[Federal Register Volume 67, Number 238 (Wednesday, December 11, 2002)]
[Proposed Rules]
[Pages 76123-76142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31225]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209500-86, REG-164464-02]
RIN 1545-BA10,1545-BB79


Reductions of Accruals and Allocations because of the Attainment 
of any Age; Application of Nondiscrimination Cross-Testing Rules to 
Cash Balance Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations that would provide 
rules regarding the requirements that accruals or allocations under 
certain retirement plans not cease or be reduced because of the 
attainment of any age. In addition, the proposed regulations would 
provide rules for the application of certain nondiscrimination rules to 
cash balance plans. These regulations would affect retirement plan 
sponsors and administrators, and participants in and beneficiaries of 
retirement plans. This document also provides notice of a public 
hearing on these proposed regulations.

DATES: Written comments, requests to speak and outlines of oral 
comments to be discussed at the public hearing scheduled for April 10, 
2003, at 10 a.m., must be received by March 13, 2003.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-209500-86), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered to: 
CC:ITA:RU (REG-209500-86), room 5226, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the Internet by submitting comments 
directly to the IRS Internet site at: www.irs.gov/regs. The public 
hearing will be held in room 4718, Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S. 
F. Marshall, (202) 622-6090, or R. Lisa Mojiri-Azad, (202) 622-6030; 
concerning submissions and the hearing, and/or to be placed on the 
building access list to attend the hearing, Sonya Cruse, 202-622-7180 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under sections 401 and 411 of the Internal 
Revenue Code of 1986 (Code). Section 411(b)(1)(H), which was added in 
subtitle C of the Omnibus Budget Reconciliation Act of 1986 (OBRA `86) 
(100 Stat. 1874), provides that a defined benefit plan fails to comply 
with section 411(b) if, under the plan, an employee's benefit accrual 
is ceased, or the rate of an employee's benefit accrual is reduced, 
because of the attainment of any age. Under section 411(b)(2)(A), added 
by subtitle C of OBRA `86, a defined contribution plan fails to comply 
with section 411(b) unless, under the plan, allocations to the 
employee's account are not ceased, and the rate at which amounts are 
allocated to the employee's account is not reduced, because of the 
attainment of any age.
    Section 411(b)(1)(H)(iii) provides that any requirement of 
continued accrual of benefits after normal retirement age is treated as 
satisfied to the extent benefits are distributed to the participant or 
the participant's benefits are actuarially increased to reflect the 
delay in the distribution of benefits after attainment of normal 
retirement age. Section 411(a) requires a qualified plan to meet 
certain vesting requirements. In the case of a participant in a defined 
benefit plan who works after attaining normal retirement age, these 
vesting requirements are not satisfied unless the plan provides an 
actuarial increase after normal retirement age for accrued benefits, 
distributes benefits while the participant is working after normal 
retirement age, or suspends benefits as described in section 
411(a)(3)(B) (and the regulations of the Department of Labor at 29 CFR 
2530.203-3). Section 401(a)(9)(C)(iii), added to the Code by the Small 
Business Job Protection Act of 1996 (110 Stat. 1755) (1996), requires 
that the accrued benefit of any employee who retires after age 70\1/2\ 
be actuarially increased to take into account the period after age 
70\1/2\ during which the employee is not receiving benefits.
    Section 4(i) of the Age Discrimination in Employment Act (ADEA) and 
sections 204(b)(1)(H) and 204(b)(2) of the Employee Retirement Income 
Security Act of 1974 (ERISA) provide requirements comparable to those 
in sections 411(b)(1)(H) and 411(b)(2) of the Code. Section 4(i)(4) of 
ADEA provides that compliance with the requirements of section 4(i) 
with respect to an employee pension benefit plan constitutes compliance 
with the requirements of section 4 of ADEA relating to benefit accrual 
under the plan.
    Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 
47713), the Secretary of the Treasury has interpretive jurisdiction 
over the subject matter addressed in these regulations for purposes of 
ERISA, as well as the Code. Therefore, these regulations apply for 
purposes of the parallel requirements of sections 204(b)(1)(H) and 
204(b)(2) of ERISA, as well as for section 411(b) of the Code.
    The Equal Employment Opportunity Commission (EEOC) has jurisdiction 
over section 4 of ADEA. Section 9204(d) of OBRA `86 requires that the 
regulations and rulings issued by the Department of Labor, the Treasury 
Department, and the EEOC pursuant to the amendments made by subtitle C 
of OBRA `86 each be consistent with the others. It further requires the 
Secretary of Labor, the Secretary of the Treasury, and the EEOC to each 
consult with the others to the extent necessary to meet the 
requirements of the preceding sentence. Executive Order 12067 requires 
all Federal departments and agencies to ``advise and offer to consult 
with the Equal Employment Opportunity Commission during the development 
of any proposed rules, regulations, policies, procedures or orders 
concerning equal employment opportunity.'' The IRS and Treasury have 
consulted with the Department of Labor and the EEOC prior to the 
issuance of these proposed regulations under sections 411(b)(1)(H) and 
411(b)(2) of the Code.
    The EEOC published proposed regulations interpreting section 4(i) 
of ADEA in the Federal Register on November 27, 1987 (52 FR 45360). 
Proposed regulations REG-209500-86 (formerly EE-184-86) under sections 
411(b)(1)(H) and 411(b)(2) were previously published by the IRS and 
Treasury in the Federal Register on April 11, 1988 (53 FR 11876), as 
part of a package of regulations (the 1988 proposed regulations) that 
also included proposed regulations under sections 410(a), 411(a)(2), 
411(a)(8) and 411(c) (relating to maximum age for participation, 
vesting, normal retirement age, and actuarial adjustments after normal 
retirement age). The IRS, Treasury, the Department of Labor, and

[[Page 76124]]

the EEOC consulted prior to the issuance of both sets of proposed 
regulations.
    Notice 88-126 (1988-2 CB 538), addressed certain effective date 
issues for sections 411(b)(1)(H) and 411(b)(2). The EEOC issued a 
similar notice addressing those effective date issues in the Federal 
Register on January 9, 1989 (54 FR 604). The United States Supreme 
Court subsequently issued an opinion addressing the effective date of 
section 411(b)(1)(H) in Lockheed Corp. v. Spink, 517 U.S. 882 (1996), 
which is discussed below.
    On October 20, 1999, the IRS and Treasury published a solicitation 
for comments in the Federal Register (64 FR 56578) inviting comments 
regarding potential issues under their jurisdiction with respect to 
cash balance plans (a type of defined benefit plan under which the 
normal form of benefit is an immediate payment of a participant's 
hypothetical account, which is adjusted periodically to reflect pay 
credits and interest credits), conversions of traditional defined 
benefit plans to cash balance plans and associated wear-away or benefit 
plateau effects. Hundreds of comments were received from a wide range 
of parties with interests in cash balance plans, including employees, 
employers, and their representatives. The most significant issue raised 
in the comments relates to the application of section 411(b)(1)(H) to 
cash balance plans and conversions of traditional defined benefit plans 
to cash balance plans.
    These proposed regulations are being issued after consideration of 
the comments on the 1988 proposed regulations, as well as more recent 
comments concerning the application of sections 411(b)(1)(H) and 
411(b)(2). These proposed regulations address the application of 
section 411(b)(1)(H) to cash balance plans, including conversions.
    These proposed regulations would also amend the provisions of the 
regulations under section 401(a)(4) to provide rules for 
nondiscrimination testing for certain cash balance plans.

Explanation of Provisions

Overview

    These proposed regulations provide guidance on the requirements of 
section 411(b)(1)(H), under which a defined benefit plan fails to be a 
qualified plan if, under the plan, benefit accruals on behalf of a 
participant are ceased or the rate of benefit accrual on behalf of a 
participant is reduced because of the participant's attainment of any 
age.\1\ Similarly, these proposed regulations provide guidance on the 
requirements of section 411(b)(2), under which a defined contribution 
plan fails to be a qualified plan if, under the plan, allocations to a 
participant's account are ceased or the rate of allocations to a 
participant's account is reduced because of the participant's 
attainment of any age.
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    \1\ While section 4(i) of the ADEA, section 204(b)(1)(H) of 
ERISA, and section 411(b)(1)(H) of the Code are worded similarly, 
the words ``attainment of any'' are not in section 4(i) of the ADEA. 
The legislative history states that no differences among the 
provisions is intended (OBRA 86 House Report No. 99-727 at 378-9), 
and the agencies have concluded that this particular difference in 
language has no effect.
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    These proposed regulations follow the 1988 proposed regulations in 
many respects. In particular, these proposed regulations would adopt 
many of the positions taken under the 1988 proposed regulations for 
determining whether a plan ceases benefit accruals or allocations 
because of the attainment of any age or provides for a direct or 
indirect reduction in the rate of benefit accrual or allocation because 
of the attainment of any age.
    These proposed regulations also provide guidance on how to 
determine the rate of benefit accrual or rate of allocation. In the 
case of defined benefit plans, the proposed regulations would provide 
two basic approaches to determining the rate of benefit accrual: a 
general approach applicable to all defined benefit plans; and a 
separate approach applicable to eligible cash balance plans, as defined 
in these proposed regulations. These proposed regulations also provide 
guidance on determining the rate of allocation under a defined 
contribution plan.
    Finally, these proposed regulations address other related issues 
also addressed in the 1988 proposed regulations, including the 
application of sections 411(b)(1)(H) and 411(b)(2) to optional forms of 
benefits, ancillary benefits and other rights and features, the 
coordination of the requirements of sections 411(b)(1)(H) and 411(b)(2) 
with certain other qualification requirements under the Code, such as 
sections 401(a)(4), 411(a), and 415, and the effective date of sections 
411(b)(1)(H) and 411(b)(2).

Applicability Prior to Normal Retirement Age

    Sections 411(b)(1)(H) and 411(b)(2) prohibit cessation of accruals 
or allocations, and reduction in the rate of benefit accrual or 
allocation, because of the attainment of any age. Under these sections, 
attainment of any age means a participant's growing older. Accordingly, 
these regulations, like the 1988 proposed regulations, would apply 
regardless of whether the participant is older than, younger than, or 
at normal retirement age.
    Some commentators have suggested that only cessations or reductions 
after attainment of normal retirement age are prohibited by these 
sections. This interpretation is not consistent with the language of 
the statute, which does not specify any minimum age at which the rule 
applies, and is not adopted under these proposed regulations.

Reduction in Rate of Benefit Accrual Because of Attainment of Any Age

    Under these proposed regulations, a defined benefit plan fails to 
comply with section 411(b)(1)(H) if, either directly or indirectly, a 
participant's rate of benefit accrual is reduced (which includes a 
cessation of participation in the plan or other discontinuance of 
benefit accruals) because of the participant's attainment of any age. A 
plan provides for a reduction in the rate of benefit accrual that is 
directly because of the attainment of any age if, during a plan year, 
under the terms of the plan, any participant's rate of benefit accrual 
for the plan year would be higher if the participant were younger. 
Thus, a plan fails to comply with section 411(b)(1)(H) if, under the 
terms of the plan, the rate of benefit accrual for any individual who 
is or could be a participant under the plan would be lower solely as a 
result of such individual being older. Whether there is an actual 
participant at any particular age is not relevant. Similarly, whether a 
reduction in the rate of benefit accrual is because of the attainment 
of any age does not depend on a comparison of a participant's rate of 
benefit accrual for a year to that participant's rate of benefit 
accrual in an earlier year. These proposed regulations include a number 
of examples (at Sec.  1.411(b)-2(b)(3)(iii) of these regulations) which 
illustrate whether a reduction in the rate of benefit accrual is 
because of the attainment of any age.
    A reduction in the rate of benefit accrual is indirectly because of 
a participant's attainment of any age if any participant's rate of 
benefit accrual for the plan year would be higher if the participant 
were to have a different characteristic that is a proxy for being 
younger, based on all the relevant facts and circumstances. For 
example, if a company assigns older workers to one division and younger 
workers to another even though they perform the same work, then 
assignment to a division

[[Page 76125]]

would be a proxy for being older or younger.
    Like the 1988 proposed regulations, these proposed regulations 
provide that a reduction in a participant's rate of benefit accrual is 
not indirectly because of the attainment of any age in violation of 
section 411(b)(1)(H) solely because of a positive correlation between 
attainment of any age and a reduction in the rate of benefit accrual. 
In addition, a defined benefit plan does not fail to satisfy section 
411(b)(1)(H) solely because, on a uniform and consistent basis without 
regard to a participant's age, the plan limits the amount of benefits a 
participant may accrue under the plan or limits the number of years of 
service or participation taken into account for purposes of determining 
the accrual of benefits under the plan, whether the plan reduces or 
ceases accruals for service in excess of such limit. A limitation that 
is expressed as a percentage of compensation (whether averaged over a 
participant's total years of credited service for the employer or over 
a shorter period) is a permissible limitation on the amount of benefits 
a participant may accrue under the plan.

Rate of Benefit Accrual

    Neither section 411(b)(1)(H) nor the 1988 proposed regulations 
define the rate of benefit accrual. These proposed regulations would 
provide two basic approaches to determining the rate of benefit 
accrual, based on the way the benefit is expressed in the plan. One 
approach may be used by all defined benefit plans. A second approach 
may be used only by an eligible cash balance plan, as defined in these 
proposed regulations.
    Under the general rule, the rate of benefit accrual for any plan 
year that ends before the participant attains normal retirement age is 
the increase in the participant's accrued normal retirement benefit for 
the year. Because the rate of benefit accrual is determined by 
reference to the increase in the accrued benefit during the plan year, 
any subsidized portion of an early retirement benefit, any qualified 
disability benefit, or any social security supplement is disregarded.
    Section 411(b)(1)(H)(iii)(II) provides that a defined benefit plan 
does not fail to comply with section 411(b)(1)(H) for a plan year to 
the extent of any adjustment in the benefit payable under the plan 
during such plan year attributable to the delay in the distribution of 
benefits after the attainment of normal retirement age. These proposed 
regulations implement this rule (i.e., permit a plan to offset any 
actuarial adjustment during the year against the otherwise required 
accruals under the plan), by providing that the rate of benefit accrual 
after normal retirement age is equal to the excess, if any, of the 
annual benefit to which the participant is entitled at the end of the 
plan year over the annual benefit to which the participant would have 
been entitled at the end of the preceding plan year. For this purpose, 
the annual benefit is determined assuming that payment commences in the 
normal form of benefit under the plan at the end of the applicable 
year. For purposes of these proposed regulations, the normal form of 
benefit is the form under which payments due to the participant are 
expressed under the plan, prior to adjustment for form of benefit.
    The methodology of determining a year-by-year rate of accrual, 
taking into account any actuarial increases during the plan year, is a 
departure from the methodology used in the 1988 proposed regulations. 
As a consequence of the methodology used in these proposed regulations, 
the plan may not reduce a participant's rate of benefit accrual in a 
plan year to take into account the fact that, in the preceding plan 
year, the actuarial increase was greater than the accrual under the 
plan formula.
    While any actuarial adjustment made to the annual benefit to which 
the participant would have been entitled at the end of the preceding 
plan year is included in the rate of benefit accrual after normal 
retirement age, a defined benefit plan must separately comply with the 
requirements of section 411(a), which are not addressed in these 
proposed regulations. Thus, for example, a plan that does not provide 
for suspension of benefits in accordance with section 411(a)(3) must 
provide for actuarial adjustments of the amount that would otherwise be 
paid (or distributions of that amount) that are adequate to satisfy 
section 411(a) and 29 CFR 2530.203-3 of the regulations of the 
Department of Labor. In addition, the plan must comply with section 
401(a)(9)(C)(iii) with respect to actuarial adjustments for 
participants who retire after attainment of 70\1/2\.
    Section 411(b)(1)(H)(iii)(I) provides that a defined benefit plan 
will not fail to satisfy section 411(b)(1)(H) to the extent of the 
actuarial equivalent of in-service distribution of benefits. Under 
these proposed regulations, the rate of benefit accrual for a 
participant who has attained normal retirement age may be reduced by 
the actuarial value of plan benefit distributions made during the year. 
This reduction is the equivalent of the provision described above under 
which a defined benefit plan may offset any actuarial adjustment during 
the year against the otherwise required accruals for the year. As 
described immediately below, the manner in which distributions made 
under the plan are taken into account for a plan year under these 
regulations is designed so that compliance with section 411(b)(1)(H) is 
not affected by the optional form in which the distribution is made.
    In the plan year during which a distribution is made, distributions 
are taken into account to the extent the actuarial value of the 
distribution does not exceed the actuarial value of distributions that 
would have been made during the plan year had distribution of the 
participant's full accrued benefit at the beginning of the plan year 
commenced at the beginning of the plan year (or, if later, at the 
participant's normal retirement age) in the normal form of benefit. 
Distributions in excess of the actuarial value of the distribution that 
would have been made during the plan year had the distribution of the 
participant's full accrued benefit commenced in the normal form (called 
accelerated benefit payments) are disregarded for that plan year, but, 
as described below, are taken into account in subsequent periods. If 
the participant is receiving a distribution in an optional form of 
benefit under which the amount payable annually is less than the amount 
payable under the normal form of benefit (for example, a QJSA under 
which the annual benefit is less than the amount payable annually under 
a straight life annuity normal form), the participant may be treated as 
receiving payments under an actuarially equivalent normal form of 
benefit.
    Any accelerated benefit payments are taken into account in plan 
years after the plan year in which the distribution was made by 
converting the accelerated benefit payments to an actuarially 
equivalent stream of annual benefit payments under the plan's normal 
form of benefit distributions, commencing at the beginning of the next 
following plan year. This equivalent stream of annual benefit payments 
is then deemed to be paid in plan years after the plan year in which 
the distribution was made, and the calculation of the rate of benefit 
accrual after normal retirement age is adjusted by adding any of these 
deemed payments for future plan years to the annual benefit to which 
the participant is entitled at the end of a plan year. As so adjusted, 
therefore, the rate of benefit accrual is determined as the excess, if 
any, of the sum of the annual benefit to which the participant is 
entitled at the end of the plan year (assuming payment commences in the 
normal form at the end of the plan year) plus the annuity

