[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Proposed Rules]
[Pages 19713-19727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9529]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 54 and 602

[REG-136193-01]
RIN 1545-BA08


Notice of Significant Reduction in the Rate of Future Benefit 
Accrual

AGENCY: Internal Revenue Service (IRS), Treasury.

[[Page 19714]]


ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
requirements of section 4980F of the Internal Revenue Code (Code) and 
section 204(h) of the Employee Retirement Income Security Act of 1974 
(ERISA), as amended, which apply to defined benefit plans and to 
individual account plans that are subject to the funding standards of 
section 412 of the Code and section 302 of ERISA. These regulations 
provide guidance on the requirements for plan administrators to give 
notice of plan amendments to adversely affected plan participants and 
other parties when those amendments provide for a significant reduction 
in the rate of future benefit accrual or the elimination or significant 
reduction in an early retirement benefit or retirement-type subsidy. 
These regulations will affect retirement plan sponsors and 
administrators, participants in and beneficiaries of retirement plans, 
and employee organizations representing retirement plan participants. 
This document also provides a notice of public hearing on these 
proposed regulations.

DATES: Written or electronic comments must be received by July 22, 
2002.
    Requests to speak (with outlines of oral comments to be discussed) 
at the public hearing scheduled for August 15, 2002, at 10 a.m., must 
be received by July 22, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-136193-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-136193-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at www.irs.gov/regs. 
The public hearing will be held in the IRS Auditorium, Seventh Floor, 
Internal Revenue Service, 1111 Constitution Ave., NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Janet A. 
Laufer at (202) 622-6090 or Diane S. Bloom at (202) 283-9888; 
concerning submissions, Donna Poindexter at (202) 622-7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:   

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent 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, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington, 
DC 20224. Comments on the collection of Information should be received 
by June 24, 2002. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in this proposed regulation are in 
Sec. 54.4980F-1. 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 plan that is subject to 
the requirements of section 204(h) or section 4980F to significantly 
reduce the rate of future benefit accrual or significantly reduce an 
early retirement benefit or retirement-type subsidy. This information 
will be used to notify participants, alternate payees, and employee 
organizations of the amendment.
    Estimated total annual reporting burden: 40,000 hours.
    The estimated annual burden per respondent varies from one hour to 
80 hours, depending on individual circumstances, with an estimated 
average of 10 hours.
    Estimated number of respondents: 4,000.
    Estimated annual frequency of responses: Once.
    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 assigned by the Office of Management and Budget.
    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

    Section 204(h) was added to ERISA by section 11006(a) of the 
Single-Employer Pension Plan Amendments Act of 1986, Title XI of Public 
Law 99-272 (100 Stat. 237) and was amended by section 1879(u)(1) of the 
Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2913) (TRA '86). 
As amended by TRA '86, section 204(h) of ERISA (section 204(h)) 
required a plan administrator to provide notice to participants and 
other interested persons after the date of adoption and at least 15 
days before the effective date of a plan amendment providing for a 
significant reduction in the rate of future benefit accrual.
    Pursuant to section 101(a) of Reorganization Plan No. 4 of 1978, 29 
U.S.C. 1001nt, the Secretary of the Treasury generally 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. On December 15, 1995, 
temporary regulations (TD 8631), under section 411 of the Internal 
Revenue Code (Code), 26 U.S.C. 411, were published in the Federal 
Register (60 FR 64320), along with a notice of proposed rulemaking 
cross-referencing the temporary regulations (60 FR 64401). Those 
temporary regulations addressed the notice requirements of section 
204(h). On December 14, 1998, final regulations (TD 8795) addressing 
the notice requirements of section 204(h) were published in the Federal 
Register. See Sec. 1.411(d)-6.
    Section 659 of the Economic Growth and Tax Relief Reconciliation 
Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) added section 
4980F of the Code, which imposes an excise tax when a plan 
administrator fails to provide timely notice of plan amendments that 
provide for a significant reduction in the rate of future benefit 
accrual, and, for this purpose, treats the elimination or

