[Federal Register Volume 63, Number 239 (Monday, December 14, 1998)]
[Rules and Regulations]
[Pages 68678-68684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32925]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8795]
RIN 1545-AT78


Notice of Significant Reduction in the Rate of Future Benefit 
Accrual

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the requirements of section 204(h) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), relating to defined benefit 
plans and to individual account plans that are subject to the funding 
standards of section 302 of ERISA. It requires the plan administrator 
to give notice of plan amendments, which provide for a significant 
reduction in the rate of future benefit accural, to participants in the 
plan and certain other parties.

DATES: Effective Date: December 14, 1998.
    Applicability Dates: For dates of applicability of these 
regulations, see Effective Dates under Supplementary Information.

FOR FURTHER INFORMATION CONTACT: Diane S. Bloom at (202)622-6214 or 
Christine L. Keller at (202)622-6090 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3705(d)) under the control number 1545-1477. The collection of 
information in these final regulations is in Sec. 1.411(d)-6. Responses 
to this collection of information are required in order to obtain a 
benefit. Specifically, this information is required for a taxpayer who 
wants to amend a qualified plan to significantly reduce the rate of 
future benefit accrual. This information will be used to notify 
participants, alternate payees and employee organizations of the 
amendment.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    The estimated average burden per recordkeeper varies from 1 hour to 
40

[[Page 68679]]

hours, depending on individual circumstances, with an estimated average 
of 5 hours.
    Estimated number of respondents: 3,000.
    Estimated annual frequency of responses: Once.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Clearance Officer, OP:FS:FP, Washington, DC 
20224, and to the Office of Management and Budget, Attn: Desk Officer 
for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On December 12, 1995, temporary regulations (TD 8631), under 
section 411 of the Internal Revenue Code, 26 U.S.C. 411, were filed, 
providing guidance on section 204(h) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), 29 U.S.C. 1054(h). The 
temporary regulations were published in the Federal Register on 
December 15, 1995 (60 FR 64320). A notice of proposed rulemaking (EE-
34-95), cross-referencing the temporary regulations, was published in 
the Federal Register (60 FR 64401) on the same day.
    After consideration of the comments received regarding the proposed 
regulations, the temporary regulations are replaced and the proposed 
regulations are adopted as revised by this Treasury decision.
    Section 204(h) was added to ERISA by section 11006(a) of the 
Single-Employer Pension Plan Amendments Act of 1986 (Title XI of Pub. 
L. 99-272), and was amended by section 1879(u)(1) of the Tax Reform Act 
of 1986, Pub. L. 99-514. Pursuant to section 101(a) of the 
Reorganization Plan No. 4 of 1978, 29 U.S.C. 1001nt, the Secretary of 
the Treasury has authority to issue regulations under parts 2 and 3 of 
subtitle B of title I of ERISA (including section 204 of ERISA). Under 
section 104 of Reorganization Plan No. 4, the Secretary of Labor 
retains enforcement authority with respect to parts 2 and 3 of subtitle 
B of title I of ERISA, but, in exercising such authority, is bound by 
the regulations issued by the Secretary of the Treasury.
    In addition to the proposed and temporary regulations, prior 
guidance relating to the requirements of section 204(h) has been 
provided in Rev. Proc. 94-13 (1994-1 C.B. 566), Notice 90-73 (1990-2 
C.B. 353), Notice 89-92 (1989-2 C.B. 410), Rev. Proc. 89-65 (1989-2 
C.B. 786), Notice 88-131 (1988-2 C.B. 546), and Notice 87-21 (1987-1 
C.B. 458).

Explanation of Provisions

    Section 204(h) applies if a defined benefit plan or a money 
purchase pension or other individual account plan that is subject to 
the funding standards of section 302 of ERISA is amended to provide for 
a significant reduction in the rate of future benefit accrual. It 
requires the plan administrator to give written notice of the amendment 
to participants in the plan, to alternate payees, and to employee 
organizations representing participants in the plan (or to a person 
designated, in writing, to receive the notice on behalf of a 
participant, alternate payee, or employee organization). The notice 
must set forth the plan amendment and its effective date and must be 
provided after adoption of the amendment and not less than 15 days 
before the effective date of the amendment.
    A plan amendment that is subject to the notice requirements of 
section 204(h) may also be subject to additional reporting and 
disclosure requirements under title I of ERISA, such as the requirement 
to provide a summary of material modifications. See sections 102(a) and 
104(a) of ERISA, 29 U.S.C. 1022 and 1024, and the regulations 
thereunder for guidance on when a summary of material modifications 
must be provided. Section 204(h) notice must be provided at least 15 
days before the effective date of an amendment significantly reducing 
the rate of future benefit accrual, even though a summary of material 
modifications describing the amendment is provided at a later date.

