[Federal Register Volume 68, Number 68 (Wednesday, April 9, 2003)]
[Rules and Regulations]
[Pages 17277-17291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8290]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 54, and 602

[TD 9052]
RIN 1545-BA08


Notice of Significant Reduction in the Rate of Future Benefit 
Accrual

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance on 
the notification requirements under section 4980F of the Internal 
Revenue Code (Code) and section 204(h) of the Employee Retirement 
Income Security Act of 1974 (ERISA). Under these final regulations, a 
plan administrator must give notice of a plan amendment to certain plan 
participants and beneficiaries when the plan amendment provides for a 
significant reduction in the rate of future benefit accrual or the 
elimination or significant reduction in an early retirement benefit or 
retirement-type subsidy. These final regulations affect retirement plan 
sponsors and administrators, participants in and beneficiaries of 
retirement plans, and employee organizations representing retirement 
plan participants.

DATES: Effective date. These regulations are effective on April 9, 
2003.
    Applicability date. For dates of applicability of these 
regulations, see Sec.  54.4980F-1, Q&A-18, of these regulations.

FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard at (202) 622-6060 or 
Diane S. Bloom at (202) 283-9888 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1780. Responses to this collection of information 
are required to obtain a benefit for a taxpayer who wants to amend a 
plan with an amendment that significantly reduces the rate of future 
benefit accrual or eliminates or significantly reduces an early 
retirement benefit or retirement-type subsidy.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    The estimated annual burden per respondent varies from 1 hour to 80 
hours, depending on individual circumstances, with an estimated average 
of 10 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR parts 1, 54, and 602 
under section 4980F of the Code and section 204(h) of ERISA. Prior to 
2001, section 204(h) of ERISA had no analogous section in the Code, but 
pursuant to section 101(a) of the Reorganization Plan No. 4 of 1978, 29 
U.S.C. 1001nt, the Secretary of the Treasury has authority to issue 
regulations under parts 2 and 3 of subtitle B of title I of ERISA, 
including section 204(h) of ERISA. Under section 104 of the 
Reorganization Plan No. 4, the Secretary of Labor retains enforcement 
authority with respect to parts 2 and 3 of subtitle B of title 1 of 
ERISA, but, in exercising that authority, is bound by the regulations 
issued by the Secretary of Treasury. On December 15, 1995, temporary 
regulations (TD 8631), under section 411(d)(6) of the Code were 
published in the Federal Register (60 FR 64320), providing guidance on 
section 204(h) of ERISA. A notice of proposed rulemaking (EE-34-95), 
cross-referencing the temporary regulations was published in the 
Federal Register (60 FR 64401) on the same day. On

[[Page 17278]]

December 14, 1998, final regulations (TD 8795) addressing the notice 
requirements under section 204(h) of ERISA were published in the 
Federal Register (63 FR 68678) and were codified in Sec.  1.411(d)-6. 
The final regulations in this Treasury decision remove Treasury 
regulation Sec.  1.411(d)-6.
    Section 659 of the Economic Growth and Tax Relief Reconciliation 
Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) added section 
4980F of the Code. Section 4980F imposes an excise tax when a plan 
administrator fails to provide timely notice of plan amendments that 
provide for a significant reduction in the rate of future benefit 
accrual. A reduction of an early retirement benefit or a retirement-
type subsidy is also treated, for purposes of section 4980F of the 
Code, as a reduction in the rate of future benefit accrual. Section 
659(b) of EGTRRA also amended section 204(h) of ERISA to treat the 
elimination of an early retirement benefit or a retirement-type subsidy 
as a reduction in the rate of future benefit accrual. The Job Creation 
and Worker Assistance Act of 2002, Public Law 107-147 (116 Stat. 21) 
included certain technical corrections to section 659 of EGTRRA.
    On April 23, 2002, proposed regulations under section 4980F of the 
Code and section 204(h) of ERISA were published in the Federal Register 
(67 FR 19713). On August 15, 2002, the IRS held a public hearing on the 
proposed regulations. Written comments responding to the notice of 
proposed rulemaking were also received. After consideration of all the 
comments, the proposed regulations are adopted, as amended by this 
Treasury decision, and the regulations under Sec.  1.411(d)-6 are 
removed. The revisions are discussed below.
    The regulations retain the overall structure of the proposed 
regulations and, like the proposed regulations, include a number of 
examples illustrating applicable rules. Some of the examples show the 
information required to be furnished in a section 204(h) notice, both 
as to amendments that result in a simple reduction in the future rate 
of benefit accrual and as to those that result in more complex 
reductions. The most complex are examples in which a defined benefit 
plan is amended to change prospectively the plan's benefit accrual 
formula from a traditional formula to a formula that bases future 
benefits on an account balance--commonly called a conversion to a cash 
balance pension plan--with the result that, for purposes of the notice 
requirements of section 4980F and section 204(h), the future rate of 
benefit accrual may be reduced for some participants and increased for 
others, including a separate but similarly complex effect on future 
early retirement benefits.
    None of the examples illustrates rules in any other regulation or 
positions of Treasury or the IRS regarding provisions of the Internal 
Revenue Code other than the notice requirements of section 4980F and 
section 204(h). Thus, the examples do not indicate any possible outcome 
regarding proposed regulations that were published in the Federal 
Register (67 FR 76123) on December 11, 2002 relating to sections 
411(b)(1)(H) and 411(b)(2) of the Internal Revenue Code, which require 
that accruals or allocations under certain retirement plans not cease 
or be reduced because of the attainment of any age. Specifically, 
Treasury and the IRS are still considering comments received in 
connection with those proposed regulations, including comments relating 
to cash balance pension plans, and will only address the application of 
section 411(b)(1)(H) to cash balance plans as part of the process to 
issue regulations under sections 411(b)(1)(H).

Explanation of Revisions and Summary of Comments

A. Overview

    Section 4980F of the Code and section 204(h) of ERISA require 
notice of an amendment to an applicable pension plan that either 
provides for a significant reduction in the rate of future benefit 
accrual or eliminates or significantly reduces an early retirement 
benefit or retirement-type subsidy. An applicable pension plan is a 
defined benefit plan and any individual account plan that is subject to 
the funding requirements of section 412 of the Code. The notice is 
required to be provided to participants and alternate payees for whom 
the amendment is reasonably expected to reduce significantly the rate 
of future benefit accrual and to employee organizations representing 
those participants. The statute generally requires the plan 
administrator to provide the notice within a reasonable time before the 
effective date of the plan amendment.
    A plan amendment that is subject to the notice requirements of 
section 4980F of the Code and section 204(h) of ERISA (section 204(h) 
amendment) may be subject to additional reporting and disclosure 
requirements under title I of ERISA, such as the requirement to provide 
a summary of material modifications (SMM) describing the amendment. 
Notice under section 4980F of the Code and section 204(h) of ERISA 
(section 204(h) notice) must be provided in accordance with the 
provisions of these regulations even though sections 102(a) and 104(b) 
of ERISA also may require that an SMM describing the plan amendment be 
furnished to participants covered under the plan and beneficiaries 
receiving benefits under the plan. The Department of Labor has advised 
the IRS that a plan administrator who provides a section 204(h) notice 
to applicable individuals in accordance with this final rule will be 
treated as having furnished those individuals with an SMM regarding the 
section 204(h) amendment. The Department of Labor has also advised the 
IRS that furnishing the notice to the last known address of an 
individual would be sufficient for this purpose where the plan utilizes 
a method of delivery described in 29 CFR 2520.104b-1 and the 
fiduciaries of the plan have taken reasonable steps to keep plan 
records up-to-date and to locate lost or missing participants. Finally, 
the Department of Labor noted that the plan administrator is required 
to satisfy any other requirements regarding the furnishing of SMMs or 
updated summary plan descriptions, including, for example, satisfaction 
of the requirement to furnish an SMM to any other participants covered 
under the plan, and to beneficiaries receiving benefits under the plan, 
who are entitled to an SMM regarding the amendment.

B. Conversion of a Money Purchase Pension Plan into an Individual 
Account Plan That is Not Subject to Section 412

    Rev. Rul. 2002-42 (2002-28 I.R.B. 76), provides that a conversion 
of a money purchase pension plan into a profit-sharing plan is 
considered a significant reduction in the rate of future benefit 
accrual under the money purchase pension plan, thus requiring notice 
under section 4980F of the Code and section 204(h) of ERISA. As stated 
in the revenue ruling, allocations under the profit-sharing plan are 
not benefit accruals under the money purchase pension plan for purposes 
of determining whether there is a reduction in the rate of future 
benefit accrual. Accordingly, the final regulations clarify that a plan 
amendment to convert a money purchase pension plan into a profit-
sharing or any other individual account plan that is not subject to 
section 412 of the Code (including a merger, consolidation, or 
transfer) is deemed to be a plan amendment that provides for a 
significant reduction in the rate of

[[Page 17279]]

future benefit accrual for purposes of section 4980F of the Code and 
section 204(h) of ERISA.