[[Page 19715]]

reduction of an early retirement benefit or retirement-type subsidy as 
a reduction in the rate of future benefit accrual. EGTRRA also amended 
section 204(h) to treat the elimination or reduction of an early 
retirement benefit or retirement-type subsidy as a reduction in the 
rate of future benefit accrual. The requirement in section 204(h)(1) 
that notice be given after the date of adoption and at least 15 days in 
advance of the amendment's effective date was replaced by a requirement 
contained in both section 4980F(e)(3) and section 204(h)(3) that, 
except as provided in regulations, the notice be provided within a 
``reasonable time'' before the effective date of the amendment. The 
notice requirements in section 4980F of the Code are essentially 
identical to the notice requirements in section 204(h), as amended by 
EGTRRA. In addition, section 204(h) has been amended by EGTRRA to 
provide that, in the case of an egregious failure to meet the notice 
requirements, the provisions of the plan are applied as if the 
amendment entitled applicable individuals to the greater of the 
benefits to which they would have been entitled without regard to the 
amendment or the benefits under the plan as amended.
    The Job Creation and Worker Assistance Act of 2002, Public Law 107-
147 (116 Stat. 21) included certain technical corrections to section 
659 of EGTRRA.
    These proposed regulations, when finalized, would replace the 
Treasury regulations currently at Sec. 1.411(d)-6 to reflect the EGTRRA 
changes outlined above. Since the notice requirements of section 204(h) 
are now also required under section 4980F of the Code, these proposed 
regulations are issued under section 4980F, but apply for purposes of 
section 204(h), as well as for purposes of section 4980F.

Explanation of Provisions

Statutory Requirements After EGTRRA

    Section 4980F(e) of the Code and section 204(h) of ERISA require 
notice to be provided when a defined benefit plan or a money purchase 
pension or other individual account plan that is subject to the funding 
standards of section 412 of the Code is amended to significantly reduce 
the rate of future benefit accrual. This notice must be provided to 
participants and alternate payees for whom the amendment is reasonably 
expected to significantly reduce the rate of future benefit accrual, 
and to employee organizations representing such participants. For 
purposes of these rules, an amendment that eliminates or reduces an 
early retirement benefit or retirement-type subsidy is treated as an 
amendment that reduces the rate of future benefit accrual. The notice 
must contain sufficient information (as determined in accordance with 
regulations) to enable such individuals to understand the effect of the 
amendment and, except to the extent provided in regulations, must be 
provided within a reasonable time before the effective date of the 
amendment. Additionally, section 4980F(e)(2) of the Code and section 
204(h)(2) of ERISA authorize the Secretary to provide special rules for 
plans covering fewer than 100 participants and for plans that offer 
participants the option to choose between the new benefit formula and 
the old benefit formula.
    A plan amendment that is subject to the notice requirements of 
section 4980F of the Code and section 204(h) of ERISA (section 204(h) 
amendment) may be subject to additional reporting and disclosure 
requirements under title I of ERISA, such as the requirement to provide 
a summary of material modifications (SMM) describing the amendment. 
Notice under section 4980F of the Code and section 204(h) of ERISA 
(referred to in the proposed regulations as section 204(h) notice) must 
be provided in accordance with the provisions of these regulations even 
though sections 102(a) and 104(b) of ERISA also may require that an SMM 
describing the plan amendment be furnished to participants covered 
under the plan and beneficiaries receiving benefits under the plan. The 
Department of Labor has advised the IRS that, at least until the 
effective date of final regulations under section 4980F of the Code, a 
plan administrator that provides a section 204(h) notice to applicable 
individuals in accordance with these proposed regulations will be 
treated as having furnished those individuals with an SMM regarding the 
section 204(h) amendment. The plan administrator is required to satisfy 
any other requirements regarding the furnishing of SMMs or updated 
summary plan descriptions, including, for example, satisfaction of the 
requirement to furnish an SMM to any other participants covered under 
the plan, and to beneficiaries receiving benefits under the plan, who 
are entitled to an SMM regarding the amendment.

