[Federal Register Volume 71, Number 153 (Wednesday, August 9, 2006)]
[Rules and Regulations]
[Pages 45379-45386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-12885]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9280]
RIN 1545-BE10


Section 411(d)(6) Protected Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance on 
certain issues under section 411(d)(6) of the Internal Revenue Code 
(Code), including the interaction between the anti-cutback rules of 
section 411(d)(6) and the nonforfeitability requirements of section 
411(a). These regulations also provide a utilization test under which 
certain plan amendments are permitted to eliminate or reduce certain 
early retirement benefits, retirement-type subsidies, or optional forms 
of benefit. These regulations generally affect sponsors of, and 
participants and beneficiaries in, qualified retirement plans.

DATES: Effective Date: These regulations are effective August 9, 2006.
    Applicability Date: For dates of applicability, see Sec.  1.411(d)-
3(j) of these regulations.

FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard at (202) 622-6060 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
411(d)(6) of the Code. These regulations revise Sec.  1.411(d)-3 to 
provide guidance on the application of section 411(d)(6) to a plan 
amendment that 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 permitted 
under the vesting rules of section 411(a)(3) through (11). These rules 
are intended to reflect Central Laborers' Pension Fund v. Heinz, 541 
U.S. 739 (2004). These regulations also set forth standards for the 
utilization test, which is a permitted method of eliminating optional 
forms of benefit that are burdensome to the plan and of de minimis 
value to plan participants.
    Section 401(a)(7) provides that a trust does not constitute a 
qualified trust unless its related plan satisfies the requirements of 
section 411. 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) 
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, either (1) by the employer who maintains the plan under 
which such benefits were being paid, in the case of a plan other than a 
multiemployer plan, or (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 set forth 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 are referred to as ``section 
203(a)(3)(B) service.'' See 29 CFR 2530.203-3(c).
    Under section 411(a)(10), a plan amendment changing the plan's 
vesting schedule must satisfy certain requirements. Section 
411(a)(10)(A) provides that a plan amendment changing any vesting 
schedule under the plan does not satisfy the minimum vesting standards 
of section 411(a)(2) if the nonforfeitable percentage of the accrued 
benefit derived from employer contributions (determined as of the 
applicable amendment date) \1\ of any employee who is a participant in 
the plan is less than the nonforfeitable percentage computed under the 
plan without regard to the amendment. Section 411(a)(10)(B) provides 
that a plan amendment changing any vesting schedule under the plan does 
not satisfy the minimum vesting standards of section 411(a)(2) unless 
each participant with at least 3 years of service is permitted to elect 
to have his or her nonforfeitable percentage computed under the plan 
without regard to the plan amendment.
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    \1\ The term applicable amendment date means the later of the 
effective date of the amendment or the date that the amendmdent is 
adopted. See Sec.  1.411(d)-3(g)(4).
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    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. This protection 
applies with

[[Page 45380]]

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 an optional form of benefit (other than a 
plan amendment that has the effect of eliminating or reducing an early 
retirement benefit or a retirement-type subsidy).
    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 regulations for purposes of ERISA, as 
well as the Code. Thus, these final regulations issued under section 
411(d)(6) of the Code also apply for purposes of section 204(g) of 
ERISA.
    In Central Laborers', the plaintiffs were two 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. After the two participants' 
benefit payments had commenced 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 two 
participants on account of their disqualifying employment as 
construction supervisors. The two participants sued to recover the 
suspended payments, claiming that the amendment expanding the plan's 
suspension provisions violated section 204(g) of ERISA.
    The Supreme Court, holding for the two 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 
held 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 and section 203(a)(3)(B) of ERISA), such a condition may not 
be imposed on a benefit after the 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', 547 U.S. at 744, quoting 
Heinz v. Central Laborers' Pension Fund, 303 F.3d 802, 805 (7th Cir. 
2002).
    On July 11, 1988, final regulations (TD 8212) under section 
411(d)(6) were published in the Federal Register (53 FR 26050). Those 
regulations are contained in Sec.  1.411(d)-4 (the 1988 regulations). 
On August 12, 2005, final regulations (TD 9219) under section 411(d)(6) 
were published in the Federal Register (70 FR 47109) (the 2005 final 
regulations). Those 2005 final regulations, which are largely contained 
in Sec.  1.411(d)-3, set 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 reserved two topics for later guidance--a utilization 
test and the interaction of the permitted forfeiture rules under 
section 411(a) with the anti-cutback rules under section 411(d)(6) 
after taking into account the decision in Central Laborers'.
    In connection with the 2005 final regulations, a notice of public 
rulemaking (REG-156518-04) under section 411(d)(6) of the Code was 
published in the Federal Register (70 FR 47155) (the 2005 proposed 
regulations) to address the two reserved topics discussed in this 
preamble. On December 6, 2005, the IRS held a public hearing on the 
2005 proposed regulations. Written comments responding to the notice of 
public rulemaking were also received. After consideration of all the 
comments, the 2005 proposed regulations are adopted, as amended by this 
Treasury Decision. The revisions are discussed in this preamble.

