[Federal Register Volume 72, Number 248 (Friday, December 28, 2007)]
[Proposed Rules]
[Pages 73680-73699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25025]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104946-07]
RIN 1545-BG36


Hybrid Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
relating to sections 411(a)(13) and 411(b)(5) of the Internal Revenue 
Code (Code) concerning certain hybrid defined benefit plans. These 
regulations provide guidance on changes made by the Pension Protection 
Act of 2006. These regulations affect sponsors, administrators, 
participants, and beneficiaries of hybrid defined benefit plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 27, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-104946-07), 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-
104946-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-104946-07).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lauson C. 
Green or Linda S. F. Marshall at (202) 622-6090; concerning submissions 
of comments or to request a public hearing, Funmi Taylor at (202) 622-
7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 411(a)(13) and 411(b)(5) of the Code. 
Generally, a defined benefit pension plan must satisfy the minimum 
vesting standards of section 411(a) and the accrual requirements of 
section 411(b) in order to be qualified under section 401(a) of the 
Code. Sections 411(a)(13) and 411(b)(5), which were added to the Code 
by section 701(b) of the Pension Protection Act of 2006, Public Law 
109-280, 120 Stat. 780 (PPA '06), modify the minimum vesting standards 
of section 411(a) and the accrual requirements of section 411(b).
    Section 411(a)(13)(A) provides that an applicable defined benefit 
plan (which is defined in section 411(a)(13)(C)) is not treated as 
failing to meet either (i) The requirements of section 411(a)(2) 
(subject to a special vesting rule in section 411(a)(13)(B) with 
respect to benefits derived from employer contributions) or (ii) The 
requirements of section 411(c) or 417(e) with respect to contributions 
other than employee contributions, merely because the present value of 
the accrued benefit (or any portion thereof) of any participant is, 
under the terms of the plan, equal to the amount expressed as the 
balance in a hypothetical account or as an accumulated percentage of 
the participant's final average compensation. Section 411(a)(13)(B) 
requires an applicable defined benefit plan to provide that an employee 
who has completed at least 3 years of service has a nonforfeitable 
right to 100 percent of the employee's accrued benefit derived from 
employer contributions.
    Under section 411(a)(13)(C)(i), a plan is an applicable defined 
benefit plan if the plan is a defined benefit plan under which the 
accrued benefit (or any portion thereof) of a participant is calculated 
as the balance of a hypothetical account maintained for the participant 
or as an accumulated percentage of the participant's final average 
compensation. Under section

[[Page 73681]]

411(a)(13)(C)(ii), the Secretary of the Treasury is to issue 
regulations which include in the definition of an applicable defined 
benefit plan any defined benefit plan (or portion of such a plan) which 
has an effect similar to a plan described in section 411(a)(13)(C)(i).
    Section 411(b)(1)(H)(i) provides that a defined benefit plan fails 
to comply with section 411(b) if, under the plan, an employee's benefit 
accrual is ceased, or the employee's rate of benefit accrual is 
reduced, because of the attainment of any age. Section 411(b)(5), which 
was added to the Code by section 701(b)(1) of PPA '06, provides 
additional rules related to section 411(b)(1)(H)(i). Section 
411(b)(5)(A) generally provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) if a participant's 
accrued benefit, as determined as of any date under the terms of the 
plan, would be equal to or greater than that of any similarly situated 
younger individual who is or could be a participant. Section 
411(b)(5)(G) provides that, for purposes of section 411(b)(5), any 
reference to the accrued benefit of a participant shall be a reference 
to the participant's benefit accrued to date. For purposes of section 
411(b)(5)(A), section 411(b)(5)(A)(iv) provides that the accrued 
benefit may, under the terms of the plan, be expressed as an annuity 
payable at normal retirement age, the balance of a hypothetical 
account, or the current value of the accumulated percentage of the 
employee's final average compensation.