Time for Providing Section 204(h) Notice Under Proposed Regulations

    The proposed regulations aim to strike a balance between giving 
participants and other affected parties section 204(h) notice long 
enough in advance to enable them to understand and consider the 
information before the amendment goes into effect, and allowing 
employers the ability to effect changes to their plans for business 
reasons (such as to facilitate business reorganizations or to permit 
small businesses the flexibility to reduce costs promptly) within a 
reasonable time. The Treasury Department and IRS have concluded, based 
on the history of the legislation, that the reason why the 15-day 
advance notice required under section 204(h) as it existed prior to 
EGTRRA was replaced by the ``reasonable time'' standard is because the 
15-day standard was perceived as often being insufficient. Accordingly, 
these proposed regulations would provide that a reasonable time 
generally means at least 45 days before the effective date of the plan 
amendment.
    However, the proposed regulations include certain special timing 
rules, including rules that would allow section 204(h) notice to be 
provided as late as 15 days before the effective date of the amendment 
in two types of cases. First, the proposed regulations would generally 
permit section 204(h) notice to be provided 15 days in advance for 
amendments adopted in connection with business mergers and 
acquisitions. Second, the proposed regulations include a 15-day advance 
notice requirement with respect to amendments of small plans. Thus, the 
15-day standard that was in section 204(h) before EGTRRA would 
generally continue to apply for small plans and for amendments adopted 
in connection with business mergers and acquisitions for which notice 
would have been required under section 204(h) as in effect before 
EGTRRA. The proposed regulations provide an additional special timing 
rule that applies in the case of an amendment that is adopted in 
connection with a business merger or acquisition involving a plan-to-
plan transfer or merger and that affects only an early retirement 
benefit or retirement-type subsidy (but does not reduce the rate of 
future benefit accrual). In the case of such an amendment, the notice 
must be provided no later than 30 days after the effective date of the 
amendment.
    In the case of a plan amendment which offers participants the 
option to choose between the new benefit formula and the old benefit 
formula, the general timing rules would apply, except that the proposed 
regulations would allow certain additional information to be provided 
at a later date, as described in Content of Section 204(h) Notice of 
this preamble.

[[Page 19716]]

