[Federal Register Volume 70, Number 155 (Friday, August 12, 2005)]
[Proposed Rules]
[Pages 47155-47160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-15960]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-156518-04]
RIN 1545-BE10


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 certain issues relating to the anti-cutback rules of section 
411(d)(6) of the Internal Revenue Code, which generally protect accrued 
benefits, early retirement benefits, retirement-type subsidies, and 
optional forms of benefit under qualified retirement plans. The 
proposed regulations would address the interaction between the anti-
cutback rules of section 411(d)(6) and the nonforfeitability 
requirements of section 411(a), and would also provide a utilization 
test under which certain plan amendments would be permitted to 
eliminate or reduce certain early retirement benefits, retirement-type 
subsidies, or optional forms of benefit. These proposed regulations 
would generally affect sponsors of, and participants in, qualified 
retirement plans.

DATES: Written or electronic comments must be received by November 10, 
2005.
    Requests to speak (with outlines of oral comments to be discussed) 
at the public hearing scheduled for December 6, 2005, at 10 a.m. must 
be received by November 15, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-156518-04), room 
5203, Internal Revenue Service, PO Box 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-
156518-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically, via the IRS Internet site at http://www.irs.gov/regs, or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-156581-04). 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 Treena Garrett, (202) 622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 411(d)(6) of the Internal Revenue Code (Code). These proposed 
regulations, when finalized, would revise Treasury Regulations Sec.  
1.411(d)-3 to provide guidance on when a plan amendment may alter a 
benefit entitlement with respect to benefits accrued before the date of 
the amendment to add a condition that is permitted under section 
411(a). These rules are intended to reflect the holding in Central 
Laborers' Pension Fund v. Heinz, 541 U.S. 739 (June 7, 2004). The 
proposed regulations would also provide a new method--a utilization 
test--under which a plan amendment is permitted to eliminate or reduce 
an early retirement benefit, a retirement-type subsidy, or an optional 
form of benefit.
    Section 411(a) generally provides that an employee's right to the 
accrued benefit derived from employer contributions must become 
nonforfeitable within a specified period of service. Section 411(a)(3) 
provides circumstances under which an employee's benefit is permitted 
to be forfeited without violating section 411(a). Section 411(a)(3)(B) 
specifically provides that a right to an accrued benefit derived from 
employer contributions is not treated as forfeitable solely because the 
plan provides that the payment of benefits is suspended for such period 
as the employee is employed, subsequent to the commencement of payment 
of such benefits: (1) In the case of a plan other than a multiemployer 
plan, by the employer who maintains the plan under which such benefits 
were being paid; and (2) in the case of a multiemployer plan, in the 
same industry, the same trade or craft, and the same geographic area 
covered by the plan as when such benefits commenced.
    The definition of employment for which benefit payments are 
permitted to be suspended is further described in 29 CFR 2530.203-3 of 
the Department of Labor Regulations, which interprets section 
203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 
(ERISA), as amended, the counterpart to section 411(a)(3)(B) of the 
Code. Employment that satisfies the conditions described in section 
203(a)(3)(B) of ERISA and the regulations thereunder is referred to as 
``section 203(a)(3)(B) service.'' See 29 CFR 2530.203-3(c).
    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(d)(6)(B) 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 of the Treasury 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).

[[Page 47156]]