Explanation of Provisions

Application of Section 411(d)(6) to Plan Amendments Affecting Vesting

    In applying the holding in Central Laborers', these regulations 
retain the rule in the 2005 proposed regulations that provides that a 
plan amendment that places greater restrictions or conditions on a 
participant's rights to section 411(d)(6) protected benefits by adding 
or modifying a plan provision relating to suspension of benefit 
payments during a period of employment or reemployment violates section 
411(d)(6). This rule applies for periods beginning on or after June 7, 
2004, the date of the decision in Central Laborers'. For relief 
limiting the retroactive application of Central Laborers', see the 
discussion under the heading ``Effective Dates'' in this preamble.
    These regulations also address a broader question of the 
interaction of the vesting rules in section 411(a) with the 
requirements of section 411(d)(6), applying the reasoning in Central 
Laborers' to other situations. These regulations generally retain the 
rule in the 2005 proposed regulations that 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, violates section 411(d)(6), 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).\2\ 
These

[[Page 45381]]

regulations also provide examples of the application of this rule, 
including an example illustrating, for changes in a plan's vesting 
schedule, the protection of a participant's right to have post-
amendment vesting of the participant's pre-amendment accrued benefit 
determined under the old vesting schedule. Of course, these regulations 
also retain the rule that such a plan amendment is permitted under 
section 411(d)(6) to the extent it applies to benefits accruing after 
the applicable amendment date.
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    \2\ However, note that section 411(d)(6) does not prohibit a 
plan amendment that reduces or suspends benefits under a 
multiemployer plan as permitted under section 411(a)(3)(F) (e.g., a 
plan amendment to reduce benefits as permitted under section 418D or 
to suspend benefit payments as permitted under section 418E).
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    Some commentators agreed with the rule in the 2005 proposed 
regulations that adopts the holding and rationale of Central Laborers', 
but other commentators raised concerns about the scope of the rule. 
Several commentators argued that Central Laborers' only addresses the 
interaction of section 411(d)(6) with the suspension of benefit rules 
under section 411(a)(3)(B), and does not require the extension of its 
holding to plan amendments relating to the other vesting provisions 
under section 411(a). Those commentators recommended that the 
regulations be revised to narrow the scope of the rule in the 2005 
proposed regulations to the fact pattern in Central Laborers'. Other 
commentators recommended that the final regulations provide that, for a 
plan amendment changing the plan's vesting schedule, the rule in the 
2005 proposed regulations does not apply, so that section 411(a)(10) 
would provide the exclusive requirements for vesting schedule changes. 
Some of these commentators supported this request by stating that the 
rule in the 2005 proposed regulations had the effect of rendering 
section 411(a)(10) moot.
    After consideration of the comments relating to the rule in the 
2005 proposed regulations, the Treasury Department and the IRS believe 
that the holding and rationale in the Central Laborers' decision 
control and, thus, the rule in the 2005 proposed regulations should be 
retained, subject to a certain modifications. In this regard, the 
Treasury Department and the IRS note that the protection provided by 
section 411(a)(10) applies with respect to future accruals, whereas the 
protection extended by these regulations to changes in a vesting 
schedule applies only with respect to benefits accrued before the 
applicable amendment date. However, in light of the comments, these 
final regulations provide a limited exception from the requirement in 
the 2005 proposed regulations for a plan changing its vesting 
computation period. Under this exception, a plan amendment that 
satisfies the rules for changing a plan's vesting computation period, 
as set forth in applicable Department of Labor Regulations,\3\ does not 
fail to satisfy the requirements under section 411(d)(6) merely because 
the plan changes the plan's vesting computation period.
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    \3\ See 29 CFR 2530.203-2(c) for rules relating to changing a 
plan's vesting computation period. See also Sec. Sec.  1.411(a)-
8(b)(3) and 1.411(a)-8T(b)(3).
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Utilization Test