Content of Section 204(h) Notice

    Section 4980F(e)(2) of the Code and section 204(h)(2) of ERISA 
require section 204(h) notice to be written in a manner calculated to 
be understood by the average plan participant and to provide sufficient 
information (as determined in accordance with regulations) to allow 
applicable individuals to understand ``the effect of'' the amendment.
    The Conference report for EGTRRA states that the changes to the 
section 204(h) of ERISA notice requirements were expected to ``provide 
for alternative disclosures rather than a single disclosure methodology 
that may not fit all situations,'' and also notes ``the need to 
consider the complex actuarial calculations and assumptions involved in 
providing necessary disclosures.'' H.R. Rep. 107-84, at 266. In 
addition, particular concern was expressed about the effects of 
conversion of traditional defined benefit plans to cash balance or 
hybrid formula plans and the effects of ``wear-away'' provisions under 
which participants earn no additional benefits for a period of time 
after conversion. H.R. Rep. 107-84, at 266.
    The content requirements in these proposed regulations take into 
account this background and generally seek to ensure that adversely 
affected participants receive sufficient information to enable them to 
understand the impact and magnitude of the changes being made to their 
pension plan, without imposing unduly burdensome requirements on 
employers and while permitting latitude to employers in diverse 
businesses with varying employee demographics to determine how to 
communicate plan changes in an appropriately effective manner. 
Accordingly, the proposed regulations provide general standards for the 
content of a section 204(h) notice, rather than containing specific 
requirements for each type of notice.
    The proposed regulations require a section 204(h) notice to include 
sufficient information to allow applicable individuals to understand 
the effect of the plan amendment, including the approximate magnitude 
of the expected reduction. The type and amount of information necessary 
to satisfy this standard varies depending on the nature of the change 
resulting from the amendment. The information must be written in a 
manner calculated to be understood by the average plan participant. The 
notice must describe the affected provisions prior to plan amendment, 
describe these provisions as amended, and state the effective date of 
the amendment. This description of plan provisions might be similar to 
the description of a plan's benefit accrual formula in a summary plan 
description that satisfies the requirements under Sec. 2520.102-3 of 
the Department of Labor regulations. If the amendment applies by its 
terms differently to various classes of employees (such as where the 
amendment applies differently depending on what division an employee is 
in), the explanation must include sufficient information to allow an 
affected participant to understand the general class or classes of 
participants to whom the reduction applies. Also, these proposed 
regulations clarify that, in cases in which a plan amendment affects 
different classes of applicable individuals differently, the plan 
administrator may provide different section 204(h) notices. A section 
204(h) notice cannot include materially false or misleading information 
(or omit information so as to cause the information provided to be 
misleading).
    If a section 204(h) amendment reduces an early retirement benefit 
or retirement-type subsidy merely as a result of reducing the rate of 
future benefit accrual, the section 204(h) notice need not contain a 
separate description of that reduction in the early retirement benefit 
or retirement-type subsidy.
    Additional information may be necessary to make the approximate 
magnitude of the reduction apparent. In cases in which it is not 
reasonable to expect that the approximate magnitude of the reduction 
will be reasonably apparent from a narrative description, one or more 
illustrative examples are required to be included in the notice. Thus, 
for example, illustrative examples would be required for a 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 with regard to normal retirement benefits or an early 
retirement subsidy (a wear-away period). However, examples are not 
required to illustrate circumstances under which a participant's 
benefit may increase as a result of the section 204(h) amendment.
    Where an amendment may result in reductions that vary in their 
impact on applicable individuals, the examples must show the 
approximate range of the reductions. However, the range of reductions 
need not include reductions that are likely to occur in only a de 
minimis number of cases if a narrative statement is included to that 
effect (for example, such a narrative might state that larger or 
smaller reductions may occur in some other cases) and examples are 
provided that show the approximate range of the reductions in cases 
other than this de minimis number. For amendments for which the maximum 
reduction occurs under identifiable circumstances with proportionately 
smaller reductions in other cases, the range of reductions can 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, as might occur for an amendment that results in a wear-away, 
two illustrative examples may be provided showing the smallest likely 
reduction and the largest likely reduction.
    Examples 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 may 
be based on any reasonable assumptions, such as assumptions relating to 
age, service, and compensation (and salary scale assumptions for 
amendments that alter the compensation taken into account under the 
plan, such as a change from a final pay plan to a career average pay 
plan), but the section 204(h) notice must identify those assumptions. 
The proposed regulations include special rules for determining whether 
an amendment is reasonably expected to result in a wear-away period.
    The proposed regulations include special rules for any case in 
which an applicable individual can choose between the new formula and 
the old formula. Under these rules, the individual must be provided 
sufficient information to enable the individual to make an informed 
choice between the new and old benefit formulas. The information to 
enable the individual to make an informed choice is not required to be 
provided at the same time as section 204(h) notice is otherwise 
required to be provided, as long as it is provided within a period that 
is reasonably contemporaneous with the individual's choice and that 
allows sufficient advance notice to enable the individual to understand 
and consider the additional information before making the choice.
    A section 204(h) notice may include more information than is 
required, but cannot include any false or misleading information and 
cannot include so much additional information that the required 
information fails to be provided in a manner calculated to come to the 
attention of applicable individuals. While a notice for an amendment 
converting a traditional

[[Page 19717]]

final pay plan to a cash balance plan must include an estimate of the 
future normal retirement benefit of the participant in the illustration 
even if that requires an estimate of future wage increases, a section 
204(h) notice could also include alternative estimates. For example, an 
alternative estimate could be based on an assumption that there are no 
future wage increases.
    The proposed regulations include several examples, including 
examples that are intended to show the illustrations that are required 
for a cash balance conversion amendment that is a based on a very 
simplified form of conversion. For more complex conversion amendments, 
it is expected that more illustrations may be appropriate. However, 
these regulations do not require section 204(h) notice to include 
different illustrative examples to address the amount of the reduction 
for every demographic variation (e.g., differences in compensation or 
years of service).