    Section 411(b)(5)(B) imposes several requirements on an applicable 
defined benefit plan as a condition of the plan satisfying section 
411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is 
treated as failing to meet the requirements of section 411(b)(1)(H) if 
the terms of the plan provide for an interest credit (or an equivalent 
amount) for any plan year at a rate that is greater than a market rate 
of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as 
having an above-market rate merely because the plan provides for a 
reasonable minimum guaranteed rate of return or for a rate of return 
that is equal to the greater of a fixed or variable rate of return. 
Section 411(b)(5)(B)(i)(II) provides that an interest credit (or an 
equivalent amount) of less than zero can in no event result in the 
hypothetical account balance or similar amount being less than the 
aggregate amount of contributions credited to the account. Section 
411(b)(5)(B)(i)(III) specifies that the Secretary of the Treasury may 
provide by regulation for rules governing the calculation of a market 
rate of return for purposes of section 411(b)(5)(B)(i)(I) and for 
permissible methods of crediting interest to the account (including 
fixed or variable interest rates) resulting in effective rates of 
return meeting the requirements of section 411(b)(5)(B)(i)(I).
    Section 411(b)(5)(B)(ii), (iii), and (iv) contain minimum benefit 
rules that apply if, after June 29, 2005, an applicable plan amendment 
is adopted. Section 411(b)(5)(B)(v)(I) defines an applicable plan 
amendment as an amendment to a defined benefit plan which has the 
effect of converting the plan to an applicable defined benefit plan. 
Under section 411(b)(5)(B)(ii), if, after June 29, 2005, an applicable 
plan amendment is adopted, the plan is treated as failing to meet the 
requirements of section 411(b)(1)(H) unless the requirements of section 
411(b)(5)(B)(iii) are met with respect to each individual who was a 
participant in the plan immediately before the adoption of the 
amendment. Section 411(b)(5)(B)(iii) specifies that, subject to section 
411(b)(5)(B)(iv), the requirements of section 411(b)(5)(B)(iii) are met 
with respect to any participant if the accrued benefit of the 
participant under the terms of the plan as in effect after the 
amendment is not less than the sum of: (I) The participant's accrued 
benefit for years of service before the effective date of the 
amendment, determined under the terms of the plan as in effect before 
the amendment; plus (II) The participant's accrued benefit for years of 
service after the effective date of the amendment, determined under the 
terms of the plan as in effect after the amendment. Section 
411(b)(5)(B)(iv) provides that, for purposes of section 
411(b)(5)(B)(iii)(I), the plan must credit the participant's account or 
similar amount with the amount of any early retirement benefit or 
retirement-type subsidy for the plan year in which the participant 
retires if, as of such time, the participant has met the age, years of 
service, and other requirements under the plan for entitlement to such 
benefit or subsidy.
    Section 411(b)(5)(B)(v) sets forth certain provisions related to an 
applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if 
the benefits under two or more defined benefit plans of an employer are 
coordinated in such a manner as to have the effect of adoption of an 
applicable plan amendment, the plan sponsor is treated as having 
adopted an applicable plan amendment as of the date the coordination 
begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the 
Treasury to issue regulations to prevent the avoidance of the purposes 
of section 411(b)(5)(B) through the use of two or more plan amendments 
rather than through a single plan amendment.
    Section 411(b)(5)(B)(vi) provides a special rule for converting a 
variable interest crediting rate to a fixed rate for purposes of 
determining plan benefits in the case of a terminating applicable 
defined benefit plan.
    Section 411(b)(5)(C) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) solely because the 
plan provides offsets against benefits under the plan to the extent the 
offsets are allowable in applying the requirements of section 401(a). 
Section 411(b)(5)(D) provides that a plan is not treated as failing to 
meet the requirements of section 411(b)(1)(H) solely because the plan 
provides a disparity in contributions or benefits with respect to which 
the requirements of section 401(l) (relating to permitted disparity for 
Social Security benefits and related matters) are met.
    Section 411(b)(5)(E) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H) solely because the 
plan provides for indexing of accrued benefits under the plan. Under 
section 411(b)(5)(E)(iii), indexing means the periodic adjustment of 
the accrued benefit by means of the application of a recognized 
investment index or methodology. Section 411(b)(5)(E)(ii) requires 
that, except in the case of a variable annuity, the indexing not result 
in a smaller benefit than the accrued benefit determined without regard 
to the indexing.