    These regulations generally retain the rule in the 2005 proposed 
regulations that a plan is permitted to be amended to eliminate 
optional forms of benefit that comprise a generalized optional form \4\ 
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. Under the utilization 
test, a plan is not permitted to eliminate any core option \5\ offered 
under the plan and the plan amendment eliminating the generalized 
optional form cannot apply 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 (for example, a 90-day period) 
after the date the amendment is adopted. The utilization test, along 
with the redundancy method and the core options method, are three 
permitted methods for eliminating or reducing section 411(d)(6)(B) 
protected benefits. See Sec.  1.411(d)-3(c), (d), and (e) of the 2005 
final regulations for rules relating to the redundancy and core options 
methods.
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    \4\ 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.
    \5\ The term core option is defined in Sec.  1.411(d)-3(g)(5) as 
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.
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    These regulations provide that, in order to eliminate a noncore 
optional form of benefit under the utilization test, the plan must 
satisfy two conditions. First, the generalized optional form must have 
been available to at least a minimum number of participants who are 
taken into account during the relevant look-back period. Second, no 
participant must have elected the optional form of benefit that is part 
of the generalized optional form with an annuity commencement date that 
is within the look-back period.
    Under the 2005 proposed regulations, the look-back period was 
generally the 2 plan years immediately preceding the date on which the 
plan amendment eliminating the general optional form is adopted. These 
regulations modify the look-back period from the 2005 proposed 
regulations to include the portion of the plan year in which the plan 
amendment is adopted that precedes the date of adoption (the pre-
adoption period). Adding the pre-adoption period to the look-back 
period ensures that participants who elected the generalized optional 
form with an annuity commencement date within the year of adoption are 
taken into account. However, in order to reduce burdens for plans, the 
regulations permit a plan to exclude from the lookback period the 
calendar month in which the amendment is adopted and the 1 or 2 
preceding calendar months (to the extent those preceding months are 
within the pre-adoption period). These regulations also retain the rule 
under the 2005 proposed regulations permitting a plan to extend the 
look-back period to include an additional 1, 2, or 3 plan years.
    Under the utilization test in the 2005 proposed regulations, 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. A participant is generally taken into account only if, 
during the look-back period, the participant was eligible to commence 
payment of an optional form of benefit that is part of the generalized 
optional form being eliminated. However, the 2005 proposed regulations 
provided that a participant is not 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.
    Commentators recommended that the regulations be revised to provide 
an alternative for smaller plans that cannot meet the 100-participant 
requirement, even with the 5-year look-back rule. Commentators also 
recommended that the utilization test be revised to permit a plan to 
use the utilization test to

[[Page 45382]]