    Section 645(b)(1) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) 
amended section 411(d)(6)(B) of the Code to direct the Secretary of the 
Treasury 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 204(g) of ERISA contains parallel rules to section 
411(d)(6) of the Code, including a similar directive to the Secretary 
of the Treasury to issue regulations providing that section 204(g) of 
ERISA 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. Under section 101 of Reorganization 
Plan No. 4 of 1978 (43 FR 47713) and section 204(g) of ERISA, the 
Secretary of the Treasury has interpretive jurisdiction over the 
subject matter addressed in these proposed regulations for purposes of 
ERISA, as well as the Code. Thus, these proposed Treasury regulations 
issued under section 411(d)(6) of the Code apply as well for purposes 
of section 204(g) of ERISA.
    On July 11, 1988, final regulations (TD 8212) under section 
411(d)(6) were published in the Federal Register (53 FR 26050). These 
regulations are contained in Sec.  1.411(d)-4.
    In conjunction with the publication of these proposed regulations, 
final regulations under sections 411(d)(6) and 4980F are being 
published elsewhere in the Rules and Regulations portion of this issue 
in the Federal Register. Those final regulations are contained in Sec.  
1.411(d)-3, which sets forth conditions under which a plan amendment is 
permitted to eliminate an optional form of benefit and to eliminate or 
reduce an early retirement benefit or a retirement-type subsidy that 
creates 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. However, 
those regulations reserve 2 topics for later guidance--the utilization 
test (currently reserved in Sec.  1.411(d)-3(f)) and the interaction of 
the permitted forfeiture rules under section 411(a) with the anti-
cutback rules under section 411(d)(6) (currently reserved in Sec.  
1.411(d)-3(a)(3)). These proposed regulations would address these 2 
topics as described below.
    In Central Laborers', the plaintiffs were 2 inactive participants 
in a multiemployer pension plan who commenced payment of their benefits 
in 1996 after qualifying for subsidized early retirement payments. The 
plan terms required that payments be suspended if a participant engaged 
in disqualifying employment. At the time of their commencement of 
benefits, the plan defined disqualifying employment to include only 
employment covered by the plan, but not work as a construction 
supervisor. Both participants were employed as construction supervisors 
after they commenced payment of benefits. Although the 2 participants' 
benefit payments were not suspended in 1996, the plan was amended in 
1998 to expand its definition of disqualifying employment to include 
any employment in the same trade or craft, industry, and geographic 
area covered by the plan, and the plan stopped payments to the 2 
participants on account of their disqualifying employment as 
construction supervisors. The 2 participants sued to recover the 
suspended payments, claiming that the amendment expanding the plan's 
suspension provisions violated section 204(g) of ERISA (the counterpart 
to section 411(d)(6) of the Code).
    The Supreme Court, holding for the 2 participants, ruled that 
section 204(g) of ERISA prohibits a plan amendment expanding the 
categories of post-retirement employment that result in suspension of 
the payment of early retirement benefits already accrued. The Court 
found that, while ERISA permits certain conditions that are elements of 
the benefit itself (such as suspensions under section 411(a)(3)(B) of 
the Code or section 203(a)(3)(B) of ERISA), such a condition may not be 
imposed after a benefit has accrued, and that the right to receive 
benefit payments on a certain date may not be limited by a new 
condition narrowing that right. The Court agreed with the 7th Circuit 
that ``[a] participant's benefits cannot be understood without 
reference to the conditions imposed on receiving those benefits, and an 
amendment placing materially greater restrictions on the receipt of the 
benefit ``reduces'' the benefit just as surely as a decrease in the 
size of the monthly benefit.'' Central Laborers' at 744, quoting Heinz 
v. Central Laborers' Pension Fund, 303 F.3d 802, 805 (7th Cir. 2002).
    Rev. Proc. 2005-23 (2005-18 I.R.B. 991) limits the retroactive 
application of Central Laborers' for qualified plans under section 
401(a) pursuant to the Commissioner's authority under section 
7805(b)(8). The revenue procedure provides that the IRS will not 
disqualify a plan solely on account of a plan amendment adopted before 
June 7, 2004 that violated section 411(d)(6) by adding or expanding a 
suspension of benefit provision permitted under section 411(a)(3) if 
certain requirements are satisfied. These requirements include the 
adoption of a reforming amendment that provides for the payment of 
benefits retroactive to June 7, 2004, to affected plan participants. 
Rev. Proc. 2005-23 does not address participants' rights to recover 
benefits under Title I of ERISA.
    Rev. Proc. 2005-23 states that Treasury and the IRS intend to 
propose regulations that reflect the holding in Central Laborers'. The 
revenue procedure provides that the proposed regulations will provide 
guidance on when an amendment may add a benefit entitlement condition 
that is permitted under the vesting rules with respect to benefits 
accrued before the date of the amendment. Those rules are contained in 
these proposed regulations.