[[Page 76126]]

equivalent of accelerated benefit payments deemed paid in the next plan 
year, over the sum of the annual benefit to which the participant would 
have been entitled at the end of the preceding plan year (assuming that 
payment commences in the normal form at the later of normal retirement 
age and the end of the preceding plan year), plus the annuity 
equivalent of accelerated benefit payments deemed paid during the plan 
year. The effect of this adjustment, in the case of a single sum 
distribution, is to put the participant in the same position as if the 
participant had received the distribution in the normal form.

Eligible Cash Balance Plans

    The 1988 proposed regulations did not contain any guidance specific 
to cash balance plans. A cash balance plan is a type of defined benefit 
plan that determines benefits by reference to an employee's 
hypothetical account. Since the 1988 proposed regulations were issued, 
the number of cash balance plans has increased. The development of cash 
balance plans has raised the issue of whether this design complies with 
section 411(b)(1)(H).
    Under a cash balance plan, an employee's hypothetical account 
balance is credited with hypothetical allocations, often referred to as 
service credits or pay credits, and hypothetical earnings, often 
referred to as interest credits. Under some cash balance plans, the 
right to interest credits for future periods accrues at the same time 
as the pay credit (i.e., the interest credit is not contingent on the 
performance of services in the future). Under other cash balance plans, 
all or some portion of the interest credit for future periods is 
contingent on the performance of services in the future. The benefit 
under a cash balance plan is expressed in the plan document (and 
communicated to employees) as the hypothetical account balance, 
although not all cash balance plans provide a single sum distribution.
    Under a cash balance plan, the interest credits for a younger 
participant will compound over a greater number of years until normal 
retirement age than for an older participant. This will result in a 
larger accrual for younger employees, when measured as the increase in 
the benefit payable at normal retirement age. Accordingly, some 
commentators have argued that the basic cash balance plan design 
violates section 411(b)(1)(H). Others have asserted that cash balance 
plans do not violate section 411(b)(1)(H) if the additions to the 
hypothetical account are not smaller because of the attainment of any 
age. They argue that, because pay credits under a cash balance plan are 
comparable to allocations under a defined contribution plan, these pay 
credits are an appropriate measure for testing whether a cash balance 
plan satisfies section 411(b)(1)(H).
    These proposed regulations would provide that the rate of benefit 
accrual under an eligible cash balance plan, as defined in these 
proposed regulations, is permitted to be determined as the additions to 
the participant's hypothetical account for the plan year, except that 
previously accrued interest credits are not included in the rate of 
benefit accrual. Because the rate of benefit accrual is determined 
based on how benefits are expressed under the plan, this method of 
determining the rate of benefit accrual is restricted to eligible cash 
balance plans, as defined in these proposed regulations.
    An eligible cash balance plan is a defined benefit plan that 
satisfies certain requirements. First, for accruals in the current plan 
year, the normal form of benefit is an immediate payment of the balance 
in a hypothetical account. As long as the normal form of benefit is an 
immediate payment of the balance in a hypothetical account, a plan does 
not fail to be an eligible cash balance plan merely because a single-
sum distribution of that amount is not actually available as a 
distribution option under the plan.
    Second, a plan is an eligible cash balance plan only if the plan 
provides that, at the same time that the participant accrues an 
addition to the hypothetical account, the participant accrues the right 
to future interest credits (without regard to future service) at a 
reasonable rate of interest that does not decrease because of the 
attainment of any age. Because the rate of benefit accrual under an 
eligible cash balance plan is generally determined by reference to 
additions to the hypothetical account disregarding interest credits, 
these interest credits must be provided for all future periods, 
including after normal retirement age, and an eligible cash balance 
plan cannot treat interest credits after normal retirement age as 
actuarial increases that are offset against the otherwise required 
accrual. A participant is not treated as having the right to future 
interest credits if the plan provides that additions to the 
hypothetical account under the plan are reduced for the actuarial 
equivalent of any in-service distributions because, as discussed above, 
such a reduction is the equivalent of an offset for an actuarial 
adjustment. Any additional interest credits under an eligible cash 
balance plan that do not accrue at the same time as the corresponding 
addition to the hypothetical account are included in determining the 
rate of benefit accrual in the year in which those additional interest 
credits are accrued.
    In addition, a plan that is converted to a cash balance plan is 
subject to certain requirements, discussed below.
    There are other hybrid designs that would satisfy some, but not 
all, of the requirements for an eligible cash balance plan. For 
example, there are some designs under which the normal form of benefit 
is the immediate payment of an account balance, but which do not 
provide for reasonable interest credits on that account balance. Under 
these proposed regulations, the rate of benefit accrual under these 
plans would be determined under the general rules applicable to 
traditional defined benefit plans.

Plans With Mixed Formulas

    Some defined benefit plans have both a traditional defined benefit 
formula and a cash balance formula, and these proposed regulations 
provide rules for plans with such a mixed formula. If a portion of the 
plan formula under a defined benefit plan would satisfy the 
requirements for an eligible cash balance plan if that were the only 
formula under the plan, then that portion of the plan formula is 
referred to as an eligible cash balance formula in these proposed 
regulations. Any other portion of the plan formula is referred to as a 
traditional defined benefit formula.
    The portion that is an eligible cash balance formula (or formulas 
if the plan has multiple eligible cash balance formulas) would be 
permitted to be tested using the rules for eligible cash balance plans, 
with the remainder of the plan tested under the rules for a traditional 
defined benefit formula (regardless of how many traditional defined 
benefit formulas the plan may have). This rule applies only if each 
such separately-treated plan would satisfy the maximum age conditions 
in section 410(a)(2) and the eligible cash balance and traditional 
defined benefit formulas interact in one of three specific ways for 
current and future accruals. The three ways are: (1) The plan provides 
that the participant's benefit is based on the sum of accruals under 
two different formulas (either sequentially where the cash balance 
formula goes into effect during the year or simultaneously where the 
plan provides for a participant to accrue benefits under both a 
traditional defined benefit formula and a cash balance formula at the 
same time with the participant to be entitled to the sum of the two); 
(2) the

[[Page 76127]]

plan provides a benefit for a participant equal to the greater of the 
benefit determined under two or more formulas, one of which is an 
eligible cash balance formula and the other of which is not; or (3) 
under the plan, some participants are eligible for accruals only under 
an eligible cash balance formula and the remaining participants are 
eligible for accruals only under a traditional defined benefit formula 
or the other 2 specific methods. If the eligible cash balance formula 
and the traditional defined benefit formula interact in any other 
manner, the plan is not treated as an eligible cash balance plan for 
any portion of the plan formula.

Amendments Establishing an Eligible Cash Balance Formula

    In many cases, a plan sponsor amends a traditional defined benefit 
plan to make it a cash balance plan. This process is often referred to 
as a ``conversion.'' The terms of cash balance conversions vary, but 
often provide an opening hypothetical account balance for each 
participant. In some cases, the opening balance may be based on the 
participant's prior accrued benefit under the traditional defined 
benefit plan or on the participant's prior service with the plan 
sponsor. In other cases, the opening balance is set at zero, and each 
participant is entitled to the sum of the participant's accrued benefit 
under the traditional defined benefit plan and the cash balance 
account.
    Some commentators have questioned whether certain cash balance 
conversions that provide for the establishment of an opening account 
balance satisfy section 411(b)(1)(H). These commentators have noted 
that, under section 411(d)(6), the participant can never be denied 
payment of the prior accrued benefit. They note that, if the opening 
account balance and subsequent interest credits through normal 
retirement age generate benefits that are not at least as large as the 
prior accrued benefit, the participant will not accrue net benefits for 
some period after the conversion. This period, often referred to as a 
``wear-away'' period, will continue until the participant's account 
balance generates benefits that exceed the prior accrued benefit. These 
commentators argue that the wear-away period inherently produces a 
lower rate of accrual for older participants.\2\
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    \2\ This type of wear-away differs from a wear-away that results 
from the fact that certain optional forms of benefit may be 
subsidized under the traditional defined benefit plan but not under 
the cash balance plan or that other actuarial factors may produce a 
larger benefit amount prior to normal retirement age under the 
traditional defined benefit plan but not under the cash balance 
plan. This may occur even though the actuarial value of the accrued 
benefit under the traditional defined benefit plan is included in 
the participant's opening account balance. Although section 
411(d)(6) protects optional forms of benefit under the pre-amendment 
formula, section 411(b)(1)(H)(iv) specifically provides that a 
reduction because of the attainment of any age does not occur as a 
result of the subsidized portion of an early retirement benefit.
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    Other commentators have argued that a wear-away period does not 
violate section 411(b)(1)(H) because the length of the wear-away period 
is determined not by the participant's age but by the size of the 
participant's prior accrued benefit under the traditional defined 
benefit plan. Additionally, commentators have pointed out that, because 
the prior accrued benefit is calculated using an interest rate 
determined at the time of the amendment but the interest credits under 
the cash balance plan often fluctuate under a variable index, a 
participant may move in or out of a wear-away period after a cash 
balance conversion solely because of future changes in interest rates.
    Under these proposed regulations, the mere conversion of a 
traditional defined benefit plan to a cash balance plan would not cause 
the plan to fail section 411(b)(1)(H). However, a converted plan that 
otherwise would be treated as an eligible cash balance plan must 
satisfy one of two alternative rules. Under the first alternative, the 
converted plan must determine each participant's benefit as not less 
than the sum of the participant's benefits accrued under the 
traditional defined benefit plan and the cash balance account. A plan 
satisfying this first alternative will not have a wear-away period for 
benefits accrued under the traditional defined benefit plan.
    Under the second alternative, the converted plan must establish 
each participant's opening account balance as an amount not less than 
the actuarial present value of the participant's prior accrued benefit, 
using reasonable actuarial assumptions. For this purpose, an interest 
rate assumption is not treated as reasonable if it increases, directly 
or indirectly, because of the participant's attainment of any age 
(which would result in lower present values for older participants). 
This alternative does not preclude the possibility of a wear-away 
period for some or all the participants in the plan, but it ensures 
that the opening account balance of each participant reflects the 
actuarial value of the prior accrued benefit, determined by using 
reasonable assumptions. Any excess in the opening account balance over 
the present value of a participant's previously accrued benefit is 
included as part of the participant's rate of benefit accrual for the 
plan year, and thus is tested under section 411(b)(1)(H) along with 
other pay credits for the year. Effectively, this alternative provides 
that a converted plan will not fail to satisfy section 411(b)(1)(H) if 
the benefit formula before the conversion satisfies section 
411(b)(1)(H), the opening account balance is based on actuarial 
assumptions that are reasonable (and an interest rate that does not 
increase for older participants), and the benefit formula after the 
conversion--including any excess in the opening account balance over 
the present value of a participant's previously accrued benefit--
satisfies section 411(b)(1)(H).

Use of Compensation in Calculating Rate of Benefit Accrual

    A participant's rate of benefit accrual for a plan year can be 
determined as a dollar amount. Alternatively, if a plan's formula bases 
a participant's accruals on current compensation, then a participant's 
rate of benefit accrual can be determined as a percentage of the 
participant's current compensation. Likewise, if a plan's formula bases 
a participant's accruals on average compensation, then a participant's 
rate of benefit accrual can be determined as a percentage of that 
measure of the participant's average compensation. In order for the 
participant's rate of benefit accrual to be determined as a percentage 
of the participant's current or average compensation, compensation must 
be determined without regard to attainment of any age. The alternative 
of using current or average compensation simplifies testing, without 
changing the result.

Defined Contribution Plans

    A defined contribution plan fails to comply with section 411(b)(2) 
if, either directly or indirectly, because of a participant's 
attainment of any age, the allocation of employer contributions or 
forfeitures to the account of the participant is discontinued or the 
rate at which the allocation of employer contributions or forfeitures 
is made to the account of the participant is decreased. For determining 
if there is a cessation or reduction in allocations because of 
attainment of any age, these proposed regulations would adopt a 
substantive standard that is similar to the standard that applies under 
these proposed regulations for defined benefit plans and to the 
standard that was proposed in the 1988 proposed regulations.
    A reduction in the rate of allocation is directly because of a 
participant's

[[Page 76128]]

attainment of any age for a plan year if under the terms of the plan, 
any participant's rate of allocation during the plan year would be 
higher if the participant were younger.
    A reduction in the rate of allocation is indirectly because of a 
participant's attainment of any age if any participant's rate of 
allocation during the plan year would be higher if the participant were 
to have any characteristic which is a proxy for being younger, based on 
applicable facts and circumstances. A cessation or reduction in 
allocations is not indirectly because of the attainment of any age 
solely because of a positive correlation between attainment of any age 
and a reduction in the allocations or rate of allocation. Thus, a 
defined contribution plan does not provide for cessation or reduction 
in allocations solely because the plan limits the total amount of 
employer contributions and forfeitures that may be allocated to a 
participant's account or limits the total number of years of credited 
service that may be taken into account for purposes of determining 
allocations for the plan year.
    Target benefit plans (defined contribution plans under which 
contributions are determined by reference to a targeted benefit 
described in the plan) are subject to section 411(b)(2) which applies 
to defined contribution plans. Under these proposed regulations, a 
target benefit plan would satisfy section 411(b)(2) only if the defined 
benefit formula used to determine allocations would satisfy section 
411(b)(1)(H) without regard to section 411(b)(1)(H)(iii) relating to 
adjustments for distributions and actuarial increases. A target benefit 
plan would not fail to satisfy section 411(b)(2) with respect to 
allocations after normal retirement age merely because the allocation 
for a plan year is reduced to reflect an older participant's shorter 
longevity using a reasonable actuarial assumption regarding mortality. 
These proposed regulations also would authorize the Commissioner to 
develop additional guidance with respect to the application of section 
411(b)(2) to target benefit plans.

