) Facts. The facts are the same as in Example 3, except 
that the plan covers two groups of alternate payees. The alternate 
payees in the first group are entitled to a certain percentage or 
portion of the former spouse's accrued benefit and, for this purpose, 
the accrued benefit is determined at the time the former spouse begins 
receiving retirement benefits under the plan. The alternate payees in 
the second group are entitled to a certain percentage or portion of the 
former spouse's accrued benefit and, for this purpose, the accrued 
benefit was determined at the time the qualified domestic relations 
order was issued by the court.
    (ii) Conclusion. It is reasonable to expect that the benefits to be 
received by the second group of alternate payees will not be affected by 
any reduction in a former spouse's rate of future benefit accrual. 
Accordingly, the plan administrator is not required to provide section 
204(h) notice to the alternate payees in the second group.
    Example 5. (i) Facts. A plan covers hourly employees and salaried 
employees. The plan provides the same rate of benefit accrual for both 
groups. The employer amends the plan to reduce significantly the rate of 
future benefit accrual of the salaried employees only. At that time, it 
is reasonable to expect that only a small percentage of hourly employees 
will become salaried in the future.
    (ii) Conclusion. The plan administrator is not required to provide 
section 204(h) notice to the participants who are currently hourly 
employees.
    Example 6. (i) Facts. A plan covers employees in Division M and 
employees in Division N. The plan provides the same rate of benefit 
accrual for both groups. The employer amends the plan to reduce 
significantly the rate of future benefit accrual of employees in 
Division M. At that time, it is reasonable to expect that in the future 
only a small percentage of employees in Division N will be transferred 
to Division M.
    (ii) Conclusion. The plan administrator is not required to provide 
section 204(h) notice to the participants who are employees in Division 
N.
    Example 7. (i) Facts. The facts are the same facts as in Example 6, 
except that at the time the amendment is adopted, it is expected that 
thereafter Division N will be merged into Division M in connection with 
a corporate reorganization (and the employees in Division N will become 
subject to the plan's amended benefit formula applicable to the 
employees in Division M).
    (ii) Conclusion. In this case, the plan administrator must provide 
section 204(h) notice to the participants who are employees in Division 
M and to the participants who are employees in Division N.
    Example 8. (i) Facts. A plan is amended to reduce significantly the 
rate of future benefit accrual for all current employees who are 
participants. The plan amendment will be effective on January 1, 2004. 
The plan will provide the notice to applicable individuals on October 
31, 2003. In determining which current employees are applicable 
individuals, the plan administrator determines that October 1, 2003, is 
a typical business day that is reasonably proximate to the time the 
section 204(h) notice is provided.
    (ii) Conclusion. In this case, October 1, 2003 is a typical business 
day that satisfies the requirements of Q&A-10(e) of this section.

    Q-11. What information is required to be provided in a section 
204(h) notice?
    A-11. (a) Explanation of notice requirements--(1) In general. 
Section 204(h) notice must include sufficient information to allow 
applicable individuals to understand the effect of the plan amendment. 
In order to satisfy this rule, a plan administrator providing section 
204(h) notice must satisfy each of the following requirements of this 
paragraph (a).

[[Page 328]]

    (2) Information in section 204(h) notice. The information in a 
section 204(h) notice must be written in a manner calculated to be 
understood by the average plan participant and to apprise the applicable 
individual of the significance of the notice.
    (3) Required narrative description of amendment--(i) Reduction in 
rate of future benefit accrual. In the case of an amendment reducing the 
rate of future benefit accrual, the notice must include a description of 
the benefit or allocation formula prior to the amendment, a description 
of the benefit or allocation formula under the plan as amended, and the 
effective date of the amendment.
    (ii) Reduction in early retirement benefit or retirement-type 
subsidy. In the case of an amendment that reduces an early retirement 
benefit or retirement-type subsidy (other than as a result of an 
amendment reducing the rate of future benefit accrual), the notice must 
describe how the early retirement benefit or retirement-type subsidy is 
calculated from the accrued benefit before the amendment, how the early 
retirement benefit or retirement-type subsidy is calculated from the 
accrued benefit after the amendment, and the effective date of the 
amendment. For example, if, for a plan with a normal retirement age of 
65, the change is from an unreduced normal retirement benefit at age 55 
to an unreduced normal retirement benefit at age 60 for benefits accrued 
in the future, with an actuarial reduction to apply for benefits accrued 
in the future to the extent that the early retirement benefit begins 
before age 60, the notice must state the change and specify the factors 
that apply in calculating the actuarial reduction (for example, a 5% per 
year reduction applies for early retirement before age 60).
    (4) Sufficient information to determine the approximate magnitude of 
reduction--(i) General rule. (A) Section 204(h) notice must include 
sufficient information for each applicable individual to determine the 
approximate magnitude of the expected reduction for that individual. 
Thus, in any case in which it is not reasonable to expect that the 
approximate magnitude of the reduction for each applicable individual 
will be reasonably apparent from the description of the amendment 
provided in accordance with paragraph (a)(3) of this Q&A-11, further 
information is required. The further information may be provided by 
furnishing additional narrative information or in other information that 
satisfies this paragraph of this section.
    (B) To the extent any expected reduction is not uniformly applicable 
to all participants, the notice must either identify the general classes 
of participants to whom the reduction is expected to apply, or by some 
other method include sufficient information to allow each applicable 
individual receiving the notice to determine which reductions are 
expected to apply to that individual.
    (ii) Illustrative examples--(A) Requirement generally. The 
requirement to include sufficient information for each applicable 
individual to determine the approximate magnitude of the expected 
reduction for that individual under (a)(4)(i)(A) of this Q&A-11 is 
deemed satisfied if the notice includes one or more illustrative 
examples showing the approximate magnitude of the reduction in the 
examples, as provided in this paragraph (a)(4)(ii). Illustrative 
examples are in any event required to be provided for any change from a 
traditional defined benefit formula to a cash balance formula or a 
change that results in a period of time during which there are no 
accruals (or minimal accruals) with regard to normal retirement benefits 
or an early retirement subsidy (a wear-away period).
    (B) Examples must bound the range of reductions. Where an amendment 
results in reductions that vary (either among participants, as would 
occur for an amendment converting a traditional defined benefit formula 
to a cash balance formula, or over time as to any individual 
participant, as would occur for an amendment that results in a wear-away 
period), the illustrative example(s) provided in accordance with this 
paragraph (a)(4)(ii) must show the approximate range of the reductions. 
However, any reductions that are likely to occur in only a de minimis 
number of cases are not required to be taken into account in determining 
the range of the reductions if a narrative