eliminate a general optional form even if a small percentage of 
participants elected the generalized optional form. The percentages 
proposed by the commentators ranged from 1% to 5% of the participants. 
Commentators further recommended that the regulations be revised to 
permit participants who elected single-sum distributions to be taken 
into account in determining the applicable number of participants.
    In light of these comments, these regulations include a number of 
revisions. In applying the utilization test, the generalized optional 
form must be available to at least the applicable number of 
participants who are taken into account. These regulations define the 
term applicable number of participants as 50 participants. These 
regulations also set forth a special rule that permits a plan to take 
into account any participant who elects a single-sum distribution that 
applied with respect to at least 25% of the participant's accrued 
benefit, provided the applicable number of participants is increased to 
1,000 participants.
    The Treasury Department and the IRS continue to believe that the 
utilization test, by its nature, determines which optional forms are 
considered valuable to participants. This determination is made by 
reference to participants' elections. The fact that, during a 2-year 
period, no participant in a substantial number of participant elections 
elected any optional form of benefit that is within a generalized 
optional form is a compelling indication that elimination of that 
generalized optional form would not adversely affect the rights of any 
participant in a more than de minimis manner. Conversely, if at least 
one participant in the sample elected the generalized optional form, 
that election would provide significant evidence that the elimination 
of the generalized optional form could adversely affect the rights of 
some other participant in a more than de minimis manner. In addition, a 
plan that satisfies the requirements of the utilization test is 
permitted to be amended to eliminate all of the optional forms of 
benefit that comprise a generalized optional form without having to 
satisfy separately the requirements of Sec.  1.411(d)-3(e). Thus, these 
regulations retain the requirement from the 2005 proposed regulations 
that no participant must have elected any optional form that is part of 
the generalized optional form that is being eliminated.

Other Issues

    These regulations also include a few modifications to the 2005 
final regulations. Specifically, the regulations include specific 
reference to amendments permitted under sections 418D and 418E 
(relating to, respectively, to multiemployer plans in reorganization 
and accrued benefits attributable to employer contributions that are 
not eligible for the Pension Benefit Guaranty Corporation's guarantee) 
as not being subject to the requirements of section 411(d)(6). See 
section 411(a)(3)(F), which permits the reduction and suspension of 
accrued benefits by a multiemployer plan pursuant to sections 418D and 
418E, as well as section 4281 of ERISA.
    These regulations also revise the method for determining whether an 
optional form of benefit is within a family of optional forms of 
benefit for purposes of eliminating redundant optional forms of benefit 
in situations in which a plan permits a participant to make different 
distribution elections with respect to two or more separate portions of 
the participant's accrued benefit. Comments were received recommending 
that the regulations be revised to permit a plan that provides 
different elections with respect to separate portions of a 
participant's benefit (for example, plans with one set of generally 
applicable distribution options and a second set of distribution 
options that apply only to a participant's benefit earned while 
employed by a former employer) to be permitted to apply the redundancy 
rules separately to each set of distribution options.
    In light of this comment, these regulations permit a plan to apply 
the redundancy rules separately to each portion of the participant's 
benefit to which separate distribution elections apply as if that 
portion were the participant's entire benefit. This change is similar 
to the bifurcation rule in Sec.  1.417(a)(3)-1(c)(5)(iii), which 
permits a plan that permits a participant to make separate distribution 
elections with respect to two or more portions of the participant's 
benefit to describe the financial effect and relative value of combined 
optional forms of benefit separately for each such portion of the 
benefit, rather than for each optional form of benefit (for example, 
each combination of possible elections).

Effective Dates

Applicability Dates for Amendments Relating to Vesting

    With respect to a plan amendment that places greater restrictions 
or conditions on a participant's rights to section 411(d)(6) protected 
benefits by adding or modifying a plan provision relating to suspension 
of benefit payments, the rules in these regulations apply for periods 
beginning on or after June 7, 2004. However, for a plan amendment that 
places greater restrictions or conditions on a participant's rights to 
section 411(d)(6) protected benefits with respect to vesting, other 
than a plan amendment relating to a suspension of benefit payments, the 
rules in these regulations apply to plan amendments adopted after 
August 9, 2006.

Applicability Date for Change to Redundancy Rule Regarding Bifurcation 
of Benefits

    The change to the regulations permitting a plan to apply the 
redundancy rules separately to each portion of a participant's benefit 
to which separate distribution elections apply is applicable for 
amendments adopted after August 9, 2006.

Applicability Date for Utilization Test

    The rules provided in the utilization test are applicable for 
amendments adopted after December 31, 2006.