C. Rate of Future Benefit Accrual Determined Annually

    A commentator questioned the provisions of the proposed regulations 
under which the determination of whether there is a reduction in the 
rate of future benefit accrual would be based on the whether the 
amendment is reasonably expected to reduce ``the benefits accruing for 
a year.'' The commentator objected on the grounds that this could 
require section 204(h) notice for an amendment that increases benefits 
in one year and then reduces them in the next, even though the 
aggregate benefit over the two years might not be reduced or might even 
be increased in the aggregate. The final regulations retain this rule, 
but clarify in an example that where a reduction occurs at the same 
time as an immediate increase in accrued benefits such that the 
participant's aggregate benefit can never be less than what it would 
have been had the amendment not been adopted, the reduction is not 
significant.

D. Reduction in the Rate of Future Benefit Accrual for Individual 
Account Plans

    A commentator suggested that the regulations be revised to clarify 
that only contributions or forfeitures that are allocated to a 
participant's account be considered in determining whether a plan 
amendment to an individual account plan reduces the rate of future 
benefit accrual. The commentator recommended this revision to clarify 
that an amendment reducing a contribution formula is not considered 
insignificant solely because expected future investment returns might 
offset a portion of the reduction in the contribution formula. A 
clarification that reflects this suggestion has been adopted in the 
final regulations.

E. Determination of Applicable Individuals

    A commentator suggested that the regulations be revised to clarify 
the date as of which applicable individuals should be identified. The 
commentator argued that the lack of a clear determination date would 
make it difficult, from an administrative standpoint, for plans to 
identify applicable individuals due to turnover among participants. The 
final regulations provide that whether a plan participant or an 
alternate payee is an applicable individual is determined on a typical 
business day that is reasonably proximate to the time the section 
204(h) notice is provided (or at the latest date for providing section 
204(h) notice, if earlier), based on all relevant facts and 
circumstances. An example to this effect has been added to the final 
regulations.

F. Definition of Early Retirement Benefits and Retirement-Type 
Subsidies

    A commentator stated that Treasury and IRS should issue regulations 
defining the terms early retirement benefits and retirement-type 
subsidies. The commentator noted that there are numerous references to 
the terms early retirement benefit or retirement-type subsidy in both 
the Code (section 4980F(f)(3) and section 411(d)(6)(B)(i)), ERISA 
(sections 204(g)(2)(A) and 204(h)(9)) and the regulations (Sec.  
1.411(d)-4 and Proposed Sec.  54.4980F-1), but the terms are not 
defined. The commentator expressed concern that adverse consequences 
might result from an egregious failure to identify a significant 
reduction in early retirement benefit or a retirement-type subsidy and 
guidance has not been issued to clarify the meaning of those terms. The 
definitions of Early retirement benefits and retirement-type subsidies 
affect more than determining whether an amendment requires a section 
204(h) notice and, therefore, are beyond the scope of these final 
regulations. Treasury and IRS anticipate issuing proposed regulations 
under section 411(d)(6), including general guidance concerning early 
retirement benefits and retirement-type subsidies. Comments regarding 
the anticipated proposed regulations were requested, including comments 
on the guidance that should be provided regarding early retirement 
benefits and retirement-type subsidies, in Notice 2002-46 (2002-28 
I.R.B. 96) and Notice 2003-10 (2003-5 I.R.B. 369).

G. Timing of Notice

    A number of comments addressed what constitutes a reasonable period 
for providing a section 204(h) notice. The proposed regulations 
included a generally applicable 45-day advance notice rule with 
exceptions for amendments in connection with certain business 
transactions and small plans. Some comments recommended that notice 
generally be required to be provided more than 45 days in advance of 
the effective date of the section 204(h) amendment and others 
recommended that notice generally be allowed to be provided less than 
45 days in advance of the effective date of the section 204(h) 
amendment. The approach in the proposed regulations was designed to 
strike a balance between providing participants with sufficient time to 
understand and consider the information in the notice and allowing 
employers to effect changes in their plans for business reasons within 
a reasonable time, and has been retained in the final regulations.
    A commentator requested clarification that section 204(h) notice 
may be provided before the adoption date of the amendment. The 
commentator noted that neither section 4980F of the Code nor section 
204(h) of ERISA prevents a plan administrator from providing section 
204(h) notice before the adoption date of the amendment. The 
regulations have not been revised to reflect this suggestion because 
the statute is already sufficiently clear that section 204(h) notice 
may be provided before the adoption of the amendment.

H. Certification of Accuracy by Senior Officer

    A commentator suggested that the regulations be revised to require 
that a senior officer of the plan sponsor or the plan administrator 
certify to employees of the plan sponsor and the IRS that the 
disclosures in the section 204(h) notice accurately describe the 
effects of the amendment and that the notice is presented in a manner 
that is understandable to the average applicable individual. The 
commentator also suggested that the senior officer should certify that 
the section 204(h) notice provided to applicable individuals does not 
contain any false or misleading information. The commentator argued 
that this certification would not be burdensome to plan sponsors if 
they have exercised due diligence concerning the content of the section 
204(h) notice. Because of concerns about the usefulness of such a rule 
as well as whether there is statutory authority for such a rule, this 
suggestion has not been adopted.

I. Determination and Effects of Egregious Failures

    A commentator suggested that the regulations revise the definition 
of an egregious violation to distinguish between intentional and 
negligent acts of failure. The commentator stated that it is possible 
that a trustee or plan sponsor may make a decision not to provide 
section 204(h) notice that the trustee or plan sponsor thought was 
prudent at the time but later determined was a mistake. The commentator 
argued that these types of decisions, which may be negligent but not 
intentional, should not be considered egregious failures. The 
commentator suggested that the final regulations be revised to provide 
that an egregious failure is an action resulting from a deliberate 
choice by the plan sponsor, in which the plan sponsor

[[Page 17280]]

knew or reasonably should have known that a section 204(h) notice would 
be required. The commentator also suggested that the final regulations 
be revised to provide that only applicable individuals who were 
adversely affected by the egregious failure be entitled to the greater 
of the old or new benefit formulas.
    Section 204(h)(6)(B) of ERISA generally defines an egregious 
failure as a failure within the control of the plan sponsor that is 
either an intentional failure or a failure to provide most of the 
individuals with most of the information they are entitled to receive. 
Further, section 204(h)(6)(A) of ERISA provides that, in the case of 
any egregious failure to meet any requirement of section 204(h) with 
respect to any plan amendment, the provisions are applied so that all 
applicable individuals are entitled to the greater of the benefits to 
which they would have been entitled without regard to the amendment, or 
the benefits under the plan with regard to the amendment. Accordingly, 
these suggestions were not adopted in the final regulations because 
they would conflict with the plain language of section 204(h) of ERISA.

J. Content of Section 204(h) Notice

    Section 4980F of the Code and section 204(h) of ERISA require that 
section 204(h) notice be written in a manner calculated to be 
understood by the average plan participant and that it provide 
sufficient information to allow applicable individuals to understand 
the effect of the amendment. Q&A-11 of these final regulations sets 
forth the content requirements for section 204(h) notice. The final 
regulations retain the basic structure of Q&A-11 in the proposed 
regulations, but include a number of clarifications, including 
clarifying that the content must permit the applicable individual to 
determine the approximate magnitude of the reduction applicable to that 
individual. The regulations provide that this requirement is deemed to 
be satisfied if the notice includes illustrative examples satisfying 
certain conditions. At the request of a commentator, the final 
regulations clarify that individualized benefit statements may be used 
in lieu of illustrative examples if the statements include the same 
information as illustrative examples, such as showing the approximate 
range of the reductions for the individual if the reductions vary over 
time and identification of the assumptions used in the projections.

K. Benefit Changes Made by Collective Bargaining Agreements

    A commentator suggested that the final regulations be revised to 
distinguish between a reduction in the rate of future benefit accrual 
by collective bargaining agreements and a reduction in the rate of 
future benefit accrual by plan amendments. Multiemployer plans often 
incorporate the provisions of related collective bargaining agreements 
by reference. The commentator argued that when the rate of future 
benefit accrual is being reduced by a change to a collective bargaining 
agreement, section 204(h) notice is not required because there is no 
plan amendment relating to the reduction. The commentator suggested 
that the final regulations include an example clarifying that in 
situations where there is an automatic benefit change that is linked to 
a collective bargaining agreement, section 204(h) notice is not 
required, or at a minimum that some relief be provided to allow the 
amendment to go into effect quickly. The IRS and Treasury believe that 
when a benefit formula in a plan document incorporates provisions of 
the collective bargaining agreement by reference, those provisions are 
part of the plan. Accordingly, the final regulations provide a rule in 
Q&A-7(a)(2) that if all or a part of a plan's rate of future benefit 
accrual, or an early retirement benefit or retirement-type subsidy 
provided under the plan, depends on provisions in another document that 
are referenced in the plan document, a change in the provisions of the 
other document is an amendment of the plan. An example illustrating 
this rule has been added to the final regulations.
    The IRS and Treasury recognize that multiemployer plans may need 
additional time to comply with the requirements of Q&A-7(a)(2) of these 
final regulations, therefore the effective date of this rule has been 
delayed until January 1, 2004. In addition, because of the special 
characteristics of multiemployer plans (e.g., participating employers 
are often small businesses with fewer than 100 employees), the final 
regulations provide that, for a multiemployer plan, section 204(h) 
notice must be provided at least 15 days before the effective date of 
any section 204(h) amendment.