[[Page 329]]

statement is included to that effect and examples are provided that show 
the approximate range of the reductions in other cases. Amendments for 
which the maximum reduction occurs under identifiable circumstances, 
with proportionately smaller reductions in other cases, may be 
illustrated by one example illustrating the maximum reduction, with a 
statement that smaller reductions also occur. Further, assuming that the 
reduction varies from small to large depending on service or other 
factors, two illustrative examples may be provided showing the smallest 
likely reduction and the largest likely reduction.
    (C) Assumptions used in examples. The examples provided under this 
paragraph (a)(4)(ii) are not required to be based on any particular form 
of payment (such as a life annuity or a single sum), but may be based on 
whatever form appropriately illustrates the reduction. The examples 
generally may be based on any reasonable assumptions (for example, 
assumptions relating to the representative participant's age, years of 
service, and compensation, along with any interest rate and mortality 
table used in the illustrations, as well as salary scale assumptions 
used in the illustrations for amendments that alter the compensation 
taken into account under the plan), but the section 204(h) notice must 
identify those assumptions. However, if a plan's benefit provisions 
include a factor that varies over time (such as a variable interest 
rate), the determination of whether an amendment is reasonably expected 
to result in a wear-away period must be based on the value of the factor 
applicable under the plan at a time that is reasonably close to the date 
section 204(h) notice is provided, and any wear-away period that is 
solely a result of a future change in the variable factor may be 
disregarded. For example, to determine whether a wear-away occurs as a 
result of a section 204(h) amendment that converts a defined benefit 
plan to a cash balance pension plan that will credit interest based on a 
variable interest factor specified in the plan, the future interest 
credits must be projected based on the interest rate applicable under 
the variable factor at the time section 204(h) notice is provided.
    (D) Individual statements. This paragraph (a)(4)(ii) may be 
satisfied by providing a statement to each applicable individual 
projecting what that individual's future benefits are reasonably 
expected to be at various future dates and what that individual's future 
benefits would have been under the terms of the plan as in effect before 
the section 204(h) amendment, provided that the statement includes the 
same information required for examples under paragraphs (a)(4)(ii)(A) 
through (C) of this Q&A-11, including showing the approximate range of 
the reductions for the individual if the reductions vary over time and 
identification of the assumptions used in the projections.
    (5) No false or misleading information. A section 204(h) notice may 
not include materially false or misleading information (or omit 
information so as to cause the information provided to be misleading).
    (6) Additional information when reduction not uniform--(i) In 
general. If an amendment by its terms affects different classes of 
participants differently (e.g., one new benefit formula will apply to 
Division A and another to Division B), then the requirements of 
paragraph (a) of this Q&A-11 apply separately with respect to each such 
general class of participants. In addition, the notice must include 
sufficient information to enable an applicable individual who is a 
participant to understand which class he or she is a member of.
    (ii) Option for different section 204(h) notices. If a section 
204(h) amendment affects different classes of applicable individuals 
differently, the plan administrator may provide to differently affected 
classes of applicable individuals a section 204(h) notice appropriate to 
those individuals. Such section 204(h) notice may omit information that 
does not apply to the applicable individuals to whom it is furnished, 
but must identify the class or classes of applicable individuals to whom 
it is provided.
    (b) Examples. The following examples illustrate the requirements 
paragraph (a) of this Q&A-11. In each example, it is assumed that the 
actual notice provided is written in a manner calculated

[[Page 330]]

to be understood by the average plan participant and to apprise the 
applicable individual of the significance of the notice in accordance 
with paragraph (a)(2) of this Q&A-11. The examples are as follows:

    Example 1. (i) Facts. Plan A provides that a participant is entitled 
to a normal retirement benefit of 2% of the participant's average pay 
over the 3 consecutive years for which the average is the highest 
(highest average pay) multiplied by years of service. Plan A is amended 
to provide that, effective January 1, 2004, the normal retirement 
benefit will be 2% of the participant's highest average pay multiplied 
by years of service before the effective date, plus 1% of the 
participant's highest average pay multiplied by years of service after 
the effective date. The plan administrator provides notice that states: 
``Under the Plan's current benefit formula, a participant's normal 
retirement benefit is 2% of the participant's average pay over the 3 
consecutive years for which the average is the highest multiplied by the 
participant's years of service. This formula is being changed by a plan 
amendment. Under the Plan as amended, a participant's normal retirement 
benefit will be the sum of 2% of the participant's average pay over the 
3 consecutive years for which the average is the highest multiplied by 
years of service before the January 1, 2004 effective date, plus 1% of 
the participant's average pay over the 3 consecutive years for which the 
average is the highest multiplied by the participant's years of service 
after December 31, 2003. This change is effective on January 1, 2004.'' 
The notice does not contain any additional information.
    (ii) Conclusion. The notice satisfies the requirements of paragraph 
(a) of this Q&A-11.
    Example 2. (i) Facts. Plan B provides that a participant is entitled 
to a normal retirement benefit at age 64 of 2.2% of the participant's 
career average pay multiplied by years of service. Plan B is amended to 
cease all accruals, effective January 1, 2004. The plan administrator 
provides notice that includes a description of the old benefit formula, 
a statement that, after December 31, 2003, no participant will earn any 
further accruals, and the effective date of the amendment. The notice 
does not contain any additional information.
    (ii) Conclusion. The notice satisfies the requirements of paragraph 
(a) of this Q&A-11.
    Example 3. (i) Facts. Plan C provides that a participant is entitled 
to a normal retirement benefit at age 65 of 2% of career average 
compensation multiplied by years of service. Plan C is amended to 
provide that the normal retirement benefit will be 1% of average pay 
over the 3 consecutive years for which the average is the highest 
multiplied by years of service. The amendment only applies to accruals 
for years of service after the amendment, so that each employee's 
accrued benefit is equal to the sum of the benefit accrued as of the 
effective date of the amendment plus the accrued benefit equal to the 
new formula applied to years of service beginning on or after the 
effective date. The plan administrator provides notice that describes 
the old and new benefit formulas and also explains that for an 
individual whose compensation increases over the individual's career 
such that the individual's highest 3-year average exceeds the 
individual's career average, the reduction will be less or there may be 
no reduction. The notice does not contain any additional information.
    (ii) Conclusion. The notice satisfies the requirements of paragraph 
(a) of this Q&A-11.
    Example 4. (i) Facts. (A) Plan D is a defined benefit pension plan 
under which each participant accrues a normal retirement benefit, as a 
life annuity beginning at the normal retirement age of 65, equal to the 
participant's number of years of service multiplied by 1.5 percent 
multiplied by the participant's average pay over the 3 consecutive years 
for which the average is the highest. Plan D provides early retirement 
benefits for former employees beginning at or after age 55 in the form 
of an early retirement annuity that is actuarially equivalent to the 
normal retirement benefit, with the reduction for early commencement 
based on reasonable actuarial assumptions that are specified in Plan D. 
Plan D provides for the suspension of benefits of participants who 
continue in employment beyond normal retirement age, in accordance with 
section 203(a)(3)(B) of ERISA and regulations thereunder issued by the 
Department of Labor. The pension of a participant who retires after age 
65 is calculated under the same normal retirement benefit formula, but 
is based on the participant's service credit and highest 3-year pay at 
the time of late retirement with any appropriate actuarial increases.
    (B) Plan D is amended, effective July 1, 2005, to change the formula 
for all future accruals to a cash balance formula under which the 
opening account balance for each participant on July 1, 2005, is zero, 
hypothetical pay credits equal to 5 percent of pay are credited to the 
account thereafter, and hypothetical interest is credited monthly based 
on the applicable interest rate under section 417(e)(3) of the Internal 
Revenue Code at the beginning of the quarter. Any participant who 
terminates employment with vested benefits can receive an actuarially 
equivalent annuity (based on the same reasonable actuarial assumptions 
that are specified in Plan D) commencing at any time after termination 
of employment and before the plan's normal retirement age of 65. The 
benefit resulting from the hypothetical account balance is in addition 
to the benefit accrued before July 1,

[[Page 331]]