Relief Limiting the Retroactive Application of Central Laborers'

    Rev. Proc. 2005-23 (2005-18 I.R.B. 991), as modified by Rev. Proc. 
2005-76 (2005-50 I.R.B. 1139), 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). Rev. Proc. 2005-
23 provides that a qualified plan will not be treated as having failed 
to satisfy the requirements of section 401(a) merely because a plan 
amendment that was adopted before June 7, 2004, violated section 
411(d)(6) by adding or expanding a provision under which a suspension 
of benefit provision occurs. To receive this treatment, a plan must 
adopt a reforming plan amendment, comply operationally with the 
reforming amendment, and provide to affected participants notice of the 
right to elect retroactively to commence payment of benefits. All of 
these actions must be completed on or before January 1, 2007.
    In response to the 2005 proposed regulations, some commentators 
expressed concern on how section 411(d)(6) would apply to plan 
amendments adopted many years in the past when both the rules for 
interpreting the suspension of benefit provisions under section 
411(a)(3)(B) and the rules for satisfying section 411(d)(6) were still 
being developed. Commentators specifically raised the issue of whether 
the adoption of a benefit suspension amendment in response to the final

[[Page 45383]]

suspension of benefit regulations issued by the Department of Labor 
would violate section 411(d)(6).\6\
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    \6\ See 29 CFR 2530.203-3, providing rules that permit a plan to 
withhold permanently a plan participant's benefit payments on 
account of a continuation of employment or reemployment after the 
payments commenced. See also Notice 82-23 (1982-2 C.B. 752) 
(providing guidance on the need to amend and the timing for a plan 
to be amended to comply with the final suspension of benefit 
regulations).
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    In light of these comments and taking into account the Supreme 
Court's suggestion for relief in Central Laborers',\7\ the Treasury 
Department and IRS believe that it is appropriate not to require that a 
plan correct under Rev. Proc. 2005-23 in order to qualify for relief 
from disqualification under section 401(a) for a plan amendment that 
added or expanded a suspension of benefit provision if the amendment 
was adopted before the effective date of the 1988 regulations under 
section 411(d)(6). Providing this section 7805(b) treatment for any 
such amendment is appropriate because it would be difficult to 
determine whether a plan amendment adding or expanding a suspension of 
benefit payment that was adopted at that time violated section 
411(d)(6). In addition, any correction made for any affected plan 
participant would likely be insignificant (especially in light of 
subsequent accruals), while creating significant administrative burdens 
for the plan.
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    \7\ The Court stated in Central Laborers':
    Nothing we hold today requires the IRS to revisit the tax-exempt 
status in past years of plans that were amended in reliance on the 
agency's representations in its manual by expanding the categories 
of work that would trigger suspension of benefit payments as to 
already-accrued benefits. The Internal Revenue Code gives the 
Commissioner discretion to decline to apply decisions of this Court 
retroactively * * *. This would doubtless be an appropriate occasion 
for exercise of that discretion.
    Central Laborers', 541 U.S. at 748, n.4.
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    Accordingly, pursuant to the Commissioner's authority under section 
7805(b)(8), a plan will not fail to satisfy section 401(a) merely 
because the plan was amended to add or expand a suspension of benefit 
provision, provided that the amendment was adopted before January 1, 
1989. In the case of collectively bargained plans, this relief applies 
to plan amendments adopted before January 1, 1991. These dates are 
based on the effective dates of the 1988 regulations under Sec.  
1.411(d)-4 for plans generally existing as of August 1, 1986.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. In addition, 
because no collection of information is imposed on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply, and therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(b) of the Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these regulations is Pamela R. Kinard of 
the Office of the 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

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

0
Par. 2. Section 1.411(a)-8 is amended by adding paragraph (c)(3) to 
read as follows:


Sec.  1.411(a)-8  Changes in vesting schedule.

* * * * *
    (c) * * *
    (3) Relationship with section 411(d)(6). For additional 
requirements relating to section 411(d)(6), see Sec.  1.411(d)-3(a)(3).
* * * * *

