[Federal Register Volume 69, Number 57 (Wednesday, March 24, 2004)]
[Proposed Rules]
[Pages 13769-13786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6220]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[REG-128309-03]
RIN 1545-BC26


Section 411(d)(6) Protected Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations providing guidance 
on the conditions under which a plan amendment may eliminate or reduce 
an early retirement benefit, a retirement-type subsidy, or an optional 
form of benefit (section 411(d)(6)(B) protected benefits) with respect 
to a participant's benefits attributable to service before the 
amendment. The proposed regulations would also provide guidance 
concerning how the notice requirements of section 4980F apply with 
respect to such plan amendments. These proposed regulations would 
generally affect plan sponsors of, and participants in, qualified 
retirement plans.

DATES: Written or electronic comments must be received by June 22, 
2004.
    Requests to speak (with outlines of oral comments to be discussed) 
at the public hearing scheduled for June 24, 2004, at 10 a.m. must be 
received by June 3, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-128309-03), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
128309-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically to the IRS Internet site at http://www.irs.gov/regs. The public hearing will be held in the Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Pamela R. Kinard at (202) 622-6060; concerning submissions of comments, 
the hearing, and the requests to be placed on the building access list 
to attend the hearing, contact Guy Traynor, (202) 622-7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR parts 1 and 54 
under sections 411(d)(6) and 4980F of the Internal Revenue Code (Code) 
and section 204(g) and (h) of the Employee Retirement Income Security 
Act of 1974 (ERISA). These proposed regulations, when finalized, would 
revise Treasury regulations Sec.  1.411(d)-3 to reflect changes to 
section 411(d)(6) made by the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA). 
These proposed regulations would also include rules relating to changes 
to section 411(d)(6) made by the Retirement Equity Act of 1984, Public 
Law 98-397 (98 Stat. 1426) (REA). In addition, these proposed 
regulations would amend Sec.  54.4980F-1(b), Q&A-8, relating to the 
notice requirement for certain plan amendments that reduce early 
retirement benefits or retirement-type subsidies.
    Section 411(d)(6)(A) provides that a plan is treated as not 
satisfying the requirements of section 411 if the accrued benefit of a 
participant is decreased by an amendment of the plan, other than an 
amendment described in section 412(c)(8) of the Code or section 4281 of 
ERISA. Section 411(a)(7) generally defines the term ``accrued benefit'' 
as meaning, for a defined benefit plan, the employee's accrued benefit 
determined under the plan and, except as provided in section 411(c)(3), 
expressed in the form of an annual benefit commencing at normal 
retirement age. Under section 411(c)(3), if an employee's accrued 
benefit under a defined benefit plan is to be determined as an amount 
other than an annual benefit commencing at normal retirement age, the 
employee's accrued benefit is the actuarial equivalent of such benefit.
    Section 301(a) of REA amended section 411(d)(6) to add subparagraph 
(B), which provides that a plan amendment that has the effect of 
eliminating or reducing an early retirement benefit or a retirement-
type subsidy, or eliminating an optional form of benefit, with respect 
to benefits attributable to service before the amendment is treated as 
impermissibly reducing accrued benefits. For a retirement-type subsidy, 
this protection applies only with respect to an employee who satisfies 
the preamendment conditions for the subsidy (either before or after the 
amendment). Section 411(d)(6)(B) also authorizes the Secretary to 
provide, through regulations, that section 411(d)(6)(B) does not apply 
to any plan amendment that eliminates optional forms of benefit (other 
than a plan amendment that has the effect of eliminating or reducing an 
early retirement benefit or a retirement-type subsidy).
    On July 11, 1988, final regulations (TD 8212) under section 
411(d)(6) were published in the Federal Register (53 FR 26050). Section 
1.411(d)-4, Q&A-1(a), of the Regulations provides that section 
411(d)(6) protects certain benefits, to the extent they have accrued, 
so that such benefits cannot be reduced or eliminated by plan 
amendment, except to the extent permitted by regulations. Section 
1.411(d)-4 provides rules for when a plan may be amended to reduce or 
eliminate a section 411(d)(6) protected benefit.

[[Page 13770]]

    Section 4980F of the Code and section 204(h) of ERISA each require 
that a plan administrator must give notice of a plan amendment to 
affected 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 a retirement-type subsidy.
    Section 645(b)(1) of EGTRRA amended section 411(d)(6)(B) of the 
Code to direct the Secretary to issue regulations providing that 
section 411(d)(6)(B) does not apply to any amendment that reduces or 
eliminates early retirement benefits or retirement-type subsidies that 
create significant burdens or complexities for the plan and plan 
participants unless such amendment adversely affects the rights of any 
participant in a more than de minimis manner. Section 645(b)(2) of 
EGTRRA also amended section 204(g)(2) of ERISA to include a similar 
directive for purposes of section 204(g) of ERISA, which provides a 
rule parallel to section 411(d)(6) of the Code.
    Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 
47713), the Secretary of the Treasury has interpretive jurisdiction 
over the subject matter addressed in these regulations for purposes of 
ERISA, as well as the Code. Further, section 204(g) of ERISA authorizes 
the Secretary of the Treasury to issue the regulations under section 
204(g) of ERISA, relating to the permissible elimination of optional 
forms of benefit. Thus, these proposed Treasury regulations issued 
under sections 411(d)(6) and 4980F of the Code apply as well for 
purposes of section 204(g) and (h) of ERISA, and respond to the EGTRRA 
directive for purposes of both section 411(d)(6) of the Code and 
section 204(g) of ERISA.
    In Notice 2002-46 (2002-2 C.B. 96), Treasury and the IRS requested 
comments regarding the possible approaches for eliminating optional 
forms of benefit from defined benefit plans, including comments on 
whether the retention of certain optional forms of benefit under a 
defined benefit plan results in significant burdens or complexities for 
plan sponsors and participants, and the conditions under which these 
optional forms of benefit are of de minimis value to plan participants. 
In Notice 2003-10 (2003-5 I.R.B. 369), Treasury and the IRS announced 
that regulations would be proposed to provide general guidance relating 
to early retirement benefits and retirement-type subsidies under 
section 411(d)(6)(B). Comments were requested on the guidance that 
should be provided with respect to early retirement benefits and 
retirement-type subsidies, as well as whether the proposed regulations 
should permit plan amendments that eliminate or reduce early retirement 
benefits or retirement-type subsidies that are contingent on 
unpredictable events. A number of helpful comments were received in 
response to these notices and those comments were considered in 
drafting these proposed regulations.

Explanation of Provisions

General Overview

    The proposed regulations would implement the provisions of section 
645(b)(1) of EGTRRA by permitting the elimination of early retirement 
benefits, retirement-type subsidies, and optional forms of benefit 
under a plan which create significant burdens or complexities for the 
plan and its participants, but only if the elimination does not 
adversely affect the rights of any participant in a more than de 
minimis manner. These rules relating to the permissible elimination of 
section 411(d)(6)(B) protected benefits are in addition to the rules 
permitting elimination of section 411(d)(6) protected benefits under 
Sec.  1.411(d)-4. These proposed regulations would also include general 
guidance on section 411(d)(6), including the meaning of terms used 
therein, the scope of the section 411(d)(6)(A) protection against plan 
amendments decreasing a participant's accrued benefit, and the scope of 
the section 411(d)(6)(B) protection for early retirement benefits, 
retirement-type subsidies, and optional forms of benefit.

Scope of Section 411(d)(6) Protections

    The proposed regulations would revise the existing final 
regulations at Sec.  1.411(d)-3. The rules under those regulations 
would generally be retained but would be updated to reflect statutory 
changes such as the elimination of class-year vesting and the enactment 
of section 411(d)(6)(B).
    The proposed regulations also would take into account and respond 
to judicial decisions interpreting section 411(d)(6) (or its parallel 
provision at section 204(g) of ERISA).\1\ For example, the proposed 
regulations would provide that section 411(d)(6) protection applies to 
a participant's entire accrued benefit without regard to whether any 
portion of that accrued benefit is accrued before a participant's 
severance from employment or is included in the accrued benefit of the 
participant pursuant to a plan amendment adopted after the 
participant's severance from employment.\2\
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    \1\ See Bellas v. CBS, Inc., 221 F. 3d 517 (3rd Cir. 2000), 
cert. denied, 531 U.S. 1104 (2001) (involuntary separation benefit 
is both an early retirement benefit and a retirement-type subsidy to 
the extent it provides for the payment of normal retirement benefits 
that continue beyond normal retirement age), Board of Trustees of 
the Sheet Metal Workers' National Pension Fund v. C.I.R., 318 F. 3d 
599 (4th Cir. 2003) (a COLA benefit granted by a plan amendment is 
not an accrued benefit for participants that retired before the 
effective date of the amendment and, thus, the subsequent plan 
amendment eliminating the COLA benefit did not violate the anti-
cutback rule of section 411(d)(6)), Michael v. Riverside Cement, 266 
F. 3d 1023 (9th Cir. 2001) (a plan amendment providing for an 
actuarial offset of early retirement benefits previously received by 
a rehire upon subsequent retirement violates ERISA section 204(g), 
even though the net effect of the amendment is an increase in the 
early retirement benefit of the participant), and Heinz v. Central 
Laborers' Pension Fund, 303 F. 3d 802 (7th Cir. 2002)), cert. 
granted, 72 U.S.L.W. 3370 (U.S. Dec. 1, 2003) (a pension plan 
offering fully subsidized early retirement benefits violated section 
204(g) of ERISA when the plan was amended to expand the definition 
of disqualifying employment for purposes of applying its suspension 
of benefits rule).
    \2\ This is contrary to the analysis in Board of Trustees of the 
Sheet Metal Workers' National Pension Fund v. C.I.R.
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    The proposed regulations would retain the rules in the existing 
regulations that provide that, for purposes of determining whether or 
not any participant's accrued benefit is decreased, all plan amendments 
affecting, directly or indirectly, the computation of accrued benefits 
are taken into account, and that, in determining whether a reduction 
has occurred, all amendments with the same applicable amendment date 
(the later of the adoption date or the effective date) are treated as 
one plan amendment, and would provide that these rules apply to section 
411(d)(6)(B) protected benefits as well. Thus, for example, if there 
are two amendments with the same applicable amendment date, and one 
amendment increases accrued benefits and the other amendment decreases 
the early retirement factors that are used to determine the early 
retirement annuity, the amendments are treated as one amendment and 
only violate section 411(d)(6) if the net dollar amount of the early 
retirement annuity after the two amendments is lower at any point in 
time than it would have been without the two amendments.\3\
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    \3\ This is contrary to the analysis in Michael v. Riverside 
Cement.
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    The proposed regulations would also provide that a plan amendment 
violates the requirements of section 411(d)(6) if it is one of a series 
of plan amendments made at different times that, when taken together, 
have the effect of reducing or eliminating a section 411(d)(6) 
protected benefit in a manner that would otherwise be prohibited if 
accomplished through a single amendment. The

[[Page 13771]]

proposed regulations, however, do not address the interaction of the 
vesting rules in section 411(a) with section 411(d)(6). This topic, 
which is currently before the Supreme Court in Central Laborers' 
Pension Fund v. Heinz, No. 02-891, is instead reserved for future 
guidance.
    The proposed regulations also provide a number of clarifications 
regarding section 411(d)(6)(B) protected benefits. The proposed 
regulations would clarify that, if a plan amendment merely replaces an 
optional form of benefit with another optional form of benefit that is 
of inherently equal or greater value, the amendment is not to be 
treated as eliminating an optional form of benefit, or eliminating or 
reducing an early retirement benefit or retirement-type subsidy. For 
example, a change in the method of calculating a joint and survivor 
annuity from using a 90% adjustment factor on account of the 
survivorship payment at particular ages on the annuity starting date to 
using a 91% adjustment factor at the same ages on the annuity starting 
date is not treated as an elimination of an optional form of benefit.
    The proposed regulations would reflect the rules in the existing 
regulation Sec.  1.411(d)-4, Q&A-1(d), that ancillary benefits, other 
rights or features, and any other benefits not described in section 
411(d)(6) are not benefits protected under section 411(d)(6). The 
definitions of optional form of benefit, ancillary benefit, and other 
right or feature have been drawn from the definitions in Sec.  
1.401(a)(4)-4. In addition the proposed regulations would provide a 
definition of early retirement benefit, retirement-type benefit, and 
retirement-type subsidy. See the discussion in this preamble under the 
heading Retirement-Type Subsidies and Contingent-Event Benefits.