Explanation of Provisions

Interaction of the Permitted Forfeiture Rules Under Section 411(a) with 
the Anti-Cutback Rules Under Section 411(d)(6)

    The proposed regulations would address the interaction of the 
vesting rules in section 411(a) with the anti-cutback rules in section 
411(d)(6), taking into account the decision in Central Laborers'. The 
regulations would provide that a plan amendment that decreases accrued 
benefits, or otherwise places greater restrictions on the rights to 
section 411(d)(6) protected benefits violates section 411(d)(6), even 
if the amendment merely adds a restriction or condition on receipt of 
section 411(d)(6) protected benefits that is otherwise permitted under 
the vesting rules in section 411(a)(3) through (11). The proposed 
regulations would further provide that such a plan amendment is 
permitted under section 411(d)(6) to the extent it applies with respect 
to benefits accruing after the applicable amendment date.
    The proposed regulations include 3 examples illustrating this rule. 
One example includes facts similar to Central Laborers'. Another 
example illustrates the interaction of section 411(d)(6) with the rule 
of parity in section 411(a)(6)(D). The final example addresses how a 
plan amendment that

[[Page 47157]]

changes the plan's vesting schedule would violate section 411(d)(6) if 
the amendment were to place greater restrictions on the rights to 
section 411(d)(6) protected benefits. This example illustrates that the 
application of this section 411(d)(6) rule to a plan amendment changing 
a plan's vesting schedule is in addition to the requirements under 
section 411(a)(10)(A) (requiring that the nonforfeitable percentage of 
a participant's accrued benefit as of the applicable amendment date not 
be decreased by the plan amendment) and under section 411(a)(10)(B) 
(requiring that the plan permit each participant having not less than 3 
years of service to elect to have his or her nonforfeitable percentage 
computed without regard to the plan amendment). Thus, if a plan 
amendment changes the plan's vesting schedule, the amendment must not 
place greater restrictions (including vesting restrictions) on a 
participant's rights to previously accrued benefits, and must also 
comply with section 411(a)(10). As indicated in the example, both of 
these requirements are satisfied for an amendment changing a plan's 
vesting schedule if each plan participant is entitled to benefits based 
on the greater of the new and old vesting schedules.
    While the proposed regulations address the addition of conditions 
specifically described in section 411(a), these rules would also apply 
in other situations. For example, if a plan provides section 411(d)(6) 
protected benefits that are conditioned on the reemployment of the 
participant, then a plan amendment adding additional restrictions with 
respect to benefits already accrued on those benefits is required to 
satisfy section 411(d)(6). However, a plan amendment is permitted to 
add restrictions with respect to future accruals.