0
Par. 3. Section 1.411(d)-3 is amended by:
0
1. Revising the first sentence of paragraph (a)(1).
0
2. Revising paragraphs (a)(3) and (f).
0
3. Adding Examples 3 and 4 to paragraph (a)(4), Example 3 to paragraph 
(b)(4), and Example 6 to paragraph (h).
0
4. Adding paragraphs (c)(6), (j)(3), (j)(4), and (j)(5).
    The revisions and additions 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 
(see, for example, sections 418D and 418E of the Internal Revenue Code, 
and section 1541(a)(2) of the Taxpayer Relief Act of 1997, Public Law 
105-34 (111 Stat. 788, 1085)). * * *
* * * * *
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits--(i) In general. 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 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 accrued prior to the applicable amendment date. See 
section 411(a)(10) and Sec.  1.411(a)-8 for additional rules relating 
to changes in a plan's vesting schedule.
    (ii) Exception for changes in a plan's vesting computation period. 
Notwithstanding paragraph (a)(3)(i) of this section, a plan amendment 
that satisfies the applicable requirements under 29 CFR 2530.203-2(c) 
(rules relating to vesting computation periods) does not fail to 
satisfy the requirements of section 411(d)(6) merely because the plan 
amendment changes the plan's vesting computation period.
    (4) * * *

    Example 3. (i) Facts. Employer N maintains Plan C, a qualified 
defined benefit plan under which an employee becomes a participant 
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 at least 5 consecutive 1-year breaks in

[[Page 45384]]

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 this paragraph 
(a), 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:

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

    (B) In January 2006, 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 2007, 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 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 this paragraph 
(a) 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 5 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 
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 vesting percentages under the two vesting schedules (for 
example, for G and each other participant in Plan E to be 20% vested 
upon completion of 3 years of service, 40% vested upon completion of 
4 years of service, and fully vested upon completion of 5 years of 
service) for those account balances and earnings.

    (b) * * *
    (4)* * *
    Example 3. (i) Facts. Plan C, a multiemployer defined benefit 
plan in which participation is limited to electricians in the 
construction industry, provides that a participant may elect to 
commence distributions only if the participant is not currently 
employed by a participating employer 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 an electrician supervisor was not 
disqualifying employment for purposes of Plan C's suspension of 
pension benefit provision, and E elected to commence benefit 
payments in 2005. In 2006, effective January 1, 2007, Plan C 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. The plan's definition of disqualifying employment satisfies 
the requirements of section 411(a)(3)(B). On January 1, 2007, E's 
pension benefits are suspended because of E's disqualifying 
employment as an electrician supervisor.
    (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.
* * * * *
    (c) * * *
    (6) Separate application of redundancy rules for bifurcated 
benefits. If a plan permits the participant to make different 
distribution elections with respect to two or more separate portions of 
the participant's benefit, the rules of this paragraph (c) are 
permitted to be applied separately to each such portion of the 
participant's benefit as if that portion were the participant's entire 
benefit. Thus, for example, if one set of distribution elections 
applies to a portion of the participant's accrued benefit and another 
set of distribution elections applies to the other portion of the 
participant's accrued benefit, then with respect to one portion of the 
participant's benefit, the determination of whether any optional form 
of benefit is within a family of optional forms of benefit is permitted 
to be made disregarding elections that apply to the other portion of 
the participant's benefit. Similarly, if a participant can elect to 
receive any portion of the accrued benefit in a single sum and the 
remainder pursuant to a set of distribution elections, the rules of 
this paragraph (c) are permitted to be applied separately to the set of 
distribution elections that apply to the portion of the participant's 
accrued benefit that is not payable in a single sum (for example, for 
the portion of a participant's benefit that is not paid in a single 
sum, the determination of whether any optional form of benefit is 
within a family of optional forms of benefit is permitted to be made 
disregarding the fact that the other portion of the participant's 
benefit is paid in a single sum).
* * * * *
    (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

[[Page 45385]]