Permitted Elimination of Benefits That Are Burdensome or Complex and of 
De Minimis Value to Participants

    Section 411(d)(6)(B) of the Code, as amended by EGTRRA, directs the 
Secretary to issue regulations providing that section 411(d)(6)(B) does 
not apply to any amendment that reduces or eliminates benefits or 
subsidies that create significant burdens or complexities for the plan 
and plan participants unless such amendment adversely affects the 
rights of any participant in a more than de minimis manner.
    The EGTRRA Conference Report provides that it is intended that the 
factors to be considered in determining whether a plan amendment has 
more than a de minimis adverse effect on any participant will include: 
(1) All of the participant's early retirement benefits, retirement-type 
subsidies, and optional forms of benefit that are reduced or eliminated 
by the amendment; (2) the extent to which early retirement benefits, 
retirement-type subsidies, and optional forms of benefit in effect with 
respect to a participant after the amendment's effective date provide 
rights that are comparable to the rights that are reduced or eliminated 
by the plan amendment; (3) the number of years before the participant 
attains normal retirement age under the plan (or early retirement age, 
as applicable); (4) the size of the participant's benefit that is 
affected by the plan amendment, in relation to the amount of the 
participant's compensation; and (5) the number of years before the plan 
amendment is effective. H.R. Conf. Rep. 107-84, at 254 (2001).
    The proposed regulations would generally permit an employer to 
eliminate a section 411(d)(6)(B) protected benefit if the eliminated 
optional form of benefit is redundant with respect to a retained 
optional form of benefit. Additional rules would apply to an amendment 
that, in addition to eliminating an optional form of benefit, also 
eliminates an early retirement benefit or a retirement-type subsidy. 
Alternatively, an employer would be permitted to eliminate a section 
411(d)(6)(B) protected benefit if the plan amendment was not effective 
for benefits that begin in the next four years and certain core options 
are made available to plan participants.
    The concepts of allowing an employer to eliminate a redundant 
optional form of benefit and allowing an employer to eliminate all 
optional forms of benefit that fall outside a list of core optional 
forms of benefit were included in suggestions made by commentators who 
suggested that the elimination of an optional form of benefit would not 
adversely affect the right of a plan participant in more than a de 
minimis manner as long as the plan offers other optional forms of 
benefit that are sufficiently similar to the eliminated optional form 
of benefit. These concepts also reflect factors identified in the 
legislative history (e.g., the extent to which section 411(d)(6)(B) 
protected benefits that are available to a participant after the 
amendment's effective date provide rights that are comparable to the 
rights of section 411(d)(6)(B) protected benefits that are reduced or 
eliminated by the plan amendment).
    The Treasury and IRS also received comments from practitioners 
suggesting that the proposed regulations provide a utilization test, 
which would permit the elimination of an optional form of benefit if 
the employer can show that the benefit has been utilized rarely by plan 
participants. These commentators suggested that the lack of utilization 
is compelling evidence that the elimination of the optional form of 
benefit would not adversely affect the rights of any plan participant 
in more than a de minimis manner. The Treasury and IRS did not include 
a utilization test in the proposed regulations because of, among other 
reasons, the difficulty in applying a utilization standard in 
situations where there are few retirements (e.g., a small plan).
    Under the proposed regulations, the determination of whether the 
optional forms of benefit that remain after an amendment are 
sufficiently similar to an eliminated optional form of benefit such 
that its elimination would not adversely affect the rights of any plan 
participant in more than a de minimis manner depends on a number of 
factors. These factors include the extent to which the remaining 
optional forms of benefit provide the same essential characteristics as 
the eliminated optional form of benefit; whether the remaining optional 
forms of benefit are available on the same date and are actuarially 
equivalent to the eliminated optional form of benefit; and the period 
of time before the eliminated optional form of benefit could have 
commenced.
    The rules in the proposed regulations would require any amendment 
eliminating an optional form of benefit to have a delayed effective 
date. This requirement reflects some of the relevant factors listed in 
the legislative history (i.e., the number of years until the 
participant reaches retirement age and the number of years until the 
amendment is effective). A participant's expectations as to which 
optional forms of benefit will be available are more settled for a 
participant who is closer to commencing benefits. Therefore, whether 
any remaining optional form of benefit is sufficiently similar to an 
eliminated optional form of benefit so that the substitution of one for 
the other does not adversely affect the right of a plan participant in 
more than a de minimis manner depends in part on how far in the future 
the participant is expecting to commence benefits.
    The Treasury and IRS believe that the proposed regulations would 
assist plans that have accumulated numerous optional forms of benefits 
by simplifying plan administration and reducing plan complexity for 
participants. At the same time, the

[[Page 13772]]

proposed regulations would continue to protect the rights of plan 
participants by not permitting plan amendments that eliminate or reduce 
an early retirement benefit or a retirement-type subsidy by more than a 
de minimis amount and by protecting the right to elect an optional form 
of benefit that is most advantageous for a participant with substandard 
mortality (through inclusion of that form of benefit as a required core 
option). The rule regarding multiple amendments, discussed above, would 
preclude the adoption of a series of amendments that, when taken 
together, constitute an impermissible elimination of a section 
411(d)(6)(B) protected benefit. This rule would apply, for example, if 
a series of amendments were adopted that eliminated a benefit of more 
than de minimis value when considered together, even though each 
amendment by itself eliminated a benefit of de minimis value.

Elimination of Redundant Optional Forms of Benefit

    The proposed regulations would provide that a plan may be amended 
to eliminate an optional form of benefit for a participant with respect 
to benefits attributable to service before the applicable amendment 
date if the optional form of benefit is redundant with respect to a 
retained optional form of benefit and certain other conditions are 
satisfied. An optional form of benefit is considered redundant with 
respect to a retained optional form of benefit if the retained optional 
form of benefit is in the same family of optional forms of benefit as 
the optional form of benefit being eliminated and the participant's 
rights with respect to the retained optional form of benefit are not 
subject to materially greater restrictions than applied to the optional 
form of benefit being eliminated.
    Under the proposed regulations, a plan would be permitted to be 
amended to eliminate a redundant optional form of benefit for a 
participant (with respect to benefits attributable to service before 
the applicable amendment date) only if the plan amendment does not 
apply to an optional form of benefit with an annuity starting date that 
is earlier than 90 days after the date the amendment is adopted. In 
addition, in cases in which the retained optional form of benefit for 
the participant does not commence on the same annuity starting date as 
the optional form of benefit that is being eliminated, or, as of the 
applicable amendment date, the actuarial present value of the retained 
optional form of benefit is less than the actuarial present value of 
the optional form of benefit being eliminated, the plan amendment would 
have to satisfy additional conditions described below.
    The proposed regulations would describe 6 basic families of 
optional forms of benefit--the 50% or more joint and contingent family, 
the below 50% joint and contingent family, the 10 years or less term 
certain and life annuity family, the greater than 10 years term certain 
and life annuity family, the 10 years or less level installment family, 
and the greater than 10 years level installment family. For this 
purpose, the determination of whether two optional forms of benefit are 
in one of the 6 basic families is made without regard to certain 
differences among enumerated additional features, such as the actuarial 
factors used to determine the amount of benefits under the optional 
form of benefit, a social security leveling feature, a refund of 
employee contributions feature, or a retroactive annuity starting date 
feature.
    Under the proposed regulations, not every optional form of benefit 
will fit within one of the 6 families listed above. For example, a 
single-sum distribution option will not be in one of the 6 families 
listed above and, therefore, the right to receive a single-sum 
distribution cannot be eliminated under the redundancy rule. However, 
if there are two optional forms of benefit that do not fit within a 
family listed above and the only differences between those optional 
forms of benefit are differences that would be disregarded in 
determining whether two optional forms of benefits are within the same 
family (e.g., a single-sum distribution option with and without a 
retroactive annuity starting date feature), the two optional forms of 
benefit are treated as members of a separate family.
    The proposed regulations would provide that the ability to 
eliminate redundant optional forms of benefits generally would not 
apply to optional forms of benefit that are core options (as described 
below). However, an optional form of benefit that is a core option 
could be eliminated in favor of a similar retained core option (where 
the only differences between the eliminated optional form of benefit 
and the retained optional form of benefit are differences that would be 
disregarded in determining whether the two optional forms of benefits 
are within the same family).
    The proposed regulations would also provide that, to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, the retained optional form of benefit must also include that 
feature, and, to the extent that the optional form of benefit that is 
being eliminated does not include a social security leveling feature or 
a refund of employee contributions feature, the retained optional form 
of benefit must not include that feature. Thus, a plan cannot eliminate 
an optional form of benefit that includes a refund of employee 
contributions feature in favor of an optional form of benefit that does 
not include that feature. Similarly, a plan cannot eliminate an 
optional form of benefit that includes a social security leveling 
feature in favor of an optional form of benefit that does not include 
that feature. However, the plan need not retain social security 
leveling features that provide for assumed commencement of social 
security benefits at more than one date.
    In addition, the proposed regulations provide that, to the extent 
an optional form of benefit that is being eliminated is payable without 
a retroactive annuity starting date feature, the retained optional form 
of benefit must be payable without that feature. Thus, a plan cannot 
eliminate an optional form of benefit that is payable without a 
retroactive annuity starting date feature in favor of an optional form 
of benefit that is payable only with a retroactive annuity starting 
date. However, the plan can eliminate an optional form of benefit 
payable with a retroactive annuity starting date feature in favor of an 
optional form of benefit that is payable without a retroactive annuity 
starting date.

Permissible Elimination of Noncore Optional Forms of Benefit Where Core 
Options Are Offered

    As an alternative to the redundancy rule, the proposed regulations 
would allow a plan amendment to eliminate an optional form of benefit 
for plan participants with respect to benefits attributable to service 
before the applicable amendment date if: (1) The plan, after the 
amendment, offers a designated set of core options to plan participants 
with respect to benefits attributable to service both before and after 
the amendment; and (2) the amendment does not apply to participants 
with annuity starting dates less than four years after the date the 
amendment is adopted.
    The core options are defined in the proposed regulations as a 
straight life annuity, a 75% joint and contingent annuity, a 10-year 
certain and life annuity, and the most valuable option for a 
participant with a short life expectancy. The core options were 
selected to define a minimum set of

[[Page 13773]]

optional forms of benefit that provide participants with a sufficiently 
broad set of choices to meet participants' essential needs in a wide 
range of personal circumstances. The 75% joint and contingent annuity 
has been chosen as a required core option based on a recommendation 
from the 1994-1996 report of the Advisory Council on Social 
Security.\4\ In that report, the Council recommended that dependent 
spousal benefits in Social Security be gradually increased to 75% of 
the combined benefit that the surviving spouse and decedent spouse were 
receiving when both of the spouses were alive. This recommendation was 
based on statistical studies concluding that a retired surviving spouse 
generally needs to receive at least 75% of the amount that the retired 
couple was receiving in order for the surviving spouse to maintain his 
or her standard of living.
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    \4\ See the Report of the 1994-1996 Advisory Council on Social 
Security, available at http://www.ssa.gov/history/reports/adcouncil/report/findings.htm.
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    The Treasury and IRS received comments emphasizing the importance 
of ensuring that a core set of options include some forms of 
distribution that would be particularly valuable to a participant whose 
life expectancy differs from the life expectancy used by the plan for 
actuarial adjustments. This includes providing an option of a life 
annuity (valuable for a participant with an above-average life 
expectancy) and the importance of retaining a single-sum payment option 
(or the form providing the largest death benefit) for a participant 
with a below-average life expectancy, such as a participant who retires 
due to a mortal illness.
    In light of the comments received, the proposed regulations would 
include in the list of core options the most valuable option for a 
participant with a short life expectancy. This is defined as the 
optional form of benefit that is reasonably expected to result in 
payments that have the largest actuarial present value in the case of a 
participant who dies shortly after the annuity starting date. The 
proposed regulations would provide a safe harbor method for determining 
which optional form of benefit under the plan is the most valuable 
option for a participant with a short life expectancy. Under this safe 
harbor method, a plan may treat a single-sum distribution option with 
an actuarial present value that is not less than the actuarial present 
value of any optional form of benefit being eliminated as the most 
valuable option for a participant with a short life expectancy. If a 
plan does not offer such a single-sum distribution option, the plan may 
treat a joint and contingent annuity with a continuation percentage of 
at least as great as the highest continuation percentage available 
before the amendment as the most valuable option for a participant with 
a short life expectancy, provided that the continuation percentage is 
at least 75%. In the event a plan has neither a single-sum distribution 
option nor a joint and contingent annuity with a continuation 
percentage of at least 75%, the plan may treat a term certain and life 
annuity with a term certain period of at least 15 years as the most 
valuable option for a participant with a short life expectancy.
    In addition, an employer would not be permitted to use the core 
options alternative to eliminate a single-sum distribution. An 
exception applies for a single-sum distribution option with respect to 
less than 25% of the participant's accrued benefit as of the date that 
the single-sum distribution option is eliminated. This protection 
against elimination of a single-sum distribution option is in addition 
to any protection that might be afforded such option as the most 
valuable option for a participant with a short life expectancy.
    The proposed regulations also would provide that, to the extent an 
optional form of benefit being eliminated includes either a social 
security leveling feature or a refund of employee contributions 
feature, at least one of the core options must also be available with 
that feature. In addition, to the extent that an optional form of 
benefit being eliminated does not include a social security leveling 
feature or a refund of employee contributions feature, each of the core 
options must be available without that feature.
    As with the redundancy rule, if the core options do not commence on 
the same annuity starting date as the optional form of benefit that is 
being eliminated, or, as of the applicable amendment date, the 
actuarial present value of the core option is less than the actuarial 
present value of the optional form of benefit being eliminated, the 
plan amendment would have to satisfy additional conditions described 
below.