Optional Forms of Benefit and Other Rights and Features

    These proposed regulations generally retain the requirements 
applicable to optional forms of benefit that were in the 1988 proposed 
regulations. Under these rules, with the exceptions noted below, a 
participant's rate of benefit accrual under a defined benefit plan and 
a participant's allocations under a defined contribution plan are 
considered to be reduced because of the participant's attainment of any 
age if optional forms of benefits, ancillary benefits, or other rights 
or features otherwise provided to a participant under the plan are not 
provided, or are provided on a less favorable basis, with respect to 
benefits or allocations attributable to credited service because of the 
participant's attainment of any age. In addition, a plan would not fail 
to satisfy section 411(b)(1)(H) merely due to variance because of the 
attainment of any age with respect to the subsidized portion of an 
early retirement benefit (whether provided on a temporary or permanent 
basis), a qualified disability benefit (as defined in Sec.  1.411(a)-
7(c)(3)), or a social security supplement (as defined in Sec.  
1.411(a)-7(c)(4)(ii)).\3\ These proposed regulations also clarify that 
a plan would not fail to satisfy section 411(b)(1)(H) merely because 
the plan makes actuarial adjustments using a reasonable assumption 
regarding mortality to calculate optional forms of benefit or to 
calculate the cost of providing a qualified preretirement survivor 
annuity, as defined in section 417(c).
---------------------------------------------------------------------------

    \3\ The ADEA also includes special rules relating to certain of 
these benefits. See 29 U.S.C. 623(f)(2) and (l).
---------------------------------------------------------------------------

Coordination With Other Provisions

    Sections 411(b)(1)(H)(v) and 411(b)(2)(C) both provide for the 
coordination of the requirements of each section with other applicable 
qualification requirements. Under these proposed regulations, a plan 
will not fail to satisfy section 411(b)(1)(H) or 411(b)(2) because of a 
limit on accruals or allocations necessary to comply with the 
limitations of section 415 or to prevent discrimination in favor of 
highly compensated employees within the meaning of section 401(a)(4). 
Additionally, these proposed regulations would authorize the 
Commissioner to provide additional guidance relating to prohibited 
discrimination in favor of highly compensated employees. These proposed 
regulations would also provide that no benefit accrual or allocation is 
required under section 411(b)(1)(H) or 411(b)(2) for a plan year to the 
extent such allocation or accrual would cause the plan to fail to 
satisfy the requirements of section 401(l) (relating to permitted 
disparity) for the plan year, such as if a younger person has a smaller 
permitted disparity due to having a later social security retirement 
age. Further, under these proposed regulations, a plan would not fail 
to satisfy section 411(b)(1)(H) or 411(b)(2) for a plan year merely 
because of the distribution rights provided under section 411(a)(11), 
including deferral rights for participants whose benefits are 
immediately distributable within the meaning of Sec.  1.411(a)-11(c).

Application of Section 401(a)(4) to New Comparability Cash Balance 
Plans

    These proposed regulations also include a proposed amendment to the 
regulations under section 401(a)(4). This amendment would provide that 
a defined benefit plan that determines compliance with section 
411(b)(1)(H) by using the special definition of rate of accrual for an 
eligible cash balance plan is not permitted to demonstrate that the 
benefits provided under the arrangement do not discriminate in favor of 
highly compensated employees by using an inconsistent method (i.e., an 
accrual rate based on the normal retirement benefit), unless the plan 
complies with a modified version of the provisions of the regulations 
under section 401(a)(4) related to cross-testing by a defined 
contribution plan. Under these requirements, an eligible cash balance 
plan under which the additions to the hypothetical account are neither 
broadly available nor reflect a gradual age and service schedule, as 
defined under existing regulations relating to cross-tested defined 
contribution plans, may test on the basis of benefits only if the plan 
satisfies a minimum allocation gateway.
    The minimum allocation gateway generally requires that the 
hypothetical allocation rate for each nonhighly compensated employee be 
at least one-third of the hypothetical allocation rate for the highly 
compensated employee with the highest hypothetical allocation rate. 
However, the minimum allocation gateway is also satisfied if the 
hypothetical allocation rate for each nonhighly compensated employee is 
no less than 5%, provided the highest hypothetical allocation rate for 
any highly compensated employee is not in excess of 25%. If the highest 
hypothetical allocation rate is above 25%, the 5% factor is increased, 
up to as much as 7.5%. This minimum allocation gateway, which is 
normally applicable to DB/DC plans (i.e., defined benefit plans and 
defined contribution plans that are combined for nondiscrimination 
testing), is used for purposes of eligible cash balance plans, rather 
than the minimum allocation gateway normally applicable to defined 
contribution plans, because hypothetical allocations under a cash 
balance plan can be significantly greater than allocations under a 
defined contribution plan.

[[Page 76129]]

    If the eligible cash balance plan is aggregated with other plans 
that are not cash balance plans, the regulations would treat the cash 
balance plan as a defined contribution plan for purposes of applying 
the rules applicable to aggregated plans. For this purpose, a plan with 
both an eligible cash balance formula and a traditional defined benefit 
formula is treated as an aggregation of two plans.

Effective Date of Sections 411(b)(1)(H) and 411(b)(2)

    The 1988 proposed regulations included provisions related to the 
effective date of sections 411(b)(1)(H) and 411(b)(2). The effective 
date provisions in these proposed regulations differ from the 1988 
proposed regulations (and Notice 88-126) in order to reflect the 
decision in Lockheed Corp. v. Spink, 517 U.S. 882 (1996).
    In general, sections 411(b)(1)(H) and 411(b)(2) are effective for 
plan years beginning on or after January 1, 1988 with respect to a 
participant who is credited with at least one hour of service in a plan 
year beginning on or after January 1, 1988. In the case of a 
participant who is credited with at least one hour of service in a plan 
year beginning on or after January 1, 1988, section 411(b)(1)(H) is 
effective with respect to all years of service completed by the 
participant, except that, in accordance with Lockheed Corp. v. Spink, 
plan years beginning before January 1, 1988 are excluded. For purposes 
of these proposed regulations, an hour of service includes any hour 
required to be recognized under the plan by section 410 or 411.
    Similarly, section 411(b)(2) does not apply with respect to 
allocations of employer contributions or forfeitures to the accounts of 
participants under a defined contribution plan for a plan year 
beginning before January 1, 1988.
    These proposed regulations would also provide a special effective 
date for a plan maintained pursuant to one or more collective 
bargaining agreements between employee representatives and one or more 
employers, ratified before March 1, 1986. For such plans, sections 
411(b)(1)(H) and 411(b)(2) are effective for benefits provided under, 
and employees covered by, any such agreement with respect to plan years 
beginning on or after the later of (i) January 1, 1988 or (ii) the 
earlier of January 1, 1990 or the date on which the last of such 
collective bargaining agreements terminates (determined without regard 
to any extension of any such agreement occurring on or after March 1, 
1986). The otherwise generally applicable effective date rules would 
apply to a collectively bargained plan, as of the effective date of 
section 411(b)(1)(H) or 411(b)(2) applicable to such plan.

Proposed Effective Date

    The regulations are proposed to be applicable to plan years 
beginning after the date final regulations are published in the Federal 
Register. These proposed regulations cannot be relied upon until 
adopted in final form. However, until these regulations are adopted in 
final form, the reliance provided on the 1988 proposed regulations 
continues to be available. In addition, the proposed regulations at 
Sec. Sec.  1.410(a)-4A, 1.411(a)-3, 1.411(b)-3 and 1.411(c)-1(f)(2) 
(relating to maximum age for participation, vesting, normal retirement 
age, and actuarial adjustments after normal retirement age), which were 
published in the same notice of proposed rulemaking as the 1988 
proposed regulation and which are not republished here, are also 
expected to be finalized for future plan years.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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, and because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, 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 written comments (preferably a signed 
original and eight (8) copies) that are submitted timely to the IRS. 
Alternatively, taxpayers may submit comments electronically to the IRS 
Internet site at www.irs.gov/regs. All comments will be available for 
public inspection and copying. The IRS and Treasury request comments on 
the clarity of the proposed rules and how they may be made easier to 
understand or to implement. Comments are also requested on the 
following issues:
    [sbull] Because these proposed regulations are based on a year-by-
year determination of the rate of benefit accrual that does not 
accommodate averaging over a period of earlier years, one result would 
be that, if a higher accrual is provided for older workers in one year, 
the rates cannot be leveled out in subsequent periods in a manner that 
takes the earlier higher accruals into account. This might occur for a 
change from a fractional accrual method to a unit credit method for all 
years of service. Comments are requested on whether rates should be 
permitted to be averaged and, if so, under what conditions.
    [sbull] In the case of a conversion of a traditional defined 
benefit plan to a cash balance plan, these proposed regulations 
generally provide for any excess of a participant's opening 
hypothetical account balance over the present value of the 
participant's prior accrued benefit to be tested for age 
discrimination. Comments are requested on whether any other portion of 
the hypothetical account balance should be disregarded in applying 
section 411(b)(1)(H) under other circumstances, for example, if the 
opening account balance is a reconstructed cash balance account (i.e., 
the account balance that each participant would have had at the time of 
the conversion if the cash balance formula had been in effect for the 
participant's entire period of service). In addition, comments are 
requested on the effect of these rules on employers, if any, that may 
have used the extended wear-away transition rule of Sec.  1.401(a)(4)-
13(f)(2)(i).
    [sbull] Because these proposed regulations provide for the rate of 
benefit accrual under section 411(b)(1)(H) to be based on the annual 
increase in the accrued benefit under the plan, the rate of benefit 
accrual under a floor offset plan, as described in Rev. Rul. 76-259 
(1976-2 CB 111), would be determined after taking into account the 
amount of the offset. Comments are requested on whether the rate of 
benefit accrual for a floor offset plan should be tested before 
application of the offset and, if so, under what conditions. For 
example, should the rate of benefit accrual for a floor offset plan be 
tested before application of the offset if the plan provides an 
actuarial increase after normal retirement age or if the annuity 
purchase rate used to calculate the offset is not less favorable after 
normal retirement age than the annuity purchase rate applicable at 
normal retirement age.
    A public hearing has been scheduled for April 10, 2003, at 10 a.m. 
in room 4718 of the Internal Revenue Building, 1111 Constitution Avenue 
NW., Washington, DC. All visitors must present photo identification to 
enter the

[[Page 76130]]

building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts at the Constitution Avenue entrance. For information 
about having your name placed on the building access list to attend the 
hearing, see the FOR FURTHER INFORMATION CONTACT section of this 
preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by 
March 13, 2003. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Linda S. F. 
Marshall and R. Lisa Mojiri-Azad of the Office of the Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However, 
other personnel from the IRS and Treasury participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR Part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
the following citation in numerical order:

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

    Section 1.411(b)-2 is also issued under 26 U.S.C. 411(b)(1)(H) and 
411(b)(2). * * *
    Par. 2. Section 1.401(a)(4)-3 is revised as follows:
    1. A new sentence is added before the last sentence of paragraph 
(a)(1).
    2. Paragraph (g) is added.
    The additions and revisions read as follows:


Sec.  1.401(a)(4)-3  Nondiscrimination in amount of employer-provided 
benefits under a defined benefit plan.

    (a) Introduction--(1) Overview. * * * Paragraph (g) of this section 
provides additional rules that apply to a plan that satisfies the 
requirements of section 411(b)(1)(H) and Sec.  1.411(b)-2 using the 
rate of benefit accrual determined pursuant to the rules of Sec.  
1.411(b)-2(b)(2)(iii) for eligible cash balance plans. * * *
* * * * *
    (g) Additional rules for eligible cash balance plans--(1) In 
general. Notwithstanding the provisions of paragraphs (a) through (f) 
of this section, a plan that satisfies the requirements of section 
411(b)(1)(H) and Sec.  1.411(b)-2 using the rate of benefit accrual 
under the plan or a portion of the plan determined pursuant to the 
rules of Sec.  1.411(b)-2(b)(2)(iii) for eligible cash balance plans is 
permitted to satisfy the requirements of section 401(a)(4) by 
satisfying the requirements of this section (relating to 
nondiscrimination in amount of employer-provided benefits) only if the 
plan satisfies paragraph (g)(2) or (3) of this section, as applicable.
    (2) Eligible cash balance plans not aggregated with another defined 
benefit plan. A plan described in paragraph (g)(1) of this section 
under which benefits are determined solely in accordance with an 
eligible cash balance formula (as defined in Sec.  1.411(b)-
2(b)(2)(iii)(C)(1)) satisfies this paragraph (g)(2) only if the plan 
meets either of the following conditions--
    (i) The plan would satisfy the requirements of Sec.  1.401(a)(4)-
8(b)(1)(iii) or (iv) by treating the additions to the hypothetical 
account that are included in the rate of benefit accrual under the 
rules of Sec.  1.411(b)-2(b)(2)(iii)(A) as allocations under a defined 
contribution plan; or
    (ii) The plan would satisfy the requirements of Sec.  1.401(a)(4)-
9(b)(2)(v)(D) by treating the additions to the hypothetical account 
that are included in the rate of benefit accrual under the rules of 
Sec.  1.411(b)-2(b)(2)(iii)(A) as allocations under a defined 
contribution plan for purposes of determining equivalent normal 
allocation rates (within the meaning of Sec.  1.401(a)(4)-9(b)(2)(ii)).
    (3) Eligible cash balance plans aggregated with another defined 
benefit plan. In the case of a plan described in paragraph (g)(1) of 
this section that is not described in paragraph (g)(2) of this section 
(for example, an eligible cash balance plan that is aggregated with 
another defined benefit plan that is not an eligible cash balance plan 
or a plan that uses an eligible cash balance formula with a traditional 
defined benefit plan formula as described in Sec.  1.411(b)-
2(b)(2)(iii)(C)), the plan would satisfy the requirements of Sec.  
1.401(a)(4)-9(b)(2)(v)(D) by treating the additions to the hypothetical 
account that are included in the rate of benefit accrual under the 
rules of Sec.  1.411(b)-2(b)(2)(iii)(A) as allocations under a defined 
contribution plan.
    Par. 3. Section 1.401(a)(4)-9 is amended by:
    1. Amending paragraph (b)(2)(v) by removing the language ``For plan 
years'' and adding in its place ``Except as provided in paragraph 
(b)(2)(vi) of this section, for plan years''.
    2. Adding paragraph (b)(2)(vi).
    The addition reads as follows:


Sec.  1.401(a)(4)-9  Plan aggregation and restructuring.

* * * * *
    (b) * * *
    (2) * * *
    (vi) Special rules for cash balance plans aggregated with defined 
contribution plans--(A) In general. In the case of a DB/DC plan where 
the defined benefit plan (or any portion thereof) satisfies the 
requirements of section 411(b)(1)(H) using the rate of benefit accrual 
determined pursuant to the rules of Sec.  1.411(b)-2(b)(iii) for 
eligible cash balance plans, the DB/DC plan is permitted to demonstrate 
satisfaction of the nondiscrimination in amount requirement of Sec.  
1.401(a)(4)-1(b)(2) on the basis of benefits only if--
    (1) The plan would satisfy the requirements of paragraph (b)(2)(v) 
of this section if the additions to the hypothetical account that are 
included in the rate of benefit accrual under the rules of Sec.  
1.411(b)-2(b)(2)(iii)(A) are treated as allocations under a defined 
contribution plan; or
    (2) The plan is described in paragraph (b)(2)(vi)(B) of this 
section (regarding eligible cash balance plans aggregated only with 
defined contribution plans).
    (B) Special rule for cash balance plans aggregated with defined 
contribution plans that are not aggregated with other defined benefit 
plans. A DB/DC plan is described in this paragraph (b)(2)(vi)(B) if the 
DB/DC plan satisfies the following conditions--
    (1) All defined benefit plans that are included in the DB/DC plan 
satisfy the requirements of section 411(b)(1)(H) using the rate of 
benefit accrual determined pursuant to the rules of Sec.  1.411(b)-
2(b)(iii) for eligible cash balance plans; and
    (2) The DB/DC plan would satisfy the requirements of Sec.  
1.401(a)(4)-8(b)(1)(i)(B)(1) or (2) (regarding broadly available 
allocation rates or certain age-based allocation rates) if the 
additions to the hypothetical account that are included in the rate of 
benefit accrual under the rules of Sec.  1.411(b)-2(b)(2)(iii)(A) are 
treated as allocations under a defined contribution plan.