Summary of Comments

    Commentators generally supported the basic rules in the proposed 
and temporary regulations, and the final regulations are substantially 
similar to the proposed and temporary regulations. However, a number of 
clarifications have been made in response to comments.
    For example, changes have been made in the rules for cases in which 
there has been a failure to notify all affected participants in 
accordance with section 204(h). The proposed and temporary regulations 
provided that if a plan administrator fails to notify more than a de 
minimis percentage of affected participants, the plan administrator is 
considered to have complied with section 204(h) only with respect to 
those participants who were provided with section 204(h) notice. In 
response to comments, the final regulations have added a requirement 
that the plan administrator have acted in good faith in order for this 
relief to apply. Thus, where there is an intentional failure to give 
section 204(h) notice, the amendment will not be effective as to any 
participant.
    In addition, the final regulations provide that the basic rule in 
Q&A-13 of the final regulations (that the amendment will not be 
effective with respect to participants or alternate payees who did not 
receive section 204(h) notice) applies unless the number of 
participants who were not provided with section 204(h) notice is de 
minimis and certain other conditions (described in Q&A-14 of the final 
regulations) are satisfied. Thus, the regulations clarify that, except 
for the limited circumstances set forth in Q&A-14 of the final 
regulations relating to certain de minimis failures to notify, the 
amendment will not be effective with respect to participants or 
alternate payees who did not receive notice in accordance with section 
204(h).
    At the suggestion of commentators, the final regulations also 
address the application of section 204(h) to a sale of a business, as 
well as its application to plan mergers and transfers of plan assets 
and liabilities. The final regulations add examples that apply the 
general principles established under the regulations to typical sales 
and merger transactions. In response to one commentator, an example has 
been added to illustrate that a plan merger can require notice under 
section 204(h).
    In response to requests by commentators for additional guidance on 
the mechanics of providing section 204(h) notice, Q&A-11 has been added 
providing rules that can be relied on to calculate the 15-day notice 
period. These rules provide that when section 204(h) notice is 
delivered by first class mail, the notice is considered given as of the 
date of the United States postmark stamped on the cover in which the 
document is mailed.
    Commentators also suggested that the rules under the temporary 
regulations concerning plan terminations needed to be expanded. The 
final regulations contain an example illustrating the application of 
section 204(h) to certain specific situations that arise when a defined 
benefit plan cannot be terminated on a proposed termination date 
because there is a failure to satisfy

[[Page 68680]]

all of the requirements of title IV of ERISA for terminating the plan. 
The example provides, in part, that if all of the requirements of title 
IV are not satisfied accruals will still cease if an amendment has been 
adopted that ceases accruals as of a specified date and section 204(h) 
notice of that amendment, including a statement of its effective date, 
is given. Apart from this clarification, the rule under the temporary 
regulations concerning terminations under title IV remains unchanged.
    The final regulations, like the proposed and temporary regulations, 
interpret section 204(h) as applying with respect to changes that 
affect the annual benefit commencing at normal retirement age. The 
statutory phrase ``rate of future benefit accrual'' implies, on its 
face, that section 204(h) is limited to changes in the accrued benefit. 
Nonetheless, one commentator suggested that the temporary regulations 
be changed to require section 204(h) notice when defined benefit plans 
are amended to significantly reduce or eliminate early retirement 
subsidies or optional forms of benefit. Most commentators, however, 
generally supported the basic standard of the regulations under which a 
reduction in the rate of future benefit accrual depends on whether the 
amendment affects the annual benefit commencing at normal retirement 
age. Some commentators also noted that the approach in the proposed and 
temporary regulations would ease plan administration. Accordingly, the 
final regulations retain the rule of the proposed and temporary 
regulations that, for purposes of section 204(h), an amendment to a 
defined benefit plan affects the rate of future benefit accrual only if 
it is reasonably expected to change the amount of the future annual 
benefit commencing at normal retirement age.
    The final regulations clarify that the term ``annual benefit 
commencing at normal retirement age'' refers, in a defined benefit 
plan, to the benefit payable in the form in which the terms of the plan 
express the accrued benefit. In the case of a defined benefit plan that 
does not express the accrued benefit as an annual benefit, the final 
regulations provide that the term ``annual benefit commencing at normal 
retirement age'' refers to 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 
under the principles of section 411(c)(3) (relating to actuarial 
adjustments to determine an employee's accrued benefit).
    Some commentators also suggested that certain bright-line standards 
be established for some of the rules, including how to determine 
whether an amendment results in a significant reduction and what 
constitutes a de minimis percentage of participants for purposes of the 
rules relating to failure to provide notice to all participants and 
alternate payees. Because the wide variety of potential facts and 
circumstances make it difficult to adopt clear standards that are 
appropriate in all circumstances, the final regulations do not include 
such bright-line standards.