Excise Tax Under Internal Revenue Code Section 4980F(c)(1)

    Section 4980F(c)(1) of the Code provides that no excise tax is 
imposed on a failure for any period during which it is established to 
the satisfaction of the Secretary that the employer (or other person 
responsible for the tax) did not know that the failure existed and 
exercised reasonable diligence to meet the notice requirements. The 
proposed regulations provide that the requirements of section 
4980F(c)(1) of the Code are satisfied if and only if the person that 
would be responsible for the tax exercised reasonable diligence in 
attempting to deliver timely section 204(h) notice to applicable 
individuals (by the latest date permitted under the regulations) and 
believed that section 204(h) notice was actually and timely delivered 
to each applicable individual. An example of this illustrates that 
section 4980F(c)(1) of the Code would apply to a situation in which a 
plan administrator relies on an overnight delivery service to send 
materials to the persons who are expected to hand deliver section 
204(h) notice to participants, and the overnight delivery service is 
late in making that delivery.

ERISA Provisions Regarding Egregious Failures

    Section 204(h)(6)(A) of ERISA, as amended by EGTRRA, provides that 
in the case of an egregious failure to meet the notice requirements, 
the provisions of the plan are applied as if the plan amendment 
entitled applicable individuals to the greater of the benefits to which 
they would have been entitled without regard to the amendment or the 
benefits under the plan as amended. Section 204(h)(6)(B) of ERISA 
provides that, for this purpose, there is an egregious failure to meet 
the section 204(h) notice requirements if such failure is within the 
control of the plan sponsor and is an intentional failure (including 
any failure to promptly provide the required notice or information 
after the plan administrator discovers an unintentional failure to meet 
notice requirements) or a failure to provide most of the individuals 
with most of the information they are entitled to receive. The proposed 
regulations provide that a failure is not egregious if the plan 
administrator reasonably determines, taking into account the statute, 
administrative guidance, and relevant facts and circumstances, that the 
reduction is not significant. The proposed regulations clarify that, in 
the case of a failure that is not egregious, the failure will not 
preclude the amendment from becoming effective. However, where there is 
a failure, whether or not egregious, recourse may be available under 
ERISA section 502 to, among other things, recover benefits due under 
the plan, enforce rights under the terms of the plan, clarify rights to 
future benefits under the plan, obtain equitable relief, or otherwise 
redress such violation. This might occur, for example, if a participant 
receives and thus uses materially inadequate or misleading information 
in making a choice between the new and the old benefit formula.

Method of Delivery of Section 204(h) Notice

    As a general standard, the section 204(h) notice either must be 
provided 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 the 
notice results in actual receipt. Therefore, section 204(h) notice may 
not be provided by ``posting.''
    Section 4980F(g) of the Code and section 204(h)(7) of ERISA, as 
amended by EGTRRA, state that the Secretary of the Treasury may by 
regulation allow 204(h) notice to be provided using new technologies. 
Because those provisions specifically relate to electronic delivery and 
were enacted after enactment of the Electronic Signatures in Global and 
National Commerce Act (114 Stat. 464) (2000) (E-SIGN Act), the 
authority conferred by those provisions on the Secretary to decide 
whether to permit, and under what conditions to permit, electronic 
delivery of section 204(h) notice is not constrained by the provisions 
of the E-SIGN Act.
    Section 4980F(g) of the Code and section 204(h)(7) of ERISA give 
the Secretary of the Treasury authority to impose appropriate criteria 
for the provision of section 204(h) notice through electronic methods 
to ensure that applicable individuals will receive section 204(h) 
notice electronically and are able to access it timely. As noted above, 
section 204(h) notice either must be provided 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 the notice results in actual receipt. 
These proposed regulations would apply the same standard to the 
electronic delivery of section 204(h) notice by requiring that the 
method used result in actual receipt or that the plan administrator 
take appropriate and necessary measures to ensure that any provision of 
the notice in electronic format results in actual receipt of the 
transmitted information. Additionally, the plan administrator must 
offer to provide each applicable individual a paper version of the 
notice free of charge. Of course, the requirements of these regulations 
must otherwise be satisfied when section 204(h) notice is provided in 
electronic format. The proposed regulations include a number of 
examples illustrating the rules applicable to the electronic provision 
of a section 204(h) notice and also include a safe harbor, which has 
conditions similar to the consumer protection provisions of section 
101(c) of the E-SIGN Act.
    Under the proposed regulations, permitted electronic means for 
furnishing section 204(h) notice would include e-mail, a site on the 
Internet, or other electronic communications site, and a DVD or CD that 
could generally be accessed using a computer at an employee's worksite. 
However, section 204(h) notice information is not considered provided 
merely because it is available through a computer kiosk, even when the 
kiosk is at the individual's workplace and the individual is otherwise 
provided notice of the availability of information at the kiosk, 
because, like posting, providing such information through a kiosk 
places a burden on participants to seek out the information. 
Nevertheless, information made available through a kiosk is considered 
provided to those applicable individuals who actually access the 
information through the kiosk.