Elimination of Early Retirement Benefits and Retirement-Type Subsidies

    The proposed regulations would set forth additional requirements 
that a plan amendment must satisfy if the retained optional form of 
benefit or each core option does not have the same annuity starting 
date or has a lower actuarial present value than the optional form of 
benefit that is being eliminated. Such an amendment would be permitted 
only if the optional form of benefit creates significant burdens and 
complexities for the plan and plan participants and the elimination 
does not adversely affect the rights of any participant in more than a 
de minimis manner. If the additional requirements are satisfied, a plan 
may be amended to eliminate an optional form of benefit without regard 
to whether the amendment has the effect of eliminating an early 
retirement benefit or reducing a retirement-type subsidy. These 
additional requirements would not apply to an amendment that eliminates 
an optional form of benefit in a manner that is otherwise permissible 
under these proposed regulations where both the annuity starting date 
and the actuarial present value of the retained optional form of 
benefit are the same as those features of the eliminated optional form 
of benefit.
    The determination of whether a plan amendment eliminates or reduces 
section 411(d)(6)(B) protected benefits that create significant burdens 
or complexities for the plan and its participants is based on facts and 
circumstances. In the case of an amendment that eliminates an early 
retirement benefit, relevant factors include whether the annuity 
starting dates under the plan considered in the aggregate are 
burdensome or complex (e.g., the number of categories of early 
retirement benefits, whether the terms and conditions applicable to the 
plan's early retirement benefits are difficult to summarize in a manner 
that is concise and readily understandable to the average plan 
participant, and whether those different early retirement benefits were 
added to the plan as a result of plan mergers, acquisitions, or other 
business transactions), and whether the effect of the plan amendment is 
to reduce the number of categories of early retirement benefit. 
Analogous factors apply in the case of a plan amendment eliminating a 
retirement-type subsidy or changing actuarial factors.
    The proposed regulations would provide a rebuttable presumption for 
plan amendments that eliminate a set of annuity starting dates or 
actuarial factors where the annuity starting dates or actuarial factors 
under the plan considered in the aggregate are burdensome or complex. 
If this is the case, then elimination of any one item of the relevant 
category (i.e., annuity starting dates or actuarial factors) is 
presumed to eliminate section 411(d)(6)(B) protected benefits that 
create significant burdens or complexities for the plan and its 
participants. However, if the effect of a plan amendment with respect 
to a set of

[[Page 13774]]

optional forms of benefit is merely to substitute one set of annuity 
starting dates for another set of annuity starting dates (or one set of 
actuarial factors for another set of actuarial factors), without any 
reduction in the number of different annuity starting dates (or 
actuarial factors), then the plan amendment would not be permitted 
under these regulations.
    The generally applicable rules regarding multiple amendments apply 
to a series of plan amendments that first create burdens and 
complexities and then later eliminate them. In accordance with these 
rules, for example, section 411(d)(6)(B) protected benefits are not 
considered to create burdens and complexities for a plan and its 
participants if the plan adds a retirement-type subsidy in order to 
later eliminate another retirement-type subsidy, even if the 
elimination of the other subsidy would not adversely affect the rights 
of any plan participant in a more than de minimis manner as provided in 
the regulations.
    In the case of a plan amendment eliminating an optional form of 
benefit under the redundancy rule, the proposed regulations would 
provide that a plan amendment eliminating the optional form of benefit 
does not adversely affect the rights of any participant in more than a 
de minimis manner if the retained optional form of benefit has 
substantially the same annuity starting date as the optional form of 
benefit that is being eliminated and the actuarial present value of the 
eliminated optional form of benefit does not exceed the actuarial 
present value of the retained optional form of benefit by more than a 
de minimis amount. In the case of a plan amendment eliminating an 
optional form of benefit under the core options rule, the proposed 
regulations would provide the plan amendment does not adversely affect 
the rights of any participant in more than a de minimis manner if each 
of the core options is available with substantially the same annuity 
starting date as the optional form of benefit that is being eliminated 
and the actuarial present value of the eliminated benefit does not 
exceed the actuarial present value of any core benefit by more than a 
de minimis amount. For these purposes, the proposed regulations would 
provide that annuity starting dates are considered substantially the 
same if they are within six months of each other.
    The Conference Report to EGTRRA provides that the intent of the 
provision authorizing regulations is solely to permit the elimination 
of early retirement benefits, retirement-type subsidies, or optional 
forms of benefit that have no more than a de minimis effect on any 
participant but create disproportionate burdens and complexities for a 
plan and its participants, and provides two examples illustrating this 
intent. H.R. Conf. Rep. 107-84, at 254-55 (2001). These examples 
involve a situation in which the acquisition of the employer and 
subsequent merger of plans results in the maintenance of multiple 
retirement-type subsidies (including early retirement subsidies) that 
create disproportionate burdens and complexities for the plan and its 
participants. Under the first example, for a 25-year-old participant 
with compensation of $40,000, the Conference Report provides that 
Treasury regulations could permit the participant's retirement-type 
subsidy under the plan to be eliminated entirely. For this participant, 
taking into account all relevant factors, including the value of the 
benefit, the participant's compensation, and the number of years before 
eligibility for the subsidy, the participant's subsidy, with a present 
value of $75, is of de minimis value. Under the second example, for a 
50-year-old participant with compensation of $40,000, the Conference 
Report provides that Treasury regulations could permit the 
participant's retirement-type subsidy with a present value of $10,000 
to be replaced with another retirement-type subsidy with a present 
value of $9,850. The Conference Report provides that the regulations 
could permit replacement in the retirement-type subsidy (which reduces 
the value of the participant's subsidy by $150) because the difference 
in subsidies is de minimis. However, the $10,000 subsidy could not be 
entirely eliminated. Id.
    Based on these examples, the proposed regulations would provide 
that a reduction in actuarial present value is of no more than a de 
minimis amount (and hence, the rights of any participant are not 
adversely affected in a more than de minimis manner) if the reduction 
does not exceed the greater of 2% of the present value of the 
retirement-type subsidy under the eliminated optional form of benefit 
(if any) prior to the amendment or 1% of the participant's compensation 
for the prior plan year (as defined in section 415(c)(3)).
    In addition to this numerical test, the proposed regulations would 
provide a de minimis test relating to changes in early retirement and 
other actuarial adjustment factors. Under this rule, the elimination of 
an optional form of benefit does not adversely affect the rights of any 
participant in more than a de minimis manner if the amendment does not 
apply to an annuity starting date before the end of the expected 
transition period for that optional form of benefit. The expected 
transition period for an optional form of benefit is the period by the 
end of which it is reasonable to expect, taking into account future 
accruals, that the section 411(d)(6)(B) protected benefit being 
eliminated would be subsumed by another optional form of benefit if the 
plan amendment limited the optional form of benefit being eliminated to 
the participant's benefits attributable to service before the 
applicable amendment date. The expected transition period is thus based 
on the expected wearaway period.
    For purposes of this expected transition rule, the expected 
transition period must be determined in accordance with reasonable 
actuarial assumptions about the future that are likely to result in the 
longest reasonable expected transition period, such as the assumption 
that the participant's compensation will not increase and that future 
accruals will not exceed accruals in recent periods. If the plan is 
subsequently amended to reduce the rate of future benefit accrual (or 
otherwise to lengthen the expected transition period) before the end of 
the previously determined expected transition period, the subsequent 
plan amendment must provide that the elimination of the optional form 
of benefit is void (or must provide for the effective date to be 
further extended to a new expected transition date taking into account 
the subsequent amendment). In addition, a plan amendment eliminating an 
optional form of benefit using the expected transition rule must be 
limited to participants who continue employment through the end of the 
expected transition period.

Advance Notice to Participants

    Section 4980F(e) 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 that eliminates or significantly reduces an early retirement 
benefit or a retirement-type subsidy. See Sec.  54.4980F-1 generally. 
While Sec.  54.4980F-1(b), Q&A-7(b) and 8(c), generally provide that an 
amendment eliminating an optional form of benefit as permitted under 
these proposed regulations would not be a significant reduction for 
which advance notice to participants is required, plan sponsors are 
reminded that an amendment limiting an early retirement

[[Page 13775]]

benefit or retirement-type subsidy to service before the applicable 
amendment date might be a significant reduction in future benefits for 
which advance notice is required. Accordingly, advance notice may be 
required for an amendment permitted under these rules.
    These regulations include proposed amendments to the section 4980F 
regulations clarifying that, for purposes of determining whether an 
amendment reducing a retirement-type subsidy as permitted under the 
expected transition period rule is a significant reduction for purposes 
of section 4980F, the amendment is treated in the same manner as an 
amendment that limits the retirement-type subsidy to benefits that 
accrue before the applicable amendment date with respect to the 
participants (and alternate payees) to whom the reduction is reasonably 
expected to apply. The proposed changes to the section 4980F 
regulations also include examples illustrating these rules and 
clarifying that the effective date of the amendment for purposes of 
section 4980F(e) of the Code and section 204(h) of ERISA is not the 
same as the effective date of the reduction.

Retirement-Type Subsidies and Contingent-Event Benefits

    Since section 411(d)(6)(B) was added to the Code in REA, questions 
have arisen as to whether a benefit that is contingent on the 
occurrence of an unpredictable event--such as a plant shutdown--is a 
retirement-type subsidy and, thus, protected by section 411(d)(6). Some 
courts have held that an unpredictable contingent-event benefit is 
protected, while one has held that it is not.\5\
    Notice 2003-10 requested comments on anticipated guidance regarding 
early retirement benefits and retirement-type subsidies under section 
411(d)(6)(B). Notice 2003-10 also stated that regulations addressing 
subsidies provided upon a plant shutdown would be prospective and that 
relief from disqualification would be provided.
---------------------------------------------------------------------------

    \5\ Compare Bellas v. CBS, Inc., supra, at fn. 1; Richardson v. 
Pension Plan of Bethlehem Steel Corp., 67 F. 3d 1462 (9th Cir. 
1995), withdrawn, 91 F. 3d 1312 (9th Cir. 1996), modified, 112 F.3d 
982 (9th Cir. 1997) (shutdown benefit is a retirement-type subsidy 
protected under anticutback rule, opinion withdrawn and modified 
because court later found plan amendment not valid); Harms v. 
Cavenham Forest Industries, Inc., 984 F. 2d 686 (5th Cir.), cert. 
denied, 510 U.S. 944 (1993) (involuntary separation benefit is a 
retirement-type benefit protected under the anticutback rule); and 
Arena v. ABB Power T&D Company, Inc., 2003 U.S. Dist. LEXIS 13166, 
31 Employee Benefit Cas. (BNA) 1473 (S.D. Ind. July 22, 2003) (plant 
shutdown benefit is a retirement-type subsidy protected by the 
anticutback rule because the benefit continues beyond normal 
retirement age and the amount of the benefit exceeds the actuarially 
reduced normal retirement benefit); with Ross v. Pension Plan for 
Hourly Employees of SKF Industries, Inc., 847 F. 2d 329 (6th Cir. 
1988) (plant shutdown benefit is not a retirement-type subsidy).
---------------------------------------------------------------------------

    After reviewing the legislative history, the analysis in the 
relevant cases, and the submissions of the commentators, Treasury and 
the IRS have concluded that, if a contingent-event benefit is a 
retirement-type subsidy, the benefit cannot be reduced or eliminated 
with respect to service prior to the applicable amendment date without 
violating section 411(d)(6)(B). The proposed regulations would apply 
this result without regard to whether the contingent event that 
triggers the payment of the benefit has or has not occurred prior to 
the amendment. Thus, the proposed regulations would require the 
protection of contingent-event benefits that provide retirement-type 
subsidies under section 411(d)(6)(B) even before the occurrence of the 
contingency.
    The rules under the proposed regulations for determining whether a 
contingent-event benefit provides a retirement-type subsidy that is 
protected under section 411(d)(6) or an ancillary benefit that is not 
protected would be based on the legislative history of REA. The 
legislative history provides that:

[T]he term ``retirement-type subsidy'' is to be defined by Treasury 
regulations. The committee intends that under these regulations, a 
subsidy that continues after retirement is generally to be 
considered a retirement-type subsidy. The committee expects, 
however, that a qualified disability benefit, a medical benefit, a 
social security supplement, a death benefit (including life 
insurance), or a plant shutdown benefit (that does not continue 
after retirement age) will not be considered a retirement-type 
subsidy. The committee expects that Treasury regulations will 
prevent the recharacterization of retirement-type benefits as 
benefits that are not protected [under section 411(d)(6)].\6\
---------------------------------------------------------------------------

    \6\ S. Rep. No. 98-575, at 26 (1984).

    The proposed regulations would provide that ancillary benefits are 
the benefits listed in the legislative history and other similar 
benefits that do not affect the payment of the accrued benefit. Thus, 
if the contingent-event benefit is a plant-shutdown benefit that does 
not continue beyond retirement age, then the proposed regulations would 
include the benefit in the definition of ancillary benefits and the 
contingent-event benefit could be reduced or eliminated without 
violating section 411(d)(6).
    By contrast, the proposed regulations would provide that the 
payment of an accrued benefit in an optional form or the payment of any 
other benefit that continues after retirement is a retirement-type 
benefit (provided that it is not in the list of ancillary benefits set 
forth in the regulations). Thus, the proposed regulations would provide 
that if the contingent-event benefit continues beyond retirement (and 
is not in the list of ancillary benefits set forth in the regulations), 
the contingent-event benefit would be a retirement-type benefit. To the 
extent that the retirement-type benefit has a present value in excess 
of the present value of the accrued benefit, the contingent-event 
benefit provides a retirement-type subsidy that is protected under 
section 411(d)(6)(B).
    Further, in accordance with the legislative history to REA, the 
regulations would specifically prohibit an amendment that 
recharacterizes a retirement-type benefit as an ancillary benefit. 
Thus, for example, a plan cannot be amended to recharacterize any 
portion of an early retirement subsidy as a social security supplement 
that is an ancillary benefit. See also Sec.  1.411(d)-4, Q&A-2(c), for 
rules relating to serial amendments.