Effective Dates

    The final regulations apply to amendments adopted on or after 
December 12, 1998. The final regulations provide that the rules set 
forth in the temporary regulations apply to determine whether section 
204(h) and the final regulations are satisfied with respect to an 
amendment that is adopted before the effective date of the final 
regulations (and on or after the effective date of the temporary 
regulations).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 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 notice of proposed 
rulemaking preceding the regulations was issued prior to March 24, 
1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply to these regulations, and, therefore, a Regulatory Flexibility 
Analysis is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, the notice of proposed rulemaking preceding these 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal author of these regulations is Christine L. Keller. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Par. 1. The authority citation for part 1 is amended by removing 
the entry for Sec. 1.411(d)-6T and by adding an entry in numerical 
order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Sec. 1.411(d)-6 is issued under Reorganization Plan No. 4 of 
1978, 29 U.S.C. 1001nt. * * *


Sec. 1.411(d)-6T  [Removed]

    Par. 2. Section 1.411(d)-6T is removed.
    Par. 3. Section 1.411(d)-6 is added to read as follows:


Sec. 1.411(d)-6  Section 204(h) notice.

    Q-1: What are the requirements of section 204(h) of the Employee 
Retirement Income Security Act of 1974, as amended (ERISA) (29 U.S.C 
1054(h))?
    A-1: (a) Requirements of section 204(h). Section 204(h) of ERISA 
(``section 204(h)'') generally requires written notice of an amendment 
to certain plans that provides for a significant reduction in the rate 
of future benefit accrual. Section 204(h) generally requires the notice 
to be provided to plan participants, alternate payees, and employee 
organizations. The plan administrator must provide the notice after 
adoption of the plan amendment and not less than 15 days before the 
effective date of the plan amendment.
    (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: To which plans does section 204(h) apply?
    A-2: Section 204(h) applies to defined benefit plans that are 
subject to part 2 of subtitle B of title I of ERISA and to individual 
account plans that are subject to both such part 2 and the funding 
standards of section 302 of ERISA. Accordingly, individual account 
plans that are not subject to the funding standards of section 302, 
such as profit-sharing and stock bonus plans, are not subject to 
section 204(h).
    Q-3: What is ``section 204(h) notice''?

[[Page 68681]]

    A-3: ``Section 204(h) notice'' is notice that complies with section 
204(h) and the rules in this section.
    Q-4: For which amendments is section 204(h) notice required?
    A-4: (a) In general. Section 204(h) notice is required for an 
amendment to a plan described in Q&A-2 of this section that provides 
for a significant reduction in the rate of future benefit accrual.
    (b) Delegation of authority to Commissioner. The Commissioner of 
Internal Revenue may provide through publication in the Internal 
Revenue Bulletin of revenue rulings, notices, or other documents (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) of 
this Q&A-4 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 of 1986, as amended 
(Code) (including requirements for tax qualification), ERISA, or other 
applicable federal law.
    Q-5: What is an amendment that affects the rate of future benefit 
accrual for purposes of section 204(h)?
    A-5: (a) In general--(1) Defined benefit plans. For purposes of 
section 204(h), an amendment to a defined benefit plan affects the rate 
of future benefit accrual only if it is reasonably expected to change 
the amount of the future annual benefit commencing at normal retirement 
age. 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 the principles of 
section 411(c)(3) of the Code).
    (2) Individual account plans. For purposes of section 204(h), an 
amendment to an individual account plan affects the rate of future 
benefit accrual only if it is reasonably expected to change the amounts 
allocated in the future to participants' accounts. Changes in the 
investments or investment options under an individual account plan are 
not taken into account for this purpose.
    (b) Determination of rate of future benefit accrual. In accordance 
with paragraph (a) of this Q&A-5, the rate of future benefit accrual is 
determined without regard to optional forms of benefit (other than the 
annual benefit described in paragraph (a) of this Q&A-5), early 
retirement benefits, or retirement-type subsidies, within the meaning 
of such terms as used in section 411(d)(6) of the Code (section 204(g) 
of ERISA). 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).
    (c) Examples. These examples illustrate the rules in this Q&A-5:

    Example 1. A plan is amended with respect to future benefit 
accruals to eliminate a right to commencement of a benefit prior to 
normal retirement age. Because the amendment does not change the 
annual benefit commencing at normal retirement age, it does not 
reduce the rate of future benefit accrual for purposes of section 
204(h).
    Example 2. A plan is amended to modify the actuarial factors 
used in converting an annuity form of distribution to a single sum 
form of distribution. The use of these modified assumptions results 
in a lower single sum. Because the amendment does not affect the 
annual benefit commencing at normal retirement age, it does not 
change the rate of future benefit accrual for purposes of section 
204(h).

    Q-6: What plan provisions are taken into account in determining 
whether there has been a reduction in the rate of future benefit 
accrual?
    A-6: (a) Plan provisions taken into account. All plan provisions 
that may affect the rate of future benefit accrual of participants or 
alternate payees must be taken into account in determining whether an 
amendment provides for a significant reduction in the rate of future 
benefit accrual. Such provisions include, for example, the dollar 
amount or percentage of compensation on which benefit accruals are 
based; in the case of a plan using permitted disparity under section 
401(l) of the 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)); 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; 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)).
    (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. For 
example, provisions such as vesting schedules or optional forms of 
benefit (other than the annual benefit described in Q&A-5(a) of this 
section) are not taken into account.
    (c) Examples. The following example illustrates the rules in this 
Q&A-6:

    Example. A defined benefit plan provides a normal retirement 
benefit equal to 50% of final average compensation times 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 that changes the numerator or denominator of 
that fraction must be taken into account in determining whether 
there has been a reduction in the rate of future benefit accrual.

    Q-7: What is the basic principle used in determining whether an 
amendment provides for a significant reduction in the rate of future 
benefit accrual for purposes of section 204(h)?
    A-7: Whether an amendment provides for a significant reduction in 
the rate of future benefit accrual for purposes of section 204(h) is 
determined based on reasonable expectations taking into account the 
relevant facts and circumstances at the time the amendment is adopted. 
For a defined benefit plan this is done by comparing the amount of the 
annual benefit commencing at normal retirement age as determined under 
Q&A-5(a)(1) under the terms of the plan as amended, with the amount of 
the annual benefit commencing at normal retirement age as determined 
under Q&A-5(a)(1) under the terms of the plan prior to amendment. For 
an individual account plan, this is done in accordance with Q&A-5(a)(2) 
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.
    Q-8: Are employees who have not yet become participants in a plan 
at the time an amendment to the plan is adopted taken into account in 
applying section 204(h) with respect to the amendment?
    A-8: No. Employees who have not yet become participants in a plan 
at the

[[Page 68682]]

time an amendment to the plan is adopted are not taken into account in 
applying section 204(h) with respect to the amendment. Thus, if section 
204(h) notice is required with respect to an amendment, the plan 
administrator need not provide section 204(h) notice to such employees.
    Q-9: If section 204(h) notice is required with respect to an 
amendment, must such notice be provided to participants or alternate 
payees whose rate of future benefit accrual is not reduced by the 
amendment?
    A-9: (a) In general. A plan administrator need not provide section 
204(h) notice to any participant whose rate of future benefit accrual 
is reasonably expected not to be reduced by the amendment, nor to any 
alternate payee under an applicable qualified domestic relations order 
whose rate of future benefit accrual is reasonably expected not to be 
reduced by the amendment. A plan administrator need not provide section 
204(h) notice to an employee organization unless the employee 
organization represents a participant to whom section 204(h) notice is 
required to be provided.
    (b) Facts and circumstances test. Whether a participant or 
alternate payee is described in paragraph (a) of this Q&A-9 is 
determined based on all relevant facts and circumstances at the time 
the amendment is adopted.
    (c) Examples. The following examples illustrate the rules in this 
Q&A-9:

    Example 1. Plan A is amended to reduce significantly the rate of 
future benefit accrual of all current employees who are participants 
in the plan. It is reasonable to expect based on the facts and 
circumstances that the amendment will not reduce the rate of future 
benefit accrual of former employees who are currently receiving 
benefits or that of former employees who are entitled to vested 
benefits. Accordingly, the plan administrator is not required to 
provide section 204(h) notice to such former employees.
    Example 2. The facts are the same as in Example 1 except that 
Plan A also 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. 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 3. Plan B covers hourly employees and salaried 
employees. Plan B provides the same rate of benefit accrual for both 
groups. The employer amends Plan B 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. Accordingly, 
the plan administrator is not required to provide section 204(h) 
notice to the participants who are currently hourly employees.
    Example 4. Plan C covers employees in Division M and employees 
in Division N. Plan C provides the same rate of benefit accrual for 
both groups. The employer amends Plan C 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. Accordingly, the plan administrator is not required to 
provide section 204(h) notice to the participants who are employees 
in Division N.
    Example 5. The facts are the same facts as in Example 4, except 
that at the time the amendment is adopted, it is expected that soon 
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). In this instance, 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.

    Q-10: Does a notice fail to comply with section 204(h) if it 
contains a summary of the amendment and the effective date, without the 
text of the amendment itself?
    A-10: No, the notice does not fail to comply with section 204(h) 
merely because the notice contains a summary of the amendment, rather 
than the text of the amendment, if the summary is written in a manner 
calculated to be understood by the average plan participant and 
contains the effective date. The summary need not explain how the 
individual benefit of each participant or alternate payee will be 
affected by the amendment.
    Q-11: How may section 204(h) notice be provided?
    A-11: A plan administrator (including a person acting on behalf of 
the plan administrator such as the employer or plan trustee) may use 
any method reasonably calculated to ensure actual receipt of the 
section 204(h) notice. First class mail to the last known address of 
the party is an acceptable delivery method. Likewise, hand delivery is 
acceptable. 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 or a 
notice to interested parties of the application for a determination 
letter may also serve as section 204(h) notice if it otherwise meets 
the requirements of this section.
    Q-12: How may the 15-day notice requirement be satisfied?
    A-12: (a) Generally. A section 204(h) notice is deemed to have been 
provided at least 15 days before the effective date of the amendment if 
it has been provided by the end of the 15th day before the effective 
date. 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.
    (b) Example. The following example illustrates the provisions of 
this Q&A-12:

    Example. Plan A is amended to reduce significantly the rate of 
future benefit accruals effective December 1, 1999. The plan 
administrator causes section 204(h) notice to be mailed to all 
affected participants. The mailing is postmarked November 16, 1999. 
Accordingly, the section 204(h) notice is considered to be given not 
less than 15 days before the effective date of the plan amendment.

    Q-13: If a plan administrator fails to provide section 204(h) 
notice to some participants or alternate payees, will the plan 
administrator be considered to have complied with section 204(h) with 
respect to participants and alternate payees who were provided with 
section 204(h) notice?
    A-13: The plan administrator will be considered to have complied 
with section 204(h) with respect to a participant to whom section 
204(h) notice is required to be provided if the participant and any 
employee organization representing the participant were provided with 
section 204(h) notice, and if the plan administrator has made a good 
faith effort to comply with the requirements of section 204(h). The 
plan administrator will be considered to have complied with section 
204(h) with respect to an alternate payee to whom section 204(h) notice 
is required to be provided if the alternate payee was provided with 
section 204(h) notice, and if the plan administrator made a good faith 
effort to comply with the requirements of section 204(h). If these 
conditions are satisfied the amendment will become effective in 
accordance with its terms with respect to the participants and 
alternate payees to whom section 204(h) notice was provided. Except to 
the extent provided