[[Page 19718]]

Proposed Effective Date

    These proposed regulations would apply to amendments that go into 
effect on or after the date that is 120 days after publication of final 
regulations in the Federal Register. The proposed regulations also 
restate the general statutory effective date and special effective date 
rules that are in section 659(c) of EGTRRA. Thus, the proposed 
regulations include the transition rule of section 659(c)(2) of EGTRRA 
that provides that, for amendments taking effect on or after the date 
of enactment of EGTRRA (June 7, 2001) and prior to the effective date 
of the final regulations, the notice requirements of section 
4980F(e)(2) and (3) of the Code, and of section 204(h) of ERISA as 
amended by EGTRRA, are treated as satisfied if the plan administrator 
makes a reasonable, good faith effort to comply with those 
requirements.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations.
    It is hereby certified that the collection of information in these 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based upon 
the fact that small entities generally do not have very complex benefit 
structures in their plans, or many different classes of participants 
who will be differently affected by an amendment reducing the rate of 
future benefit accrual. Small entities also have fewer employees, and 
so those small entities that are required to provide section 204(h) 
notice need to provide it to fewer individuals. Accordingly, the time 
required for them to prepare and provide section 204(h) notice will 
usually be modest. Furthermore, because most small entities will only 
be affected when they amend the retirement plans they sponsor to reduce 
or eliminate benefits, and most small entities will not so amend the 
retirement plans frequently, it is generally expected that most small 
entities would be required to provide section 204(h) notice only once 
over the course of several years. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and (8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and IRS specifically request comments on 
the clarity of the proposed rules and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for August 15, 2002, beginning 
at 10 a.m., in the IRS Auditorium, Seventh Floor, Internal Revenue 
Service, 1111 Constitution Avenue, NW., Washington, DC. Due to building 
security procedures, visitors must enter at the main entrance, located 
at 1111 Constitution Avenue, NW. All visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the For Further Information Contact portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topics to be discussed and time to be 
devoted to each topic (preferably a signed original and eight (8) 
copies) by June 18, 2002. A period of 10 minutes will be allotted to 
each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal author of these regulations is Janet A. Laufer, 
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). 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 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 54 and 602 are proposed to be amended 
as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


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

    Par. 2. Section 1.411(d)-6 is removed

PART 54--PENSION EXCISE TAXES

    Par. 3. The authority citation for part 54 is amended by adding the 
following citation in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec. 54.4980F-1 is also issued under 26 U.S.C. 4980.  * * *
    Par.4. Section 54.4980F-1 is added to read as follows:


Sec. 54.4980F-1  Notice requirements for certain pension plan 
amendments significantly reducing benefit accruals.

    (a) Table of contents. This paragraph contains a list of the 
questions in Sec. 54.4980F-1(b).

    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 of the Internal Revenue Code 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 an early 
retirement benefit or retirement-type subsidy is significant for 
purposes of section 204(h)?
    Q-9. When must section 204(h) notice be provided?
    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?