[[Page 76131]]

    Par. 4. Proposed Sec.  1.411(b)-2 published at 53 FR 11876 on April 
11, 1988, is revised to read as follows.


Sec.  1.411(b)-2  Reductions of accruals or allocations because of 
attainment of any age.

    (a) In general--(1) Overview. Section 411(b)(1)(H) provides that a 
defined benefit plan does not satisfy the minimum vesting standards of 
section 411(a) if, under the plan, benefit accruals on behalf of a 
participant are ceased or the rate of benefit accrual on behalf of a 
participant is reduced because of the participant's attainment of any 
age. Section 411(b)(2) provides that a defined contribution plan does 
not satisfy the minimum vesting standards of section 411(a) if, under 
the plan, allocations to a participant's account are ceased or the rate 
of allocation to a participant's account is reduced because of the 
participant's attainment of any age. Paragraph (b) of this section 
provides general rules for defined benefit plans. Paragraph (c) of this 
section provides general rules for defined contribution plans. 
Paragraph (d) of this section provides rules applying this section to 
optional forms of benefit, ancillary benefits, and other rights or 
features under defined benefit and defined contribution plans. 
Paragraph (e) of this section provides rules coordinating the 
requirements of this section with certain other qualification 
requirements. Paragraph (f) of this section contains effective date 
provisions.
    (2) Attainment of any age. For purposes of sections 411(b)(1)(H), 
411(b)(2), and this section, a participant's attainment of any age 
means the participant's growing older. Thus, the rules of sections 
411(b)(1)(H), 411(b)(2), and this section apply regardless of whether a 
participant is younger than, at, or older than normal retirement age.
    (b) Defined benefit plans--(1) In general--(i) Requirement. A 
defined benefit plan does not satisfy the requirements of section 
411(b)(1)(H) if a participant's rate of benefit accrual is reduced, 
either directly or indirectly, because of the participant's attainment 
of any age. A reduction in a participant's rate of benefit accrual 
includes any discontinuance in the participant's accrual of benefits or 
cessation of participation in the plan.
    (ii) Definition of normal form. For purposes of this paragraph (b), 
the normal form of benefit (also referred to as the normal form) means 
the form under which payments to the participant under the plan are 
expressed under the plan formula, prior to adjustment for form of 
benefit.
    (2) Rate of benefit accrual--(i) Rate of benefit accrual before 
normal retirement age. For purposes of this paragraph (b), except as 
provided in paragraph (b)(2)(iii) of this section, a participant's rate 
of benefit accrual for any plan year that ends before the participant 
attains normal retirement age is the excess (if any) of--
    (A) The participant's accrued normal retirement benefit at the end 
of the plan year; over
    (B) The participant's accrued normal retirement benefit at the end 
of the preceding plan year.
    (ii) Rate of benefit accrual after normal retirement age. In the 
case of a plan for which the rate of benefit accrual before normal 
retirement age is determined under paragraph (b)(2)(i) of this section, 
except as provided in paragraph (b)(4)(iii)(C) of this section, a 
participant's rate of benefit accrual for the plan year in which the 
participant attains normal retirement age or any later plan year 
(taking into account the provisions of section 411(b)(1)(H)(iii)(II)) 
is the excess (if any) of--
    (A) The annual benefit to which the participant is entitled at the 
end of the plan year, determined as if payment commences at the end of 
the plan year in the normal form (or the straight life annuity that is 
actuarially equivalent to the normal form if the normal form is not an 
annual benefit that does not decrease during the lifetime of the 
participant); over
    (B) The annual benefit to which the participant was entitled at the 
end of the preceding plan year, determined as if payment commences at 
the later of normal retirement age or the end of the preceding plan 
year in the normal form (or the straight life annuity that is 
actuarially equivalent to the normal form if the normal form is not an 
annual benefit that does not decrease during the lifetime of the 
participant).
    (iii) Rate of benefit accrual for eligible cash balance plans--(A) 
General rule. For purposes of this paragraph (b), in the case of an 
eligible cash balance plan, a participant's rate of benefit accrual for 
a plan year is permitted to be determined as the addition to the 
participant's hypothetical account for the plan year, except that 
interest credits added to the hypothetical account for the plan year 
are disregarded to the extent the participant had accrued the right to 
those interest credits as of the close of the preceding plan year as 
described in paragraph (b)(2)(iii)(B)(2) of this section.
    (B) Eligible cash balance plans. For purposes of this section, a 
defined benefit plan is an eligible cash balance plan for a plan year 
if it satisfies each of the following requirements for current accruals 
under the plan for that plan year--
    (1) Plan design. The normal form of benefit is an immediate payment 
of the balance in a hypothetical account (without regard to whether 
such an immediate payment is actually available under the plan).
    (2) Right to future interest. With respect to a participant's 
hypothetical account balance, the participant has accrued the right to 
annual (or more frequent) interest credits to be added to the 
hypothetical account for all future periods without regard to future 
service at a reasonable rate of interest that is not reduced, either 
directly or indirectly, because of the participant's attainment of any 
age. A plan is treated as not satisfying the requirement of this 
paragraph (b)(2)(iii)(B)(2) if it provides for any adjustment for 
benefit distributions described in paragraph (b)(4) of this section.
    (3) Plan amendments adopting cash balance formula. In the case of a 
plan amendment that has been amended to adopt a cash balance formula 
(as described in paragraphs (b)(2)(iii)(B)(1) and (2) of this section) 
for a participant, the plan as amended satisfies the requirements of 
either paragraph (b)(2)(iii)(D) or (E) of this section.
    (C) Plans with mixed benefit formulas--(1) Eligible cash balance 
formula. If a portion of the plan formula under a defined benefit plan 
would satisfy the requirements to be an eligible cash balance plan if 
it were the only formula under the plan, then, for purposes of this 
section, such portion of the plan formula is referred to as an eligible 
cash balance formula and the other portion of the plan formula is 
referred to as a traditional defined benefit formula. If the eligible 
cash balance formula and the traditional defined benefit formula 
interact in a manner described in paragraph (b)(2)(iii)(C)(2), (3), or 
(4) of this section for current and future accruals under the plan, 
then, for purposes of determining whether the plan satisfies section 
411(b)(1)(H), the plan is permitted to be treated as two separate 
plans, one of which is an eligible cash balance plan and the other of 
which is not, but only if each such plan would satisfy section 
410(a)(2). Thus, such a plan satisfies the requirements of section 
411(b)(1)(H) if the eligible cash balance formula satisfies the 
requirements of paragraph (b)(1) of this section with the participant's 
rate of

[[Page 76132]]

benefit accrual determined under paragraph (b)(2)(iii)(A) of this 
section and the portion of the plan's formula that is a traditional 
defined benefit formula satisfies the requirements of paragraph (b)(1) 
of this section with the participant's rate of benefit accrual 
determined under paragraph (b)(2)(i) or (ii) of this section, as 
applicable. If the eligible cash balance formula and the traditional 
defined benefit formula interact in a manner other than as set forth in 
paragraphs (b)(2)(iii)(C)(2), (3), or (4) of this section, the plan is 
not treated as an eligible cash balance plan for any portion of the 
plan formula.
    (2) Plans with additive formulas. A plan is described in this 
paragraph (b)(2)(iii)(C)(2) if the participant's benefit is based on 
the sum of accruals under two different formulas, one of which is an 
eligible cash balance formula and the other of which is not.
    (3) Plans with greater of formulas. A plan is described in this 
paragraph (b)(2)(iii)(C)(3) if the plan provides a benefit for a 
participant equal to the greater of the benefit determined under two or 
more formulas under the plan for a plan year, one of which is an 
eligible cash balance formula and another of which is not.
    (4) Different formulas for different participants. A plan is 
described in this paragraph (b)(2)(iii)(C)(4) if some participants are 
eligible for accruals only under an eligible cash balance formula and 
the remaining participants are eligible for accruals only under a 
traditional defined benefit formula or a combination of a traditional 
defined benefit formula or eligible cash balance formula described in 
paragraphs (b)(2)(iii)(C)(2) and (3) of this section.
    (D) Plan amendment adopting eligible cash balance formula using a 
sum of formula. A plan satisfies this paragraph (b)(2)(iii)(D) only if 
for all periods after the amendment becomes effective the plan provides 
benefits that are not less than the sum of the benefits accrued as of 
the later of the date the amendment becomes effective or the date the 
amendment is adopted, plus the benefits provided by the participant's 
hypothetical account under the eligible cash balance formula.
    (E) Plan amendment adopting eligible cash balance formula using an 
opening account balance--(1) Calculation of opening account balance. A 
plan satisfies this paragraph (b)(2)(iii)(E) only if the balance in the 
participant's hypothetical account, determined immediately after the 
amendment becomes effective, is not less than the actuarial present 
value of the participant's accrued benefit payable in the normal form 
of benefit, determined as of the later of the date the amendment 
becomes effective or the date the amendment is adopted, with such 
present value determined using reasonable actuarial assumptions. For 
this purpose, the actuarial assumptions are not reasonable if they 
include an interest rate that increases, either directly or indirectly, 
because of a participant's attainment of any age. The actuarial 
assumptions do not fail to be reasonable merely because pre-retirement 
mortality is not taken into account.
    (2) Bifurcation for purposes of determining rate of benefit 
accrual. If a plan satisfies the requirements of paragraph 
(b)(2)(iii)(E)(1), only the portion of the participant's hypothetical 
account balance in excess of the actuarial present value of the 
participant's accrued benefit payable in the normal form of benefit is 
treated as an addition to the participant's hypothetical account 
balance for the plan year for purposes of determining the participant's 
rate of benefit accrual under paragraph (b)(2)(iii)(A) of this section.
    (3) Treatment of employees past normal retirement age. In addition, 
a plan does not satisfy this paragraph (b)(2)(iii)(E) if the opening 
balance for a participant who has attained normal retirement age is 
less than the balance that would apply if the participant were at his 
or her normal retirement age.
    (iv) Determination of rate of benefit accrual--(A) In general. A 
participant's rate of benefit accrual for a plan year can be determined 
as a dollar amount. Alternatively, if a plan's formula bases a 
participant's accruals on current compensation, then a participant's 
rate of benefit accrual can be determined as a percentage of the 
participant's current compensation. For example, for an accumulation 
plan (as defined in Sec.  1.401(a)(4)-12), the participant's rate of 
benefit accrual under paragraph (b)(2)(i) of this section can be 
determined as the excess of the accrued portion of the participant's 
normal retirement benefit at the end of the plan year over the accrued 
portion of the participant's normal retirement benefit at the end of 
the preceding plan year, divided by compensation taken into account 
under the plan for the plan year. Likewise, if a plan's formula bases a 
participant's accruals on average compensation, then a participant's 
rate of benefit accrual can be determined as a percentage of that 
measure of the participant's average compensation. For a plan that 
determines benefits as a percentage of average annual compensation (as 
defined in Sec.  1.401(a)(4)-3(e)(2)), the rate of benefit accrual 
under paragraph (b)(2)(i) of this section is determined as the excess 
of the accrued portion of the participant's normal retirement benefit 
at the end of the plan year divided by average annual compensation 
taken into account under the plan at the end of the plan year, over the 
accrued portion of the participant's normal retirement benefit at the 
end of the preceding plan year divided by average annual compensation 
taken into account under the plan at the end of such preceding plan 
year. A plan is permitted to determine the participant's rate of 
benefit accrual as a percentage of the participant's current or average 
compensation only if compensation under the plan is determined without 
regard to attainment of any age.
    (B) Benefits included in rate of benefit accrual. For purposes of 
determining a participant's rate of benefit accrual, only benefits that 
are included in a participant's accrued benefit are taken into account. 
Thus, for example, a participant's rate of benefit accrual does not 
take into account benefits such as the benefits described in paragraph 
(d)(3) of this section (relating to qualified disability benefits, 
social security supplements, and early retirement benefits).
    (v) Examples. The following examples illustrate the application of 
this paragraph (b)(2). In each of the examples, normal retirement age 
is 65. The examples are as follows:

    Example 1. Plan L is a defined benefit plan under which the 
normal form of benefit is a monthly straight life annuity commencing 
at normal retirement age (or the date of actual retirement, if 
later) equal to $30 times the participant's years of service. For 
purposes of this section, a participant's rate of benefit accrual 
for any plan year is $30.
    Example 2. (i) Plan M is a defined benefit plan under which the 
normal form of benefit is an annual straight life annuity commencing 
at normal retirement age (or the date of actual retirement, if 
later) equal to 1% of the average of a participant's highest 3 
consecutive years of compensation times the participant's years of 
service.
    (ii) For purposes of this section, a participant's rate of 
benefit accrual for any plan year can be expressed as a dollar 
amount. Alternatively, a participant's rate of benefit accrual for a 
plan year can be expressed as 1% of the participant's highest 3 
consecutive years of compensation (determined using the same rules 
applicable to determining compensation under the plan for purposes 
of computing the normal form of benefit), provided that the 
definition of compensation used for this purpose is determined 
without regard to the attainment of any age. A participant's rate of 
benefit accrual cannot be determined as a percentage of any other 
measure of compensation or average compensation.
    (iii) If Plan M were to provide that compensation earned after 
the attainment of