Effective Date

    Except with respect to Q&A-7(a)(2), these regulations are 
applicable to amendments with an effective date that is on or after 
September 2, 2003.
    The provisions of Q&A-7(a)(2) of these regulations are applicable 
to amendments with an effective date that is on or after January 1, 
2004.

Special Analyses

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

Drafting Information

    The principal author of these regulations is Pamela R. Kinard, 
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities), Internal Revenue Service. However, personnel from 
other offices of the Internal Revenue Service and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

[[Page 17281]]

26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 54, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


Sec.  1.411(d)-6  [Removed]

0
Par. 2. Section 1.411(d)-6 is removed.

PART 54--PENSION EXCISE TAXES

0
Par. 3. The authority citation for part 54 is amended by adding the 
following citation in numerical order to read as follows:

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

    Section 54.4980F-1 also issued under 26 U.S.C. 4980F.* * *

0
Par. 4. Section 54.4980F-1 is added to read as follows:


Sec.  54.4980F-1  Notice requirements for certain pension plan 
amendments significantly reducing the rate of future benefit accrual.

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

List of Questions

Q-1. What are the notice requirements of section 4980F(e) of the 
Internal Revenue Code and section 204(h) of ERISA?
Q-2. What are the differences between section 4980F and section 
204(h)?
Q-3. What is an ``applicable pension plan'' to which section 4980F 
and section 204(h) apply?
Q-4. What is ``section 204(h) notice'' and what is a ``section 
204(h) amendment''?
Q-5. For which amendments is section 204(h) notice required?
Q-6. What is an amendment that reduces the rate of future benefit 
accrual or reduces an early retirement benefit or retirement-type 
subsidy for purposes of determining whether section 204(h) notice is 
required?
Q-7. What plan provisions are taken into account in determining 
whether an amendment is a section 204(h) amendment?
Q-8. What is the basic principle used in determining whether a 
reduction in the rate of future benefit accrual or a reduction in an 
early retirement benefit or retirement-type subsidy is significant 
for purposes of section 4980F and section 204(h)?
Q-9. When must section 204(h) notice be provided?
Q-10. To whom must section 204(h) notice be provided?
Q-11. What information is required to be provided in a section 
204(h) notice?
Q-12. What special rules apply if participants can choose between 
the old and new benefit formulas?
Q-13. How may section 204(h) notice be provided?
Q-14. What are the consequences if a plan administrator fails to 
provide section 204(h) notice?
Q-15. What are some of the rules that apply with respect to the 
excise tax under section 4980F?
Q-16. How do section 4980F and section 204(h) apply when a business 
is sold?
Q-17. How are amendments to cease accruals and terminate a plan 
treated under section 4980F and section 204(h)?
Q-18. What are the effective dates of section 4980F, section 204(h), 
as amended by EGTRRA, and these regulations?

Questions and Answers

    Q-1. What are the notice requirements of section 4980F(e) of the 
Internal Revenue Code and section 204(h) of ERISA?
    A-1. (a) Requirements of Internal Revenue Code section 4980F(e) and 
ERISA section 204(h). Section 4980F of the Internal Revenue Code 
(section 4980F) and section 204(h) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), 29 U.S.C. 1054(h) (section 
204(h)) each generally requires notice of an amendment to an applicable 
pension plan that either provides for a significant reduction in the 
rate of future benefit accrual or that eliminates or significantly 
reduces an early retirement benefit or retirement-type subsidy. The 
notice is required to be provided to plan participants and alternate 
payees who are applicable individuals (as defined in Q&A-10 of this 
section) and to certain employee organizations. The plan administrator 
must generally provide the notice before the effective date of the plan 
amendment. Q&A-9 of this section sets forth the time frames for 
providing notice, Q&A-11 of this section sets forth the content 
requirements for the notice, and Q&A-12 of this section contains 
special rules for cases in which participants can choose between the 
old and new benefit formulas.
    (b) Other notice requirements. Other provisions of law may require 
that certain parties be notified of a plan amendment. See, for example, 
sections 102 and 104 of ERISA, and the regulations thereunder, for 
requirements relating to summary plan descriptions and summaries of 
material modifications.
    Q-2. What are the differences between section 4980F and section 
204(h)?
    A-2. The notice requirements of section 4980F generally are 
parallel to the notice requirements of section 204(h), as amended by 
the Economic Growth and Tax Relief Reconciliation Act of 2001, Public 
Law 107-16 (115 Stat. 38) (2001) (EGTRRA). However, the consequences of 
the failure to satisfy the requirements of the two provisions differ: 
Section 4980F imposes an excise tax on a failure to satisfy the notice 
requirements, while section 204(h)(6), as amended by EGTRRA, contains a 
special rule with respect to an egregious failure to satisfy the notice 
requirements. See Q&A-14 and Q&A-15 of this section. Except to the 
extent specifically indicated, these regulations apply both to section 
4980F and to section 204(h).
    Q-3. What is an ``applicable pension plan'' to which section 4980F 
and section 204(h) apply?
    A-3. (a) In general. Section 4980F and section 204(h) apply to an 
applicable pension plan. For purposes of section 4980F, an applicable 
pension plan means a defined benefit plan qualifying under section 
401(a) or 403(a) of the Internal Revenue Code, or an individual account 
plan that is subject to the funding standards of section 412 of the 
Internal Revenue Code. For purposes of section 204(h), an applicable 
pension plan means a defined benefit plan that is subject to part 2 of 
subtitle B of title I of ERISA, or an individual account plan that is 
subject to such part 2 and to the funding standards of section 412 of 
the Internal Revenue Code. Accordingly, individual account plans that 
are not subject to the funding standards of section 412 of the Internal 
Revenue Code, such as profit-sharing and stock bonus plans and 
contracts under section 403(b) of the Internal Revenue Code, are not 
applicable pension plans to which section 4980F or section 204(h) 
apply. Similarly, a defined benefit plan that neither qualifies under 
section 401(a) or 403(a) of the Internal Revenue Code nor is subject to 
part 2 of subtitle B of title I of ERISA is not an applicable pension 
plan. Further, neither a governmental plan (within the meaning of 
section 414(d) of the Internal Revenue Code),

[[Page 17282]]