[[Page 19719]]

    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 is the effective date of section 4980F of the 
Internal Revenue Code, section 204(h) of ERISA, as amended by 
EGTRRA, and these regulations?

    (b) Questions and answers. The questions and answers are as 
follows:
    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 or 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. Section 4980F was added to the Internal Revenue Code by the 
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 
107-16 (115 Stat. 38) (2001) (EGTRRA). EGTRRA also amended section 
204(h) to, among other things, extend the notice requirement to a plan 
amendment that eliminates or significantly reduces an early retirement 
benefit or retirement-type subsidy, even if it does not significantly 
reduce the rate of future benefit accrual. The notice requirements of 
section 4980F generally are parallel to the notice requirements of 
section 204(h), as amended by EGTRRA. However, the consequences 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 egregious failures. 
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, 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 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. Section 204(h) notice is notice that complies with section 
4980F(e), section 204(h)(1), and this section. 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, including a cessation of benefit 
accrual.
    (b) Early retirement benefits and retirement-type subsidies. 
Section 204(h) notice is 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

[[Page 19720]]

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 to reduce the amount of the 
future annual benefit commencing at normal retirement age 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 to 
reduce the amounts allocated in the future to participants' accounts 
for a 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 to 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. 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.
    (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. 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)-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 vesting 
schedules or the right to make after-tax contributions or elective 
deferrals are not taken into account.
    (c) Example. The following example illustrates the rules in this 
Q&A-7:

    Example. (i) Facts. 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 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.

    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 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 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, 
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, 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.
    (c) Application to certain amendments reducing early retirement 
benefits or retirement-type subsidies. Because section 204(h) notice is 
required only for reductions that are significant, section 204(h) 
notice is not required for an amendment that reduces an early 
retirement benefit or retirement-type subsidy if the amendment is 
permitted under the third sentence of section 411(d)(6)(B) of the 
Internal Revenue Code and regulations thereunder (relating to the 
elimination

[[Page 19721]]

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).
    Q-9. When must section 204(h) notice be provided?
    A-9. (a) 45-day general rule. Except as described in paragraphs (b) 
and (c) 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 (d) 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 (c)(2) of this Q&A-9, in the case of a small plan, section 
204(h) notice must be at least 15 days before the effective date of any 
section 204(h) amendment. 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) 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 (c)(2) of 
this Q&A-9, if a section 204(h) amendment is adopted in connection 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 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 (c), see Sec. 1.410(b)-2(f) of this chapter for the 
definition of acquisition or disposition.
    (d) 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 (c) 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 be 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.
    (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 based on all 
relevant facts and circumstances at the time the section 204(h) notice 
must be provided (or is provided, if earlier).
    (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. The plan is amended effective as of January 1, 2005 to 
significantly reduce the rate of future benefit accrual.
    (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 and are employed by the employer.

    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

[[Page 19722]]

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.