[[Page 76133]]

age 65 is not taken into account in determining average compensation 
or were otherwise to determine compensation in a manner that depends 
on a participant's age, then, for purposes of this section, a 
participant's rate of benefit accrual would have to be expressed as 
a dollar amount, and could not be expressed as a percentage of any 
measure of compensation or average compensation.
    Example 3. (i) Plan N is a defined benefit plan under which the 
normal form of benefit is an immediate payment of the balance in a 
participant's hypothetical account. A compensation credit equal to 
6% of each participant's wages for the year is added to the 
hypothetical account of a participant who is an employee. At the end 
of each plan year, the hypothetical account is credited with 
interest based on the applicable interest rate under section 417(e), 
as provided under the plan. All participants accrue the right to 
receive interest credits on their hypothetical account in the future 
regardless of performance of services in the future, including after 
normal retirement age.
    (ii) Under paragraph (b)(2)(iii)(B) of this section, Plan N 
satisfies the requirements to be an eligible cash balance plan. 
Participant A's compensation for a plan year is $40,000. The 
compensation credit for Participant A allocated to A's hypothetical 
account for that plan year is $2,400. Because Plan N is an eligible 
cash balance plan, the rate of benefit accrual for Participant A is 
permitted to be determined as the addition to Participant A's 
hypothetical account for the plan year, disregarding interest 
credits. Therefore, Participant A's rate of benefit accrual is equal 
to $2,400, or 6% of wages.
    Example 4. (i) The facts are the same as in Example 3, except 
that the cash balance formula under Plan N is the result of a plan 
amendment. Under the plan, as amended, the benefits equal the sum 
of--
    (1) 1% of the average of the participant's highest 3 consecutive 
years of base salary times years of service, but disregarding 
service and salary after the effective date of the amendment, in a 
normal form of benefit that is a straight life annuity commencing at 
normal retirement age (or the date of actual retirement, if later); 
and
    (2) the participant's hypothetical account under the same cash 
balance formula in Example 3 that applies after the effective date 
of the amendment, in a normal form of benefit expressed as an 
immediate payment of the balance of the participant's hypothetical 
account.
    (ii) Under paragraph (b)(2)(iii)(B)(3) of this section, the plan 
is an eligible cash balance plan if the plan satisfies the 
requirements of paragraph (b)(2)(iii)(D) or (E) of this section. The 
plan's formula is described in paragraph (b)(2)(iii)(D) of this 
section. Accordingly, the portion of the plan formula that provides 
for compensation credits on a participant's hypothetical account is 
an eligible cash balance formula under paragraph (b)(2)(iii)(B) of 
this section. Therefore, a participant's rate of benefit accrual 
under the eligible cash balance formula is permitted to be 
determined as the addition to the participant's hypothetical account 
for the plan year, disregarding interest credits. Participant B's 
base salary for the year is $50,000. The compensation credit for 
Participant B credited to B's hypothetical account for the year is 
$3,000. The rate of benefit accrual under the eligible cash balance 
formula for Participant B is equal to $3,000, or 6% of base salary.
    Example 5. (i) The facts are the same as in Example 3, except 
that Plan N is a defined benefit plan that is converted to a cash 
balance plan by the adoption of a plan amendment, effective at the 
beginning of the next plan year, establishing an opening 
hypothetical account for each participant with an accrued benefit 
under the plan prior to conversion. Prior to conversion, Plan N 
provided a benefit equal to 1% of the average of a participant's 
highest 3 consecutive years of compensation times years of service. 
Effective as of the date of the conversion, hypothetical accounts 
are established equal to the present value of a participant's 
accrued benefit using section 417(e) interest and reasonable 
mortality assumptions (except no pre-retirement mortality is used). 
Under the cash balance portion of the formula, compensation and 
interest credits are made as described in Example 3.
    (ii) Under paragraph (b)(2)(iii)(B)(3) of this section, the plan 
is an eligible cash balance plan only if the plan satisfies the 
requirements of paragraph (b)(2)(iii)(D) or (E) of this section. The 
plan's formula is described in paragraph (b)(2)(iii)(E) of this 
section. Accordingly, the portion of the plan formula that provides 
for compensation credits on a participant's hypothetical account is 
an eligible cash balance formula. The rate of benefit accrual for a 
participant is therefore permitted to be determined as the addition 
to the participant's hypothetical account for the plan year, 
disregarding interest credits. In addition, under paragraph 
(b)(2)(iii)(E) of this section, because the opening hypothetical 
account balance is equal to the actuarial present value of the 
participant's accrued benefit, that balance is not treated as an 
addition for the plan year. The result would not be different if the 
opening accounts were established using another interest rate or 
another mortality assumption if the actuarial assumptions were 
reasonable. Participant C's wages for the year are $60,000. The 
compensation credit allocated to C's hypothetical account for the 
year is $3,600. The rate of accrual under the eligible cash balance 
formula for C is equal to $3,600, or 6% of compensation.
    Example 6. (i) The facts are the same as in Example 5, except 
that Plan N provides for only new participants and participants who 
are less than age 55 at the time of the conversion to be eligible 
for benefits under the cash balance formula. Accordingly, 
participants who are age 55 or older at the time of the conversion 
are only eligible for the benefit payable under the plan formula in 
effect before the conversion (1% of the participant's highest 3 
consecutive years of compensation times years of service) taking 
into account compensation and service after the conversion.
    (ii) Because Plan N provides benefits based on a mixed formula 
under paragraph (b)(2)(iii)(C) of this section, Plan N is permitted 
under paragraph (b)(2)(iii)(C)(1) of this section to be treated as 
two separate plans for purposes of section 411(b)(1)(H), one of 
which is an eligible cash balance plan and the other of which is 
not, but only if each plan would satisfy section 410(a)(2). No 
portion of Plan N can be treated as an eligible cash balance plan 
because the portion of Plan N that would otherwise be an eligible 
cash balance plan would fail to satisfy section 410(a)(2) as a 
result of having a maximum age of 55 for individuals who are 
participants at the time of the conversion.
    Example 7. (i) The facts are the same as in Example 5, except 
that Plan N provides for participants to receive the greater of the 
benefit payable under the cash balance formula or the benefit 
payable under the plan formula in effect before the conversion (1% 
of the participant's highest 3 consecutive years of compensation 
times years of service) taking into account compensation and service 
after the conversion.
    (ii) Because Plan N provides benefits based on the greater of 
the amount payable under two different formulas, under paragraph 
(b)(2)(iii)(C)(4) of this section, Plan N is tested for satisfaction 
of the requirements of section 411(b)(1)(H) and this paragraph (b) 
by separately testing the eligible cash balance formula using a rate 
of benefit accrual equal to compensation credits of 6% of 
compensation and the traditional defined benefit formulas using a 
rate of benefit accrual equal to 1% of highest 3 consecutive years 
of compensation.

    (3) Reduction that is directly or indirectly because of a 
participant's attainment of any age--(i) Reduction in rate of benefit 
accrual that is directly because of a participant's attainment of any 
age. A plan provides for a reduction in the rate of benefit accrual 
that is directly because of a participant's attainment of any age for 
any plan year if, under the terms of the plan, any participant's rate 
of benefit accrual for the plan year would be higher if the participant 
were younger. Thus, a plan fails to satisfy section 411(b)(1)(H) and 
this paragraph (b) if, under the terms of the plan, the rate of benefit 
accrual for any individual who is or could be a participant under the 
plan would be lower solely as a result of the individual being older.
    (ii) Reduction in rate of benefit accrual that is indirectly 
because of a participant's attainment of any age--(A) In general. A 
plan provides for a reduction in the rate of benefit accrual that is 
indirectly because of a participant's attainment of any age for any 
plan year if any participant's rate of benefit accrual for the plan 
year would be higher if the participant were to have a different 
characteristic which is a proxy for being younger, based on the all of 
relevant facts and circumstances. Thus, a plan fails to satisfy section 
411(b)(1)(H) and this paragraph (b) if the rate of benefit accrual for 
any individual who is or could be a participant under

[[Page 76134]]

the plan would be lower solely as a result of such individual having a 
different characteristic which is a proxy for being older, based on all 
of the relevant facts and circumstances.
    (B) Permissible limitations. A reduction in a participant's rate of 
benefit accrual is not indirectly because of the attainment of any age 
in violation of section 411(b)(1)(H) solely because of a positive 
correlation between attainment of any age and a reduction in the rate 
of benefit accrual. In addition, a defined benefit plan does not fail 
to satisfy section 411(b)(1)(H) and this paragraph (b) solely because, 
on a uniform and consistent basis without regard to a participant's 
age, the plan limits the amount of benefits a participant may accrue 
under the plan, limits the number of years of service or years of 
participation taken into account for purposes of determining the 
accrual of benefits under the plan (credited service), or provides for 
a reduced rate of accrual for credited service in excess of a fixed 
number of years. For this purpose, a limitation that is expressed as a 
percentage of compensation (whether averaged over a participant's total 
years of credited service for the employer or over a shorter period) is 
treated as a permissible limitation on the amount of benefits a 
participant may accrue under the plan.
    (iii) Examples. The provisions of this paragraph (b)(3) may be 
illustrated by the following examples. In each of the examples, except 
as specifically indicated, normal retirement age is 65, the plan 
contains no limitations on the maximum amount of benefits the plan will 
pay to any participant (other than the limitations imposed by section 
415), on the maximum number of years of credited service taken into 
account under the plan, or on the compensation used for purposes of 
determining the amount of any participant's accrued benefit (other than 
the limitation imposed by section 401(a)(17)), and the plan uses the 
following actuarial assumptions in determining actuarial equivalence: a 
7.5% rate of interest and the 83 GAM (male) mortality table. The 
examples are as follows:

    Example 1. (i) Plan M provides an accrued benefit of 1% of a 
participant's average annual compensation, multiplied by the 
participant's years of credited service under the plan payable in 
the normal form of a straight life annuity commencing at normal 
retirement age or the date of actual retirement if later. Plan M 
suspends payment of benefits for participants who work past normal 
retirement age, in accordance with section 411(a)(3)(B) and 29 CFR 
2530.203-3 of the regulations of the Department of Labor, and does 
not provide for an actuarial increase in computing the accrued 
benefit for participants who commence benefits after normal 
retirement age.
    (ii) The rate of benefit accrual for all participants in Plan M 
is 1% of average annual compensation. Thus, there could be no 
participant who would have a rate of benefit accrual that is greater 
than 1% if the individual were younger. Accordingly, there is no 
reduction in the rate of benefit accrual because of the individual's 
attainment of any age under this paragraph (b)(3) and Plan M 
satisfies the requirements of section 411(b)(1)(H) and this 
paragraph (b).
    Example 2. (i) Assume the same facts as in Example 1, except 
that Plan M provides that not more than 35 years of credited service 
are taken into account in determining a participant's accrued 
benefit under the plan. Participant A became a participant in the 
plan at age 25 and worked continuously in covered service under Plan 
M until A retires at age 70.
    (ii) The rate of benefit accrual under Plan M is 1% of average 
annual compensation for participants who have up to 35 years of 
credited service and zero for participants who have more than 35 
years of credited service. Because a reduction from a rate of 
benefit accrual from 1% of average annual compensation to zero is 
based on service, and would not be affected if any participant were 
younger (with the same number of years of service), Plan M does not 
provide for a reduction in the rate of benefit accrual that is 
directly because of an individual's attainment of any age as 
provided in paragraph (b)(3)(i) of this section. Under paragraph 
(b)(3)(ii) of this section, a uniform limit on the number of years 
of service taken into account for purposes of determining the 
accrual of benefits under the plan is not considered to be a 
reduction in the rate of benefit accrual that is indirectly because 
of a participant's attainment of any age.
    (iii) Upon A's retirement at age 70, A will have an accrued 
benefit under the plan's benefit formula of 35% of A's average 
annual compensation at age 70 (1% per year of credited service x 35 
years of credited service). Plan M will not fail to satisfy the 
requirements of section 411(b)(1)(H) and this paragraph (b) merely 
because the plan provides that the final 10 years of A's service 
under the plan are not taken into account in determining A's accrued 
benefit. The result would be the same if Plan M provided that no 
participant could accrue a benefit in excess of 35% of the 
participant's average annual compensation.
    Example 3. Assume the same facts as in Example 1, except that 
Plan M provides that a participant's years of service after 
attainment of social security retirement age are disregarded for 
purposes of determining a participant's accrued benefit under the 
plan. Because a participant who is covered under the plan after 
social security retirement age would have a higher rate of benefit 
accrual if he or she were younger (and had not attained social 
security retirement age), that participant's rate of benefit accrual 
is reduced directly because of the participant's attainment of any 
age under paragraph (b)(3)(i) of this section. Consequently, Plan M 
fails to satisfy the requirements of section 411(b)(1)(H) and this 
paragraph (b).
    Example 4. (i) Assume the same facts as in Example 1, except 
that Plan M provides that a participant's compensation after the 
attainment of age 62 is not taken into account in determining the 
participant's accrued benefit under the plan.
    (ii) Accordingly, the plan's measure of average compensation 
cannot be used in determining a participant's rate of benefit 
accrual because it does not apply to participants in a uniform 
manner that is independent of age. Because a participant who is or 
could be covered under Plan M after the attainment of age 62 whose 
compensation increases after age 62 would have a higher rate of 
benefit accrual if the participant were younger than age 62, that 
participant's rate of benefit accrual is reduced directly because of 
the participant's attainment of any age under paragraph (b)(3)(i) of 
this section. This reduction occurs whether or not there is any 
actual participant in Plan M who has attained age 62 or whose 
average annual compensation has increased after age 62. 
Consequently, the plan fails to satisfy the requirements of section 
411(b)(1)(H) and this paragraph (b).
    Example 5. (i) Assume the same facts as in Example 1, except 
that Plan M is amended to cease all benefit accruals for all 
participants and is subsequently terminated.
    (ii) After all benefit accruals have ceased, the rate of benefit 
accrual of all participants is zero. Thus, there could not be any 
participant who would have a rate of benefit accrual that is greater 
than zero if the participant were younger, so that there is no 
reduction in the rate of benefit accrual that is because of the 
individual's attainment of any age under paragraph (b)(3) of this 
section. Accordingly, Plan M satisfies the requirements of section 
411(b)(1)(H) and this paragraph (b).
    Example 6. (i) Employer Y maintains Plan O, a defined benefit 
plan that provides an accrued benefit of 1% of a participant's 
highest 5 consecutive years of compensation, multiplied by the sum 
of the participant's age and years of service, payable in the normal 
form of a straight life annuity commencing at normal retirement age 
or the date of actual retirement if later. Plan O provides that a 
participant's years of service after the sum of a participant's age 
and years of service reach a total of 55 are disregarded for 
purposes of determining the normal retirement benefit. Participant C 
is 45 years old and has 10 years of credited service as of the 
beginning of a plan year. Thus, for that plan year, C's rate of 
benefit accrual is 1% of C's highest 5 consecutive years of 
compensation.
    (ii) If C were younger, for example age 39 (with the same years 
of service), C would have a rate of benefit accrual of 2% of C's 
highest 5 consecutive years of compensation. Accordingly, C's rate 
of benefit accrual is reduced directly because of C's attainment of 
any age as provided in this paragraph (b)(3)(i). Consequently, Plan 
O fails to satisfy the requirements of section 411(b)(1)(H) and this 
paragraph (b).
    Example 7. (i) Plan P is a defined benefit plan that provides 
for a normal retirement benefit of 40% of a participant's average 
compensation for the participant's highest 3 consecutive years of 
compensation, payable