nor a church plan (within the meaning of section 414(e) of the Internal 
Revenue Code) with respect to which no election has been made under 
section 410(d) of the Internal Revenue Code is an applicable pension 
plan.
    (b) Section 204(h) notice not required for small plans covering no 
employees. Section 204(h) notice is not required for a plan under which 
no employees are participants covered under the plan, as described in 
Sec.  2510.3-3(b) of the Department of Labor regulations, and which has 
fewer than 100 participants.
    Q-4. What is ``section 204(h) notice'' and what is a ``section 
204(h) amendment''?
    A-4. (a) Section 204(h) notice is notice that complies with section 
4980F(e) of the Internal Revenue Code, section 204(h)(1) of ERISA, and 
this section.
    (b) A section 204(h) amendment is an amendment for which section 
204(h) notice is required under this section.
    Q-5. For which amendments is section 204(h) notice required?
    A-5. (a) Significant reduction in the rate of future benefit 
accrual. Section 204(h) notice is required for an amendment to an 
applicable pension plan that provides for a significant reduction in 
the rate of future benefit accrual.
    (b) Early retirement benefits and retirement-type subsidies. 
Section 204(h) notice is also required for an amendment to an 
applicable pension plan that provides for the significant reduction of 
an early retirement benefit or retirement-type subsidy. For purposes of 
this section, early retirement benefit and retirement-type subsidy mean 
early retirement benefits and retirement-type subsidies within the 
meaning of section 411(d)(6)(B)(i).
    (c) Elimination or cessation of benefits. For purposes of this 
section, the terms reduce or reduction include eliminate or cease or 
elimination or cessation.
    (d) Delegation of authority to Commissioner. The Commissioner may 
provide in revenue rulings, notices, or other guidance published in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter) 
that section 204(h) notice need not be provided for plan amendments 
otherwise described in paragraph (a) or (b) of this Q&A-5 that the 
Commissioner determines to be necessary or appropriate, as a result of 
changes in the law, to maintain compliance with the requirements of the 
Internal Revenue Code (including requirements for tax qualification), 
ERISA, or other applicable federal law.
    Q-6. What is an amendment that reduces the rate of future benefit 
accrual or reduces an early retirement benefit or retirement-type 
subsidy for purposes of determining whether section 204(h) notice is 
required?
    A-6. (a) In general. For purposes of determining whether section 
204(h) notice is required, an amendment reduces the rate of future 
benefit accrual or reduces an early retirement benefit or retirement-
type subsidy only as provided in paragraph (b) or (c) of this Q&A-6.
    (b) Reduction in rate of future benefit accrual--(1) Defined 
benefit plans. For purposes of section 4980F and section 204(h), an 
amendment to a defined benefit plan reduces the rate of future benefit 
accrual only if it is reasonably expected that the amendment will 
reduce the amount of the future annual benefit commencing at normal 
retirement age (or at actual retirement age, if later) for benefits 
accruing for a year. For this purpose, the annual benefit commencing at 
normal retirement age is the benefit payable in the form in which the 
terms of the plan express the accrued benefit (or, in the case of a 
plan in which the accrued benefit is not expressed in the form of an 
annual benefit commencing at normal retirement age, the benefit payable 
in the form of a single life annuity commencing at normal retirement 
age that is the actuarial equivalent of the accrued benefit expressed 
under the terms of the plan, as determined in accordance with section 
411(c)(3) of the Internal Revenue Code).
    (2) Individual account plans. For purposes of section 4980F and 
section 204(h), an amendment to an individual account plan reduces the 
rate of future benefit accrual only if it is reasonably expected that 
the amendment will reduce the amount of contributions or forfeitures 
allocated for any future year. Changes in the investments or investment 
options under an individual account plan are not taken into account for 
this purpose.
    (3) Determination of rate of future benefit accrual. The rate of 
future benefit accrual for purposes of this paragraph (b) is determined 
without regard to optional forms of benefit within the meaning of Sec.  
1.411(d)-4, Q&A-1(b) of this chapter (other than the annual benefit 
described in paragraph (b)(1) of this Q&A-6). The rate of future 
benefit accrual is also determined without regard to ancillary benefits 
and other rights or features as defined in Sec.  1.401(a)(4)-4(e) of 
this chapter.
    (c) Reduction of early retirement benefits or retirement-type 
subsidies. For purposes of section 4980F and section 204(h), an 
amendment reduces an early retirement benefit or retirement-type 
subsidy only if it is reasonably expected that the amendment will 
eliminate or reduce an early retirement benefit or retirement-type 
subsidy.
    Q-7. What plan provisions are taken into account in determining 
whether an amendment is a section 204(h) amendment?
    A-7. (a) Plan provisions taken into account---(1) In general. All 
plan provisions that may affect the rate of future benefit accrual, 
early retirement benefits, or retirement-type subsidies of participants 
or alternate payees must be taken into account in determining whether 
an amendment is a section 204(h) amendment. For example, plan 
provisions that may affect the rate of future benefit accrual include 
the dollar amount or percentage of compensation on which benefit 
accruals are based; the definition of service or compensation taken 
into account in determining an employee's benefit accrual; the method 
of determining average compensation for calculating benefit accruals; 
the definition of normal retirement age in a defined benefit plan; the 
exclusion of current participants from future participation; benefit 
offset provisions; minimum benefit provisions; the formula for 
determining the amount of contributions and forfeitures allocated to 
participants' accounts in an individual account plan; in the case of a 
plan using permitted disparity under section 401(l) of the Internal 
Revenue Code, the amount of disparity between the excess benefit 
percentage or excess contribution percentage and the base benefit 
percentage or base contribution percentage (all as defined in section 
401(l) of the Internal Revenue Code); and the actuarial assumptions 
used to determine contributions under a target benefit plan (as defined 
in Sec.  1.401(a)(4)-8(b)(3)(i) of this chapter). Plan provisions that 
may affect early retirement benefits or retirement-type subsidies 
include the right to receive payment of benefits after severance from 
employment and before normal retirement age and actuarial factors used 
in determining optional forms for distribution of retirement benefits.
    (2) Provisions incorporated by reference in plan. If all or a part 
of a plan's rate of future benefit accrual, or an early retirement 
benefit or retirement-type subsidy provided under the plan, depends on 
provisions in another document that are referenced in the plan 
document, a change in the provisions of the other document is an 
amendment of the plan.
    (b) Plan provisions not taken into account. Plan provisions that do 
not

[[Page 17283]]

affect the rate of future benefit accrual of participants or alternate 
payees are not taken into account in determining whether there has been 
a reduction in the rate of future benefit accrual. Further, any benefit 
that is not a section 411(d)(6) protected benefit as described in Sec.  
1.411(d)-4, Q&A-1(d) of this chapter, or that is a section 411(d)(6) 
protected benefit that may be eliminated or reduced as permitted under 
Sec.  1.411(d)-4, Q&A-2(a) or (b) of this chapter, is not taken into 
account in determining whether an amendment is a section 204(h) 
amendment. Thus, for example, provisions relating to vesting schedules 
or the right to make after-tax contributions or elective deferrals are 
not taken into account.
    (c) Examples. The following examples illustrate the rules in this 
Q&A-7:

    Example 1. (i) Facts. A defined benefit plan provides a normal 
retirement benefit equal to 50% of highest 5-year average pay 
multiplied by a fraction (not in excess of one), the numerator of 
which equals the number of years of participation in the plan and 
the denominator of which is 20. A plan amendment is adopted that 
changes the numerator or denominator of that fraction.
    (ii) Conclusion. The plan amendment must be taken into account 
in determining whether there has been a reduction in the rate of 
future benefit accrual.
    Example 2. (i) Facts. Plan C is a multiemployer defined benefit 
plan subject to several collective bargaining agreements. The 
specific benefit formula under Plan C that applies to an employee 
depends on the hourly rate of contribution of the employee's 
employer, which is set forth in the provisions of the collective 
bargaining agreements that are referenced in the Plan C document. 
Collective Bargaining Agreement A between Employer B and the union 
representing employees of Employer B is renegotiated to provide that 
the hourly contribution rate for an employee of B who is subject to 
the Collective Bargaining Agreement A will decrease. That decrease 
will result in a decrease in the rate of future benefit accrual for 
employees of B.
    (ii) Conclusion. Under paragraph (a)(2) of this Q&A-7, the 
change to Collective Bargaining Agreement A is a plan amendment that 
is a section 204(h) amendment if the reduction in the rate of future 
benefit accrual is significant.

    Q-8. What is the basic principle used in determining whether a 
reduction in the rate of future benefit accrual or a reduction in an 
early retirement benefit or retirement-type subsidy is significant for 
purposes of section 4980F and section 204(h)?
    A-8. (a) General rule. Whether an amendment reducing the rate of 
future benefit accrual or reducing an early retirement benefit or 
retirement-type subsidy provides for a reduction that is significant 
for purposes of section 4980F and section 204(h) is determined based on 
reasonable expectations taking into account the relevant facts and 
circumstances at the time the amendment is adopted.
    (b) Application for determining significant reduction in the rate 
of future benefit accrual. For a defined benefit plan, the 
determination of whether an amendment provides for a significant 
reduction in the rate of future benefit accrual is made by comparing 
the amount of the annual benefit commencing at normal retirement age 
(or at actual retirement age, if later), as determined under Q&A-
6(b)(1) of this section, under the terms of the plan as amended with 
the amount of the annual benefit commencing at normal retirement age 
(or at actual retirement age, if later), as determined under Q&A-
6(b)(1) of this section, under the terms of the plan prior to 
amendment. For an individual account plan, the determination of whether 
an amendment provides for a significant reduction in the rate of future 
benefit accrual is made in accordance with Q&A-6(b)(2) of this section 
by comparing the amounts to be allocated in the future to participants' 
accounts under the terms of the plan as amended with the amounts to be 
allocated in the future to participants' accounts under the terms of 
the plan prior to amendment. An amendment to convert a money purchase 
pension plan to a profit-sharing or other individual account plan that 
is not subject to section 412 of the Internal Revenue Code is, in all 
cases, deemed to be an amendment that provides for a significant 
reduction in the rate of future benefit accrual.
    (c) Application to certain amendments reducing early retirement 
benefits or retirement-type subsidies. Because section 204(h) notice is 
required only for reductions that are significant, section 204(h) 
notice is not required for an amendment that reduces an early 
retirement benefit or retirement-type subsidy if the amendment is 
permitted under the third sentence of section 411(d)(6)(B) of the 
Internal Revenue Code and regulations thereunder (relating to the 
elimination or reduction of benefits or subsidies which create 
significant burdens or complexities for the plan and plan participants 
unless the amendment adversely affects the rights of any participant in 
a more than de minimis manner).
    (d) Example. The following example illustrates the rules in this 
Q&A-8:

    Example. (i) Facts. Pension Plan A is a defined benefit plan 
that provides a rate of benefit accrual of 1% of highest-five years' 
pay multiplied by years of service, payable annually for life 
commencing at normal retirement age (or at actual retirement age, if 
later). Plan A is amended, effective January 1, 2008, to provide 
that any participant who separates from service after December 31, 
2007, and before January 1, 2013, will have the same number of years 
of service he or she would have had if his or her service continued 
to December 31, 2012.
    (ii) Conclusion. While the amendment will result in a reduction 
in the annual rate of future benefit accrual from 2009 through 2012 
(because under the amendment, benefits based upon an additional five 
years of service accrue on January 1, 2008, and no additional 
service is credited after January 1, 2008 until January 1, 2013), 
the amendment does not result in a reduction that is significant 
because the amount of the annual benefit commencing at normal 
retirement age (or at actual retirement age, if later) under the 
terms of the plan as amended is not under any conditions less than 
the amount of the annual benefit commencing at normal retirement age 
(or at actual retirement age, if later) to which any participant 
would have been entitled under the terms of the plan had the 
amendment not been made.