Proposed Effective Date

    These regulations are proposed to be applicable to amendments 
adopted on or after the date of the publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. These proposed regulations cannot be relied upon until they 
are adopted in final form. When these regulations are finalized, the 
IRS, under its general authority in section 7805(b), will not treat a 
plan as failing to satisfy the requirements of sections 401 and 411 
merely because of a plan amendment that eliminates or reduces an early 
retirement benefit or retirement-type subsidy that is conditioned on 
the occurrence of an unpredictable contingent event (within the meaning 
of section 412(l)) if the amendment is adopted and effective prior to 
the occurrence of the contingent event and prior to the finalization of 
these proposed regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. This notice 
of proposed rulemaking does not impose a collection of information on 
small entities, thus the Regulatory Flexibility

[[Page 13776]]

Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, these proposed regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury and IRS specifically request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    Comments are also requested on the following issues:
     Whether there should be additional families of 
optional forms of benefit besides the six families listed in the 
redundancy rule at Sec.  1.411(d)-3(c)(4);
     Whether the core options, including the 
specification of the most valuable option for a participant with a 
short life expectancy, are sufficient to protect the value of benefit 
distribution options in a broad range of personal circumstances, such 
as for a participant with substandard mortality;
     Whether the rules in Sec.  1.411(d)-3(e) 
permitting the reduction of present value through changes in actuarial 
factors are administrable and sufficiently protective of participants' 
interests;
     Whether the expected transition period rule 
should be permitted to apply to a participant who severs employment 
during the expected transition period (and who satisfies the pre-
amendment conditions for the optional form of benefit) if the optional 
form of benefit being eliminated (or a comparable optional form of 
benefit with at least the same present value) is available before the 
end of the expected transition period and the former employee receives 
written notice describing the effect of the amendment before the 
amendment becomes applicable.
     How to determine whether a benefit, including a 
contingent-event benefit, continues after retirement (or retirement 
age);
     The extent to which plant-shutdown benefits that 
do not continue after retirement age are permitted to be provided in a 
qualified plan (e.g., whether such benefits are limited to payments 
payable before the plan's earliest retirement age or are the benefits 
limited to amounts that are less than the expected social security 
benefit or, alternatively, the normal retirement benefit); and
     What other benefits (e.g., involuntary 
termination benefits) that do not continue after retirement age and 
which are similar to the benefits listed as ancillary in the 
legislative history should be considered ancillary and should be 
permitted to be provided in a qualified plan.
    A public hearing has been scheduled for June 24, 2004, beginning at 
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the main entrance, located at 1111 Constitution 
Avenue, NW. In addition, all visitors must present photo identification 
to enter the building. Because of access restrictions, visitors will 
not be admitted beyond the immediate entrance area more than 30 minutes 
before the hearing starts. For information about having your name 
placed on the building access list to attend the hearing, see the For 
Further Information Contact portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topics to be discussed and time to be 
devoted to each topic (signed original and eight (8) copies) by June 3, 
2004. A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving comments has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed 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.

26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries to read, in part, as follows:

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

    Section 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and 
section 645(b) of the Economic Growth and Tax Relief Reconciliation 
Act of 2001, Pub. L. 107-16 (115 Stat. 38).* * *
    Par. 2. Section 1.411(d)-3 is revised to read as follows:


Sec.  1.411(d)-3  Section 411(d)(6) protected benefits.

    (a) Protection of accrued benefits--(1) General rule. Under section 
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a 
part of such plan is not a qualified trust) if a plan amendment 
decreases the accrued benefit of any plan participant, except as 
provided in section 412(c)(8), section 4281 of the Employee Retirement 
Income Security Act of 1974 as amended (ERISA), or other applicable law 
(e.g., section 1541(a)(2) of the Taxpayer Relief Act of 1997 (Pub. L. 
105-34, 111 Stat. 788, 1085)). For purposes of this section, a plan 
amendment includes any changes to the terms of a plan and includes a 
plan termination. The protection of section 411(d)(6) applies to a 
participant's entire accrued benefit without regard to whether any 
portion of that accrued benefit is accrued before a participant's 
severance from employment or is included in the accrued benefit of the 
participant pursuant to a plan amendment adopted after the 
participant's severance from employment.
    (2) Plan provisions taken into account--(i) Direct and indirect 
reduction in accrued benefit. For purposes of determining whether or 
not any participant's accrued benefit is decreased, amendments to all 
the provisions of a plan affecting, directly or indirectly, the 
computation of accrued benefits are taken into account. Plan provisions 
indirectly affecting accrued benefits include, for example, provisions 
relating to years of service and compensation.
    (ii) Amendments effective on the same applicable amendment date. In 
determining whether a reduction in accrued benefit has occurred, all 
amendments with the same applicable amendment date are treated as one 
plan amendment. Thus, if there are two

[[Page 13777]]

amendments with the same applicable amendment date, and one amendment, 
standing alone, increases benefits and the other amendment, standing 
alone, decreases benefits, the amendments are treated as one amendment 
and will only violate section 411(d)(6) if the net effect is to 
decrease the accrued benefit on that date for any participant.
    (iii) Multiple amendments. A plan amendment violates the 
requirements of section 411(d)(6) if it is one of a series of plan 
amendments made at different times that, when taken together, have the 
effect of reducing or eliminating a section 411(d)(6) protected benefit 
in a manner that would be prohibited by section 411(d)(6) if 
accomplished through a single amendment.
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits. [Reserved].
    (4) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) Facts. Plan A provides an annual benefit of 2% of 
career average pay times years of service commencing at normal 
retirement age (age 65). Plan A is amended on November 1, 2004, 
effective as of January 1, 2005, to provide for an annual benefit of 
1.3% of final pay times years of service, with final pay computed as 
the average of a participant's highest 3 consecutive years of 
compensation. As of January 1, 2005, Participant M has 16 years of 
service, his career average pay is $37,500, and the average of his 
highest 3 consecutive years of compensation is $67,308. Thus, M's 
accrued benefit as of the effective date of the amendment is 
increased from $12,000 per year at normal retirement age (2% times 
$37,500 times 16 years of service) to $14,000 per year at normal 
retirement age (1.3% times $67,308 times 16 years of service). As of 
January 1, 2005, Participant N has 6 years of service, his career 
average pay is $50,000, and the average of his highest 3 consecutive 
years of compensation is $51,282. Participant N's accrued benefit as 
of the applicable amendment date is decreased from $6,000 per year 
at normal retirement age (2% times $50,000 times 6 years of service) 
to $4,000 per year at normal retirement age (1.3% times $51,282 
times 6 years of service).
    (ii) Conclusion. The plan amendment fails to satisfy the 
requirements of section 411(d)(6)(A) because the amendment decreases 
the accrued benefit of Participant N below the level of the accrued 
benefit of Participant N immediately before the applicable amendment 
date.
    Example 2. (i) Facts. The facts are the same as Example 1 except 
that Plan A includes a provision under which Participant N's accrued 
benefit cannot be less than what it was immediately before the 
amendment (so that Participant N's accrued benefit could not be less 
than $6,000 per year at normal retirement age).
    (ii) Conclusion. The amendment does not violate the requirements 
of section 411(d)(6)(A) with respect to Participant N (although 
Participant N would not accrue any benefits until the point in time 
at which the new formula amount would exceed the amount payable 
under the minimum provision, approximately 3 years after the 
amendment becomes effective).

    (b) Protection of section 411(d)(6)(B) protected benefits--(1) 
General rule--(i) Prohibition against plan amendments eliminating or 
reducing section 411(d)(6)(B) protected benefits. A plan is treated as 
decreasing an accrued benefit if it is amended to eliminate or reduce a 
section 411(d)(6)(B) protected benefit as defined in paragraph (f)(4) 
of this section, except as provided in this section. This paragraph 
(b)(1) applies to participants who satisfy (either before or after the 
plan amendment) the pre-amendment conditions for the section 
411(d)(6)(B) protected benefit.
    (ii) Contingent benefits. The rule of paragraph (b)(1)(i) of this 
section applies to participants who satisfy (either before or after the 
plan amendment) the pre-amendment conditions for the section 
411(d)(6)(B) protected benefit even if the condition on which the 
eligibility for the section 411(d)(6)(B) protected benefit depends is 
an unpredictable event (e.g., a plant shutdown).
    (iii) Application of general rules. For purposes of determining 
whether or not any participant's section 411(d)(6)(B) protected benefit 
is eliminated or reduced, the rules of paragraph (a) of this section 
apply to section 411(d)(6)(B) protected benefits in the same manner as 
they apply to benefits described in section 411(d)(6)(A). As an example 
of the application of paragraph (a)(2)(ii) of this section to section 
411(d)(6)(B) protected benefits, if there are two amendments with the 
same applicable amendment date, and one amendment increases accrued 
benefits and the other amendment decreases the early retirement factors 
that are used to determine the early retirement annuity, the amendments 
are treated as one amendment and only violate section 411(d)(6) if the 
net dollar amount of the early retirement annuity after the two 
amendments is lower at any point in time than it would have been 
without the two amendments. As an example of the application of 
paragraph (a)(2)(iii) of this section to section 411(d)(6)(B) protected 
benefits, a series of amendments that, when taken together, have the 
effect of reducing or eliminating early retirement benefits or 
retirement-type subsidies in a manner that adversely affects the rights 
of any participant in more than a de minimis manner violates section 
411(d)(6)(B) even if each amendment would be permissible pursuant to 
paragraphs (c) through (e) of this section.
    (2) Permissible elimination of section 411(d)(6)(B) protected 
benefits--(i) In general. A plan may be amended to eliminate a section 
411(d)(6)(B) protected benefit if the elimination is in accordance with 
section 411(d)(6)(C), (D), or (E), paragraph (c) or (d) of this 
section, or Sec.  1.411(d)-4.
    (ii) Increases in payment amounts do not eliminate an optional form 
of benefit. If a plan amendment merely replaces an optional form of 
benefit with another optional form of benefit that is of inherently 
equal or greater value (within the meaning of Sec.  1.401(a)(4)-
4(d)(4)(i)(A)), the amendment is not to be treated as eliminating an 
optional form of benefit, or eliminating or reducing an early 
retirement benefit or retirement-type subsidy. Thus, for example, a 
change in the method of calculating a joint and survivor annuity from 
using a 90% adjustment factor on account of the survivorship payment at 
particular ages on the annuity starting date to using a 91% adjustment 
factor at the same ages on the annuity starting date is not treated as 
an elimination of an optional form of benefit.
    (3) Permissible elimination of benefits that are not section 
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does 
not provide protection for benefits that are ancillary benefits, other 
rights and features, or any other benefits that are not described in 
section 411(d)(6). See Sec.  1.411(d)-4, Q&A-1(d). However, a plan may 
not be amended to recharacterize a retirement-type benefit as an 
ancillary benefit. Thus, for example, a plan amendment to 
recharacterize any portion of an early retirement subsidy as a Social 
Security supplement that is an ancillary benefit violates section 
411(d)(6).
    (ii) No protection for future benefit accruals. Section 411(d)(6) 
only protects benefits that accrue before the applicable amendment 
date. Thus, a plan may be amended to eliminate or reduce an early 
retirement benefit, a retirement-type subsidy, or an optional form of 
benefit with respect to benefits not yet accrued on the applicable 
amendment date without violating section 411(d)(6). However, section 
4980F(e) of the Internal Revenue 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 that eliminates or significantly reduces an early 
retirement benefit or a retirement-type subsidy. See Sec.  54.4980F-1 
of this chapter generally, and see Sec.  54.4980F-

[[Page 13778]]