Utilization Test

    The proposed regulations would provide that a plan is permitted to 
be amended to eliminate optional forms of benefit that comprise a 
generalized optional form \1\ for a participant with respect to 
benefits accrued before the applicable amendment date if certain 
requirements relating to the use of the generalized optional form are 
satisfied. However, under the utilization test, a plan is not permitted 
to be amended to eliminate core options (i.e., a straight life annuity, 
a 75% joint and contingent annuity, a 10-year term certain and life 
annuity, and the most valuable option for a participant with a short 
life expectancy). In order to eliminate a noncore optional form of 
benefit under the proposed utilization test, 2 conditions must be 
satisfied: (1) The generalized optional form is available to a 
substantial number of participants during the relevant look-back period 
and (2) no participant must have elected any optional form of benefit 
that is within its generalized optional form during such relevant look-
back period.
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    \1\ The term generalized optional form is defined in Sec.  
1.411(d)-3(g)(8) as a group of optional forms of benefit that are 
identical except for differences due to the actuarial factors that 
are used to determine the amount of the distributions under those 
optional forms of benefit and the annuity starting dates.
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    If the utilization test is satisfied, the plan could be amended to 
eliminate all of the optional forms of benefit that comprise a 
generalized optional form without having to satisfy the burdensome and 
de minimis requirements of Sec.  1.411(d)-3(e). Treasury and the IRS 
believe that the utilization test, by its nature, implicitly 
determines--by reference to participant's elections--which optional 
forms of benefit are considered valuable to plan participants. The fact 
that no participant in a substantial sample elected any optional form 
of benefit that is within a generalized optional form is a compelling 
indication that elimination of that the entire generalized optional 
form would not adversely affect the rights of any participant in a more 
than de minimis manner.
    The utilization test would provide that the generalized optional 
form being eliminated must have been available to at least 100 
participants who are taken into account during the look-back period. 
The look-back period under the utilization test in the proposed 
regulations is the 2 plan years immediately preceding the plan year in 
which the plan amendment eliminating the optional form of benefit is 
adopted. At least one of the plan years during the look-back period 
must be a 12-month plan year. If a plan does not have at least 100 
participants who are taken into account during those 2 plan years, the 
look-back period is permitted to be expanded to be the 3, 4, or 5 plan 
years immediately preceding the plan year in which the plan amendment 
eliminating the optional form of benefit is adopted in order to have a 
look-back period that has at least 100 participants who are taken into 
account. If a plan does not have at least 100 participants who can be 
taken into account during the relevant 5-year period, the plan is not 
permitted to use the utilization test.
    For purposes of the utilization test, a participant is generally 
taken into account only if during the look-back period the participant 
was eligible to elect to commence payment of an optional form of 
benefit that is part of the generalized optional form being eliminated. 
However, a participant would not be taken into account if the 
participant: did not elect any optional form of benefit with an annuity 
commencement date that is within the look-back period; elected 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; elected an optional form of benefit that was only available 
during a limited period of time that contained a retirement-type 
subsidy that was not extended to the generalized optional form being 
eliminated; or elected an optional form of benefit with an annuity 
commencement date that is more than 10 years before normal retirement 
age.\2\ Treasury and the IRS believe that, in light of these 
restrictions on participants who are permitted to be taken into account 
in applying the utilization test, the sample size of 100 participants 
who are eligible to elect the generalized optional form is sufficiently 
large to demonstrate that elimination of the generalized optional form 
would not adversely affect the rights of any plan participant in a more 
than de minimis manner.
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    \2\ The term annuity commencement date is defined in Sec.  
1.411(d)-3(g)(3) as the annuity starting date, except that, in the 
case of a retroactive annuity starting date, annuity commencement 
date is the date of the first payment of benefits pursuant to a 
participant election of a retroactive annuity starting date, as 
defined in Sec.  1.417(e)-1(b)(3)(iv).
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    Under the proposed regulations, a plan amendment eliminating a 
generalized optional form under the utilization rule cannot be 
applicable with respect to an optional form of benefit with an annuity 
commencement date that is earlier than the number of days in the 
maximum QJSA explanation period (as defined in Sec.  1.411(d)-3(g)(9)) 
after the date the amendment is adopted. This waiting period is the 
same as the waiting period for the elimination of an optional form of 
benefit under the redundancy rule in Sec.  1.411(d)-3(c)(1)(ii).

Proposed Effective Date

    The rules relating to section 411(a) nonforfeitability provisions 
are proposed to be effective June 7, 2004, the date of the Central 
Laborers' decision. The rules relating to the utilization test are 
proposed to be effective for amendments adopted after December 31, 
2006. With respect to the rules relating to the utilization test, these 
proposed regulations cannot be relied upon until they are adopted in 
final form in the Federal Register.

[[Page 47158]]

Special Analyses

    It has been determined that these proposed regulations are 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. Because these 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, these proposed 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their 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 Department 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.
    A public hearing has been scheduled for December 6, 2005, 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 (a signed original and eight (8) copies) by 
November 15, 2005. 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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order 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, Public Law 107-16 (115 Stat. 38).* * *

    Par. 2. Section 1.411(d)-3 is amended by:
    1. Revising paragraph (a)(3).
    2. Adding Examples 3 and 4 to paragraph (a)(4).
    3. Adding Example 3 to paragraph (b)(4).
    4. Revising paragraph (f).
    5. Adding Example 6 to paragraph (h).
    6. Adding paragraphs (j)(3) and (j)(4).
    The revisions and additions read as follows:


Sec.  1.411(d)-3  Section 411(d)(6) Protected Benefits.