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

[[Page 17284]]

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

    Example 1. (i) Facts. A defined benefit plan requires an 
individual to complete 1 year of service to become a participant who 
can accrue benefits, and participants cease to accrue benefits under 
the plan at severance from employment with the employer. There are 
no alternate payees and employees are not represented by an employee 
organization. On November 18, 2004, the plan is amended effective as 
of January 1, 2005 to reduce significantly the rate of future 
benefit accrual. Section 204(h) notice is provided on November 1, 
2004.
    (ii) Conclusion. Section 204(h) notice is only required to be 
provided to individuals who, based on the facts and circumstances on 
November 1, 2004, are reasonably expected to have completed at least 
1 year of service and to be employed by the employer on January 1, 
2005.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that the sole effect of the plan amendment is to alter the 
pre-amendment plan provisions under which benefits payable to an 
employee who retires after 20 or more years of service are unreduced 
for commencement before normal retirement age. The amendment 
requires 30 or more years of service in order for benefits 
commencing before normal retirement age to be unreduced, but the 
amendment only applies for future benefit accruals.
    (ii) Conclusion. Section 204(h) notice is only required to be 
provided to individuals who, on January 1, 2005, have completed at 
least 1 year of service but less than 30 years of service, are 
employed by the employer, have not attained normal retirement age, 
and will have completed 20 or more years of service before normal 
retirement age if their employment continues to normal retirement 
age.
    Example 3. (i) Facts. A plan is amended to reduce significantly 
the rate of future benefit accrual for all current employees who are 
participants. Based on the facts and circumstances, it is reasonable 
to expect that the amendment will not reduce the rate of future 
benefit accrual of former employees who are currently receiving 
benefits or of former employees who are entitled to deferred vested 
benefits.
    (ii) Conclusion. The plan administrator is not required to 
provide section 204(h) notice to any former employees.
    Example 4. (i) Facts. The facts are the same as in Example 3, 
except that the plan covers two groups of alternate payees. The 
alternate payees in the first group are entitled to a certain 
percentage or portion of the former spouse's accrued benefit and, 
for this purpose, the accrued benefit is determined at the time the 
former spouse begins receiving retirement benefits under the plan. 
The alternate payees in the second group are entitled to a certain 
percentage or portion of the former spouse's accrued benefit and, 
for this purpose, the accrued benefit was determined at the time the 
qualified domestic relations order was issued by the court.
    (ii) Conclusion. It is reasonable to expect that the benefits to 
be received by the second group of alternate payees will not be 
affected by any reduction in a former spouse's rate of future 
benefit accrual. Accordingly, the plan administrator is not required 
to provide section 204(h) notice to the alternate payees in the 
second group.
    Example 5. (i) Facts. A plan covers hourly employees and 
salaried employees. The plan provides the same rate of benefit 
accrual for both groups. The employer amends the plan to reduce 
significantly the rate of future benefit accrual of the salaried 
employees only. At that time, it is reasonable to expect that only a 
small percentage of hourly employees will become salaried in the 
future.
    (ii) Conclusion. The plan administrator is not required to 
provide section 204(h) notice to the participants who are currently 
hourly employees.
    Example 6. (i) Facts. A plan covers employees in Division M and 
employees in Division N. The plan provides the same rate of benefit 
accrual for both groups. The employer amends the plan to reduce 
significantly the rate of future benefit accrual of employees in 
Division M. At that time, it is reasonable to expect that in the 
future only a small percentage of employees in Division N will be 
transferred to Division M.
    (ii) Conclusion. The plan administrator is not required to 
provide section 204(h) notice to the participants who are employees 
in Division N.
    Example 7. (i) Facts. The facts are the same facts as in Example 
6, except that at the time the amendment is adopted, it is expected 
that thereafter Division N will be merged into Division M in 
connection with a corporate reorganization (and the employees in 
Division N will become subject to the plan's amended benefit formula 
applicable to the employees in Division M).

[[Page 17285]]

    (ii) Conclusion. In this case, the plan administrator must 
provide section 204(h) notice to the participants who are employees 
in Division M and to the participants who are employees in Division 
N.
    Example 8. (i) Facts. A plan is amended to reduce significantly 
the rate of future benefit accrual for all current employees who are 
participants. The plan amendment will be effective on January 1, 
2004. The plan will provide the notice to applicable individuals on 
October 31, 2003. In determining which current employees are 
applicable individuals, the plan administrator determines that 
October 1, 2003, is a typical business day that is reasonably 
proximate to the time the section 204(h) notice is provided.
    (ii) Conclusion. In this case, October 1, 2003 is a typical 
business day that satisfies the requirements of Q&A-10(e) of this 
section.

    Q-11. What information is required to be provided in a section 
204(h) notice?
    A-11. (a) Explanation of notice requirements--(1) In general. 
Section 204(h) notice must include sufficient information to allow 
applicable individuals to understand the effect of the plan amendment. 
In order to satisfy this rule, a plan administrator providing section 
204(h) notice must satisfy each of the following requirements of this 
paragraph (a).
    (2) Information in section 204(h) notice. The information in a 
section 204(h) notice must be written in a manner calculated to be 
understood by the average plan participant and to apprise the 
applicable individual of the significance of the notice.
    (3) Required narrative description of amendment--(i) Reduction in 
rate of future benefit accrual. In the case of an amendment reducing 
the rate of future benefit accrual, the notice must include a 
description of the benefit or allocation formula prior to the 
amendment, a description of the benefit or allocation formula under the 
plan as amended, and the effective date of the amendment.
    (ii) Reduction in early retirement benefit or retirement-type 
subsidy. In the case of an amendment that reduces an early retirement 
benefit or retirement-type subsidy (other than as a result of an 
amendment reducing the rate of future benefit accrual), the notice must 
describe how the early retirement benefit or retirement-type subsidy is 
calculated from the accrued benefit before the amendment, how the early 
retirement benefit or retirement-type subsidy is calculated from the 
accrued benefit after the amendment, and the effective date of the 
amendment. For example, if, for a plan with a normal retirement age of 
65, the change is from an unreduced normal retirement benefit at age 55 
to an unreduced normal retirement benefit at age 60 for benefits 
accrued in the future, with an actuarial reduction to apply for 
benefits accrued in the future to the extent that the early retirement 
benefit begins before age 60, the notice must state the change and 
specify the factors that apply in calculating the actuarial reduction 
(for example, a 5% per year reduction applies for early retirement 
before age 60).
    (4) Sufficient information to determine the approximate magnitude 
of reduction--(i) General rule. (A) Section 204(h) notice must include 
sufficient information for each applicable individual to determine the 
approximate magnitude of the expected reduction for that individual. 
Thus, in any case in which it is not reasonable to expect that the 
approximate magnitude of the reduction for each applicable individual 
will be reasonably apparent from the description of the amendment 
provided in accordance with paragraph (a)(3) of this Q&A-11, further 
information is required. The further information may be provided by 
furnishing additional narrative information or in other information 
that satisfies this paragraph of this section.
    (B) To the extent any expected reduction is not uniformly 
applicable to all participants, the notice must either identify the 
general classes of participants to whom the reduction is expected to 
apply, or by some other method include sufficient information to allow 
each applicable individual receiving the notice to determine which 
reductions are expected to apply to that individual.
    (ii) Illustrative examples--(A) Requirement generally. The 
requirement to include sufficient information for each applicable 
individual to determine the approximate magnitude of the expected 
reduction for that individual under (a)(4)(i)(A) of this Q&A-11 is 
deemed satisfied if the notice includes one or more illustrative 
examples showing the approximate magnitude of the reduction in the 
examples, as provided in this paragraph (a)(4)(ii). Illustrative 
examples are in any event required to be provided for any change from a 
traditional defined benefit formula to a cash balance formula or a 
change that results in a period of time during which there are no 
accruals (or minimal accruals) with regard to normal retirement 
benefits or an early retirement subsidy (a wear-away period).
    (B) Examples must bound the range of reductions. Where an amendment 
results in reductions that vary (either among participants, as would 
occur for an amendment converting a traditional defined benefit formula 
to a cash balance formula, or over time as to any individual 
participant, as would occur for an amendment that results in a wear-
away period), the illustrative example(s) provided in accordance with 
this paragraph (a)(4)(ii) must show the approximate range of the 
reductions. However, any reductions that are likely to occur in only a 
de minimis number of cases are not required to be taken into account in 
determining the range of the reductions if a narrative statement is 
included to that effect and examples are provided that show the 
approximate range of the reductions in other cases. Amendments for 
which the maximum reduction occurs under identifiable circumstances, 
with proportionately smaller reductions in other cases, may be 
illustrated by one example illustrating the maximum reduction, with a 
statement that smaller reductions also occur. Further, assuming that 
the reduction varies from small to large depending on service or other 
factors, two illustrative examples may be provided showing the smallest 
likely reduction and the largest likely reduction.
    (C) Assumptions used in examples. The examples provided under this 
paragraph (a)(4)(ii) are not required to be based on any particular 
form of payment (such as a life annuity or a single sum), but may be 
based on whatever form appropriately illustrates the reduction. The 
examples generally may be based on any reasonable assumptions (for 
example, assumptions relating to the representative participant's age, 
years of service, and compensation, along with any interest rate and 
mortality table used in the illustrations, as well as salary scale 
assumptions used in the illustrations for amendments that alter the 
compensation taken into account under the plan), but the section 204(h) 
notice must identify those assumptions. However, if a plan's benefit 
provisions include a factor that varies over time (such as a variable 
interest rate), the determination of whether an amendment is reasonably 
expected to result in a wear-away period must be based on the value of 
the factor applicable under the plan at a time that is reasonably close 
to the date section 204(h) notice is provided, and any wear-away period 
that is solely a result of a future change in the variable factor may 
be disregarded. For example, to determine whether a wear-away occurs as 
a result of a section 204(h) amendment that converts a defined benefit 
plan to a cash balance pension plan that will credit interest based on 
a