1(b), Q&A-7(b) and Q&A-8(c), with respect to whether such notice is 
required for a reduction in an early retirement benefit or retirement-
type subsidy permitted under section 411(d)(6)(B).
    (c) Permissible elimination of optional forms of benefit that are 
redundant--(1) General rule. Except as otherwise provided in paragraph 
(c)(5) of this section, a plan may be amended to eliminate an optional 
form of benefit for a participant with respect to benefits accrued 
before the applicable amendment date if--
    (i) The optional form of benefit is redundant with respect to a 
retained optional form of benefit, within the meaning of paragraph 
(c)(2) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity starting date that is less 
than 90 days after the date the amendment is adopted; and
    (iii) In any case in which the retained optional form of benefit 
for the participant does not commence on the same annuity starting date 
as the optional form of benefit that is being eliminated or, as of the 
applicable amendment date, the actuarial present value of the retained 
optional form of benefit for the participant is less than the actuarial 
present value of the optional form of benefit that is being eliminated, 
the requirements of paragraph (e) of this section are satisfied.
    (2) Similar types of optional forms of benefit are redundant--(i) 
General rule. An optional form of benefit is redundant with respect to 
a retained optional form of benefit if--
    (A) The retained optional form of benefit is available to the 
participant;
    (B) The retained optional form of benefit is in the same family of 
optional forms, within the meaning of paragraphs (c)(3) and (4) of this 
section, as the optional form of benefit being eliminated; and
    (C) A participant's rights with respect to the retained optional 
form of benefit are not subject to materially greater restrictions 
(such as conditions relating to eligibility, restrictions on a 
participant's ability to designate the person who is entitled to 
benefits following the participant's death, or restrictions on a 
participant's right to receive an in-kind distribution) than applied to 
the optional form of benefit being eliminated.
    (ii) Special rule for core options. An optional form of benefit 
that is a core option may not be eliminated as a redundant benefit 
under the rules of this paragraph (c) unless the retained optional form 
of benefit and the eliminated core option are identical except for 
differences described in paragraph (c)(3)(ii) of this section. Thus, 
for example, a particular 10-year certain and life annuity may not be 
eliminated by plan amendment unless the retained optional form of 
benefit is another 10-year certain and life annuity.
    (3) Family of optional forms of benefit--(i) In general. Paragraph 
(c)(4) of this section describes certain families of optional forms of 
benefits. Not every optional form of benefit that is offered under a 
plan necessarily fits within a family as described in paragraph (c)(4) 
of this section. Each optional form of benefit that is not included in 
any particular family listed in paragraph (c)(4) of this section is in 
a separate family with other optional forms of benefit that would be 
identical to that optional form of benefit but for differences that are 
described in paragraph (c)(3)(ii) of this section.
    (ii) Certain differences among optional forms of benefit--(A) 
Differences in actuarial factors and annuity starting dates. The 
determination of whether two optional forms of benefit are within a 
family of optional forms of benefit is made without regard to the 
actuarial factors that are used to determine the amount of the 
distributions under those optional forms of benefit and without regard 
to annuity starting dates. For example, if a plan has a single-sum 
distribution option that is calculated using a 5% interest rate and a 
specific mortality table and another single-sum distribution option 
that is calculated using the applicable interest rate as defined in 
section 417(e)(3)(A)(ii)(II) and the applicable mortality table as 
defined in section 417(e)(3)(A)(ii)(I), both single-sum distribution 
options are in the same family under the rules of paragraph (c)(3)(i) 
of this section.
    (B) Differences in Social Security leveling features, refund of 
employee contributions features, and retroactive annuity starting date 
features. Two optional forms of benefit that are identical except with 
respect to Social Security leveling features, refund of employee 
contributions features, or retroactive annuity starting date features 
are treated as members of the same family of optional forms of benefit. 
But see paragraph (c)(5) of this section for special rules relating to 
Social Security leveling, refund of employee contributions, and 
retroactive annuity starting date features in optional forms of 
benefit.
    (4) List of families. The following are families of optional forms 
of benefit for purposes of this paragraph (c):
    (i) Joint and contingent options with continuation percentages of 
50% to 100%. An optional form of benefit is within the 50% or more 
joint and contingent family if it provides a life annuity to the 
participant and a survivor annuity to an individual that is at least 
50% and no more than 100% of the annuity provided to the participant. 
An optional form of benefit is within the 50% or more joint and 
contingent family without regard to whether the form of benefit 
includes a term certain provision, a pop-up provision (under which 
payments increase upon the death of the beneficiary or another event 
that causes the beneficiary not to be entitled to a survivor annuity), 
or a cash refund feature (under which payment is provided upon the 
death of the last annuitant in an amount equal to the excess of the 
present value of the annuity at the annuity starting date over the 
total of payments before the death of the last annuitant).
    (ii) Joint and contingent options with continuation percentages 
less than 50%. An optional form of benefit is within the below 50% 
joint and contingent family if it provides a life annuity to the 
participant and a survivor annuity to an individual that is no more 
than 50% of the annuity provided to the participant. An optional form 
of benefit is within the below 50% joint and contingent family without 
regard to whether the form of benefit includes a term certain 
provision, a pop-up provision (under which payments increase upon the 
death of the beneficiary or another event that causes the beneficiary 
not to be entitled to a survivor annuity), or a cash refund feature 
(under which payment is provided upon the death of the last annuitant 
in an amount equal to the excess of the present value of the annuity at 
the annuity starting date over the total of payments before the death 
of the last annuitant).
    (iii) Term certain and life annuity options with a term of 10 years 
or less. An optional form of benefit is within the 10 years or less 
term certain and life family if it is a life annuity with a guarantee 
that payments will continue to the participant's designated beneficiary 
for the remainder of a fixed period that is not in excess of 10 years 
if the participant dies before the end of the fixed period.
    (iv) Term certain and life annuity options with a term in excess of 
10 years. An optional form of benefit is within the greater than 10 
years term certain and life family if it is a life annuity with a 
guarantee that payments will continue to the participant's designated 
beneficiary for the remainder of a fixed period that is in excess of 10

[[Page 13779]]

years if the participant dies before the end of the fixed period.
    (v) Level installment payment options over a period of 10 years or 
less. An optional form of benefit is within the 10 years or less 
installment family if it provides for substantially level payments to 
the participant for a fixed period of at least two years with a 
guarantee that payments will continue to the participant's beneficiary 
for the remainder of the fixed period not in excess of 10 years if the 
participant dies before the end of the fixed period.
    (vi) Level installment payment options over a period of more than 
10 years. An optional form of benefit is within the greater than 10 
years installment family if it provides for substantially level 
payments to the participant for a fixed period with a guarantee that 
payments will continue to the participant's beneficiary for the 
remainder of a fixed period that is in excess of 10 years if the 
participant dies before the end of the fixed period.
    (5) Special rules for certain features included in optional forms 
of benefit. For purposes of applying this paragraph (c), to the extent 
an optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, the retained optional form of benefit must also include that 
feature, and to the extent that the optional form of benefit that is 
being eliminated does not include a social security leveling feature or 
a refund of employee contributions feature, the retained optional form 
of benefit must not include that feature. For purposes of applying this 
paragraph (c), to the extent an optional form of benefit that is being 
eliminated does not include a retroactive annuity starting date 
feature, the retained optional form of benefit must not include the 
feature.
    (d) Permissible elimination of noncore optional forms of benefit 
where core options are offered--(1) General rule. Except as otherwise 
provided in paragraph (d)(2) of this section, a plan may be amended to 
eliminate an optional form of benefit for a participant with respect to 
benefits attributable to service before the applicable amendment date 
if--
    (i) After the amendment, each of the core options described in 
paragraph (f)(3) of this section is available to the participant with 
respect to benefits attributable to service before and after the 
amendment;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity starting date that is less 
than four years after the date the amendment is adopted; and
    (iii) In any case in which all of the core options are not 
available commencing on the same annuity starting date as each optional 
form of benefit that is being eliminated or, as of the applicable 
amendment date, the actuarial present value of the benefit payable 
under any of the core options with the same annuity starting date is 
less than the actuarial present value of benefits payable under the 
optional form of benefit that is being eliminated, the requirements of 
paragraph (e) of this section are satisfied.
    (2) Special rules--(i) Treatment of certain features included in 
optional forms of benefit. For purposes of applying this paragraph (d), 
to the extent an optional form of benefit that is being eliminated 
includes either a social security leveling feature or a refund of 
employee contributions feature, at least one of the core options must 
also be available with that feature, and, to the extent that the 
optional form of benefit that is being eliminated does not include a 
social security leveling feature or a refund of employee contributions 
feature, each of the core options must be available without that 
feature. For purposes of applying this paragraph (d), to the extent an 
optional form of benefit that is being eliminated does not include a 
retroactive annuity starting date feature, each of the core options 
must be available without that feature.
    (ii) Eliminating the most valuable option for a participant with a 
short life expectancy. For purposes of applying this paragraph (d), if 
the most valuable option for a participant with a short life expectancy 
as described in paragraph (f)(3)(i)(D) of this section is eliminated, 
then, after the plan amendment, an optional form of benefit that is 
identical, except for differences described in paragraph (c)(3)(ii) of 
this section, must be available to the participant. However, such a 
plan amendment cannot eliminate a refund of employee contributions 
feature from the most valuable option for a participant with a short 
life expectancy.
    (iii) Single-sum distributions. A plan amendment is not treated as 
satisfying this paragraph (d) if it eliminates an optional form of 
benefit that includes a single-sum distribution that applies with 
respect to at least 25% of the participant's accrued benefit as of the 
date the optional form of benefit is eliminated. But see Sec.  
1.411(d)-4, Q&A-2(b)(2)(v), relating to involuntary single-sum 
distributions for benefits with a present value not in excess of the 
maximum dollar amount in section 411(a)(11).
    (e) Permissible plan amendments under paragraphs (c) and (d) 
eliminating or reducing section 411(d)(6)(B) protected benefits that 
are burdensome and of de minimis value--(1) In general. A plan 
amendment that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of 
this section, is required to satisfy this paragraph (e) satisfies this 
paragraph (e) if--
    (i) The amendment eliminates section 411(d)(6)(B) protected 
benefits that create significant burdens or complexities for the plan 
and its participants as described in paragraph (e)(2) of this section; 
and
    (ii) The amendment does not adversely affect the rights of any 
participant in a more than de minimis manner as described in paragraph 
(e)(3) of this section.
    (2) Plan amendments eliminating section 411(d)(6)(B) protected 
benefits that create significant burdens and complexities--(i) Facts 
and circumstances analysis. The determination of whether a plan 
amendment eliminates section 411(d)(6)(B) protected benefits that 
create significant burdens or complexities for the plan and its 
participants is based on facts and circumstances. In the case of an 
amendment that eliminates an early retirement benefit, relevant factors 
include whether the annuity starting dates under the plan considered in 
the aggregate are burdensome or complex (e.g., the number of categories 
of early retirement benefits, whether the terms and conditions 
applicable to the plan's early retirement benefits are difficult to 
summarize in a manner that is concise and readily understandable to the 
average plan participant, and whether those different early retirement 
benefits were added to the plan as a result of plan mergers, 
acquisitions, or other business transactions), and whether the effect 
of the plan amendment is to reduce the number of categories of early 
retirement benefit. Similarly, in the case of a plan amendment 
eliminating a retirement-type subsidy or changing actuarial factors, 
relevant factors include whether the actuarial factors used for 
determining benefit distributions available in otherwise identical 
forms of benefit under the plan considered in the aggregate are 
burdensome or complex (e.g., the number of different retirement-type 
subsidies and other actuarial factors available under the plan, whether 
the terms and conditions applicable to the plan's retirement-type 
subsidies are difficult to summarize in a manner that is concise and 
readily understandable to the average plan participant, and

[[Page 13780]]