* * * * *
    (a) * * *
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits. The rules of this 
paragraph (a) apply to a plan amendment that decreases a participant's 
accrued benefits, or otherwise places greater restrictions or 
conditions on a participant's rights to section 411(d)(6) protected 
benefits, even if the amendment merely adds a restriction or condition 
that is otherwise permitted under the vesting rules in section 
411(a)(3) through (11). However, such an amendment does not violate 
section 411(d)(6) to the extent it applies with respect to benefits 
that accrue after the applicable amendment date.
* * * * *
    (4) * * *

    Example 3. (i) Facts. Employer N maintains Plan C, a qualified 
defined benefit plan under which an employee participates upon 
completion of 1 year of service and is vested in 100% of the 
employer-derived accrued benefit upon completion of 5 years of 
service. Plan C provides that a former employee's years of service 
prior to a break in service will be reinstated upon completion of 1 
year of service after being rehired. Plan C has participants who 
have fewer than 5 years of service and who are accordingly 0% vested 
in their employer-derived accrued benefits. On December 31, 2007, 
effective January 1, 2008, Plan C is amended, in accordance with 
section 411(a)(6)(D), to provide that any nonvested participant who 
has 5 consecutive 1-year breaks in service and whose number of 
consecutive 1-year breaks in service exceeds his or her number of 
years of service before the breaks will have his or her pre-break 
service disregarded in determining vesting under the plan.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the 
plan amendment does not satisfy the requirements of paragraph (a) of 
this section, and thus violates section 411(d)(6), because the 
amendment places greater restrictions or conditions on the rights to 
section 411(d)(6) protected benefits, as of January 1, 2008, for 
participants who have fewer than 5 years of service, by restricting 
the ability of those participants to receive further vesting 
protections on benefits accrued as of that date.
    Example 4. (i) Facts--(A) Employer O sponsors Plan D, a 
qualified profit sharing plan under which each employee has a 
nonforfeitable right to a percentage of his or her employer-derived 
accrued benefit based on the following table:

------------------------------------------------------------------------
                                                         Nonforfeitable
             Completed years of  service                   percentage
------------------------------------------------------------------------
Fewer than 3.........................................                  0
3....................................................                 20
4....................................................                 40
5....................................................                 60
6....................................................                 80
7....................................................                100
------------------------------------------------------------------------

    (B) In January 2005, Employer O acquires Company X, which 
maintains Plan E, a qualified profit sharing plan under which each 
employee who has completed 5 years of service has a nonforfeitable 
right to 100% of the employer-derived accrued benefit. In 2006, Plan 
E is merged into Plan D. On the effective date for the merger, Plan 
D is amended to provide that the vesting schedule for participants 
of Plan E is the 7-year graded vesting schedule of Plan D. In 
accordance with section 411(a)(10)(A), the plan amendment provides 
that any participant of Plan E who had completed 5 years of service 
prior to the amendment is fully vested. In addition, as required 
under section 411(a)(10)(B), the amendment provides that any 
participant in Plan E who has at least 3 years of service prior to 
the amendment is permitted to make an irrevocable election to have 
the vesting of his or her nonforfeitable right to the employer-
derived accrued benefit determined under either the 5-year cliff 
vesting schedule or the 7-year graded vesting

[[Page 47159]]

schedule. Participant G, who has an account balance of $10,000 on 
the applicable amendment date, is a participant in Plan E with 2 
years of service as of the applicable amendment date. As of the date 
of the merger, Participant G's nonforfeitable right to G's employer-
derived accrued benefit is 0% under both the 7-year graded vesting 
schedule of Plan D and the 5-year cliff vesting schedule of Plan E.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the 
plan amendment does not satisfy the requirements of paragraph (a) of 
this section and violates section 411(d)(6), because the amendment 
places greater restrictions or conditions on the rights to section 
411(d)(6) protected benefits with respect to G and any participant 
who has fewer than 7 years of service and who elected (or was made 
subject to) the new vesting schedule. A method of avoiding a section 
411(d)(6) violation with respect to account balances attributable to 
benefits accrued as of the applicable amendment date and earnings 
thereon, would be for Plan D to provide for the vested percentage of 
G and each other participant in Plan E to be no less than the 
greater of the 2.
* * * * *
    (b) * * *
    (4) * * *