    Section 701(a) of PPA '06 added provisions to the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 
829) (ERISA), that are parallel to the above-described sections of the 
Code that were added by section 701(b) of PPA '06. The guidance 
provided in these proposed regulations with respect to the Code would 
also apply for purposes of the parallel amendments to ERISA made by 
section 701(a) of PPA '06.\1\
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    \1\ Under section 101 of Reorganization Plan No. 4 of 1978 (43 
FR 47713), the Secretary of the Treasury has interpretive 
jurisdiction over the subject matter addressed by these proposed 
regulations for purposes of ERISA, as well as the Code.
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    Section 701(c) of PPA '06 added provisions to the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602) (ADEA), that are parallel to section 411(b)(5) of the Code. 
Executive Order 12067 requires all Federal departments and agencies to 
advise and offer to consult with the Equal Employment Opportunity 
Commission (EEOC) during the development of any proposed rules,

[[Page 73682]]

regulations, policies, procedures or orders concerning equal employment 
opportunity. The IRS and the Treasury Department have consulted with 
the EEOC prior to the issuance of these proposed regulations.
    Section 701(d) of PPA '06 provides that nothing in the amendments 
made by section 701 should be construed to create an inference 
concerning the treatment of applicable defined benefit plans or 
conversions of plans into applicable defined benefit plans under 
section 411(b)(1)(H), or concerning the determination of whether an 
applicable defined benefit plan fails to meet the requirements of 
section 411(a)(2), 411(c), or 417(e) as in effect before such 
amendments solely because the present value of the accrued benefit (or 
any portion thereof) of any participant is, under the terms of the 
plan, equal to the amount expressed as the balance in a hypothetical 
account or as an accumulated percentage of the participant's final 
average compensation.
    Section 701(e) of PPA '06 sets forth the effective date provisions 
with respect to amendments made by section 701 of PPA '06. Section 
701(e)(1) specifies that the amendments made by section 701 generally 
apply to periods beginning on or after June 29, 2005. Thus, the age 
discrimination safe harbors under section 411(b)(5)(A) and section 
411(b)(5)(E) are effective for periods beginning on or after June 29, 
2005. Section 701(e)(2) provides that the special present value rules 
of section 411(a)(13)(A) are effective for distributions made after 
August 17, 2006.
    Under section 701(e)(3) of PPA '06, in the case of a plan in 
existence on June 29, 2005, the 3-year vesting rule under section 
411(a)(13)(B) and the market rate of return limitation under section 
411(b)(5)(B)(i) are generally effective for years beginning after 
December 31, 2007. In the case of a plan not in existence on June 29, 
2005, those sections are effective for periods beginning on or after 
June 29, 2005. Section 701(e)(4) of PPA '06 contains special effective 
date provisions for collectively bargained plans that modify these 
effective dates.
    Under section 701(e)(5) of PPA '06, sections 411(b)(5)(B)(ii), 
(iii), and (iv) apply to a conversion amendment that is adopted after, 
and takes effect after, June 29, 2005.
    Section 702 of PPA '06 provides for regulations to be prescribed by 
August 16, 2007, addressing the application of rules set forth in 
section 701 of PPA '06 where the conversion of a defined benefit 
pension plan into an applicable defined benefit plan is made with 
respect to a group of employees who become employees by reason of a 
merger, acquisition, or similar transaction.
    Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and 
411(b)(2) were published by the Treasury Department and the IRS in the 
Federal Register on April 11, 1988 (53 FR 11876), as part of a package 
of regulations that also included proposed regulations under sections 
410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age 
for participation, vesting, normal retirement age, and actuarial 
adjustments after normal retirement age, respectively).\2\
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    \2\ On December 11, 2002, the Treasury Department and the IRS 
issued proposed regulations regarding the age discrimination 
requirements of section 411(b)(1)(H) that specifically addressed 
cash balance plans as part of a package of regulations that also 
addressed section 401(a)(4) nondiscrimination cross-testing rules 
applicable to cash balance plans (67 FR 76123). The 2002 proposed 
regulations were intended to replace the 1988 proposed regulations. 