[[Page 76135]]

in the normal form of a straight life annuity commencing at normal 
retirement age or the date of actual retirement if later. If a 
participant separates from service prior to normal retirement age, 
Plan P provides a benefit equal to an amount that bears the same 
ratio to 40% of such average compensation as the participant's 
actual number of years of service bears to the number of years of 
service the participant would have if the participant's service 
continued to normal retirement age. As of the end of a plan year, 
participant D is 45 years old and has completed 20 years of service, 
and participant E is 41 years old and has completed 1 year of 
credited service. Thus, D's rate of benefit accrual for the plan 
year may be determined as 1% of compensation for D's highest 3 
consecutive years, and E's rate of benefit accrual for the plan year 
may be determined as 1.6% of compensation for E's highest 3 
consecutive years.
    (ii) If D were younger than age 45 (with 20 years of service and 
the same compensation history), D's rate of benefit accrual for the 
plan year would not be greater than 1% of compensation for D's 
highest 3 consecutive years. Thus, there is no reduction in the rate 
of benefit accrual for D that is directly because of the 
individual's attainment of any age as provided in paragraph 
(b)(3)(i) of this section. In addition, there are no facts and 
circumstances indicating that D's rate of benefit accrual is reduced 
indirectly because of D's attainment of any age as provided in 
paragraph (b)(3)(ii) of this section. Likewise, if E were younger 
than age 41 (with 1 year of service and the same compensation 
history), E's rate of benefit accrual for the plan year would not be 
greater than 1.6% of compensation for E's highest 3 consecutive 
years. Thus, there is no reduction in the rate of benefit accrual 
for E that is directly because of the individual's attainment of any 
age as provided in paragraph (b)(3)(i) of this section. In addition, 
there are no facts and circumstances indicating that E's rate of 
benefit accrual is reduced indirectly because of E's attainment of 
any age under paragraph (b)(3)(ii) of this section. These same 
results would apply for any possible participant in Plan P. 
Accordingly, Plan P satisfies the requirements of section 
411(b)(1)(H) and this paragraph (b).
    Example 8. (i) Plan A is a defined benefit plan that provides 
for an accrued benefit of 2% of a participant's average compensation 
for the participant's highest 3 consecutive years of compensation 
for the first 20 years of service, plus 1% of such average 
compensation for years in excess of 20, payable in the normal form 
of a straight life annuity commencing at normal retirement age or 
the date of actual retirement if later. However, if a participant 
separates from service prior to normal retirement age, Plan P 
provides a benefit equal to an amount that bears the same ratio to 
the total percentage of such average compensation that the 
participant would have if service continued to normal retirement age 
as the participant's actual number of years of service bears to the 
number of years of service the participant would have if the 
participant's service continued to normal retirement age. For 
participants who work past normal retirement age, Plan A provides a 
benefit equal to 2% per year for years of service not in excess of 
20, plus the following rate for years of service in excess of 20: 
the sum of 40% plus the product of 1% times service in excess of 20 
years, with that sum divided by total service to the end of the 
current plan year. As of the beginning of the plan year beginning 
January 1, 2008, participant N is 64 years old and has completed 20 
years of service, and participant O is 70 years old and has 
completed 20 years of credited service. Thus, N's rate of benefit 
accrual for that plan year may be determined as 1.95% of 
compensation for N's highest 3 consecutive years (2% for 20 years, 
plus 1% for 1 year, with that sum divided by 21 equals 1.95%), and 
O's rate of benefit accrual for that plan year also may be 
determined 1.95% of compensation for O's highest 3 consecutive years 
(40% for the first 20 years, plus 1% for service to the end of 2008, 
with that sum divided by 21 equals 1.95%).
    (ii) If O were younger than age 70 (with 20 years of service and 
the same compensation history), O's rate of benefit accrual for the 
plan year would not be greater than 1.95% of compensation for O's 
highest 3 consecutive years. The same conclusion applies for any 
other possible participant. Thus, Plan A satisfies paragraph 
(b)(3)(ii) of this section.
    (iii) However, if Plan A were instead to provide a rate of 
benefit accrual for service after normal retirement age equal to 2% 
for years of service not in excess of 20, plus 1% for service in 
excess of 20, Plan A would fail to satisfy paragraph (b)(3)(ii) of 
this section. For example, O's rate of benefit accrual would be 1% 
for 2008, whereas N's rate of benefit accrual would be 1.95% for 
2008, even though the only difference between O and N is that N is 
younger.
    Example 9. (i) The facts are similar to Example 8, except that 
the formula is 1% of a participant's average compensation for the 
participant's highest 3 consecutive years of compensation for the 
first 20 years, plus 2% of such average compensation for years in 
excess of 20, payable in the normal form of a straight life annuity 
commencing at normal retirement age or the date of actual retirement 
if later. As in Example 8, if a participant separates from service 
prior to normal retirement age, Plan P provides a benefit equal to 
an amount that bears the same ratio to the total percentage of such 
average compensation that the participant would have if service 
continued to normal retirement age as the participant's actual 
number of years of service bears to the number of years of service 
the participant would have if the participant's service continued to 
normal retirement age. Further, similar to the facts in Example 
8(iii) of this paragraph (b)(3)(iii), for participants who work past 
normal retirement age, Plan A provides a benefit equal to 1% per 
year for years of service not in excess of 20, plus 2% per year for 
years of service in excess of 20. As of the beginning of the plan 
year beginning January 1, 2008, participant K is 45 years old and 
has completed 10 years of service, and participant M is 55 years old 
and has completed 10 years of credited service. Thus, K's rate of 
benefit accrual for the plan year may be determined as 1.33% of 
compensation for K's highest 3 consecutive years (1% for 20 years, 
plus 2% for 10 more years, with the sum divided by 30 equals 1.33%), 
and M's rate of benefit accrual for the plan year may be determined 
as 1% of compensation for O's highest 3 consecutive years (1% for 20 
years, with that amount divided by 20 equals 1%).
    (ii) If M were younger than age 55 (with 10 years of service and 
the same compensation history), M's rate of benefit accrual for the 
plan year would be greater than 1% of compensation for M's highest 3 
consecutive years. (Plan A also provides for an impermissible 
reduction in the rate of benefit accrual for a participant whose 
service continues after normal retirement age in a manner that is 
comparable to Example 8(iii) of this paragraph (b)(3)(iii).) Thus, 
Plan A fails to satisfy paragraph (b)(3)(ii) of this section.
    Example 10. (i) Employer Z maintains Plan Q, a defined benefit 
plan that provides an accrued benefit of $40 per month multiplied by 
a participant's years of credited service. Participant F attains 
normal retirement age of 65 and continues in the full time service 
of Z. At age 65, F has 30 years of credited service under the plan 
and could receive a normal retirement benefit of $1,200 per month 
($40 X 30 years) if F retires. The plan suspends benefits for 
participants who work past normal retirement age, in accordance with 
section 411(a)(3)(B) and 29 CFR 2530.203-3 of the regulations of the 
Department of Labor, and does not provide for any actuarial increase 
for employment past normal retirement age. Accordingly, the plan 
does not pay F's accrued benefit while F remains in the full time 
service of Z and does not provide for an actuarial adjustment of F's 
accrued benefit because of delayed payment. For example, if F 
retires at age 67, after completing 2 additional years of credited 
service for Z, F will receive a benefit of $1,280 per month ($40 x 
32 years) commencing at age 67.
    (ii) Under Plan Q, the rate of accrual for all participants is 
$40 per month. Thus, there could not be any participant who would 
have a rate of benefit accrual that is greater than $40 per month if 
the participant were younger, so that there is no reduction in the 
rate of benefit accrual that is because of the individual's 
attainment of any age under paragraph (b)(3)(i) of this section. 
Accordingly, Plan Q satisfies the requirements of section 
411(b)(1)(H) and this paragraph (b).
    Example 11. (i) Assume the same facts as in Example 10, except 
that the plan provides that the amount of F's benefit at normal 
retirement age will be actuarially increased for delayed retirement 
(even though the plan suspends benefits for participants who work 
past normal retirement age), and this actuarially increased benefit 
will be paid if it exceeds the plan formula, but no actuarial 
increase is provided for any amount that is accrued after normal 
retirement age. The plan takes this actuarial increase into account 
as part of the rate of benefit accrual in plan years ending after 
F's attainment of normal retirement age, as provided under paragraph 
(b)(2)(ii) of this section.

[[Page 76136]]

    (ii) Under section 411(b)(1)(H) and this paragraph (b), F's 
employment past normal retirement age cannot cause F's rate of 
benefit accrual for any year to be less than $40 for the year. Plan 
Q satisfies this requirement for the first year after normal 
retirement age because, under the plan, F is entitled to receive, 
upon retirement at the end of the year when F is age 66, an 
actuarially increased benefit of $1,344.68 per month, so that the 
rate of benefit accrual for the year is $144.68 (which is $1,344.68 
minus $1,200).
    (iii) Further, for the second year past normal retirement age 
ending when F is age 67, F must be entitled to a rate of benefit 
accrual of at least $149.50 per month, which is the highest rate of 
benefit accrual under Plan Q for any younger participant with 32 
years of service at the end of the year. (In these facts, all 
participants have a rate of accrual of $40 until normal retirement 
age and a participant who is age 66 with 32 years of service at the 
end of the year would have a rate of benefit accrual of $149.50 due 
to an actuarial increase on an age 65 benefit of $1,240 per month.) 
Under the plan, F is entitled to receive, upon retirement at age 67, 
an actuarially increased benefit of $1,511.39 per month. Plan Q 
satisfies the requirement that F be entitled to the highest rate of 
benefit accrual provided to any younger participant because the rate 
of benefit accrual in that year ($1,511.39 minus $1,344.68 equals 
$166.71) is not less than what the rate would be for F if F were 
younger. These same results would apply for any possible participant 
in Plan Q. Accordingly, Plan Q satisfies the requirements of section 
411(b)(1)(H) and this paragraph (b).
    Example 12. (i) Employer Z maintains Plan R, a defined benefit 
plan that provides an accrued benefit of 2% of the average of a 
participant's high 3 consecutive years of compensation multiplied by 
the participant's years of credited service under the plan. 
Participant G, who has attained normal retirement age (age 65) under 
the plan, continues in the full time service of Z. At normal 
retirement age, G has average compensation of $40,000 for G's high 3 
consecutive years and has 10 years of credited service under the 
plan. Thus, at normal retirement age, G is entitled to receive an 
annual normal retirement benefit of $8,000 ($40,000 x .02 x 10 
years). Payment of G's retirement benefit is not suspended, and the 
plan provides that retirement benefits that commence after a 
participant's normal retirement age are actuarially increased for 
late retirement. Under the plan provision relating to actuarial 
increase, the actuarial increase for the plan year is made to the 
benefit that would have been paid had the participant retired as of 
the end of the preceding plan year. The plan then provides the 
greater of this actuarially increased benefit and benefits under the 
plan formula based on continued service, thereby including the 
actuarial increase in the rate of benefit accrual in plan years 
ending after G's attainment of normal retirement age, as provided in 
paragraph (b)(2)(ii) of this section. The foregoing is illustrated 
in the following table with respect to certain years of credited 
service performed by G after attaining normal retirement age 65. 
(Certain numbers may not total due to rounding.)

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Additional
                                                                            accruals      Annual     Actuarial      Annual
                                                                 Plan       for the    benefit, as  increase on   benefit to     Annual        Rate of
                                      Years of  Average pay   formula at   plan year   actuarially  the benefit   which C is   benefit as      benefit
                                       service   for high 3    start of    under plan   increased     at prior   entitled at   percent of      accrual
      Age at start of plan year       at start  consecutive   plan year     formula     (column 8   age (column    start of    average pay    (column 9
                                       of plan    years at    (.02 times   (column 4    from prior    6 minus        year      column 8 /    less column
                                        year      start of     column 2      minus         year       column 8   (greater of    column 3)    9 for prior
                                                 plan year      times       column 4   actuarially   for prior     column 4     (percent)       year)
                                                              column 3)    for prior    increased)     year)      and column                  (percent)
                                                                             year)                                    6)
(1)                                        (2)          (3)          (4)          (5)          (6)          (7)          (8)        (9)          (10)
-------------------------------------
65..................................        10      $40,000       $8,000          n/a          n/a          n/a       $8,000         20             2
66..................................        11       42,000        9,240       $1,240       $8,964          964        9,240         22             2
67..................................        12       58,000       13,920        4,680       10,386        1,142       13,920         24             2
68..................................        13       60,000       15,600        1,680       15,697        1,777       15,697         26.16          2.16
69..................................        14       66,000       18,480        2,880       17,762        2,065       18,480         28.1           2
70..................................        15       68,000       20,400        1,920       20,998        2,509       20,989         30.87          2.87
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) In the year G is 69 at the beginning of the year, G's rate of 
benefit accrual (1.84% of the average high 3 consecutive years of 
compensation) is lower than the rate of benefit accrual that would 
apply to a younger participant because a participant who is younger 
than age 65 with the same number of years of credited service and 
compensation history would have a rate equal to 2% of average high 3 
consecutive years of compensation. Accordingly, Plan R fails to satisfy 
the requirements of section 411(b)(1)(H) and this paragraph (b).
    Example 13. (i) The facts are the same as in Example 10, except 
that, under the plan provisions relating to retirement after normal 
retirement age, a participant's benefit is equal to the sum of the 
benefit that would have been paid had the participant retired as of 
the end of the preceding plan year and the greater of the actuarial 
increase for the plan year on that amount or the otherwise 
applicable accrual for the plan year under the plan formula. The 
foregoing is illustrated in the following table with respect to 
certain years of credited service performed by G after attaining 
normal retirement age 65.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Annual
                                                                           Additional                             benefit to
                                                                            accruals      Annual     Actuarial    which C is
                                                                 Plan       for the    benefit, as  increase on  entitled at     Annual        Rate of
                                      Years of  Average pay   formula at   plan year   actuarially  the benefit    start of    benefit as      benefit
                                       service   for high 3    start of    under plan   increased     at prior      yeare      percent of      accrual
      Age at start of plan year       at start  consecutive   plan year     formula     (column 8   age (column   (column 8    average pay    (column 9
                                       of plan    years at    (.02 times   (column 4    from prior    6 minus      at prior    column 8 /    less column
                                        year      start of     column 2      minus         year       column 8     age plus     column 3)    9 for prior
                                                 plan year      times       column 4   actuarially   for prior   the greater    (percent)       year)
                                                              column 3)    for prior    increased)     year)     of column 5                  (percent)
                                                                             year)                                and column
                                                                                                                      7)
(1)                                        (2)          (3)          (4)          (5)          (6)          (7)          (8)        (9)          (10)
-------------------------------------
65..................................        10      $40,000       $8,000          n/a          n/a          n/a       $8,000        20%            2%
66..................................        11       42,000        9,240       $1,240       $8,964         $964        9,240         22             2
67..................................        12       58,000       13,920        4,680       10,386        1,142       13,920         24             2
68..................................        13       60,000       15,600        1,680       15,697        1,777       15,697         26.16          2.16

[[Page 76137]]

 
69..................................        14       66,000       18,480        2,880       17,762        2,065       18,577         28.1           2
70..................................        15       68,000       20,400        1,920       21,098        2,521       21,098         31.03          2.93
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) In the year G is 69 at the beginning of the year, G's rate 
of benefit accrual (2% of the average high 3 consecutive years of 
compensation) is not lower than the rate that would apply to G if G 
were younger. For example, if G were age 68 with the same 14 years 
of credited service and compensation history that G has at age 69, G 
would have a rate of benefit accrual equal to 2% of average high 3 
consecutive years of compensation (in contrast to Example 12 in 
which the rate is 1.84% for an employee who is age 69 with 14 years 
of service, but would be 2% for younger employees with the same 
service and compensation history). Similar results would apply for 
any other potential younger participant in Plan R. Accordingly, Plan 
R satisfies the requirements of section 411(b)(1)(H) and this 
paragraph (b).
    (iii) The decrease in G's rate of benefit accrual from 2.16% to 
2% from age 68 to age 69 is not an impermissible reduction because 
of age. Under paragraph (b)(3) of this section, the determination of 
whether an impermissible reduction occurs because of age is made by 
comparing any potential participant's rate of benefit accrual to 
what the rate would be if the participant were younger (but with the 
same years of service, compensation history, and any other relevant 
factors taken into account under the plan), not by comparing a 
participant's rate in one year to that participant's rate in an 
earlier year. As indicated in paragraph (ii) of this Example 13, the 
rate of benefit accrual for a participant who is age 69 with 14 
years of service at the beginning of the year is compared with the 
rate for all younger participants with the same service and 
compensation history. Similarly, the 2.16% rate for a participant 
who is age 68 with 13 years of service at the beginning of the year 
is compared with the rate for all younger participants with the same 
service and compensation history. Thus, for example, if G were age 
67 with the same 13 years credited service and high 3 years of 
compensation equal to $60,000 that G has at age 68, G would have a 
rate of benefit accrual equal to 2.08% of average high 3 consecutive 
years of compensation.