[[Page 17286]]

variable interest factor specified in the plan, the future interest 
credits must be projected based on the interest rate applicable under 
the variable factor at the time section 204(h) notice is provided.
    (D) Individual statements. This paragraph (a)(4)(ii) may be 
satisfied by providing a statement to each applicable individual 
projecting what that individual's future benefits are reasonably 
expected to be at various future dates and what that individual's 
future benefits would have been under the terms of the plan as in 
effect before the section 204(h) amendment, provided that the statement 
includes the same information required for examples under paragraphs 
(a)(4)(ii)(A) through (C) of this Q&A-11, including showing the 
approximate range of the reductions for the individual if the 
reductions vary over time and identification of the assumptions used in 
the projections.
    (5) No false or misleading information. A section 204(h) notice may 
not include materially false or misleading information (or omit 
information so as to cause the information provided to be misleading).
    (6) Additional information when reduction not uniform--(i) In 
general. If an amendment by its terms affects different classes of 
participants differently (e.g., one new benefit formula will apply to 
Division A and another to Division B), then the requirements of 
paragraph (a) of this Q&A-11 apply separately with respect to each such 
general class of participants. In addition, the notice must include 
sufficient information to enable an applicable individual who is a 
participant to understand which class he or she is a member of.
    (ii) Option for different section 204(h) notices. If a section 
204(h) amendment affects different classes of applicable individuals 
differently, the plan administrator may provide to differently affected 
classes of applicable individuals a section 204(h) notice appropriate 
to those individuals. Such section 204(h) notice may omit information 
that does not apply to the applicable individuals to whom it is 
furnished, but must identify the class or classes of applicable 
individuals to whom it is provided.
    (b) Examples. The following examples illustrate the requirements 
paragraph (a) of this Q&A-11. In each example, it is assumed that the 
actual notice provided is written in a manner calculated to be 
understood by the average plan participant and to apprise the 
applicable individual of the significance of the notice in accordance 
with paragraph (a)(2) of this Q&A-11. The examples are as follows:

    Example 1. (i) Facts. Plan A provides that a participant is 
entitled to a normal retirement benefit of 2% of the participant's 
average pay over the 3 consecutive years for which the average is 
the highest (highest average pay) multiplied by years of service. 
Plan A is amended to provide that, effective January 1, 2004, the 
normal retirement benefit will be 2% of the participant's highest 
average pay multiplied by years of service before the effective 
date, plus 1% of the participant's highest average pay multiplied by 
years of service after the effective date. The plan administrator 
provides notice that states: ``Under the Plan's current benefit 
formula, a participant's normal retirement benefit is 2% of the 
participant's average pay over the 3 consecutive years for which the 
average is the highest multiplied by the participant's years of 
service. This formula is being changed by a plan amendment. Under 
the Plan as amended, a participant's normal retirement benefit will 
be the sum of 2% of the participant's average pay over the 3 
consecutive years for which the average is the highest multiplied by 
years of service before the January 1, 2004 effective date, plus 1% 
of the participant's average pay over the 3 consecutive years for 
which the average is the highest multiplied by the participant's 
years of service after December 31, 2003. This change is effective 
on January 1, 2004.'' The notice does not contain any additional 
information.
    (ii) Conclusion. The notice satisfies the requirements of 
paragraph (a) of this Q&A-11.
    Example 2. (i) Facts. Plan B provides that a participant is 
entitled to a normal retirement benefit at age 64 of 2.2% of the 
participant's career average pay multiplied by years of service. 
Plan B is amended to cease all accruals, effective January 1, 2004. 
The plan administrator provides notice that includes a description 
of the old benefit formula, a statement that, after December 31, 
2003, no participant will earn any further accruals, and the 
effective date of the amendment. The notice does not contain any 
additional information.
    (ii) Conclusion. The notice satisfies the requirements of 
paragraph (a) of this Q&A-11.
    Example 3. (i) Facts. Plan C provides that a participant is 
entitled to a normal retirement benefit at age 65 of 2% of career 
average compensation multiplied by years of service. Plan C is 
amended to provide that the normal retirement benefit will be 1% of 
average pay over the 3 consecutive years for which the average is 
the highest multiplied by years of service. The amendment only 
applies to accruals for years of service after the amendment, so 
that each employee's accrued benefit is equal to the sum of the 
benefit accrued as of the effective date of the amendment plus the 
accrued benefit equal to the new formula applied to years of service 
beginning on or after the effective date. The plan administrator 
provides notice that describes the old and new benefit formulas and 
also explains that for an individual whose compensation increases 
over the individual's career such that the individual's highest 3-
year average exceeds the individual's career average, the reduction 
will be less or there may be no reduction. The notice does not 
contain any additional information.
    (ii) Conclusion. The notice satisfies the requirements of 
paragraph (a) of this Q&A-11.
    Example 4. (i) Facts. (A) Plan D is a defined benefit pension 
plan under which each participant accrues a normal retirement 
benefit, as a life annuity beginning at the normal retirement age of 
65, equal to the participant's number of years of service multiplied 
by 1.5 percent multiplied by the participant's average pay over the 
3 consecutive years for which the average is the highest. Plan D 
provides early retirement benefits for former employees beginning at 
or after age 55 in the form of an early retirement annuity that is 
actuarially equivalent to the normal retirement benefit, with the 
reduction for early commencement based on reasonable actuarial 
assumptions that are specified in Plan D. Plan D provides for the 
suspension of benefits of participants who continue in employment 
beyond normal retirement age, in accordance with section 
203(a)(3)(B) of ERISA and regulations thereunder issued by the 
Department of Labor. The pension of a participant who retires after 
age 65 is calculated under the same normal retirement benefit 
formula, but is based on the participant's service credit and 
highest 3-year pay at the time of late retirement with any 
appropriate actuarial increases.
    (B) Plan D is amended, effective July 1, 2005, to change the 
formula for all future accruals to a cash balance formula under 
which the opening account balance for each participant on July 1, 
2005, is zero, hypothetical pay credits equal to 5 percent of pay 
are credited to the account thereafter, and hypothetical interest is 
credited monthly based on the applicable interest rate under section 
417(e)(3) of the Internal Revenue Code at the beginning of the 
quarter. Any participant who terminates employment with vested 
benefits can receive an actuarially equivalent annuity (based on the 
same reasonable actuarial assumptions that are specified in Plan D) 
commencing at any time after termination of employment and before 
the plan's normal retirement age of 65. The benefit resulting from 
the hypothetical account balance is in addition to the benefit 
accrued before July 1, 2005 (taking into account only service and 
highest 3-year pay before July 1, 2005), so that it is reasonably 
expected that no wear-away period will result from the amendment. 
The plan administrator expects that, as a general rule, depending on 
future pay increases and future interest rates, the rate of future 
benefit accrual after the conversion is higher for participants who 
accrue benefits before approximately age 50 and after approximately 
age 70, but is lower for participants who accrue benefits between 
approximately age 50 and age 70.
    (C) The plan administrator of Plan D announces the conversion to 
a cash balance formula on May 16, 2005. The announcement is 
delivered to all participants and includes a written notice that 
describes the old formula, the new formula, and the effective date.