2005 (taking into account only service and highest 3-year pay before 
July 1, 2005), so that it is reasonably expected that no wear-away 
period will result from the amendment. The plan administrator expects 
that, as a general rule, depending on future pay increases and future 
interest rates, the rate of future benefit accrual after the conversion 
is higher for participants who accrue benefits before approximately age 
50 and after approximately age 70, but is lower for participants who 
accrue benefits between approximately age 50 and age 70.
    (C) The plan administrator of Plan D announces the conversion to a 
cash balance formula on May 16, 2005. The announcement is delivered to 
all participants and includes a written notice that describes the old 
formula, the new formula, and the effective date.
    (D) In addition, the notice states that the Plan D formula before 
the conversion provided a normal retirement benefit equal to the product 
of a participant's number of years of service multiplied by 1.5 percent 
multiplied by the participant's average pay over the 3 years for which 
the average is the highest (highest 3-year pay). The notice includes an 
example showing the normal retirement benefit that will be accrued after 
June 30, 2005 for a participant who is age 49 with 10 years of service 
at the time of the conversion. The plan administrator reasonably 
believes that such a participant is representative of the participants 
whose rate of future benefit accrual will be reduced as a result of the 
amendment. The example estimates that, if the participant continues 
employment to age 65, the participant's normal retirement benefit for 
service from age 49 to age 65 will be $657 per month for life. The 
example assumes that the participant's pay is $50,000 at age 49. The 
example states that the estimated $657 monthly pension accrues over the 
16-year period from age 49 to age 65 and that, based on assumed future 
pay increases, this amount annually would be 9.1 percent of the 
participant's highest 3-year pay at age 65, which over the 16 years from 
age 49 to age 65 averages 0.57 percent per year multiplied by the 
participant's highest 3-year pay. The example also states that the sum 
of the monthly annuity accrued before the conversion in the 10-year 
period from age 39 to age 49 plus the $657 monthly annuity estimated to 
be accrued over the 16-year period from age 49 to age 65 is $1,235 and 
that, based on assumed future increases in pay, this would be 17.1 
percent of the participant's highest 3-year pay at age 65, which over 
the employee's career from age 39 to age 65 averages 0.66 percent per 
year multiplied by the participant's highest 3-year pay. The notice also 
includes two other examples with similar information, one of which is 
intended to show the circumstances in which a small reduction may occur 
and the other of which shows the largest reduction that the plan 
administrator thinks is likely to occur. The notice states that the 
estimates are based on the assumption that pay increases annually after 
June 30, 2005, at a 4 percent rate. The notice also specifies that the 
applicable interest rate under section 417(e) for hypothetical interest 
credits after June 30, 2005 is assumed to be 6 percent, which is the 
section 417(e) of the Internal Revenue Code applicable interest rate 
under the plan for 2005.
    (ii) Conclusion. The information in the notice, as described in 
paragraph (i)(C) and (i)(D) of this Example 4, satisfies the 
requirements of paragraph (a)(3) of this Q&A-11 with respect to 
applicable individuals who are participants. The requirements of 
paragraph (a)(4) of this Q&A-11 are satisfied because, as noted in 
paragraph (i)(D) of this Example 4, the notice describes the old formula 
and describes the estimated future accruals under the new formula in 
terms that can be readily compared to the old formula, i.e., the notice 
states that the estimated $657 monthly pension accrued over the 16-year 
period from age 49 to age 65 averages 0.57 percent of the participant's 
highest 3-year pay at age 65. The requirement in paragraph (a)(4)(ii) of 
this Q&A-11 that the examples include sufficient information to be able 
to determine the approximate magnitude of the reduction would also be 
satisfied if the notice instead directly stated the amount of the 
monthly pension that would have accrued over the 16-year period from age 
49 to age 65 under the old formula.
    Example 5. (i) Facts. The facts are the same as in Example 4, except 
that, under the plan as in effect before the amendment, the early 
retirement pension for a participant who terminates employment after age 
55 with at least 20 years of service is equal to the normal retirement 
benefit without reduction from age 65 to age 62 and reduced by only 5 
percent per year for each year before age 62. As a result, early 
retirement benefits for such a participant constitute a retirement-type 
subsidy. The plan as in effect after the amendment provides an early 
retirement benefit equal to the sum of the early retirement benefit 
payable under the plan as in effect before the amendment taking into 
account only service and highest 3-year pay before July 1, 2005, plus an 
early retirement annuity that is actuarially equivalent to the account 
balance for service after June 30, 2005. The notice provided by the plan 
administrator describes the old early retirement annuity, the new early 
retirement annuity, and the effective date. The notice includes an 
estimate of the early retirement annuity payable to the illustrated 
participant for service after the conversion if the participant were to 
retire at age 59 (which the plan administrator believes is a typical 
early retirement age) and elect to begin receiving an

[[Page 332]]

immediate early retirement annuity. The example states that the normal 
retirement benefit expected to be payable at age 65 as a result of 
service from age 49 to age 59 is $434 per month for life beginning at 
age 65 and that the early retirement annuity expected to be payable as a 
result of service from age 49 to age 59 is $270 per month for life 
beginning at age 59. The example states that the monthly early 
retirement annuity of $270 is 38 percent less than the monthly normal 
retirement benefit of $434, whereas a 15 percent reduction would have 
applied under the plan as in effect before the amendment. The notice 
also includes similar information for examples that show the smallest 
and largest reduction that the plan administrator thinks is likely to 
occur in the early retirement benefit. The notice also specifies the 
applicable interest rate, mortality table, and salary scale used in the 
example to calculate the early retirement reductions.
    (ii) Conclusion. The information in the notice, as described in 
paragraphs (i)(C) and (D) of Example 4 and paragraph (i) of this Example 
5, satisfies the requirements of paragraph (a)(3) of this Q&A-11 with 
respect to applicable individuals who are participants. The requirements 
of paragraph (a)(4) of this Q&A-11 are satisfied because, as noted in 
paragraph (i) of this Example 5, the notice describes the early 
retirement subsidy under the old formula and describes the estimated 
early retirement pension under the new formula in terms that can be 
readily compared to the old formula, i.e., the notice states that the 
monthly early retirement pension of $270 is 38 percent less than the 
monthly normal retirement benefit of $434, whereas a 15 percent 
reduction would have applied under the plan as in effect before the 
amendment. The requirements of paragraph (a)(4)(ii) of this Q&A-11 that 
the examples include sufficient information to be able to determine the 
approximate magnitude of the reduction would also be satisfied if the 
notice instead directly stated the amount of the monthly early 
retirement pension that would be payable at age 59 under the old 
formula.