    (4) Certain adjustments for benefit distributions--(i) In general. 
Under section 411(b)(1)(H)(iii)(I), a defined benefit plan may provide 
that the requirement for continued benefit accrual under section 
411(b)(1)(H)(i) and this paragraph (b) for a plan year is treated as 
satisfied to the extent of the actuarial equivalent of benefits 
distributed, as provided in this paragraph (b)(4). Distributions made 
before the participant attains normal retirement age or during a period 
that is not ``section 203(a)(3)(B) service,'' as defined in 29 CFR 
2530.203-3(c) of the regulations of the Department of Labor, may not be 
taken into account under this paragraph (b)(4).
    (ii) Amount of the adjustment for benefits distributed. A defined 
benefit plan does not violate paragraph (b) of this section for a plan 
year merely because the rate of benefit accrual is reduced (but not 
below zero) to the extent of the actuarial equivalent of plan benefit 
distributions made to the participant during the plan year. For this 
purpose, distributions made during the plan year generally are 
disregarded for that year to the extent the actuarial value of the 
distributions exceeds the actuarial value of distributions that would 
have been made during the plan year had distribution of the 
participant's accrued benefit commenced at the beginning of the plan 
year (or, if later, at the participant's normal retirement age) in the 
normal form of benefit. (But see paragraph (b)(4)(iii) of this section 
for rules taking this excess into account at the end of the current 
year and in future years.) In addition, in any case in which the 
participant's benefits are being distributed in an optional form of 
benefit under which the amount payable annually is less than the amount 
payable under the plan's normal form of benefit (for example, a QJSA 
under which the annual benefit is less than the amount payable annually 
under a straight life annuity normal form), the plan may treat the 
participant as receiving payments under an actuarially equivalent 
normal form of benefit for the plan year and all future plan years.
    (iii) Treatment of accelerated benefit payments--(A) Accelerated 
benefit payments. This paragraph (b)(4)(iii) applies if the actuarial 
value of the distributions made to the participant during a plan year 
exceeds the actuarial value of the distributions that would have been 
made during the plan year had distributions commenced at the beginning 
of the plan year (or, if later, at the participant's normal retirement 
age) in the normal form of benefit. In such a case, the excess payments 
(referred to as accelerated benefit payments) are converted to an 
actuarially equivalent stream of annual benefit payments under the 
plan's normal form of benefit, commencing at the beginning of the next 
plan year. This conversion must be based on the same actuarial 
assumptions used under the plan to determine the distributions made to 
the participant during the plan year. For purposes of this paragraph 
(b)(4)(iii), the actuarially equivalent stream of annual benefit 
payments is referred to as the annuity equivalent of accelerated 
benefit payments.
    (B) Credit for annuity equivalent of accelerated benefit payments. 
For purposes of applying paragraphs (b)(4)(ii) and (iii)(C) of this 
section, the annuity equivalent of accelerated benefit payments is 
deemed to be paid to the participant in each plan year that begins 
after the plan year during which any accelerated benefit payment under 
paragraph (b)(4)(iii)(A) of this section is made.
    (C) Effect of accelerated benefit payments on rate of benefit 
accrual. If any accelerated benefit payments under paragraph 
(b)(4)(iii)(A) of this section have been made to a participant, then, 
in lieu of determining the participant's rate of benefit accrual under 
paragraph (b)(2)(ii) of this section, the participant's rate of benefit 
accrual for a plan year is determined as the excess (if any) of--
    (1) The sum of the annual benefit to which the participant is 
entitled at the end of the current plan year, assuming payment 
commences in the normal form at the end of the current plan year, plus 
the amount deemed paid in the next

[[Page 76138]]

plan year under the annuity equivalent of accelerated benefit payments; 
over
    (2) The sum of the annual benefit to which the participant was 
entitled at the end of the preceding plan year, assuming that payment 
commences in the normal form at the later of normal retirement age and 
the end of the preceding plan year, plus the amount deemed paid during 
the current plan year under the annuity equivalent of accelerated 
benefit payments.
    (iv) Examples. The provisions of this paragraph (b)(4) may be 
illustrated by the following examples. In each of the examples, except 
as otherwise indicated, normal retirement age is 65 and the birthday of 
each participant is assumed to be January 1. In addition, except as 
otherwise indicated, the plan contains no limitations on the maximum 
amount of benefits the plan will pay to any participant (other than the 
limitations imposed by section 415), on the maximum number of years of 
credited service taken into account under the plan, or on the 
compensation used for purposes of determining the amount of any 
participant's normal retirement benefit (other than the limitation 
imposed by section 401(a)(17)) and the plan uses the following 
actuarial assumptions for purposes of determining the amount of any 
participant's accrued benefit (other than the limitation imposed by 
section 401(a)(17)), and the plan uses the following actuarial 
assumptions in determining actuarial equivalence: a 7.5% rate of 
interest and the 83 GAM (male) mortality table. The examples are as 
follows:

    Example 1. (i) Facts relating to the year in which participant 
attains age 65. Employer Z maintains Plan Q, a defined benefit plan 
that provides an accrued benefit of $40 per month multiplied by the 
participant's years of credited service. Participant F attains 
normal retirement age of 65 on January 1 and continues in the full 
time service of Z. At the end of the year in which F attains age 65, 
F has 30 years of credited service under the plan and could receive 
an accrued benefit of $1,200 per month ($40 x 30 years) if F 
retires. Plan Q does not suspend payment of benefits for 
participants who work past normal retirement age and F commences 
benefit payments at normal retirement age. (These are the same facts 
as in Example 10 of paragraph (b)(3)(iii) of this section, except 
that the Plan Q does not provide for the suspension of normal 
retirement benefit payments.) The plan offsets the value of the 
benefit distributions against benefit accruals in plan years ending 
after the participant's attainment of normal retirement age, as 
permitted by paragraph (b)(4)(ii) of this section. Participant F 
(who remains in the full time service of Y) receives 12 monthly 
benefit payments after attainment of age 65 and prior to attainment 
of age 66. The total monthly benefit payments of $14,400 ($1,200 x 
12 payments) have an actuarial value at the end of the year in which 
F turns 65 of $15,118 (reflecting interest and mortality) which 
would produce a monthly life annuity benefit of $145 commencing at 
age 66. The rate of benefit accrual otherwise applicable under the 
plan formula for the year of credited service F completes after 
attaining normal retirement age is $40 per month.
    (ii) Conclusions relating to the year in which F attains age 65. 
Because the actuarial value (determined as a monthly benefit of 
$145) of the benefit payments made during the first year after F's 
attainment of normal retirement age exceeds the benefit accrual 
otherwise applicable for the first year after F's attainment of 
normal retirement age, the plan is not required to accrue benefits 
on behalf of F for the one year of credited service after F's 
attainment of normal retirement age and the plan is not required to 
increase F's monthly benefit payment of $1,200 during the year in 
which F attains age 65.
    (iii) Facts relating to the year in which F attains age 66. 
Assume F receives 12 additional monthly benefit payments the next 
year prior to F's retirement at the end of the next year when F 
attains age 66. The total monthly benefit payments of $14,400 
($1,200 x 12 payments) have an actuarial value at the end of that 
year of $15,135 (reflecting interest and mortality) which would 
produce a monthly benefit payment of $149 commencing at age 67. The 
rate of benefit accrual otherwise applicable under the plan formula 
for the additional year of credited service F completed that year is 
$40 per month.
    (iv) Conclusions relating to the year in which F attains age 66. 
Because the actuarial value (determined as a monthly benefit of 
$149) of the benefit payments made during that year exceeds the 
benefit accrual otherwise applicable for the additional year of 
credited service, the plan is not required to accrue benefits on 
behalf of F for the second year of credited service F completed 
after attaining normal retirement age and the plan is not required 
to increase F's monthly benefit payment of $1,200.
    Example 2. (i) Facts. Employer Z maintains Plan R, a defined 
benefit plan that provides an accrued benefit of 2% of the average 
of a participant's high 3 consecutive years of compensation 
multiplied by the participant's years of credited service under the 
plan. Payment of a participant's retirement benefit is not 
suspended, and the plan provides that retirement benefits that 
commence after a participant's normal retirement age are actuarially 
increased for late retirement. Under the plan provision relating to 
actuarial increase, the actuarial increase for the plan year is made 
to the benefit that would have been paid had the participant retired 
as of the end of the preceding plan year. The plan then provides the 
greater of this actuarially increased benefit and benefits under the 
plan formula based on continued service, thereby including the 
actuarial increase in the rate of benefit accrual in plan years 
ending after attainment of normal retirement age, as provided in 
paragraph (b)(2)(ii) of this section. Participant G, who has 
attained normal retirement age (age 65) under the plan, continues in 
the full time service of Z. At normal retirement age, G has average 
compensation of $40,000 for G's high 3 consecutive years and has 10 
years of credited service under the plan. Thus, at normal retirement 
age, G is entitled to receive an annual normal retirement benefit of 
$8,000 ($40,000 x .02 x 10 years). G continues working after normal 
retirement age, with G's average compensation increasing to $68,000 
at age 70. (The facts in this Example 2 are the same as Example 13 
of paragraph (b)(3)(ii) of this section, except that the employee 
does not retire at age 70, but continues in the full time service of 
Z.) Upon G's attainment of age 70, the plan commences benefit 
payments to G. The annual benefit paid to G in the first plan year 
is $21,098. In determining the annual benefit payable to G in each 
subsequent plan year, the plan offsets the value of benefit 
distributions made to the participant by the close of the prior plan 
year against benefit accruals otherwise applicable in plan years 
during which such distributions were made, as permitted by paragraph 
(b)(4)(ii)(B) of this section.
    (ii) Conclusion. Accordingly, for each subsequent plan year, G 
is entitled under the plan to receive benefit payments based on G's 
benefit at the close of the prior plan year, plus the excess (if 
any) of the benefit for the plan year determined under the plan 
formula otherwise applicable over the value of total benefit 
distributions made to G during the plan year. The foregoing is 
illustrated in the following table with respect to certain years of 
credited service performed by G while benefits were being 
distributed to G.

[[Page 76139]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Annual benefit
                                                                                                                                          to which G is
                                                                                                                                         entitled at end
                                                                                         Additional                                        of the year
                                                    Average pay for  Plan formula at    accruals for                     Annual benefit   (column 8 for
                                         Years of        high 3       start of plan    the plan year       Benefit          that is        prior year,
      Age at start of plan year         service at    consecutive    year (.02 times     under plan     distributions      actuarial         plus the
                                         start of    years at start   column 2 times  formula (column  made during the   equivalent of    excess, if any
                                        plan year     of plan year      column 3)      4 minus column     prior year        column 6     of column 5 for
                                                                                        4 for prior                                        the current
                                                                                           year)                                            year, over
                                                                                                                                           column 7 for
                                                                                                                                          current year)
(1)                                            (2)              (3)              (4)              (5)              (6)              (7)              (8)
--------------------------------------
70...................................           15          $68,000          $20,400           $1,920             none             none          $21,098
71...................................           16           70,000           22,400            2,000           21,098            2,799           21,098
72...................................           17           90,000           30,600            8,200           21,098            2,891           26,407
73...................................           18          100,000           36,000            5,400           26,407            3,743           28,065
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Example 3. (i) Facts relating to the year in which a participant 
attains age 65. Plan X provides an accrued benefit equal to 1% of 
the average of a participant's highest 3 consecutive years of 
compensation times the participant's years of service, payable in 
the normal form of a straight life annuity commencing at normal 
retirement age or at the date of actual retirement if later. Plan X 
permits a participant who is an employee to commence distributions 
after attainment of normal retirement age (age 65) and provides for 
benefits otherwise accrued after normal retirement age to be offset 
by the actuarial equivalent of any benefit distributions made to the 
participant. Plan X provides for a participant who does not commence 
distributions to receive an actuarial increase for the year from the 
amount payable at the end of the preceding year (if greater than the 
amount otherwise accrued for H during the year under X's formula). 
Participant H attains age 65 on the first day of a plan year when 
Participant H's average highest 3 consecutive years of compensation 
is $60,000 and H has 20 years of service. Accordingly, Participant 
H's accrued benefit at the beginning of the year is equal to a 
straight life annuity of $1,000 per month (20% times $60,000 divided 
by 12) commencing at the beginning of the year. Participant H elects 
to receive a single-sum distribution of $130,389 at the beginning of 
the year, which is equal to the present value of H's accrued benefit 
under section 417(e) at that time. Participant H continues to work 
through the end of the plan year and at the end of the year has 
average compensation of $60,000 for the year. Plan X uses the 
actuarial assumptions specified in section 417(e) for purposes of 
determining actuarial equivalence. For purposes of this Example 3, 
the applicable interest rate under section 417(e) is assumed to be 
6%, and the applicable mortality table under section 417(e) is the 
mortality table in effect on January 1, 2003.
    (ii) Conclusion relating to effect of distributions made in the 
year H attains age 65. Under this paragraph (b)(4), H would 
otherwise accrue an additional monthly benefit of $50 for the 
additional year of service under the plan's formula (21% times 
$60,000 minus 20% times $60,000, divided by 12). The plan is 
permitted under section 411(b)(1)(H)(iii)(I) to offset additional 
accruals otherwise applicable after normal retirement age by the 
actuarial value of distributions made during the year. However, 
under paragraph (b)(4)(ii) of this section, distributions made 
during a plan year are disregarded to the extent that the actuarial 
value of the distributions exceeds the actuarial value of 
distributions that would have been made during the plan year had 
distribution of the participant's accrued benefit commenced at the 
beginning of the plan year under the plan's normal form.
    (iii) Conclusion relating to calculations for distribution made 
in the year H attains age 65. At the end of the year, the actuarial 
value of the distribution made to H ($130,389 plus interest and 
mortality for the year equals $139,812) is greater than the year end 
actuarial value of distributions that would have been made during 
the plan year had distribution of the participant's accrued benefit 
at the beginning of the plan year commenced in the normal form at 
the beginning of the plan year (which is $12,470, based on the 
plan's actuarial assumptions). Accordingly, the $127,342 excess 
(referred to as an accelerated benefit payment) is disregarded in 
the current year. (However, as described below, the annuity 
equivalent of the $127,342 is deemed to be paid to H commencing at 
the beginning of the first plan year after the plan year during 
which the accelerated benefit payment is made.)
    (iv) Conclusion relating to rate of benefit accrual for the year 
H attains age 65. To determine the rate of benefit accrual for the 
year in which H attains age 65, the annuity equivalent of 
accelerated benefit payments is calculated and, under paragraph 
(b)(4)(iii)(C) of this section, this amount is treated as part of 
the benefit payable at the end of the year in calculating the rate 
of benefit accrual for the year. In this Example 3, the annuity 
equivalent of the $127,342 accelerated benefit payment equals a 
straight life annuity of $1,000 per month commencing at the 
beginning of the next plan year. Thus, for purposes of applying 
paragraph (b)(4)(iii) of this section to determine the rate of 
benefit accrual for the plan year in which H attains age 65, 
paragraph (b)(4)(iii)(C)(1) of this section is an annual straight 
life annuity commencing at end of the year equal to $1,000 (the sum 
of the annual benefit to which the H is entitled at the end of the 
plan year, which is zero in this case, plus the amount deemed paid 
in the next plan year under the annuity equivalent of accelerated 
benefit payments, which is $1,000 in this case) and the amount in 
paragraph (b)(4)(iii)(C)(2) of this section is an annual straight 
life annuity commencing at end of the preceding plan year equal to 
$1,000. Thus, H's rate of benefit accrual for the year is zero.
    (v) Conclusion relating to whether rate of benefit accrual for 
year H attains age 65 satisfies section 411(b)(1)(H). Under 
paragraph (b)(4)(ii) of this section, a plan may reduce the rate of 
benefit accrual otherwise applicable to the extent of distributions 
made during the year. The actuarial equivalent of $12,470 (the 
actuarial value of the 12 $1,000 monthly payments deemed paid to H 
during the plan year under paragraph (b)(4)(ii) of this section) is 
a straight life annuity commencing at the end of the plan year equal 
to $98 per month. Thus, the otherwise applicable accrual for the 
year may be reduced (but not below zero) by $98 per month. The 
highest rate of benefit accrual for any participant with H's service 
and compensation history who is younger is an annual straight life 
annuity of $50 per month. Because the permissible reduction of $98 
per month is not less than the otherwise applicable accrual of $50 
per month, Plan X is not required by this paragraph (b) for the year 
and section 411(b)(1)(H) to provide H with any additional accruals 
for the year.
    (vi) Conclusion relating to rate of benefit accrual for year H 
attains age 65 if no distribution were made. If Participant H had 
not elected to receive any distribution during the plan year, then 
H's accrued benefit at the end of the year would be a straight life 
annuity of $1,098 per month commencing at the end of the year (which 
is actuarially equivalent to a straight life annuity of $1,000 per 
month commencing at the beginning of the year). Thus, H's rate of 
benefit accrual for that year would be $98 (but no adjustments for 
any distribution would apply).
    (vii) Facts relating to next year in which H attains age 66. 
Participant H works another year and H's average compensation 
becomes $70,000. Under this paragraph (b)(4), H would otherwise 
accrue an additional monthly benefit of $233 for the additional year 
of service under the plan's formula (22% times $70,000, minus 21% 
times $60,000, divided by 12). However, the plan is permitted under 
section 411(b)(1)(H)(iii)(I) to