[[Page 17287]]

    (D) In addition, the notice states that the Plan D formula 
before the conversion provided a normal retirement benefit equal to 
the product of a participant's number of years of service multiplied 
by 1.5 percent multiplied by the participant's average pay over the 
3 years for which the average is the highest (highest 3-year pay). 
The notice includes an example showing the normal retirement benefit 
that will be accrued after June 30, 2005 for a participant who is 
age 49 with 10 years of service at the time of the conversion. The 
plan administrator reasonably believes that such a participant is 
representative of the participants whose rate of future benefit 
accrual will be reduced as a result of the amendment. The example 
estimates that, if the participant continues employment to age 65, 
the participant's normal retirement benefit for service from age 49 
to age 65 will be $657 per month for life. The example assumes that 
the participant's pay is $50,000 at age 49. The example states that 
the estimated $657 monthly pension accrues over the 16-year period 
from age 49 to age 65 and that, based on assumed future pay 
increases, this amount annually would be 9.1 percent of the 
participant's highest 3-year pay at age 65, which over the 16 years 
from age 49 to age 65 averages 0.57 percent per year multiplied by 
the participant's highest 3-year pay. The example also states that 
the sum of the monthly annuity accrued before the conversion in the 
10-year period from age 39 to age 49 plus the $657 monthly annuity 
estimated to be accrued over the 16-year period from age 49 to age 
65 is $1,235 and that, based on assumed future increases in pay, 
this would be 17.1 percent of the participant's highest 3-year pay 
at age 65, which over the employee's career from age 39 to age 65 
averages 0.66 percent per year multiplied by the participant's 
highest 3-year pay. The notice also includes two other examples with 
similar information, one of which is intended to show the 
circumstances in which a small reduction may occur and the other of 
which shows the largest reduction that the plan administrator thinks 
is likely to occur. The notice states that the estimates are based 
on the assumption that pay increases annually after June 30, 2005, 
at a 4 percent rate. The notice also specifies that the applicable 
interest rate under section 417(e) for hypothetical interest credits 
after June 30, 2005 is assumed to be 6 percent, which is the section 
417(e) of the Internal Revenue Code applicable interest rate under 
the plan for 2005.
    (ii) Conclusion. The information in the notice, as described in 
paragraph (i)(C) and (i)(D) of this Example 4, satisfies the 
requirements of paragraph (a)(3) of this Q&A-11 with respect to 
applicable individuals who are participants. The requirements of 
paragraph (a)(4) of this Q&A-11 are satisfied because, as noted in 
paragraph (i)(D) of this Example 4, the notice describes the old 
formula and describes the estimated future accruals under the new 
formula in terms that can be readily compared to the old formula, 
i.e., the notice states that the estimated $657 monthly pension 
accrued over the 16-year period from age 49 to age 65 averages 0.57 
percent of the participant's highest 3-year pay at age 65. The 
requirement in paragraph (a)(4)(ii) of this Q&A-11 that the examples 
include sufficient information to be able to determine the 
approximate magnitude of the reduction would also be satisfied if 
the notice instead directly stated the amount of the monthly pension 
that would have accrued over the 16-year period from age 49 to age 
65 under the old formula.
    Example 5. (i) Facts. The facts are the same as in Example 4, 
except that, under the plan as in effect before the amendment, the 
early retirement pension for a participant who terminates employment 
after age 55 with at least 20 years of service is equal to the 
normal retirement benefit without reduction from age 65 to age 62 
and reduced by only 5 percent per year for each year before age 62. 
As a result, early retirement benefits for such a participant 
constitute a retirement-type subsidy. The plan as in effect after 
the amendment provides an early retirement benefit equal to the sum 
of the early retirement benefit payable under the plan as in effect 
before the amendment taking into account only service and highest 3-
year pay before July 1, 2005, plus an early retirement annuity that 
is actuarially equivalent to the account balance for service after 
June 30, 2005. The notice provided by the plan administrator 
describes the old early retirement annuity, the new early retirement 
annuity, and the effective date. The notice includes an estimate of 
the early retirement annuity payable to the illustrated participant 
for service after the conversion if the participant were to retire 
at age 59 (which the plan administrator believes is a typical early 
retirement age) and elect to begin receiving an immediate early 
retirement annuity. The example states that the normal retirement 
benefit expected to be payable at age 65 as a result of service from 
age 49 to age 59 is $434 per month for life beginning at age 65 and 
that the early retirement annuity expected to be payable as a result 
of service from age 49 to age 59 is $270 per month for life 
beginning at age 59. The example states that the monthly early 
retirement annuity of $270 is 38 percent less than the monthly 
normal retirement benefit of $434, whereas a 15 percent reduction 
would have applied under the plan as in effect before the amendment. 
The notice also includes similar information for examples that show 
the smallest and largest reduction that the plan administrator 
thinks is likely to occur in the early retirement benefit. The 
notice also specifies the applicable interest rate, mortality table, 
and salary scale used in the example to calculate the early 
retirement reductions.
    (ii) Conclusion. The information in the notice, as described in 
paragraphs (i)(C) and (D) of Example 4 and paragraph (i) of this 
Example 5, satisfies the requirements of paragraph (a)(3) of this 
Q&A-11 with respect to applicable individuals who are participants. 
The requirements of paragraph (a)(4) of this Q&A-11 are satisfied 
because, as noted in paragraph (i) of this Example 5, the notice 
describes the early retirement subsidy under the old formula and 
describes the estimated early retirement pension under the new 
formula in terms that can be readily compared to the old formula, 
i.e., the notice states that the monthly early retirement pension of 
$270 is 38 percent less than the monthly normal retirement benefit 
of $434, whereas a 15 percent reduction would have applied under the 
plan as in effect before the amendment. The requirements of 
paragraph (a)(4)(ii) of this Q&A-11 that the examples include 
sufficient information to be able to determine the approximate 
magnitude of the reduction would also be satisfied if the notice 
instead directly stated the amount of the monthly early retirement 
pension that would be payable at age 59 under the old formula.

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

[[Page 17288]]

Section 204(h) notice may be enclosed with or combined with other 
notice provided by the employer or plan administrator (for example, a 
notice of intent to terminate under title IV of ERISA). Except as 
provided in paragraph (c) of this Q&A-13, a section 204(h) notice is 
deemed to have been provided on a date if it has been provided by the 
end of that day. When notice is delivered by first class mail, the 
notice is considered provided as of the date of the United States 
postmark stamped on the cover in which the document is mailed.
    (b) Example. The following example illustrates the provisions of 
paragraph (a) of this Q&A-13:

    Example. (i) Facts. Plan A is amended to reduce significantly 
the rate of future benefit accrual effective January 1, 2005. Under 
Q&A-9 of this section, section 204(h) notice is required to be 
provided at least 45 days before the effective date of the 
amendment. The plan administrator causes section 204(h) notice to be 
mailed to all affected participants. The mailing is postmarked 
November 16, 2004.
    (ii) Conclusion. Because section 204(h) notice is given 45 days 
before the effective date of the plan amendment, it satisfies the 
timing requirement of Q&A-9 of this section.
    (c) New technologies--(1) General rule. A section 204(h) notice 
may be provided to an applicable individual through an electronic 
method (other than an oral communication or a recording of an oral 
communication), provided that all of the following requirements are 
satisfied:
    (i) Either the notice is actually received by the applicable 
individual or the plan administrator takes appropriate and necessary 
measures reasonably calculated to ensure that the method for 
providing section 204(h) notice results in actual receipt of the 
notice by the applicable individual.
    (ii) The plan administrator provides the applicable individual 
with a clear and conspicuous statement, in electronic or non-
electronic form, that the applicable individual has a right to 
request and obtain a paper version of the section 204(h) notice 
without charge and, if such request is made, the applicable 
individual is furnished with the paper version without charge.
    (iii) The requirements of this section must otherwise be 
satisfied. Thus, for example, a section 204(h) notice provided 
through an electronic method must be delivered on or before the date 
required under Q&A-9 of this section and must satisfy the 
requirements set forth in Q&A-11 of this section, including the 
content requirements and the requirements that it be written in a 
manner calculated to be understood by the average plan participant 
and to apprise the applicable individual of the significance of the 
notice. Accordingly, when it is not otherwise reasonably evident, 
the recipient should be apprised (either in electronic or in non-
electronic form), at the time the notice is furnished 
electronically, of the significance of the notice.
    (2) Examples. The following examples illustrate the requirement 
in paragraph (c)(1)(i) of this Q&A-13. In these examples, it is 
assumed that the notice satisfies the requirements in paragraphs 
(c)(1)(ii) and (iii) of this section. The examples are as follows:
    Example 1. (i) Facts. On July 1, 2003, M, a plan administrator 
of Company N's plan, sends notice intended to constitute section 
204(h) notice to A, an employee of Company N and a participant in 
the plan. The notice is sent through e-mail to A's e-mail address on 
Company N's electronic information system. Accessing Company N's 
electronic information system is not an integral part of A's duties. 
M sends the e-mail with a request for a computer-generated 
notification that the message was received and opened. M receives 
notification indicating that the e-mail was received and opened by A 
on July 9, 2003.
    (ii) Conclusion. With respect to A, although M has failed to 
take appropriate and necessary measures reasonably calculated to 
ensure that the method for providing section 204(h) notice results 
in actual receipt of the notice, M satisfies the requirement of 
paragraph (c)(1)(i) of this Q&A-13 on July 9, 2003, which is when A 
actually receives the notice.
    Example 2. (i) Facts. On August 1, 2003, O, a plan administrator 
of Company P's plan, sends a notice intended to constitute section 
204(h) notice of ERISA to B, who is an employee of Company P and a 
participant in Company P's plan. The notice is sent through e-mail 
to B's e-mail address on Company P's electronic information system. 
B has the ability to effectively access electronic documents from 
B's e-mail address on Company P's electronic information system and 
accessing the system is an integral part of B's duties.
    (ii) Conclusion. Because access to the system is an integral 
part of B's duties, O has taken appropriate and necessary measures 
reasonably calculated to ensure that the method for providing 
section 204(h) notice results in actual receipt of the notice. Thus, 
regardless of whether B actually accesses B's email on that date, O 
satisfies the requirement of paragraph (c)(1)(i) of this Q&A-13 on 
August 1, 2003, with respect to B.
    (3) Safe harbor in case of consent. The requirement of paragraph 
(c)(1)(i) of this Q&A-13 is deemed to be satisfied with respect to an 
applicable individual if the section 204(h) notice is provided 
electronically to an applicable individual, and--
    (i) The applicable individual has affirmatively consented 
electronically, or confirmed consent electronically, in a manner that 
reasonably demonstrates the applicable individual's ability to access 
the information in the electronic form in which the notice will be 
provided, to receiving section 204(h) notice electronically and has not 
withdrawn such consent;
    (ii) The applicable individual has provided, if applicable, in 
electronic or non-electronic form, an address for the receipt of 
electronically furnished documents;
    (iii) Prior to consenting, the applicable individual has been 
provided, in electronic or non-electronic form, a clear and conspicuous 
statement indicating--
    (A) That the consent can be withdrawn at any time without charge;
    (B) The procedures for withdrawing consent and for updating the 
address or other information needed to contact the applicable 
individual;
    (C) Any hardware and software requirements for accessing and 
retaining the documents; and
    (D) The information required by paragraph (c)(1)(ii) of this Q&A-
13; and
    (iv) After consenting, if a change in hardware or software 
requirements needed to access or retain electronic records creates a 
material risk that the applicable individual will be unable to access 
or retain the section 204(h) notice--
    (A) The applicable individual is provided with a statement of the 
revised hardware and software requirements for access to and retention 
of the section 204(h) notice and is given the right to withdraw consent 
without the imposition of any fees for such withdrawal and without the 
imposition of any condition or consequence that was not disclosed at 
the time of the initial consent; and
    (B) The requirement of paragraph (c)(3)(i) of this Q&A-13 is again 
complied with.
    Q-14. What are the consequences if a plan administrator fails to 
provide section 204(h) notice?
    A-14. (a) Egregious failures--(1) Effect of egregious failure to 
provide section 204(h) notice. Section 204(h)(6)(A) of ERISA provides 
that, in the case of any egregious failure to meet the notice 
requirements with respect to any plan amendment, the plan provisions 
are applied so that all applicable individuals are entitled to the 
greater of the benefit to which they would have been entitled without 
regard to the amendment, or the benefit under the plan with regard to 
the amendment. For a special rule applicable in the case of a plan 
termination, see Q&A-17(b) of this section.
    (2) Definition of egregious failure. For purposes of section 204(h) 
of ERISA and this Q&A-14, there is an egregious failure to meet the 
notice requirements if a failure to provide required notice is within 
the control of the plan sponsor and is either an intentional failure or 
a failure, whether or not intentional, to provide most of the 
individuals with most of the information they are entitled