    Q-12. What special rules apply if participants can choose between 
the old and new benefit formulas?
    A-12. In any case in which an applicable individual can choose 
between the benefit formula (including any early retirement benefit or 
retirement-type subsidy) in effect before the section 204(h) amendment 
(old formula) or the benefit formula in effect after the section 204(h) 
amendment (new formula), section 204(h) notice has not been provided 
unless the applicable individual has been provided the information 
required under Q&A-11 of this section, and has also been provided 
sufficient information to enable the individual to make an informed 
choice between the old and new benefit formulas. The information 
required under Q&A-11 of this section must be provided by the date 
otherwise required under Q&A-9 of this section. The information 
sufficient to enable the individual to make an informed choice must be 
provided within a period that is reasonably contemporaneous with the 
date by which the individual is required to make his or her choice and 
that allows sufficient advance notice to enable the individual to 
understand and consider the additional information before making that 
choice.
    Q-13. How may section 204(h) notice be provided?
    A-13. (a) Delivering section 204(h) notice. A plan administrator 
(including a person acting on behalf of the plan administrator, such as 
the employer or plan trustee) must provide section 204(h) notice through 
a method that results in actual receipt of the notice or the plan 
administrator must take appropriate and necessary measures reasonably 
calculated to ensure that the method for providing section 204(h) notice 
results in actual receipt of the notice. Section 204(h) notice must be 
provided either in the form of a paper document or in an electronic form 
that satisfies the requirements of paragraph (c) of this Q&A-13. First 
class mail to the last known address of the party is an acceptable 
delivery method. Likewise, hand delivery is acceptable. However, the 
posting of notice is not considered provision of section 204(h) notice. 
Section 204(h) notice may be enclosed with or combined with other notice 
provided by the employer or plan administrator (for example, a notice of 
intent to terminate under title IV of ERISA). Except as provided in 
paragraph (c) of this Q&A-13, a section 204(h) notice is deemed to have 
been provided on a date if it has been provided by the end of that day. 
When notice is delivered by first class mail, the notice is considered 
provided as of the date of the United States postmark stamped on the 
cover in which the document is mailed.

[[Page 333]]

    (b) Example. The following example illustrates the provisions of 
paragraph (a) of this Q&A-13:

    Example. (i) Facts. Plan A is amended to reduce significantly the 
rate of future benefit accrual effective January 1, 2005. Under Q&A-9 of 
this section, section 204(h) notice is required to be provided at least 
45 days before the effective date of the amendment. The plan 
administrator causes section 204(h) notice to be mailed to all affected 
participants. The mailing is postmarked November 16, 2004.
    (ii) Conclusion. Because section 204(h) notice is given 45 days 
before the effective date of the plan amendment, it satisfies the timing 
requirement of Q&A-9 of this section.

    (c) New technologies--(1) General rule. A section 204(h) notice may 
be provided to an applicable individual through an electronic method 
(other than an oral communication or a recording of an oral 
communication), provided that all of the following requirements are 
satisfied:
    (i) Either the notice is actually received by the applicable 
individual or the plan administrator takes appropriate and necessary 
measures reasonably calculated to ensure that the method for providing 
section 204(h) notice results in actual receipt of the notice by the 
applicable individual.
    (ii) The plan administrator provides the applicable individual with 
a clear and conspicuous statement, in electronic or non-electronic form, 
that the applicable individual has a right to request and obtain a paper 
version of the section 204(h) notice without charge and, if such request 
is made, the applicable individual is furnished with the paper version 
without charge.
    (iii) The requirements of this section must otherwise be satisfied. 
Thus, for example, a section 204(h) notice provided through an 
electronic method must be delivered on or before the date required under 
Q&A-9 of this section and must satisfy the requirements set forth in 
Q&A-11 of this section, including the content requirements and the 
requirements that it be written in a manner calculated to be understood 
by the average plan participant and to apprise the applicable individual 
of the significance of the notice. Accordingly, when it is not otherwise 
reasonably evident, the recipient should be apprised (either in 
electronic or in non-electronic form), at the time the notice is 
furnished electronically, of the significance of the notice.
    (2) Examples. The following examples illustrate the requirement in 
paragraph (c)(1)(i) of this Q&A-13. In these examples, it is assumed 
that the notice satisfies the requirements in paragraphs (c)(1)(ii) and 
(iii) of this section. The examples are as follows:

    Example 1. (i) Facts. On July 1, 2003, M, a plan administrator of 
Company N's plan, sends notice intended to constitute section 204(h) 
notice to A, an employee of Company N and a participant in the plan. The 
notice is sent through e-mail to A's e-mail address on Company N's 
electronic information system. Accessing Company N's electronic 
information system is not an integral part of A's duties. M sends the e-
mail with a request for a computer-generated notification that the 
message was received and opened. M receives notification indicating that 
the e-mail was received and opened by A on July 9, 2003.
    (ii) Conclusion. With respect to A, although M has failed to take 
appropriate and necessary measures reasonably calculated to ensure that 
the method for providing section 204(h) notice results in actual receipt 
of the notice, M satisfies the requirement of paragraph (c)(1)(i) of 
this Q&A-13 on July 9, 2003, which is when A actually receives the 
notice.
    Example 2. (i) Facts. On August 1, 2003, O, a plan administrator of 
Company P's plan, sends a notice intended to constitute section 204(h) 
notice of ERISA to B, who is an employee of Company P and a participant 
in Company P's plan. The notice is sent through e-mail to B's e-mail 
address on Company P's electronic information system. B has the ability 
to effectively access electronic documents from B's e-mail address on 
Company P's electronic information system and accessing the system is an 
integral part of B's duties.
    (ii) Conclusion. Because access to the system is an integral part of 
B's duties, O has taken appropriate and necessary measures reasonably 
calculated to ensure that the method for providing section 204(h) notice 
results in actual receipt of the notice. Thus, regardless of whether B 
actually accesses B's email on that date, O satisfies the requirement of 
paragraph (c)(1)(i) of this Q&A-13 on August 1, 2003, with respect to B.