    Example 3. (i) Facts. Plan C, a multiemployer defined benefit 
plan in a particular industry, provides that a participant may elect 
to commence distributions only if the participant is not currently 
employed by an employer maintaining the plan and provides that, if 
the participant has a specified number of years of service and 
attains a specified age, the distribution is without any actuarial 
reduction for commencement before normal retirement age. Since the 
plan's inception, Plan C has provided for suspension of pension 
benefits during periods of disqualifying employment (ERISA section 
203(a)(3)(B) service). Before 2007, the plan defined disqualifying 
employment to include any job as an electrician in the particular 
industry and geographic location to which Plan C applies. This 
definition of disqualifying employment did not cover a job as an 
electrician supervisor. In 2005, Participant E, having rendered the 
specified number of years of service and attained the specified age 
to retire with a fully subsidized early retirement benefit, retires 
from E's job as an electrician with Employer Y and starts a position 
with Employer Z as an electrician supervisor. Employer Z is not a 
participating employer in Plan C but is an employer in the same 
industry and geographic location as Employer Y. When E left service 
with Employer Y, E's position as a electrician supervisor was not 
disqualifying employment for purposes of Plan C's suspension of 
pension benefit provision, and E elects to commence benefit payments 
in 2005. In 2006, effective January 1, 2007, Plan C, in accordance 
with section 411(a)(3)(B), is amended to expand the definition of 
disqualifying employment to include any job (including supervisory 
positions) as an electrician in the same industry and geographic 
location to which Plan C applies. On January 1, 2007, E's pension 
benefits are suspended because of E's disqualifying employment as an 
electrician supervisor. (These facts are generally comparable to the 
facts in Central Laborers' Pension Fund v. Heinz, 541 U.S. 739 (June 
7, 2004).)
    (ii) Conclusion. Under paragraphs (a)(3) and (b)(1) of this 
section, the 2007 plan amendment violates section 411(d)(6), because 
the amendment places greater restrictions or conditions on a 
participant's rights to section 411(d)(6) protected benefits to the 
extent it applies with respect to benefits that accrued before 
January 1, 2007. The result would be the same even if the amendment 
did not apply to former employees and instead applied only to 
participants who were actively employed at the time of the 
applicable amendment.

* * * * *
    (f) Utilization test--(1) General rule. A plan is permitted to be 
amended to eliminate all of the optional forms of benefit that comprise 
a generalized optional form (as defined in paragraph (g)(8) of this 
section) for a participant with respect to benefits accrued before the 
applicable amendment date if--
    (i) None of the optional forms of benefit being eliminated is a 
core option, within the meaning of paragraph (g)(5) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than the number of days in the maximum QJSA explanation period 
(as defined in paragraph (g)(9) of this section) after the date the 
amendment is adopted;
    (iii) The generalized optional form has been available to at least 
100 participants who are taken into account during the look-back 
period; and
    (iv) No participant has elected any optional form of benefit that 
is part of the generalized optional form with an annuity commencement 
date that is within the look-back period.
    (2) Look-back period. For purposes of this paragraph (f), the look-
back period is the 2 plan years immediately preceding the plan year in 
which the plan amendment eliminating the generalized optional form is 
adopted. At least one of the plan years during the look-back period 
must be a 12-month plan year. However, if a plan does not have at least 
100 participants who are taken into account under this paragraph (f) 
during those 2 plan years, the look-back period is permitted to be 
expanded to be the 3, 4, or 5 plan years immediately preceding the plan 
year in which the plan amendment eliminating the generalized optional 
form is adopted in order to have a look-back period that has at least 
100 participants who are taken into account under this paragraph (f). 
If a plan does not have at least 100 participants who are taken into 
account under this paragraph (f) during the relevant 5-year period, the 
plan is not permitted to add more plan years to the look-back period 
and, accordingly, such a plan is not permitted to use the utilization 
test in this paragraph (f).
    (3) Participants taken into account. Except as provided in this 
paragraph (f)(3), a participant is taken into account for purposes of 
this paragraph (f) only if the participant was eligible to elect to 
commence payment of an optional form of benefit that is part of the 
generalized optional form being eliminated with an annuity commencement 
date that is within the look-back period. However, a participant is not 
taken into account if the participant either--
    (i) Did not elect any optional form of benefit with an annuity 
commencement date that was within the look-back period;
    (ii) Elected an optional form of benefit that included a single-sum 
distribution that applied with respect to at least 25% of the 
participant's accrued benefit;
    (iii) Elected an optional form of benefit that was only available 
during a limited period of time and that contained a retirement-type 
subsidy which at that annuity commencement date was not extended to the 
optional form of benefit with the same annuity commencement date that 
is part of the generalized optional form being eliminated; or
    (iv) Elected an optional form of benefit with an annuity 
commencement date that was more than 10 years before normal retirement 
age.
    (4) Default elections. For purposes of this paragraph (f), an 
election includes the payment of an optional form of benefit that 
applies in the absence of an affirmative election.
* * * * *
    (h) * * *