[[Page 17289]]

to receive. For this purpose, an intentional failure includes any 
failure to promptly provide the required notice or information after 
the plan administrator discovers an unintentional failure to meet the 
requirements. A failure to give section 204(h) notice is deemed not to 
be egregious if the plan administrator reasonably determines, taking 
into account section 4980F, section 204(h), these regulations, other 
administrative pronouncements, and relevant facts and circumstances, 
that the reduction in the rate of future benefit accrual resulting from 
an amendment is not significant (as described in Q&A-8 of this 
section), or that an amendment does not significantly reduce an early 
retirement benefit or retirement-type subsidy.
    (3) Example. The following example illustrates the provisions of 
this paragraph (a):

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

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

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

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

    Example 1. (i) Facts. Corporation Q maintains Plan A, a defined 
benefit plan that covers all employees of Corporation Q, including 
employees in its Division M. Plan A provides that participating 
employees cease to accrue benefits when they cease to be employees 
of Corporation Q. On January 1, 2006, Corporation Q sells all of the 
assets of Division M to Corporation R. Corporation R maintains Plan 
B, which covers all of the employees of Corporation R. Under the 
sale agreement, employees of Division M become employees of 
Corporation R on the date of the sale (and cease to be employees of 
Corporation Q), Corporation Q continues to maintain Plan A following 
the sale, and the employees of Division M become participants in 
Plan B.
    (ii) Conclusion. No section 204(h) notice is required because no 
plan amendment was adopted that reduced the rate of future benefit 
accrual. The employees of Division M who become employees of 
Corporation R ceased to accrue benefits under Plan A because their 
employment with Corporation Q terminated.
    Example 2. (i) Facts. Subsidiary Y is a wholly owned subsidiary 
of Corporation S. Subsidiary Y maintains Plan C, a defined benefit 
plan that covers employees of Subsidiary Y. Corporation S sells all 
of the stock of Subsidiary Y to Corporation T. At the effective date 
of the sale of the stock of Subsidiary Y, in accordance with the 
sale agreement between Corporation S and Corporation T, Subsidiary Y 
amends Plan C so that all benefit accruals cease.
    (ii) Conclusion. Section 204(h) notice is required to be 
provided because Subsidiary Y adopted a plan amendment that 
significantly reduced the rate of future benefit accrual in Plan C.
    Example 3. (i) Facts. As a result of an acquisition, Corporation 
U maintains two defined benefit plans: Plan D covers employees of 
Division N and Plan E covers the rest of the employees of 
Corporation U. Plan E provides a significantly lower rate of future 
benefit accrual than Plan D. Plan D is merged with Plan E, and all 
of the employees of Corporation U will accrue benefits under

[[Page 17290]]

the merged plan in accordance with the benefit formula of former 
Plan E.
    (ii) Conclusion. Section 204(h) notice is required.
    Example 4. (i) Facts. The facts are the same as in Example 3, 
except that the rate of future benefit accrual in Plan E is not 
significantly lower. In addition, Plan D has a retirement-type 
subsidy that Plan E does not have and the Plan D employees' rights 
to the subsidy under the merged plan are limited to benefits accrued 
before the merger.
    (ii) Conclusion. Section 204(h) notice is required for any 
participants or beneficiaries for whom the reduction in the 
retirement-type subsidy is significant (and for any employee 
organization representing such participants).
    Example 5. (i) Facts. Corporation V maintains several plans, 
including Plan F, which covers employees of Division P. Plan F 
provides that participating employees cease to accrue further 
benefits under the plan when they cease to be employees of 
Corporation V. Corporation V sells all of the assets of Division P 
to Corporation W, which maintains Plan G for its employees. Plan G 
provides a significantly lower rate of future benefit accrual than 
Plan F. Plan F is merged with Plan G as part of the sale, and 
employees of Division P who become employees of Corporation W will 
accrue benefits under the merged plan in accordance with the benefit 
formula of former Plan G.
    (ii) Conclusion. No section 204(h) notice is required because no 
plan amendment was adopted that reduces the rate of future benefit 
accrual or eliminates or significantly reduces an early retirement 
benefit or retirement-type subsidy. Under the terms of Plan F as in 
effect prior to the merger, employees of Division P cease to accrue 
any further benefits (including benefits with respect to early 
retirement benefits and any retirement-type subsidy) under Plan F 
after the date of the sale because their employment with Corporation 
V terminated.

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

    Example. (i) Facts. An employer adopts an amendment that 
provides for the cessation of benefit accruals under a defined 
benefit plan on December 31, 2003, and for the termination of the 
plan pursuant to title IV of ERISA as of a proposed termination date 
that is also December 31, 2003. As part of the notice of intent to 
terminate required under title IV in order to terminate the plan, 
the plan administrator gives section 204(h) notice of the amendment 
ceasing accruals, which states that benefit accruals will cease ``on 
December 31, 2003 whether or not the plan is terminated on that 
date.'' However, because all the requirements of title IV for a plan 
termination are not satisfied, the plan cannot be terminated until a 
date that is later than December 31, 2003.
    (ii) Conclusion. Nonetheless, because section 204(h) notice was 
given stating that the plan was amended to cease accruals on 
December 31, 2003, section 204(h) does not prevent the amendment to 
cease accruals from being effective on December 31, 2003. The result 
would be the same had the section 204(h) notice informed the 
participants that the plan was amended to provide for a proposed 
termination date of December 31, 2003 and to provide that ``benefit 
accruals will cease on the proposed termination date whether or not 
the plan is terminated on that date.'' However, neither section 
4980F nor section 204(h) would be satisfied with respect to the 
December 31, 2003 effective date if the section 204(h) notice had 
merely stated that benefit accruals would cease ``on the termination 
date'' or ``on the proposed termination date.''

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

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

0
Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


[[Page 17291]]



0
Par. 6. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
54.4980F-1..............................................       1545-1780
 
                                * * * * *
------------------------------------------------------------------------


David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: March 27, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-8290 Filed 4-8-03; 8:45 am]
BILLING CODE 4830-01-P