    (3) Safe harbor in case of consent. The requirement of paragraph 
(c)(1)(i) of this Q&A-13 is deemed to be satisfied with respect to an 
applicable individual if the section 204(h) notice is provided 
electronically to an applicable individual, and--

[[Page 334]]

    (i) The applicable individual has affirmatively consented 
electronically, or confirmed consent electronically, in a manner that 
reasonably demonstrates the applicable individual's ability to access 
the information in the electronic form in which the notice will be 
provided, to receiving section 204(h) notice electronically and has not 
withdrawn such consent;
    (ii) The applicable individual has provided, if applicable, in 
electronic or non-electronic form, an address for the receipt of 
electronically furnished documents;
    (iii) Prior to consenting, the applicable individual has been 
provided, in electronic or non-electronic form, a clear and conspicuous 
statement indicating--
    (A) That the consent can be withdrawn at any time without charge;
    (B) The procedures for withdrawing consent and for updating the 
address or other information needed to contact the applicable 
individual;
    (C) Any hardware and software requirements for accessing and 
retaining the documents; and
    (D) The information required by paragraph (c)(1)(ii) of this Q&A-13; 
and
    (iv) After consenting, if a change in hardware or software 
requirements needed to access or retain electronic records creates a 
material risk that the applicable individual will be unable to access or 
retain the section 204(h) notice--
    (A) The applicable individual is provided with a statement of the 
revised hardware and software requirements for access to and retention 
of the section 204(h) notice and is given the right to withdraw consent 
without the imposition of any fees for such withdrawal and without the 
imposition of any condition or consequence that was not disclosed at the 
time of the initial consent; and
    (B) The requirement of paragraph (c)(3)(i) of this Q&A-13 is again 
complied with.
    Q-14. What are the consequences if a plan administrator fails to 
provide section 204(h) notice?
    A-14. (a) Egregious failures--(1) Effect of egregious failure to 
provide section 204(h) notice. Section 204(h)(6)(A) of ERISA provides 
that, in the case of any egregious failure to meet the notice 
requirements with respect to any plan amendment, the plan provisions are 
applied so that all applicable individuals are entitled to the greater 
of the benefit to which they would have been entitled without regard to 
the amendment, or the benefit under the plan with regard to the 
amendment. For a special rule applicable in the case of a plan 
termination, see Q&A-17(b) of this section.
    (2) Definition of egregious failure. For purposes of section 204(h) 
of ERISA and this Q&A-14, there is an egregious failure to meet the 
notice requirements if a failure to provide required notice is within 
the control of the plan sponsor and is either an intentional failure or 
a failure, whether or not intentional, to provide most of the 
individuals with most of the information they are entitled to receive. 
For this purpose, an intentional failure includes any failure to 
promptly provide the required notice or information after the plan 
administrator discovers an unintentional failure to meet the 
requirements. A failure to give section 204(h) notice is deemed not to 
be egregious if the plan administrator reasonably determines, taking 
into account section 4980F, section 204(h), these regulations, other 
administrative pronouncements, and relevant facts and circumstances, 
that the reduction in the rate of future benefit accrual resulting from 
an amendment is not significant (as described in Q&A-8 of this section), 
or that an amendment does not significantly reduce an early retirement 
benefit or retirement-type subsidy.
    (3) Example. The following example illustrates the provisions of 
this paragraph (a):

    Example. (i) Facts. Plan A is amended to reduce significantly the 
rate of future benefit accrual effective January 1, 2003. Section 204(h) 
notice is required to be provided 45 days before January 1, 2003. Timely 
section 204(h) notice is provided to all applicable individuals (and to 
each employee organization representing participants who are applicable 
individuals), except that the employer intentionally fails to provide 
section 204(h) notice to certain participants until May 16, 2003.
    (ii) Conclusion. The failure to provide section 204(h) notice is 
egregious. Accordingly, for the period from January 1, 2003 through June 
30, 2003 (which is the date that is 45

[[Page 335]]

days after May 16, 2003), all participants and alternate payees are 
entitled to the greater of the benefit to which they would have been 
entitled under Plan A as in effect before the amendment or the benefit 
under the plan as amended.

    (b) Effect of non-egregious failure to provide section 204(h) 
notice. If an egregious failure has not occurred, the amendment with 
respect to which section 204(h) notice is required may become effective 
with respect to all applicable individuals. However, see section 502 of 
ERISA for civil enforcement remedies. Thus, where there is a failure, 
whether or not egregious, to provide section 204(h) notice in accordance 
with this section, individuals may have recourse under section 502 of 
ERISA.
    (c) Excise taxes. See section 4980F and Q&A-15 of this section for 
excise taxes that may apply to a failure to notify applicable 
individuals of a pension plan amendment that provides for a significant 
reduction in the rate of future benefit accrual or eliminates or 
significantly reduces an early retirement benefit or retirement-type 
subsidy, regardless of whether or not the failure is egregious.
    Q-15. What are some of the rules that apply with respect to the 
excise tax under section 4980F?
    A-15. (a) Person responsible for excise tax. In the case of a plan 
other than a multiemployer plan, the employer is responsible for 
reporting and paying the excise tax. In the case of a multiemployer 
plan, the plan is responsible for reporting and paying the excise tax.
    (b) Excise tax inapplicable in certain cases. Under section 
4980F(c)(1) of the Internal Revenue Code, no excise tax is imposed on a 
failure for any period during which it is established to the 
satisfaction of the Commissioner that the employer (or other person 
responsible for the tax) exercised reasonable diligence, but did not 
know that the failure existed. Under section 4980F(c)(2) of the Internal 
Revenue Code, no excise tax applies to a failure to provide section 
204(h) notice if the employer (or other person responsible for the tax) 
exercised reasonable diligence and corrects the failure within 30 days 
after the employer (or other person responsible for the tax) first knew, 
or exercising reasonable diligence would have known, that such failure 
existed. For purposes of section 4980F(c)(1) of the Internal Revenue 
Code, a person has exercised reasonable diligence, but did not know that 
the failure existed if and only if--
    (1) The person exercised reasonable diligence in attempting to 
deliver section 204(h) notice to applicable individuals by the latest 
date permitted under this section; and
    (2) At the latest date permitted for delivery of section 204(h) 
notice, the person reasonably believes that section 204(h) notice was 
actually delivered to each applicable individual by that date.
    (c) Example. The following example illustrates the provisions of 
paragraph (b) of this Q&A-15:

    Example. (i) Facts. Plan A is amended to reduce significantly the 
rate of future benefit accrual. The employer sends out a section 204(h) 
notice to all affected participants and other applicable individuals and 
to any employee organization representing applicable individuals, 
including actual delivery by hand to employees at worksites and by 
first-class mail for any other applicable individual and to any employee 
organization representing applicable individuals. However, although the 
employer exercises reasonable diligence in seeking to deliver the 
notice, the notice is not delivered to any participants at one worksite 
due to a failure of an overnight delivery service to provide the notice 
to appropriate personnel at that site for them to timely hand deliver 
the notice to affected employees. The error is discovered when the 
employer subsequently calls to confirm delivery. Appropriate section 
204(h) notice is then promptly delivered to all affected participants at 
the worksite.
    (ii) Conclusion. Because the employer exercised reasonable 
diligence, but did not know that a failure existed, no excise tax 
applies, assuming that participants at the worksite receive section 
204(h) notice within 30 days after the employer first knew, or 
exercising reasonable diligence would have known, that the failure 
occurred.

    Q-16. How do section 4980F and section 204(h) apply when a business 
is sold?
    A-16. (a) Generally. Whether section 204(h) notice is required in 
connection with the sale of a business depends on whether a plan 
amendment is adopted that significantly reduces the rate of future 
benefit accrual or significantly reduces an early retirement benefit or 
retirement-type subsidy.

[[Page 336]]

    (b) Examples. The following examples illustrate the rules of this 
Q&A-16:

    Example 1. (i) Facts. Corporation Q maintains Plan A, a defined 
benefit plan that covers all employees of Corporation Q, including 
employees in its Division M. Plan A provides that participating 
employees cease to accrue benefits when they cease to be employees of 
Corporation Q. On January 1, 2006, Corporation Q sells all of the assets 
of Division M to Corporation R. Corporation R maintains Plan B, which 
covers all of the employees of Corporation R. Under the sale agreement, 
employees of Division M become employees of Corporation R on the date of 
the sale (and cease to be employees of Corporation Q), Corporation Q 
continues to maintain Plan A following the sale, and the employees of 
Division M become participants in Plan B.
    (ii) Conclusion. No section 204(h) notice is required because no 
plan amendment was adopted that reduced the rate of future benefit 
accrual. The employees of Division M who become employees of Corporation 
R ceased to accrue benefits under Plan A because their employment with 
Corporation Q terminated.
    Example 2. (i) Facts. Subsidiary Y is a wholly owned subsidiary of 
Corporation S. Subsidiary Y maintains Plan C, a defined benefit plan 
that covers employees of Subsidiary Y. Corporation S sells all of the 
stock of Subsidiary Y to Corporation T. At the effective date of the 
sale of the stock of Subsidiary Y, in accordance with the sale agreement 
between Corporation S and Corporation T, Subsidiary Y amends Plan C so 
that all benefit accruals cease.
    (ii) Conclusion. Section 204(h) notice is required to be provided 
because Subsidiary Y adopted a plan amendment that significantly reduced 
the rate of future benefit accrual in Plan C.
    Example 3. (i) Facts. As a result of an acquisition, Corporation U 
maintains two defined benefit plans: Plan D covers employees of Division 
N and Plan E covers the rest of the employees of Corporation U. Plan E 
provides a significantly lower rate of future benefit accrual than Plan 
D. Plan D is merged with Plan E, and all of the employees of Corporation 
U will accrue benefits under the merged plan in accordance with the 
benefit formula of former Plan E.
    (ii) Conclusion. Section 204(h) notice is required.
    Example 4. (i) Facts. The facts are the same as in Example 3, except 
that the rate of future benefit accrual in Plan E is not significantly 
lower. In addition, Plan D has a retirement-type subsidy that Plan E 
does not have and the Plan D employees' rights to the subsidy under the 
merged plan are limited to benefits accrued before the merger.
    (ii) Conclusion. Section 204(h) notice is required for any 
participants or beneficiaries for whom the reduction in the retirement-
type subsidy is significant (and for any employee organization 
representing such participants).
    Example 5. (i) Facts. Corporation V maintains several plans, 
including Plan F, which covers employees of Division P. Plan F provides 
that participating employees cease to accrue further benefits under the 
plan when they cease to be employees of Corporation V. Corporation V 
sells all of the assets of Division P to Corporation W, which maintains 
Plan G for its employees. Plan G provides a significantly lower rate of 
future benefit accrual than Plan F. Plan F is merged with Plan G as part 
of the sale, and employees of Division P who become employees of 
Corporation W will accrue benefits under the merged plan in accordance 
with the benefit formula of former Plan G.
    (ii) Conclusion. No section 204(h) notice is required because no 
plan amendment was adopted that reduces the rate of future benefit 
accrual or eliminates or significantly reduces an early retirement 
benefit or retirement-type subsidy. Under the terms of Plan F as in 
effect prior to the merger, employees of Division P cease to accrue any 
further benefits (including benefits with respect to early retirement 
benefits and any retirement-type subsidy) under Plan F after the date of 
the sale because their employment with Corporation V terminated.