Qualified Joint and Survivor Annuity explanation period (as defined in 
paragraph (g)(9) of this section) after the date the amendment is 
adopted;
    (iii) During the look-back period--
    (A) The generalized optional form has been available to at least 
the applicable number of participants who are taken into account under 
paragraph (f)(3) and (4) of this section; and
    (B) 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--(i) In general. For purposes of this 
paragraph (f), the look-back period is the period that includes--
    (A) The portion of the plan year in which such plan amendment is 
adopted that precedes the date of adoption (the pre-adoption period); 
and
    (B) The 2 plan years immediately preceding the pre-adoption period.
    (ii) Special look-back period rules--(A) 12-month plan year. In the 
look-back period, at least 1 of the plan years must be a 12-month plan 
year.
    (B) Permitted 3-month exclusion in the pre-adoption period. A plan 
is permitted to exclude from the look-back period the calendar month in 
which the amendment is adopted and the preceding 1 or 2 calendar months 
to the extent those preceding months are contained within the pre-
adoption period.
    (C) Permission to extend the look-back period. In order to have a 
look-back period that satisfies the minimum applicable number of 
participants requirement in paragraph (f)(1)(iii)(A) of this section, 
the look-back period described in paragraph (f)(2)(i)(B) of this 
section is permitted to be expanded, so as to include the 3, 4, or 5 
plan years immediately preceding the plan year in which the amendment 
is adopted. Thus, in determining the look-back period, a plan is 
permitted to substitute the 3, 4, or 5 plan years immediately preceding 
the pre-adoption period for the 2 plan years described in paragraph 
(f)(2)(i)(B) of this section. However, if a plan does not satisfy the 
minimum applicable number of participants requirement of paragraph 
(f)(1)(iii)(A) of this section using the pre-adoption period and the 
immediately preceding 5 plan years, the plan is not permitted to be 
amended in accordance with the utilization test in this paragraph (f).
    (3) Participants taken into account. 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--
    (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 where the subsidy that is part of the generalized optional form 
being eliminated was not extended to any optional form of benefit with 
the same annuity commencement date; or
    (iv) Elected an optional form of benefit with an annuity 
commencement date that was more than 10 years before normal retirement 
age.
    (4) Determining the applicable number of participants. For purposes 
of applying the rules in this paragraph (f), the applicable number of 
participants is 50 participants. However, notwithstanding paragraph 
(f)(3)(ii) of this section, a plan is permitted to take into account 
any participant who 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, but only if the applicable number of 
participants is increased to 1,000 participants.
    (5) 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. A participant is permitted to elect a single-sum 
distribution if the present value of the participant's 
nonforfeitable accrued benefit is not greater than $5,000. 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.
    (B) Utilization test. In 2007, the plan sponsor of Plan G, after 
reviewing participants' benefit elections, determines that, during 
the period from January 1, 2005, through June 30, 2007, no 
participant has elected a 5-year term certain and life annuity with 
a social security leveling option. During that period, 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 optional forms of benefit with an annuity 
commencement dates during that period. In addition, during that 
period, 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 15, 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 50 participants who are taken into account for purposes of 
paragraph (f) of this section during the look-back period. Fourth, 
during the look-back period, no participant elected any optional 
form that is part of the generalized optional form being eliminated 
(for example, the 5-year term and life annuity with a social 
security leveling option).
* * * * *
    (j) * * *
    (3) Effective dates for rules relating to section 411(a) 
nonforfeitability provisions--(i) Application of suspension of benefit 
rules to section 411(d)(6) protected benefits. With respect to a plan 
amendment that places greater restrictions or conditions on a 
participant's rights to section 411(d)(6) protected benefits by adding 
or modifying a plan provision relating to suspension of benefit 
payments during a period of employment or reemployment, the rules 
provided in paragraph (a)(3) of this section apply to periods beginning 
on or after June 7, 2004.
    (ii) Application of section 411(a) nonforfeitability provisions to 
section 411(d)(6) protected benefits. With respect to a plan amendment 
that places greater restrictions or conditions on a participant's 
rights to section 411(d)(6) protected benefits other than a plan 
amendment described in paragraph (j)(3)(i) of this section, the rules

[[Page 45386]]

provided in paragraph (a)(3) of this section apply to plan amendments 
adopted after August 9, 2006.
    (4) Effective date for change to redundancy rule regarding 
bifurcation of benefits. The rules provided in paragraph (c)(6) of this 
section are applicable for amendments adopted after August 9, 2006.
    (5) Effective date for rules relating to utilization test. The 
rules provided in paragraph (f) of this section are applicable for 
amendments adopted after December 31, 2006.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

    Approved: July 31, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E6-12885 Filed 8-8-06; 8:45 am]
BILLING CODE 4830-01-P