whether those different retirement-type subsidies and other actuarial 
factors were added to the plan as a result of plan mergers, 
acquisitions, or other business transactions), and whether the effect 
of the plan amendment is to reduce the number of categories of 
retirement-type subsidies or other actuarial factors.
    (ii) Presumption for certain amendments. If the annuity starting 
dates under the plan considered in the aggregate are burdensome or 
complex, then elimination of any one of the annuity starting dates is 
presumed to eliminate section 411(d)(6)(B) protected benefits that 
create significant burdens or complexities for the plan and its 
participants. However, if the effect of a plan amendment with respect 
to a set of optional forms of benefit is merely to substitute one set 
of annuity starting dates for another set of annuity starting dates, 
without any reduction in the number of different annuity starting 
dates, then the plan amendment does not satisfy the requirements of 
paragraph (e) of this section. Similarly, if the actuarial factors used 
for determining benefit distributions available in otherwise identical 
forms of benefit under the plan considered in the aggregate are 
burdensome or complex, then elimination of any one set of actuarial 
factors is presumed to eliminate section 411(d)(6)(B) protected 
benefits that create significant burdens or complexities for the plan 
and its participants. However, if the effect of a plan amendment with 
respect to a set of optional forms of benefit is merely to substitute 
one set of actuarial factors for another set of actuarial factors, 
without any reduction in the number of different actuarial factors, 
then the plan amendment does not satisfy the requirements of paragraph 
(e) of this section.
    (iii) Restrictions against creating burdens or complexities. See 
paragraph (b)(1)(ii) of this section for general rules applicable to 
multiple amendments. In accordance with these rules, for example, 
section 411(d)(6)(B) protected benefits are not considered to create 
burdens and complexities for a plan and its participants if the plan 
adds a retirement-type subsidy in order to later eliminate another 
retirement-type subsidy, even if the elimination of the other subsidy 
would not adversely affect the rights of any plan participant in a more 
than de minimis manner as provided in paragraph (e)(3) of this section.
    (3) Elimination of early retirement benefits or retirement-type 
subsidies that are de minimis--(i) Rules for retained optional forms of 
benefit under paragraph (c) of this section. For purposes of paragraph 
(c) of this section, the elimination of an optional form of benefit 
does not adversely affect the rights of any participant in a more than 
de minimis manner if--
    (A) The retained optional form of benefit described in paragraph 
(c) of this section has substantially the same annuity starting date as 
the optional form of benefit that is being eliminated, as described in 
paragraph (e)(4) of this section; and
    (B) Either the actuarial present value of the benefit payable in 
the optional form of benefit that is being eliminated does not exceed 
the actuarial present value of the benefit payable in the retained 
optional form of benefit by more than a de minimis amount, as described 
in paragraph (e)(5) of this section, or the amendment satisfies the 
requirements of paragraph (e)(6) of this section relating to a delayed 
effective date.
    (ii) Rules for core options under paragraph (d) of this section. 
For purposes of paragraph (d) of this section, the elimination of an 
optional form of benefit does not adversely affect the rights of any 
participant in a more than de minimis manner if, with respect to each 
of the core options--
    (A) The core option is available after the amendment with 
substantially the same annuity starting date as the optional form of 
benefit that is being eliminated, as described in paragraph (e)(4) of 
this section; and
    (B) Either the actuarial present value of the benefit payable in 
the optional form of benefit that is being eliminated does not exceed 
the actuarial present value of the benefit payable under the core 
option by more than a de minimis amount, as described in paragraph 
(e)(5) of this section, or the amendment satisfies the requirements of 
paragraph (e)(6) of this section.
    (4) Definition of substantially the same annuity starting dates. 
For purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this 
section, annuity starting dates are considered substantially the same 
if they are within six months of each other.
    (5) Definition of de minimis difference in actuarial present value. 
For purposes of applying paragraphs (e)(3)(i)(B) and (ii)(B) of this 
section, a difference in actuarial present value between the optional 
form of benefit being eliminated and the retained optional form of 
benefit or core option is of no more than a de minimis amount if, as of 
the applicable amendment date, the difference between the actuarial 
present value of the eliminated optional form of benefit and the 
actuarial present value of the retained optional form of benefit or 
core option is not more than the greater of--
    (i) 2% of the present value of the retirement-type subsidy under 
the eliminated optional form of benefit (if any) prior to the 
amendment; or
    (ii) 1% of the participant's compensation for the prior plan year 
(as defined in section 415(c)(3)).
    (6) Delayed effective date--(i) General rule. For purposes of 
applying paragraph (e)(3) of this section, an amendment that eliminates 
an optional form of benefit satisfies the requirements of this 
paragraph (e)(6) if the elimination of the optional form of benefit is 
not applicable to any annuity starting date before the end of the 
expected transition period for that optional form of benefit.
    (ii) Determination of expected transition period. The expected 
transition period for an optional form of benefit is the period that 
begins when the amendment is adopted and ends when it is reasonable to 
expect, with respect to a section 411(d)(6)(B) protected benefit (i.e. 
not taking into account future service), that the form being eliminated 
would be subsumed by another optional form of benefit (after taking 
into account expected future accruals). For this purpose, the expected 
transition period must be determined in accordance with reasonable 
actuarial assumptions about the future that are likely to result in the 
longest period of time until the eliminated optional form of benefit 
would be subsumed, such as the assumption that the participant's 
compensation will not increase and that future accruals will not exceed 
accruals in recent periods. In addition, if the plan is subsequently 
amended to reduce the rate of future benefit accrual (or otherwise to 
lengthen the expected transition period) before the end of the 
previously determined expected transition period, the later plan 
amendment must provide that the elimination of the optional form of 
benefit is void (or must provide for the effective date to be further 
extended to a new expected transition date that satisfies this 
paragraph (e)(6) taking into account the subsequent amendment).
    (iii) Applicability of the delayed effective date rule limited to 
employees who continue to accrue benefits through the end of expected 
transition period. An amendment eliminating an optional form of benefit 
under this paragraph (e)(6) must be limited to participants who 
continue to accrue benefits under the plan through the end of the 
expected transition period. Thus, for example, the plan amendment may 
not apply to any participant who has a severance from

[[Page 13781]]

employment during the expected transition period.
    (iv) Special rule for section 204(h) notice. See Sec.  54.4980F-
1(b), Q&A-8(c), of this chapter for a special rule relating to this 
paragraph (e)(6).
    (f) Definitions and use of terms--(1) Ancillary benefit. An 
ancillary benefit means a social security supplement (other than a 
QSUPP as defined in Sec.  1.401(a)(4)-12), a disability benefit not in 
excess of a qualified disability benefit described in section 
411(a)(9), an ancillary life insurance or health insurance benefit, a 
death benefit under a defined contribution plan, a preretirement death 
benefit under a defined benefit plan, a plant shutdown benefit that 
does not continue past retirement age, or any other similar benefit 
that does not affect the payment of the accrued benefit. See Sec. Sec.  
1.401-1(b)(1)(i), (ii), and (iii) and 1.401(a)(4)-4(e)(2).
    (2) Applicable amendment date. The term applicable amendment date 
means, with respect to a plan amendment, the later of the effective 
date of the amendment or the date the amendment is adopted.
    (3) Core options--(i) General rule. The core options in a plan 
are--
    (A) A straight life annuity under which the participant is entitled 
to a level life annuity with no benefit payable after the participant's 
death;
    (B) A joint and contingent annuity under which the participant is 
entitled to a life annuity with a survivor annuity for the individual 
designated by the participant (whether or not the participant's spouse) 
that is 75% of the amount payable during the participant's life;
    (C) A 10-year certain and life annuity under which the participant 
is entitled to a life annuity with a guarantee that payments will 
continue to any person designated by the participant for the remainder 
of a fixed period of 10 years if the participant dies before the end of 
the 10-year period; and
    (D) The most valuable option for a participant with a short life 
expectancy (as defined in paragraph (f)(3)(iv) of this section).
    (ii) Treatment of similar core options with different actuarial 
factors and annuity starting dates. Except for core options described 
in paragraph (f)(3)(i)(D) of this section, whether an option is a core 
option is determined without regard to the actuarial factors that are 
used to determine the amount of the distributions under those optional 
forms and without regard to annuity starting dates. Thus, two core 
options that are described in paragraph (f)(3)(i)(A), or (B) or (C) of 
this section are not different core options solely because the core 
options start on different annuity starting dates.
    (iii) Modification of core options to satisfy other requirements. 
An annuity does not fail to be a joint and contingent annuity described 
in paragraph (f)(3)(i)(B) of this section or a 10-year certain and life 
annuity described in paragraph (f)(3)(i)(C) of this section as a result 
of differences to comply with applicable law, such as limitations on 
death benefits to comply with the incidental benefit requirement of 
Sec.  1.401-1(b)(1)(i) or on account of the spousal consent rules of 
section 417.
    (iv) The most valuable option for a participant with a short life 
expectancy--(A) General definition. Except as provided in paragraph 
(f)(3)(iv)(B) of this section, the most valuable option for a 
participant with a short life expectancy means the optional form of 
benefit, for each annuity starting date, that is reasonably expected to 
result in payments that have the largest actuarial present value in the 
case of a participant who dies shortly after the annuity starting date, 
taking into account both payments due to the participant prior to the 
participant's death and any payments due after the participant's death. 
For this purpose, a plan is permitted to assume that the spouse of the 
participant is the same age as the participant. In addition, a plan is 
permitted to assume that the optional form of benefit that is the most 
valuable option for a participant with a short life expectancy when the 
participant is age 70\1/2\ also is the most valuable option for a 
participant with a short life expectancy at all older ages, and that 
the most valuable option for a participant with a short life expectancy 
at age 55 is the most valuable option for a participant with a short 
life expectancy at all younger ages.
    (B) Safe harbor hierarchy--(1) A plan may treat a single-sum 
distribution option with an actuarial present value that is not less 
than the actuarial present value of any optional form of benefit 
eliminated by the plan amendment as the most valuable option for a 
participant with a short life expectancy for each annuity starting date 
if it is available at all annuity starting dates, without regard to 
whether the option was available before the plan amendment.
    (2) If a plan before the amendment does not offer a single-sum 
distribution option as described in paragraph (f)(3)(iv)(B)(1) of this 
section, a plan may treat a joint and contingent annuity with a 
continuation percentage that is at least 75% and that is at least as 
great as the highest continuation percentage available before the 
amendment as the most valuable option for a participant with a short 
life expectancy for each annuity starting date if it is available at 
all annuity starting dates, without regard to whether the option was 
available before the plan amendment.
    (3) If the plan before the amendment offers neither a single-sum 
distribution option as described in paragraph (f)(3)(iv)(B)(1) of this 
section nor a joint and contingent annuity with a continuation 
percentage as described in paragraph (f)(3)(iv)(B)(2) of this section, 
a plan may treat a term certain and life annuity with a term certain 
period no less than 15 years as the most valuable option for a 
participant with a short life expectancy for each annuity starting date 
if it is available at all annuity starting dates, without regard to 
whether the option was available before the plan amendment.
    (4) Definitions of types of section 411(d)(6)(B) protected 
benefits--(i) Early retirement benefit. An early retirement benefit 
means the right, under the terms of a plan, to commence distribution of 
a retirement-type benefit at a particular date after severance from 
employment with the employer and before normal retirement age. 
Different early retirement benefits result from differences in terms 
relating to timing.
    (ii) Optional form of benefit. An optional form of benefit means a 
distribution alternative (including the normal form of benefit) that is 
available under the plan with respect to benefits described in section 
411(d)(6)(A) or a distribution alternative with respect to a 
retirement-type benefit. Different optional forms of benefit exist if a 
distribution alternative is not payable on substantially the same terms 
as another distribution alternative. The relevant terms include all 
terms affecting the value of the optional form, such as the method of 
benefit calculation and the actuarial assumptions used to determine the 
amount distributed. Thus, for example, different optional forms of 
benefit may result from differences in terms relating to the payment 
schedule, timing, commencement, medium of distribution (e.g., in cash 
or in kind), election rights, differences in eligibility requirements, 
or the portion of the benefit to which the distribution alternative 
applies. Differences in the normal retirement ages of employees or in 
the form in which the accrued benefit of employees is payable at normal 
retirement age under a plan are taken into account in determining 
whether a distribution alternative constitutes one or more optional 
forms of benefit.

[[Page 13782]]

    (iii) Retirement-type benefit. A retirement-type benefit means the 
payment of a distribution alternative with respect to an accrued 
benefit or the payment of any other benefit that continues after 
retirement that is not an ancillary benefit (including a QSUPP as 
defined in Sec.  1.401(a)(4)-12).
    (iv) Retirement-type subsidy. A retirement-type subsidy means the 
excess, if any, of the actuarial present value of a retirement-type 
benefit, over the actuarial present value of the accrued benefit 
commencing at normal retirement age or at actual commencement date, if 
later, with both such actuarial present values determined as of the 
date the retirement-type benefit commences. Examples of retirement-type 
subsidies include a subsidized early retirement benefit and a 
subsidized qualified joint and survivor annuity as described in Sec.  
1.415-3(c)(2)(i).
    (v) Subsidized early retirement benefit or early retirement 
subsidy. A subsidized early retirement benefit or an early retirement 
subsidy means the right, under the terms of a plan, to commence 
distribution of a retirement-type benefit at a particular date after 
severance from employment with the employer and before normal 
retirement age where the actuarial present value of the optional forms 
of benefit available to the participant under the plan at that annuity 
starting date exceeds the actuarial present value of the accrued 
benefit commencing at normal retirement age (with such actuarial 
present values determined as of the annuity starting date). Thus, an 
early retirement subsidy is an early retirement benefit that provides a 
retirement-type subsidy.
    (5) Eliminate; elimination; reduce; reduction. The terms eliminate 
or elimination when used in connection with a section 411(d)(6)(B) 
protected benefit mean to eliminate or the elimination of an optional 
form of benefit or an early retirement benefit and to reduce or a 
reduction in a retirement-type subsidy. The terms reduce and reduction 
when used in connection with a retirement-type subsidy mean to reduce 
or a reduction in the amount of the subsidy. For purposes of this 
section, an elimination includes a reduction and a reduction includes 
an elimination.
    (6) Retirement. In general, for purposes of this section, the date 
of retirement refers to the annuity starting date. Thus, the term 
preretirement refers to the time period before the annuity starting 
date.
    (7) Other rights and features. The term other right or feature 
generally means any right or feature applicable to employees under a 
plan. Different rights or features exist if a right or feature is not 
available on substantially the same terms as another right or feature. 
For exceptions to the definition of other right or feature, see Sec.  
1.401(a)(4)-4(e)(3)(ii).
    (8) Actuarial present value. For purposes of this section, the term 
actuarial present value means actuarial present value (within the 
meaning of Sec.  1.401(a)(4)-12) determined using reasonable actuarial 
assumptions.
    (9) Refund of employee contributions feature. A refund of employee 
contributions features means a feature with respect to an optional form 
of benefit that provides for employee contributions and interest 
thereon to be paid in a single sum at the annuity starting date with 
the remainder to be paid in another form beginning on that date.
    (10) Retroactive annuity starting date feature. A retroactive 
annuity starting date feature means a feature with respect to an 
optional form of benefit under which the annuity starting date for the 
distribution occurs prior to the date the participant is furnished the 
notice described in section 417(a)(3).
    (11) Section 411(d)(6)(B) protected benefit. The term section 
411(d)(6)(B) protected benefit means the portion of an early retirement 
benefit, a retirement-type subsidy, or an optional form of benefit 
attributable to the service of a participant before the applicable 
amendment date.
    (12) Social security leveling feature. A social security leveling 
feature means a feature with respect to an optional form of benefit 
which is designed to provide an approximately level amount annually 
when the participant's estimated old age benefits from Social Security 
are taken into account.
    (g) Examples. The following examples illustrate the application of 
paragraphs (b) through (f) of this section:

    Example 1. (i) Facts involving amendments to an early retirement 
subsidy. Plan A provides an annual benefit of 2% of career average 
pay times years of service commencing at normal retirement age (age 
65). Plan A is amended on November 1, 2004, effective as of January 
1, 2005, to provide for an annual benefit of 1.3% of final pay times 
years of service, with final pay computed as the average of a 
participant's highest 3 consecutive years of compensation. 
Participant M is age 50, he has 16 years of service, his career 
average pay is $37,500, and the average of his highest 3 consecutive 
years of compensation is $67,308. Thus, M's accrued benefit as of 
the effective date of the amendment is increased from $12,000 per 
year at normal retirement age (2% times $37,500 times 16 years of 
service) to $14,000 per year at normal retirement age (1.3% times 
$67,308 times 16 years of service). (These facts are similar to the 
facts in Example 1 in paragraph (a)(4) of this section.) Before the 
amendment, Plan A permitted a former employee to commence 
distribution of benefits as early as age 55 and, for a participant 
with at least 15 years of service, actuarially reduced the amount 
payable in the form of a straight life annuity commencing before 
normal retirement age by 3% per year from age 60 to age 65 and by 7% 
per year from age 55 through age 59. Thus, before the amendment, the 
amount of M's early retirement benefit that would be payable for 
commencement at age 55 was $6,000 per year ($12,000 per year minus 
3% for 5 years and minus 7% for 5 more years). The amendment also 
alters the actuarial reduction factor so that, for a participant 
with at least 15 years of service, the amount payable in a straight 
life annuity commencing before normal retirement age is reduced by 
6% per year. As a result, the amount of M's early retirement benefit 
at age 55 becomes $5,600 per year after the amendment ($14,000 minus 
6% for 10 years).
    (ii) Conclusion. The straight life annuity payable under Plan A 
at age 55 is an optional form of benefit that is an early retirement 
subsidy. The plan amendment fails to satisfy the requirements of 
section 411(d)(6)(B) because the amendment decreases the optional 
form of benefit payable to Participant M below the level that 
Participant M was entitled to receive immediately before the 
effective date of the amendment. If instead Plan A had included a 
provision under which M's straight life annuity payable at any age 
could be not be less than what it was immediately before the 
amendment (so that M's straight life annuity payable at age 55 could 
not be less than $6,000 per year), then the amendment would not fail 
to satisfy the requirements of section 411(d)(6)(B) with respect to 
M's straight life annuity payable at age 55 (although the straight 
life annuity payable to M at age 55 would not increase until the 
point in time at which the new formula amount with the new actuarial 
reduction factors exceeds the amount payable under the minimum 
provision, approximately 14 months after the amendment becomes 
effective).
    Example 2. (i) Facts involving contingent-event benefits. Plan B 
permits participants who have a severance from employment before 
normal retirement age to commence distributions at any time after 
age 55 with the amount payable to be actuarially reduced using 
reasonable actuarial assumptions regarding interest and mortality, 
but provides that the annual reduction for any participant who has 
at least 20 years of service and who has a severance from employment 
after age 55 is only 3% per year (which is a smaller reduction than 
would apply under reasonable actuarial reductions). Plan B also 
provides two plant shutdown benefits to participants who have a 
severance of employment as a result of a plant shutdown. First, the 
favorable 3% actuarial reduction will apply for commencement of 
benefits after age 55 and before age 65 for any participant who has 
a severance from employment as a result of a plant shutdown

[[Page 13783]]

and who has at least 10 years of service. Second, all participants 
who have at least 20 years of service and who have a severance from 
employment after age 55 (and before retirement age) as a result of a 
plant shutdown will receive a supplement. Under the supplement, an 
additional amount equal to the participant's estimated old-age 
insurance benefit under the Social Security Act is payable until age 
65. The supplement is not a QSUPP, as defined in Sec.  1.401(a)(4)-
12, because the plan's terms do not state that the supplement is 
treated as an early retirement benefit that is protected under 
section 411(d)(6).
    (ii) Conclusion. The benefit payable with the 3% annual 
reduction is a retirement-type benefit. The excess of the actuarial 
present value of the early retirement benefit using the 3% annual 
reduction over the actuarial present value of the normal retirement 
benefit is a retirement-type subsidy and the right to receive 
payments of the subsidy at age 55 is an early retirement benefit. 
Thus, the right to receive the retirement-type subsidy for 
participants with at least 10 years of service at the time of a 
plant shutdown is an early retirement benefit that provides a 
retirement-type subsidy and is a section 411(d)(6)(B) protected 
benefit (even though no plant shutdown has occurred). Therefore, a 
plan amendment cannot eliminate this benefit with respect to service 
before the applicable amendment date, even before the occurrence of 
the plant shutdown. Because the plan provides that the supplement 
cannot exceed the OASDI benefit (Social Security), the supplement is 
a social security supplement, which is an ancillary benefit that is 
not a section 411(d)(6)(B) protected benefit.
    Example 3. (i) Facts involving elimination of optional forms of 
benefit as redundant. Plan C is a defined benefit plan under which 
employees may elect to commence distributions at any time after the 
later of termination of employment or attainment of age 55. At each 
potential annuity starting date, Plan C permits employees to select, 
with spousal consent where required, a straight life annuity or any 
of a number of actuarially equivalent alternative forms of payment, 
including a straight life annuity with cost-of-living increases and 
a joint and contingent annuity with the participant having the right 
to select any beneficiary and any continuation percentage from 1% to 
100%, subject to modification to the extent necessary to satisfy the 
requirements of the incidental benefit requirement of Sec.  1.401-
1(b)(1)(i). The amount of any alternative payment is determined as 
the actuarial equivalent of the straight life annuity payable at the 
same age using reasonable actuarial assumptions. On September 2, 
2004, Plan C is amended to delete all continuation percentages for 
joint and contingent options other than 25%, 50%, 75% or 100%, 
effective with respect to annuity starting dates that are on or 
after January 1, 2005.
    (ii) Conclusion. (A) Categorization of family members under the 
redundancy rule. The optional forms of benefit described in 
paragraph (i) of this Example 3 are members of four families: a 
straight life annuity; a straight life annuity with cost-of-living 
increases; joint and contingent options with continuation 
percentages of less than 50%; and joint and contingent options with 
continuation percentages of 50% or more. The amendment does not 
affect either of the first two families, but affects the two 
families relating to joint and contingent options.
    (B) Conclusion for elimination of optional forms of benefit as 
redundant. The amendment satisfies the requirements of paragraph (c) 
of this section. First, the eliminated optional forms of benefit are 
redundant with respect to the retained optional forms of benefit 
because each eliminated joint and contingent annuity option with a 
continuation percentage of less than 50% is redundant with respect 
to the 25% continuation option and each eliminated joint and 
contingent annuity option with a continuation percent of 50% or 
higher is redundant with respect to any one of the retained 50%, 
75%, or 100% continuation options. In addition, to the extent that 
the optional form of benefit that is being eliminated does not 
include a social security leveling feature, return of employee 
contribution feature, or retroactive annuity starting date feature, 
the retained optional form of benefit does not include that feature. 
Second, the amendment is not effective with respect to annuity 
starting dates that are less than 90 days from the date of the 
amendment. Third, the plan amendment does not eliminate any 
available core options, including the most valuable option for a 
participant with a short life expectance, treating a joint and 
contingent annuity with a 100% continuation percentage as this 
optional form of benefit pursuant to paragraph (f)(3)(iv)(B)(2) of 
this section. Finally, the amendment need not satisfy the 
requirements of paragraph (e) of this section because the retained 
optional forms of benefit are available on the same annuity starting 
dates and have the same actuarial present value as the optional 
forms of benefit that are being eliminated.
    Example 4. (i) Facts involving elimination of optional forms of 
benefit as redundant if additional restrictions are imposed. The 
facts are the same as Example 3, except that the plan amendment also 
restricts the class of beneficiaries that may be elected under the 
four retained joint and contingent annuities to the employee's 
spouse.
    (ii) Conclusion. The amendment fails to satisfy the requirements 
of paragraph (c)(2)(i)(C) of this section because the retained joint 
and contingent annuities have materially greater restrictions on the 
beneficiary designation than did the eliminated joint and contingent 
annuities. Thus, the joint and contingent annuities being eliminated 
are not redundant with respect to the retained joint and contingent 
annuities. In addition, the amendment fails to satisfy the 
requirements of the core option rules in paragraph (d) of this 
section because the amendment fails to be limited to annuity 
starting dates that are at least 4 years after the date the 
amendment is adopted, the amendment fails to include the core option 
in paragraph (f)(3)(i)(B) of this section because the participant 
does not have the right to designate any beneficiary, and the 
amendment fails to include the core option described in paragraph 
(f)(3)(i)(C) of this section because the plan does not provide a 10-
year certain and life annuity.
    Example 5. (i) Facts involving elimination of a social security 
leveling feature and a period certain annuity as redundant. Plan D 
is a defined benefit plan under which participants may elect to 
commence distributions in the following actuarially equivalent 
forms, with spousal consent if applicable: a straight life annuity; 
a 50%, 75%, or 100% joint and contingent annuity; a 5-year, 10-year, 
or a 15-year period certain and life annuity; and an installment 
refund annuity (i.e., an optional form of benefit that provides a 
period certain, the duration of which is based on the participant's 
age), with the participant having the right to select any 
beneficiary. In addition, each annuity offered under the plan, if 
payable to a participant who is less than age 65, is available both 
with and without a social security leveling feature. The social 
security leveling feature provides for an assumed commencement of 
social security benefits at any age selected by the participant 
between age 62 and 65. Plan D is amended on September 1, 2004, 
effective as of January 1, 2005, to eliminate the installment refund 
form of benefit and to restrict the social security leveling feature 
to an assumed social security commencement age of 65.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (c) of this section. First, the installment refund annuity 
option is redundant with respect to the 15-year certain and life 
annuity (except for advanced ages where, because of shorter life 
expectancies, the installment refund annuity option is redundant 
with respect to the 5-year certain and life annuity and also 
redundant with respect to the 10-year certain and life annuity). 
Second, with respect to restricting the social security leveling 
feature to an assumed social security commencement age of 65, under 
paragraph (c)(3)(ii) of this section, straight life annuities with 
social security leveling features that have different social 
security commencement ages are treated as members of the same family 
as straight life annuities without social security leveling 
features. To the extent an optional form of benefit that is being 
eliminated includes a social security leveling feature, the retained 
optional form of benefit must also include that feature, but it is 
permitted to have a different assumed age for commencement of social 
security benefits. Third, to the extent that the optional form of 
benefit that is being eliminated does not include a social security 
leveling feature, a return of employee contribution feature, or 
retroactive annuity starting date feature, the retained optional 
form of benefit must not include that feature. Fourth, the plan 
amendment does not eliminate any available core options, including 
the most valuable option for a participant with a short life 
expectance, treating a joint and contingent annuity with a 100% 
continuation percentage as this optional form of benefit pursuant to 
paragraph (f)(3)(iv)(B)(2) of this section. Fifth, the amendment is 
not effective with respect to annuity starting dates that are less 
than 90 days from the date the amendment is adopted. The amendment