    Q-17. How are amendments to cease accruals and terminate a plan 
treated under section 4980F and section 204(h)?
    A-17. (a) General rule--(1) Rule. An amendment providing for the 
cessation of benefit accruals on a specified future date and for the 
termination of a plan is subject to section 4980F and section 204(h).
    (2) Example. The following example illustrates the rule of paragraph 
(a)(1) of this Q&A-17:

    Example. (i) Facts. An employer adopts an amendment that provides 
for the cessation of benefit accruals under a defined benefit plan on 
December 31, 2003, and for the termination of the plan pursuant to title 
IV of ERISA as of a proposed termination date that is also December 31, 
2003. As part of the notice of intent to terminate required under title 
IV in order to terminate the plan, the plan administrator gives section 
204(h) notice of the amendment ceasing accruals, which states that 
benefit accruals will cease ``on December 31, 2003 whether or not the 
plan is terminated on that date.'' However, because all the requirements 
of title IV for a plan termination are not satisfied, the plan cannot be 
terminated until a date that is later than December 31, 2003.

[[Page 337]]

    (ii) Conclusion. Nonetheless, because section 204(h) notice was 
given stating that the plan was amended to cease accruals on December 
31, 2003, section 204(h) does not prevent the amendment to cease 
accruals from being effective on December 31, 2003. The result would be 
the same had the section 204(h) notice informed the participants that 
the plan was amended to provide for a proposed termination date of 
December 31, 2003 and to provide that ``benefit accruals will cease on 
the proposed termination date whether or not the plan is terminated on 
that date.'' However, neither section 4980F nor section 204(h) would be 
satisfied with respect to the December 31, 2003 effective date if the 
section 204(h) notice had merely stated that benefit accruals would 
cease ``on the termination date'' or ``on the proposed termination 
date.''

    (3) Additional requirements under title IV of ERISA. See 29 CFR 
4041.23(b)(4) and 4041.43(b)(5) for special rules applicable to plans 
terminating under title IV of ERISA.
    (b) Terminations in accordance with title IV of ERISA. A plan that 
is terminated in accordance with title IV of ERISA is deemed to have 
satisfied section 4980F and section 204(h) not later than the 
termination date (or date of termination, as applicable) established 
under section 4048 of ERISA. Accordingly, neither section 4980F nor 
section 204(h) would in any event require that any additional benefits 
accrue after the effective date of the termination.
    (c) Amendment effective before termination date of a plan subject to 
title IV of ERISA. To the extent that an amendment providing for a 
significant reduction in the rate of future benefit accrual or a 
significant reduction in an early retirement benefit or retirement-type 
subsidy has an effective date that is earlier than the termination date 
(or date of termination, as applicable) established under section 4048 
of ERISA, that amendment is subject to section 4980F and section 204(h). 
Accordingly, the plan administrator must provide section 204(h) notice 
(either separately, with, or as part of the notice of intent to 
terminate) with respect to such an amendment.
    Q-18. What are the effective dates of section 4980F, section 204(h), 
as amended by EGTRRA, and these regulations?
    A-18. (a) Statutory effective date--(1) General rule. Section 4980F 
and section 204(h), as amended by EGTRRA, apply to plan amendments 
taking effect on or after June 7, 2001 (statutory effective date), which 
is the date of enactment of EGTRRA.
    (2) Transition rule. For amendments applying after the statutory 
effective date in paragraph (a)(1) of this Q&A-18 and prior to the 
regulatory effective date in paragraph (c) of this Q&A-18, the 
requirements of section 4980F(e)(2) and (3) of the Internal Revenue Code 
and section 204(h), as amended by EGTRRA, are treated as satisfied if 
the plan administrator makes a reasonable, good faith effort to comply 
with those requirements.
    (3) Special notice rule--(i) In general. Notwithstanding Q&A-9 of 
this section, section 204(h) notice is not required by section 4980F(e) 
of the Internal Revenue Code or section 204(h), as amended by EGTRRA, to 
be provided prior to September 7, 2001 (the date that is three months 
after the date of enactment of EGTRRA).
    (ii) Reasonable notice. The requirements of section 4980F and 
section 204(h), as amended by EGTRRA, do not apply to any plan amendment 
that takes effect on or after June 7, 2001 if, before April 25, 2001, 
notice was provided to participants and beneficiaries adversely affected 
by the plan amendment (and their representatives) which was reasonably 
expected to notify them of the nature and effective date of the plan 
amendment. For purposes of this paragraph (a)(3)(ii), notice that 
complies with Sec.  1.411(d)-6 of this chapter, as it appeared in the 
April 1, 2001 edition of 26 CFR part 1, is deemed to be notice which was 
reasonably expected to notify participants and beneficiaries adversely 
affected by the plan amendment (and their representatives) of the nature 
and effective date of the plan amendment.
    (b) Regulatory effective date--(1) General effective date. Except 
for Q&A-7(a)(2), Q&A-1 through Q&A-18 of this section apply to 
amendments with an effective date that is on or after September 2, 2003.
    (2) Effective date for Q&A-7(a)(2). Q&A-7(a)(2) of this section 
applies to amendments with an effective date that is on or after January 
1, 2004.
    (c) Amendments taking effect prior to June 7, 2001. For rules 
applicable to

[[Page 338]]

amendments taking effect prior to June 7, 2001, see Sec.  1.411(d)-6 of 
this chapter, as it appeared in the April 1, 2001 edition of 26 CFR part 
1.

[T.D. 9052, 68 FR 17281, Apr. 9, 2003, as amended by T.D. 9219, 70 FR 
47126, Aug. 12, 2005]