[[Page 68683]]

in Q&A-14, the amendment will not become effective with respect to 
those participants and alternate payees who were not provided with 
section 204(h) notice.
    Q-14: Will a plan be considered to have complied with section 
204(h) if the plan administrator provides section 204(h) notice to all 
but a de minimis percentage of participants and alternate payees to 
whom section 204(h) notice must be provided?
    A-14: The plan will be considered to have complied with section 
204(h) and the amendment will become effective in accordance with its 
terms with respect to all parties to whom section 204(h) notice was 
required to be provided (including those who did not receive notice 
prior to discovery of the omission), if the plan administrator--
    (a) Has made a good faith effort to comply with the requirements of 
section 204(h);
    (b) Has provided section 204(h) notice to each employee 
organization that represents any participant to whom section 204(h) 
notice is required to be provided;
    (c) Has failed to provide section 204(h) notice to no more than a 
de minimis percentage of participants and alternate payees to whom 
section 204(h) notice is required to be provided; and (d) Provides 
section 204(h) notice to those participants and alternate payees 
promptly upon discovering the oversight.
    Q-15: How does section 204(h) apply to the sale of a business?
    A-15: (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.
    (b) Examples. The following examples illustrate the rules of this 
Q&A-15:

    Example 1. 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, 2000, 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. In this Example, 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. 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. In this Example, 
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. Corporation U maintains two 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. In this Example, section 204(h) notice is required.
    Example 4. 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. 
In this Example, no section 204(h) notice is required because no 
plan amendment was adopted that reduced the rate of future benefit 
accrual. Under the terms of Plan F as in effect prior to the merger, 
employees of Division P cease to accrue any further benefits under 
Plan F after the date of the sale because their employment with 
Corporation V terminated.

    Q-16: How are amendments to cease accruals and terminate a plan 
treated under section 204(h)?
    A-16: (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 204(h).
    (2) Example. The following example illustrates the rule of 
paragraph (a)(1) of this Q&A-16:

    Example. (i) An employer adopts an amendment that provides for 
the cessation of benefit accruals under a defined benefit plan on 
December 31, 2001, and for the termination of the plan pursuant to 
title IV of ERISA as of a proposed termination date that is also 
December 31, 2001. 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, 2001.'' 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, 2001.
    (ii) Nonetheless, because section 204(h) notice was given 
stating that the plan was amended to cease accruals on December 31, 
2001, section 204(h) does not prevent the amendment to cease 
accruals from being effective on December 31, 2001. 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, 2001, and to provide that ``benefit accruals will 
cease on the proposed termination date whether or not the plan is 
terminated on that date.'' However, the cessation of accruals would 
not be effective on December 31, 2001, had the section 204(h) notice 
merely stated that benefit accruals would cease ``on the termination 
date or on the proposed termination date.

    (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 204(h) not later than the termination date (or date 
of termination, as applicable) established under section 4048 of ERISA. 
Accordingly, section 204(h) would in no 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 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 204(h). Accordingly, the plan 
administrator must provide section 204(h) notice (either separately or 
with or as part of the notice of intent to terminate) with respect to 
such an amendment.
    Q-17: When does section 204(h) become effective?
    A-17: (a) Statutory effective date. With respect to defined benefit 
plans, section 204(h) generally applies to plan amendments adopted on 
or after January 1, 1986. With respect to individual account plans, 
section 204(h) applies to plan amendments adopted on or after October 
22, 1986.
    (b) Regulatory effective date--(1) General regulatory effective 
date. This section is applicable for amendments adopted on or after 
December 12, 1998.
    (2) Special rule for amendments adopted under the temporary 
regulations. Whether an amendment

[[Page 68684]]

that is adopted on or after December 15, 1995 and before December 12, 
1998 complies with section 204(h) is determined under the rules of 
Sec. 1.411(d)-6T in effect prior to December 14, 1998 (See 1.411(d)-6T 
in 26 CFR Part 1 revised as of April 1, 1998).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 5. In Sec. 602.101, the table in paragraph (c) is amended by 
removing the entry for 1.411(d)6-T and by adding an entry in numerical 
order to read as follows:


Sec. 602.101 OMB  Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
             *        *        *        *        *        *
1.411(d)-6..............................................       1545-1447
 
             *        *        *        *        *        *
------------------------------------------------------------------------

    Approved: December 4, 1998.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 98-32925 Filed 12-11-98; 8:45 am]
BILLING CODE 4830-01-P