    Example 6. (i) Facts involving elimination of noncore options 
using utilization test--(A) In general. Plan G is a calendar year 
defined benefit plan under which participants may elect to commence 
distributions after termination of employment in the following 
actuarially equivalent forms, with spousal consent, if applicable: a 
straight life annuity; a 50%, 75%, or 100% joint and contingent 
annuity; or a 5-year, 10-year, or a 15-year term certain and life 
annuity. Participants whose benefits are under $5,000 are permitted 
to elect a single-sum distribution. The annuities offered under the 
plan are generally 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 the ages of 62 and 67. Under 
Plan G, the normal retirement age is defined as age 65.

[[Page 47160]]

    (B) Utilization test. In 2007, the plan sponsor of Plan G, after 
reviewing participants' benefit elections, determines that no 
participant in the 2 prior plan years (2005 and 2006) elected a 5-
year term certain and life annuity with a social security leveling 
option. During the 2 prior plan years, Plan G has made the 5-year 
term certain and life annuity with a social security leveling option 
available to 142 participants who were at least age 55 and who 
elected an optional form of benefit with an annuity commencement 
date during that 2-year period. In addition, during 2005-06 plan 
years, 20 of the 142 participants elected a single-sum distribution 
and there was no retirement-type subsidy available for a limited 
period of time. Plan G, in accordance with paragraph (f)(1) of this 
section, is amended on September 1, 2007, effective as of January 1, 
2008, to eliminate all 5-year term certain and life annuities with a 
social security leveling option for all annuity commencement dates 
on or after January 1, 2008.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (f) of this section. First, the 5-year term certain and 
life annuity with a social security leveling option is not a core 
option as defined in paragraph (g)(5) of this section. Second, the 
plan amendment is not applicable with respect to an optional form of 
benefit with an annuity commencement date that is earlier than the 
number of days in the maximum QJSA explanation period after the date 
the amendment is adopted. Third, the 5-year term certain and life 
annuity with a social security leveling option has been available to 
at least 100 participants who are taken into account for purposes of 
paragraph (f)(4) of this section during the look-back period of 2005 
and 2006. Fourth, during that period, no participant elected any 
optional form that is part of the generalized optional form being 
eliminated (i.e., the 5-year term and life annuity with a social 
security leveling option).
* * * * *
    (j) * * *
    (3) Effective date for rules relating to section 411(a) 
nonforfeitability provisions. The rules provided in paragraph (a)(3) of 
this section are effective June 7, 2004.
    (4) Effective date for rules relating to utilization test. The 
rules provided in paragraph (f) of this section are effective for 
amendments adopted after December 31, 2006.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-15960 Filed 8-11-05; 8:45 am]
BILLING CODE 4830-01-P