[[Page 13784]]

need not satisfy the requirements of paragraph (e) of this section 
because the retained optional forms of benefit are available on the 
same annuity starting dates and have the same actuarial present 
value as the optional forms of benefit that are being eliminated.
    Example 6. (i) Facts involving elimination of noncore options. 
Employer N sponsors Plan E, a defined benefit plan that permits 
every participant to elect payment in the following actuarially 
equivalent optional forms of benefit (Plan E's uniformly available 
options), with spousal consent if applicable: a straight life 
annuity, a 50%, 75%, or 100% joint and contingent annuity with no 
restrictions on designation of beneficiaries, and a 5-, 10-, or 15-
year period certain and life annuity. In addition, each can be 
elected in conjunction with a social security leveling feature, with 
the participant permitted to select a social security commencement 
age from age 62 to age 67. None of Plan E's uniformly available 
options include a single-sum distribution. The plan has been in 
existence for over 30 years, during which time Employer N has 
acquired a large number of other businesses, including merging over 
20 defined benefit plans of acquired entities into Plan E. Many of 
the merged plans offered optional forms of benefit that were not 
among Plan E's uniformly available options, including some plans 
funded through insurance products, often offering all of the 
insurance annuities that the insurance carrier offers, and with some 
of the merged plans offering single-sum distributions. In 
particular, under the XYZ acquisition, the XYZ acquired plan offered 
a single-sum distribution option that was frozen at the time of the 
acquisition. On April 1, 2005, each single-sum distribution option 
applies to less than 25% of the XYZ acquired participants' accrued 
benefits. Employer N has generally, but not uniformly, followed the 
practice of limiting the optional forms of benefit for an acquired 
unit to an employee's service before the date of the merger, and has 
uniformly followed this practice with respect to each of the early 
retirement subsidies in the acquired unit's plan. As a result, as of 
April 1, 2005, Plan E includes a large number of optional forms of 
benefit which are not members of families identified in paragraph 
(c)(4) of this section, but there are no participants who are 
entitled to any early retirement subsidies because any subsidies 
have been subsumed by the actuarially reduced accrued benefit. Plan 
E is amended in April of 2005 to eliminate all of the optional forms 
of benefit that Plan E offers other than Plan E's uniformly 
available options, except that the amendment does not eliminate any 
single-sum distribution option except with respect to XYZ acquired 
participants and permits any commencement date that was permitted 
under Plan E before the amendment. Plan E also eliminates the 
single-sum distribution option for XYZ acquired participants. 
Further, each of Plan E's uniformly available options has an 
actuarial present value that is not less than the actuarial present 
value of any optional form of benefit offered before the amendment. 
The amendment is effective with respect to annuity starting dates 
that are on or after May 1, 2009.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (d) of this section. First, Plan E, as amended, does not 
eliminate any single-sum distribution option as provided in 
paragraph (d)(2)(iii) of this section except for single-sum 
distribution options that apply to less than 25% of a plan 
participant's accrued benefit as of the date the option is 
eliminated (May 1, 2009). Second, Plan E, as amended, includes each 
of the core options as defined in paragraph (f)(3) of this section, 
including offering the most valuable option for a participant with a 
short life expectancy (treating the 100% joint and contingent 
annuity as this benefit, under paragraph (f)(3)(iv)(B)(2) of this 
section). The grandfathered single-sum distribution options are not 
the most valuable option for a participant with a short life 
expectancy because these distributions are not available with 
respect to a participant's entire accrued benefit. In addition, as 
required under paragraph (d)(2) of this section, to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee 
contributions feature, at least one of the core options is available 
with that feature and, to the extent that the optional form of 
benefit that is being eliminated does not include a social security 
leveling feature or a refund of employee contributions feature, each 
of the core options is available without that feature. Third, the 
amendment is not effective with respect to annuity starting dates 
that are less than 4 years after the date the amendment is adopted. 
Finally, the amendment need not satisfy the requirements of 
paragraph (e) of this section because the retained optional forms of 
benefit are available on the same annuity starting date and have the 
same actuarial present value as the optional forms of benefit that 
are being eliminated.
    Example 7. (i) Facts involving reductions in actuarial present 
value. (A) Plan F is a defined benefit plan providing an accrued 
benefit of 1% of the average of a participant's highest 3 
consecutive years' pay times years of service, payable as a straight 
life annuity beginning at age 65. Plan F permits employees to elect 
to commence reduced distributions at any time after the later of 
termination of employment or attainment of age 55. At each potential 
annuity starting date, Plan F permits employees to select, with 
spousal consent, either a straight life annuity, a joint and 
contingent annuity with the participant having the right to select 
any beneficiary and a continuation percent of 50%, 66\2/3\%, 75%, or 
100%, or a 10-year certain and life annuity with the participant 
having the right to select any beneficiary, subject to modification 
to the extent necessary to satisfy the requirements of the 
incidental benefit requirement of Sec.  1.401-1(b)(1)(i). The amount 
of any joint and contingent annuity and the 10-year certain and life 
annuity is determined as the actuarial equivalent of the straight 
life annuity payable at the same age using reasonable actuarial 
assumptions. The plan covers employees at four divisions, one of 
which, division X, was acquired on January 1, 1999. The plan 
provides for distributions before normal retirement age to be 
actuarially reduced, but, if a participant retires after attainment 
of age 55 and completion of 10 years of service, the applicable 
early retirement reduction factor is 3% per year for the years 
between age 65 and 62 and 6% per year for the ages from 62 to 55 for 
all employees at any division, except for employees who were in 
division X on January 1, 1999, for whom the early retirement 
reduction factor for retirement after age 55 and 10 years of service 
is 5% for each year before age 65. On December 2, 2004, effective 
January 1, 2005, Plan F is amended to change the early retirement 
reduction factors for all employees of division X to be the same as 
for other employees, effective with respect to annuity starting 
dates that are on or after January 1, 2006, but only with respect to 
participants who are employees on or after January 1, 2006 and only 
if Plan F continues accruals at the current rate through January 1, 
2006 (or the effective date of the change in reduction factors is 
delayed to reflect the change in the accrual rate). For purposes of 
this Example 7, it is assumed that an actuarially equivalent early 
retirement factor would have a reduction shown in column 4 of the 
following table, which compares the reduction factors for division X 
before and after the amendment:

----------------------------------------------------------------------------------------------------------------
                                                                  Old                   Actuarially    Column 3
                             Age                               division X   New factor   equivalent     minus
                                                                 factor                    factor      column 2
----------------------------------------------------------------------------------------------------------------
1                                                                       2            3            4            5
-------------------------------------------------------------
65..........................................................           NA           NA           NA           NA
64..........................................................           95           97         91.1           +2
63..........................................................           90           94         83.2           +4
62..........................................................           85           91         76.1           +5
61..........................................................           80           85         69.8           +5
60..........................................................           75           79         64.1           +4
59..........................................................           70           73         59.0           +3

[[Page 13785]]

 
58..........................................................           65           67         54.3           +2
57..........................................................           60           61         50.1           +1
56..........................................................           55           55         46.3            0
55..........................................................           50           49         42.8           -1
----------------------------------------------------------------------------------------------------------------

    (B) On January 1, 2005, the employee with the largest number of 
years of service is Employee E, who is age 54 and has 20 years of 
service. For 2004, Employee E's compensation is $80,000 and E's 
highest 3 consecutive years of pay on January 1, 2005 is $75,000. 
Employee E's accrued benefit as of the effective date of the 
amendment is a life annuity of $15,000 per year at normal retirement 
age (1% times $75,000 times 20 years of service) and E's early 
retirement benefit commencing at age 55 has a present value of 
$91,397 as of January 1, 2005. It is assumed for purposes of this 
example that the longest expected transition period for any active 
employee does not exceed 5 months (20 years and 5 months, times 1% 
times 49% exceeds 20 years times 1% times 50%). Finally, it is 
assumed for purposes of this example that the amendment reduces 
optional forms of benefit which are burdensome or complex.
    (ii) Conclusion concerning application of section 411(d)(6)(B). 
The amendment reducing the early retirement factors has the effect 
of eliminating the existing optional forms of benefit (where the 
amount of the benefit is based on preamendment early retirement 
factors in any case where the new factors result in a smaller amount 
payable) and adding new optional forms of benefit (where the amount 
of benefit is based on the different early retirement factors). 
Accordingly, the elimination must satisfy the requirements of 
paragraph (c) or (d) of this section if the amount payable at any 
date is less than would have been payable under the plan before the 
amendment.
    (iii) Conclusion concerning application of redundancy rules. The 
amendment satisfies the requirements of paragraph (c)(1)(i) and (ii) 
of this section (see paragraphs (iv) through (vi) of this Example 7 
for the requirements of paragraph (c)(1)(iii) of this section). 
First, with respect to each eliminated optional form of benefit 
(i.e., with respect to each optional form of benefit with the Old 
Division X Factor), after the amendment there is a retained optional 
form of benefit that is in the same family of optional forms of 
benefit (i.e., the optional form of benefit with the New Factor). 
Second, the amendment is not effective with respect to annuity 
starting dates that are less than 90 days from the date the 
amendment is adopted. Third, to the extent that the plan amendment 
eliminates the most valuable option for a participant with a short 
life expectancy, the retained optional form of benefit is identical 
except for differences in actuarial factors.
    (iv) Conclusion concerning application of the requirements under 
paragraph (e) of this section. The plan amendment must satisfy the 
requirements of paragraph (e) of this section because, as of the 
applicable amendment date, the actuarial present value of the early 
retirement subsidy is less than the actuarial present value of the 
early retirement subsidy being eliminated. The plan amendment 
satisfies the requirements under paragraph (e)(1)(i) of this section 
because the amendment eliminates optional forms of benefit that 
create significant burdens or complexities for the plan and its 
participants. See below for the de minimis requirement under 
paragraph (e)(1)(ii) of this section.
    (v) Conclusion concerning application of de minimis rules under 
paragraph (e)(5) of this section. The amendment does not satisfy the 
requirements of paragraph (e)(5) of this section because the 
reduction in the actuarial present value is more than a de minimis 
amount under paragraph (e)(5) of this section. For example, for 
Employee E, the amount of the joint and contingent annuity payable 
at age 55 is reduced from $7,500 (50% of $15,000) to $7,350 (49% of 
$15,000) and the reduction in present value as a result of the 
amendment is $1,828 ($91,397-$89,569). In this case, the retirement-
type subsidy at age 55 is the excess of the present value of the 50% 
early retirement benefit over the present value of the deferred 
payment of the accrued benefit, or $13,921 ($97,269-$83,348) and the 
present value at age 54 of the retirement-type subsidy is $13,081. 
The reduction in present value is more than the greater of 2% of the 
present value of the retirement-type subsidy and 1% of E's 
compensation because the reduction in present value exceeds $800 
(the greater of $262, which is 2% of the present value of the 
retirement-type subsidy for the benefit being eliminated, and $800, 
which is 1% of E's compensation of $80,000).
    (vi) Conclusion involving application of de minimis rules under 
paragraph (e)(6) relating to expected transition period. The 
amendment satisfies the requirements of paragraph (e)(6) of this 
section and, thus, satisfies the requirements of paragraph (c) of 
this section, including the requirement in paragraph (c)(1)(iii) of 
this section that paragraph (e) of this section be satisfied. First, 
it is presumed that the amendment reduces optional forms of benefit 
that are burdensome or complex. Second, the plan amendment is not 
effective for annuity starting dates before January 1, 2006, and 
that date is not earlier than the longest expected transition period 
for any participant in Plan F on the date of the amendment. Third, 
the amendment does not apply to any participant who has a severance 
from employment during the transition period. If, however, a later 
plan amendment reduces accruals under Plan F, the initial amendment 
will no longer satisfy the requirements of paragraph (e)(6) of this 
section (and must be voided) unless, as part of the later amendment, 
the expected transition period is extended to reflect the reduction 
in accruals under Plan F.

    (h) Effective date. The rules of this section apply to amendments 
adopted on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register.

PART 54--PENSION EXCISE TAXES

    Par. 3. The authority citation for part 54 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * * 54.4980F-1 also issued under 26 
U.S.C. 4980F. * * *

    Par. 4. Section 54.4980F-1(b) is amended by:
    1. Revising paragraph (c) of A-8.
    2. Revising paragraph (d) of A-8.
    The revisions read as follows:


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

* * * * *
    A-8. * * *
    (c) Application to certain amendments reducing early retirement 
benefits or retirement-type subsidies. Section 204(h) notice is not 
required for an amendment that reduces an early retirement benefit or 
retirement-type subsidy if the amendment is permitted under the third 
sentence of section 411(d)(6)(B) of the Internal Revenue Code and 
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). However, in determining whether an amendment provides for a 
significant reduction for purposes of this section with respect to an 
amendment that has an effective date on or after these rules are 
adopted as final regulations and that reduces a retirement-type subsidy 
as permitted under Sec.  1.411(d)-3(e)(6) of this chapter,

[[Page 13786]]

the amendment is treated in the same manner as an amendment that limits 
the retirement-type subsidy to benefits that accrue before the 
applicable amendment date (as defined at Sec.  1.411(d)-3(f)(2) of this 
chapter) with respect to each participant or alternate payee to whom 
the reduction is reasonably expected to apply.
    (d) Example. The following examples illustrate the rules in this 
Q&A-8:

    Example 1. (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 on August 1, 2007, 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.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that the 2008 amendment does not alter the plan provisions 
relating to a participant's number of years of service, but instead 
amends the plan's provisions relating to early retirement benefits. 
Before the amendment, the plan provides for distributions before 
normal retirement age to be actuarially reduced, but, if a 
participant retires after attainment of age 55 and completion of 10 
years of service, the applicable early retirement reduction factor 
is 3% per year for the years between age 65 and 62 and 6% per year 
for the ages from 62 to 55. The amendment changes these provisions 
so that an actuarial reduction applies in all cases, but, in 
accordance with section 411(d)(6)(B), provides that no participant's 
early retirement benefit will be less than the amount provided under 
the plan as in effect on December 31, 2007 with respect to service 
before January 1, 2008. For participant X, the reduction is 
significant.
    (ii) Conclusion. The amendment will result in a reduction in a 
retirement-type subsidy provided under Plan A (i.e., Plan A's early 
retirement subsidy). Section 204(h) notice must be provided to 
participant X and any other participant for whom the reduction is 
significant and the notice must be provided at least 45 days before 
January 1, 2008 (or by such other date as may apply under Q&A-9 of 
this section).
    Example 3. (i) Facts. The facts are the same as in Example 2, 
except that, for participant X, the change does not go into effect 
for any annuity starting date before January 1, 2009. Participant X 
continues employment through January 1, 2009.
    (ii) Conclusion. The conclusion is the same as in Example 2. 
Taking into account the rule in the second sentence of Q&A-8(c) of 
this section, the reduction that occurs for participant X on January 
1, 2009, is treated as the same reduction that occurs under Example 
2. Accordingly, section 204(h) notice must be provided to 
participant X at least 45 days before January 1, 2008 (or by such 
other date as may apply under Q&A-9 of this section).
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-6220 Filed 3-23-04; 8:45 am]
BILLING CODE 4830-01-P