    Q-11. What information is required to be provided in section 204(h) 
notice?
    A-11. (a) Explanation of amendment--(1) In general. Section 204(h) 
notice must include sufficient information to allow applicable 
individuals to understand the effect of the plan amendment, including 
the approximate magnitude of the expected reduction. 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. The information 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. The type and 
amount of information necessary to satisfy these standards will vary 
depending on the nature of the change resulting from the amendment, as 
described further in paragraphs (a)(2) and (3) of this Q&A-11.
    (2) Required narrative--(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 that and specify 
the factors that apply in calculating the actuarial reduction (e.g., a 
5% per year reduction applies for early retirement before age 60).
    (3) Additional required information--(i) Standard for additional 
information. In cases in which it is not reasonable to expect that the 
approximate magnitude of the reduction will be reasonably apparent from 
the description provided in accordance with in paragraph (a)(2) of this 
Q&A-11, further information is required. This requirement can be 
satisfied by furnishing additional narrative information, as described 
in paragraph (a)(3)(ii) of this Q&A-11 by furnishing illustrative 
examples, as described in paragraph (a)(3)(iii) of this Q&A-11 or 
through a combination of these.
    (ii) Additional narrative information. Further narrative 
explanation of the effect of the difference between the old and new 
formulas or benefit calculation may be provided to make the approximate 
magnitude of the reduction apparent.
    (iii) Illustrative examples--(A) Requirement generally. In cases in 
which it is not reasonable to expect that the approximate magnitude of 
the reduction will be reasonably apparent from the description provided 
in accordance with in paragraph (a)(2) of this Q&A-11 (plus any 
additional narrative information provided in accordance with paragraph 
(a)(3)(ii) of this Q&A-11), the notice must include one or more 
illustrative examples showing the approximate magnitude of the 
reduction in the example. Thus, illustrative examples are required for 
a 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 (as would occur for an amendment 
converting a traditional defined benefit formula to a cash balance 
formula or an amendment that results in a wear-away period) , the 
illustrative example(s) provided in accordance with this paragraph 
(a)(3)(iii) 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 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 required under this 
paragraph (a)(3)(iii) 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 (e.g., 
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

[[Page 19723]]

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.
    (4) No false or misleading information. A notice that includes 
materially false or misleading information (or omits information so as 
to cause the information provided to be misleading) does not constitute 
section 204(h) notice.
    (b) Additional information when reduction not uniform-- (1) 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.
    (2) 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.
    (c) Examples. The following examples illustrate the requirements of 
paragraph (a) of this Q&A-11. In each example it is assumed that the 
notice is 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.

    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 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 the effective date. 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 times 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.
    (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 times 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 
times 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 fate. 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.
    (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 times 1.5 
percent times 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 on June 30, 2005 (taking into account only service and 
highest 3-year pay before July 30, 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 times 1.5 
percent times 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

[[Page 19724]]

plan administrator 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 times 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 times 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) of this Example 4, satisfies the requirements of 
paragraph (a)(2) of this Q&A-11 with respect to applicable 
individuals who are participants. The additional requirements of 
paragraph (a)(3) 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 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 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 (i)(D) of Example 4 and paragraph (i) of this 
Example 5, satisfies the requirements of paragraph (a) of this Q&A-
11 with respect to applicable individuals who are participants. The 
requirements of paragraph (a)(3) 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)(1) of this Q&A-11 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) 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 19725]]

    (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 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 paragraph (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 satisfy section 204(h) 
of ERISA 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 satisfy section 
204(h) 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--
    (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

[[Page 19726]]

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 204(h) 
of ERISA, section 4980F of the Internal Revenue Code, 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 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 of the Internal Revenue Code 
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. 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.
    (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 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

[[Page 19727]]

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 of the Internal Revenue Code and section 
204(h) of ERISA?
    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 of the Internal 
Revenue Code and section 204(h) of ERISA.
    (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.'' 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.
    (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 of the Internal Revenue Code nor section 204(h) of ERISA 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 of the Internal Revenue Code and section 204(h) 
of ERISA not later than the termination date (or date of termination, 
as applicable) established under section 4048 of ERISA. Accordingly, 
neither section 4980F of the Internal Revenue Code nor section 204(h) 
of ERISA 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 of the Internal 
Revenue Code and section 204(h) of ERISA. 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 is the effective date of section 4980F of the Internal 
Revenue Code, section 204(h) of ERISA, as amended by EGTRRA, and these 
regulations?
    A-18. (a) Statutory effective date--(1) General rule. Section 4980F 
of the Internal Revenue Code and section 204(h) of ERISA, 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) of ERISA, 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) of ERISA, 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 of the 
Internal Revenue Code and section 204(h) of ERISA, 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) Amendments taking effect prior to June 7, 2001. For rules 
applicable to 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.
    (c) Regulatory effective date. Q&A-1 through Q&A-18 of this section 
apply to amendments taking effect on or after the date that is 120 days 
after publication of final regulations under this section (regulatory 
effective date).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-9529 Filed 4-22-02; 8:45 am]
BILLING CODE 4830-01-P