[[Page 76140]]

offset additional accruals after normal retirement age by the 
actuarial value of distributions made during the year. Under 
paragraph (b)(4)(iii)(B) of this section, the $1,000 annuity 
equivalent of accelerated benefit payments is deemed to be paid to H 
during this second year when H attains age 66. These deemed payments 
are actuarially equivalent to an accrual of $100 per month payable 
at the end of that year. Accordingly, the plan reduces the otherwise 
applicable accrual of $233 to the extent of the accrual of $100 per 
month payable at the end of the year in which H attains age 66. 
Thus, the $233 accrual during the year in which H becomes 66 is 
reduced by $100 to $133. Under the plan X, H's accrued benefit at 
the end of the year is $133 per month.
    (viii) Conclusion relating to rate of benefit accrual for year H 
attains age 66. To determine the rate of benefit accrual for the 
second year when H attains age 66, the annuity equivalent of 
accelerated benefit payments is calculated and, under paragraph 
(b)(4)(iii)(C) of this section, this amount is treated as part of 
the benefit payable at the end of the year in calculating the rate 
of benefit accrual for the second year. In this Example 3, the 
annuity equivalent of the $127,342 accelerated benefit payment that 
was made in the year in which H attained age 65 equals a straight 
life annuity of $1,000 per month commencing at the beginning of the 
next plan year. Thus, for purposes of applying paragraph (b)(4)(iii) 
of this section to determine the rate of benefit accrual for the 
second plan year, the amount in paragraph (b)(4)(iii)(C)(1) of this 
section is an annual straight life annuity commencing at end of the 
year equal to $1,133 (the sum of the annual benefit to which the H 
is entitled at the end of the plan year, which is $133 in this case, 
plus the amount deemed paid in the next plan year under the annuity 
equivalent of accelerated benefit payments, which is $1,000 in this 
case) and the amount in paragraph (b)(4)(iii)(C)(2) of this section 
is an annual straight life annuity commencing at end of the 
preceding plan year equal to $1,000. Thus, H's rate of benefit 
accrual for the year in which H becomes age 66 is $133.
    (ix) Conclusion relating to whether rate of benefit accrual for 
year H becomes 66 satisfies section 411(b)(1)(H). Under paragraph 
(b)(4))(ii) of this section, a plan may reduce the rate of benefit 
accrual to the extent of distributions made during the year. The 
actuarial equivalent of $12,480 (the actuarial value of the 12 
$1,000 monthly payments deemed made to H during the plan year) is a 
straight life annuity commencing at the end of the plan year equal 
to $100 per month. Thus, the otherwise applicable accrual for the 
year may be reduced (but not below zero) by $100 per month. The 
highest rate of benefit accrual for any participant with H's service 
and compensation history who is younger is an annual straight life 
annuity of $233 per month. Thus, because the sum of $133 and $100 is 
not less than the otherwise applicable accrual of $233 per month, 
Plan X satisfies this paragraph (b) and section 411(b)(1)(H) for the 
year.

    (c) Defined contribution plans--(1) In general. A defined 
contribution plan (including a target benefit plan described in Sec.  
1.410(a)-4(a)(1)) does not satisfy the requirements of section 
411(b)(2) if the rate of allocation made to the account of a 
participant is reduced, either directly or indirectly, because of the 
participant's attainment of any age. A reduction in the rate of 
allocation includes any discontinuance in the allocation of employer 
contributions or forfeitures to the account of the participant or 
cessation of participation in the plan.
    (2) Rate of allocation--(i) Aggregate allocations. For purposes of 
this paragraph (c), a participant's rate of allocation for any plan 
year is the aggregate allocations taken into account for the plan year 
under Sec.  1.401(a)(4)-2(c)(2).
    (ii) Determination of rate of allocation. A participant's rate of 
allocation for a plan year can be determined as a dollar amount. 
Alternatively, if a plan's formula bases a participant's allocations 
solely on compensation for the plan year and compensation is determined 
without regard to attainment of any age, then a participant's rate of 
allocation can be determined as a percentage of the participant's 
compensation for the plan year.
    (3) Reduction that is directly or indirectly because of a 
participant's attainment of any age--(i) Reduction in rate of 
allocation that is directly because of a participant's attainment of 
any age. A plan provides for a reduction in the rate of allocation that 
is directly because of a participant's attainment of any age for any 
plan year if, under the terms of the plan, any participant's rate of 
allocation for the plan year would be higher if the participant were 
younger. Thus, a plan fails to satisfy section 411(b)(2) and this 
paragraph (c) if, under the terms of the plan, the rate of allocation 
for any individual who is or could be a participant under the plan 
would be lower solely as a result of such individual being older.
    (ii) Reduction in rate of allocation that is indirectly because of 
a participant's attainment of any age--(A) In general. A plan provides 
for a reduction in the rate of allocation that is indirectly because of 
a participant's attainment of any age for any plan year if any 
participant's rate of allocation for the plan year would be higher if 
the participant were to have a characteristic that is a proxy for being 
younger, based on all of the relevant facts and circumstances. Thus, a 
plan fails to satisfy section 411(b)(2) and this paragraph (c) if the 
rate of allocation for any individual who is or could be a participant 
under the plan would be lower solely as a result of such individual 
having a different characteristic which is a proxy for being older, 
based on applicable facts and circumstances.
    (B) Treatment of limitations. A reduction in a participant's rate 
of allocation is not indirectly because of the attainment of any age in 
violation of section 411(b)(2) solely because of a positive correlation 
between attainment of any age and a reduction in the rate of 
allocation. Thus, a defined contribution plan (including a target 
benefit plan described in Sec.  1.410(a)-4(a)(1)) does not fail to 
satisfy the minimum vesting standards of section 411(a) solely because 
the plan limits the total amount of employer contributions and 
forfeitures that may be allocated to a participant's account (for a 
particular plan year or for the participant's total years of credited 
service under the plan), solely because the plan limits the total 
number of years of credited service for which a participant's account 
may receive allocations of employer contributions and forfeitures, or 
solely because the plan limits the number of years of credited service 
that may be taken into account for purposes of determining the amount 
of, or the rate at which, employer contributions and forfeitures are 
allocated to a participant's account for a particular plan year.
    (iii) Special rule for target benefit plans. A defined contribution 
plan that is a target benefit plan, as defined in Sec.  1.410(a)-
4(a)(1), satisfies section 411(b)(2) only if the defined benefit 
formula used to determine allocations would satisfy section 
411(b)(1)(H) without regard to section 411(b)(1)(H)(iii). Such a target 
benefit plan does not fail to satisfy this paragraph (c) with respect 
to allocations after normal retirement age merely because the 
allocation for a plan year is reduced to reflect shorter longevity 
using a reasonable actuarial assumption regarding mortality.
    (iv) Additional rules. The Commissioner may prescribe additional 
guidance, published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter), with respect to the application 
of section 411(b)(2) and this section to target benefit plans.
    (d) Benefits and forms of benefits subject to requirements--(1) 
General rule. Except as provided in paragraph (d)(2) or (3) of this 
section, sections 411(b)(1)(H) and 411(b)(2) and paragraphs (b) and (c) 
of this section apply to all benefits (and forms of benefits) provided 
under the plan, including accrued benefits, benefits described in 
section 411(d)(6), ancillary

[[Page 76141]]

benefits, and other rights and features provided under the plan. 
Accordingly, except as provided in paragraph (d)(2) or (3) of this 
section, a participant's rate of benefit accrual under a defined 
benefit plan and a participant's allocations under a defined 
contribution plan are considered to be reduced because of the 
participant's attainment of any age if optional forms of benefits, 
ancillary benefits, or other rights or features under the plan provided 
with respect to benefits or allocations attributable to credited 
service prior to the attainment of the participant's age are not 
provided on at least as favorable a basis with respect to benefits or 
allocations attributable to credited service after attainment of the 
participant's age. Thus, for example, a plan may not provide a single-
sum payment only with respect to benefits attributable to years of 
credited service before the attainment of a specified age. Similarly, 
except as provided in paragraph (d)(2) or (3) of this section, if an 
optional form of benefit is available under the plan at a specified 
age, the availability of that form of benefit, or the method for 
determining the manner in which that form of benefit is paid, may not, 
directly or indirectly, be denied or provided on terms less favorable 
to participants because of the attainment of any age. Similarly, if the 
method for determining the amount or the rate of the subsidized portion 
of a joint and survivor annuity or the subsidized portion of a 
preretirement survivor annuity is less favorable with respect to 
participants who have attained a specified age than with respect to 
participants who have not attained such age, benefit accruals or 
account allocations under the plan will be considered to be reduced 
because of the attainment of such age.
    (2) Special rule for actuarial assumptions regarding mortality. A 
plan does not fail to satisfy section 411(b)(1)(H) or this paragraph 
(d) merely because the plan makes actuarial adjustments using a 
reasonable assumption regarding mortality to calculate optional forms 
of benefit or to calculate the cost of providing a qualified 
preretirement survivor annuity, as defined in section 417(c).
    (3) Special rule for certain benefits. A plan does not fail to 
satisfy section 411(b)(1)(H) or this paragraph (d) merely because the 
following benefits, or the manner in which such benefits are provided 
under the plan, vary because of the attainment of any higher age--
    (i) The subsidized portion of an early retirement benefit (whether 
provided on a temporary or permanent basis);
    (ii) A qualified disability benefit (as defined in Sec.  1.411(a)-
7(c)(3)); or
    (iii) A social security supplement (as defined in Sec.  1.411(a)-
7(c)(4)(ii)).
    (e) Coordination with certain provisions. Notwithstanding section 
411(b)(1)(H), section 411(b)(2), and paragraphs (a) through (d) of this 
section, the following rules apply--
    (1) Section 415 limitations. No benefit accrual with respect to a 
participant in a defined benefit plan is required for a plan year by 
section 411(b)(1)(H)(i) and no allocation to the account of a 
participant in a defined contribution plan (including a target benefit 
plan described in Sec.  1.410(a)-4(a)(1)) is required for a plan year 
by section 411(b)(2) to the extent that the allocation or accrual would 
cause the plan to exceed the limitations of section 415.
    (2) Prohibited discrimination--(i) No benefit accrual on behalf of 
a highly compensated employee in a defined benefit plan is required for 
a plan year by section 411(b)(1)(H)(i) to the extent such benefit 
accrual would cause the plan to discriminate in favor of highly 
compensated employees within the meaning of section 401(a)(4).
    (ii) No allocation to the account of a highly compensated employee 
in a defined contribution plan (including a target benefit plan) is 
required for a plan year by section 411(b)(2) to the extent the 
allocation would cause the plan to discriminate in favor of highly 
compensated employees within the meaning of section 401(a)(4).
    (iii) The Commissioner may provide additional guidance, published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of 
this chapter), relating to prohibited discrimination in favor of highly 
compensated employees.
    (3) Permitted disparity. A defined benefit plan does not fail to 
satisfy section 411(b)(1)(H) for a plan year and a defined contribution 
plan does not fail to satisfy 411(b)(2) for a plan year merely because 
accruals or allocations under the plan are reduced to satisfy the 
uniformity requirements of Sec.  1.401(l)-2(c) or 1.401(l)-3(c) for the 
plan year.
    (4) Distribution rights under section 411. A defined benefit plan 
does not fail to satisfy section 411(b)(1)(H) for a plan year and a 
defined contribution plan does not fail to satisfy 411(b)(2) for a plan 
year merely because of the right to defer distributions provided under 
section 411(a)(11) or a plan provision consistent with section 
411(a)(11).
    (f) Effective dates--(1) Effective date of sections 411(b)(1)(H) 
and 411(b)(2) for noncollectively bargained plans--(i) In general. 
Except as otherwise provided in paragraph (f)(2) of this section, 
sections 411(b)(1)(H) and 411(b)(2) are applicable for plan years 
beginning on or after January 1, 1988, with respect to a participant 
who is credited with at least 1 hour of service in a plan year 
beginning on or after January 1, 1988. Neither section 411(b)(1)(H) nor 
section 411(b)(2) is applicable with respect to a participant who is 
not credited with at least 1 hour of service in a plan year beginning 
on or after January 1, 1988.
    (ii) Defined benefit plans. In the case of a participant who is 
credited with at least 1 hour of service in a plan year beginning on or 
after January 1, 1988, section 411(b)(1)(H) is applicable with respect 
to all years of service completed by the participant other than plan 
years beginning before January 1, 1988.
    (iii) Defined contribution plans. Section 411(b)(2) does not apply 
with respect to allocations of employer contributions or forfeitures to 
the accounts of participants under a defined contribution plan for a 
plan year beginning before January 1, 1988.
    (iv) Hour of service. For purposes of this paragraph (f)(1), 1 hour 
of service means 1 hour of service recognized under the plan or 
required to be recognized under the plan by section 410 (relating to 
minimum participation standards) or section 411 (relating to minimum 
vesting standards). In the case of a plan that does not determine 
service on the basis of hours of service, 1 hour of service means any 
service recognized under the plan or required to be recognized under 
the plan by section 410 (relating to minimum participation standards) 
or section 411 (relating to minimum vesting standards).
    (2) Effective date of sections 411(b)(1)(H) and 411(b)(2) for 
collectively bargained plans--(i) In the case of a plan maintained 
pursuant to 1 or more collective bargaining agreements between employee 
representatives and 1 or more employers, ratified before March 1, 1986, 
sections 411(b)(1)(H) and 411(b)(2) are applicable for benefits 
provided under, and employees covered by, any such agreement with 
respect to plan years beginning on or after the later of--
    (A) January 1, 1988; or
    (B) The earlier of January 1, 1990, or the date on which the last 
of such collective bargaining agreements terminates (determined without 
regard to any extension of any such agreement occurring on or after 
March 1, 1986).
    (ii) The applicability date provisions of paragraph (f)(1) of this 
section shall apply in the same manner to plans described in paragraph 
(f)(2)(i) of this section, except that the applicable date

[[Page 76142]]

determined under paragraph (f)(2)(i) of this section shall be 
substituted for the effective date determined under paragraph (f)(1) of 
this section.
    (iii) In accordance with the provisions of paragraph (f)(2)(i) of 
this section, a plan described therein may be subject to different 
applicability dates under sections 411(b)(1)(H) and 411(b)(2) for 
employees who are covered by a collective bargaining agreement and 
employees who are not covered by a collective bargaining agreement.
    (iv) For purposes of paragraph (f)(2)(i) of this section, the 
service crediting rules of paragraph (f)(1) of this section shall apply 
to a plan described in paragraph (f)(2)(i) of this section, except that 
in applying such rules the applicability date determined under 
paragraph (f)(2)(i) of this section shall be substituted for the 
applicability date determined under paragraph (f)(1) of this section. 
See paragraph (f)(1)(iv) of this section for rules relating to the 
recognition of an hour of service.
    (3) Regulatory effective date. Paragraphs (a) through (e) of this 
section are applicable with respect to plan years beginning on or after 
the date of publication of final regulations in the Federal Register.

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 02-31225 Filed 12-10-02; 8:45 am]
BILLING CODE 4830-01-P