In Ann. 2003-22 (2003-1 CB 847), see Sec.  601.601(d)(2)(ii)(b) of 
this chapter, the Treasury Department and the IRS announced the 
withdrawal of the 2002 proposed regulations under section 401(a)(4), 
and in Ann. 2004-57 (2004-2 CB 15), see Sec.  601.601(d)(2)(ii)(b) 
of this chapter, the Treasury Department and the IRS announced the 
withdrawal of the 2002 proposed regulations relating to age 
discrimination.
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    Notice 96-8 (1996-1 CB 359), see Sec.  601.601(d)(2)(ii)(b) of this 
chapter, described the application of sections 411 and 417(e) to a 
single sum distribution under a cash balance plan where interest 
credits under the plan are frontloaded (that is, where future interest 
credits to an employee's hypothetical account balance are not 
conditioned upon future service and thus accrue at the same time that 
the benefits attributable to a hypothetical allocation to the account 
accrue). Under the analysis set forth in Notice 96-8, in order to 
comply with sections 411(a) and 417(e) in calculating the amount of a 
single sum distribution under a cash balance plan, the balance of an 
employee's hypothetical account must be projected to normal retirement 
age and converted to an annuity under the terms of the plan, and then 
the employee must be paid at least the present value of the projected 
annuity, determined in accordance with section 417(e). Under that 
analysis, where a cash balance plan provides frontloaded interest 
credits using an interest rate that is higher than the section 417(e) 
applicable interest rate, payment of a single sum distribution equal to 
the current hypothetical account balance as a complete distribution of 
the employee's accrued benefit may result in a violation of section 
417(e) or a forfeiture in violation of section 411(a). In addition, 
Notice 96-8 proposed a safe harbor which provided that, if frontloaded 
interest credits are provided under a plan at a rate no greater than 
the sum of identified standard indices and associated margins, no 
violation of section 411(a) or 417(e) would result if the employee's 
entire accrued benefit is distributed in the form of a single sum 
distribution equal to the employee's hypothetical account balance, 
provided the plan uses appropriate annuity conversion factors. Since 
the issuance of Notice 96-8, four federal appellate courts have 
followed the analysis set out in the Notice: Esden v. Bank of Boston, 
229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); 
West v. AK Steel Corp. Ret. Accumulation Pension Plan, 484 F.3d 395 
(6th Cir. 2007), reh'g and reh'g en banc denied, No. 06-3442, 2007 U.S. 
App. LEXIS 20447 (6th Cir. Aug. 8, 2007); Berger v. Xerox Corp. Ret. 
Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003), reh'g and reh'g en 
banc denied, No. 02-3674, 2003 U.S. App. LEXIS 19374 (7th Cir. Sept. 
15, 2003); Lyons v. Georgia-Pacific Salaried Employees Ret. Plan, 221 
F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001).
    Notice 2007-6, 2007-3 IRB 272 (January 16, 2007), see Sec.  
601.601(d)(2)(ii)(b) of this chapter, provides transitional guidance 
with respect to certain requirements of sections 411(a)(13) and 
411(b)(5) and section 701(b) of PPA '06. Notice 2007-6 includes certain 
special definitions, including: accumulated benefit, which is defined 
as a participant's benefit accrued to date under a plan; lump sum-based 
plan, which is defined as a defined benefit plan under the terms of 
which the accumulated benefit of a participant is expressed as the 
balance of a hypothetical account maintained for the participant or as 
the current value of the accumulated percentage of the participant's 
final average compensation; and statutory hybrid plan, which is a lump 
sum-based plan or a plan which has an effect similar to a lump sum-
based plan. Notice 2007-6 provides guidance on a number of issues, 
including a rule under which a plan that provides for indexed benefits 
described in section 411(b)(5)(E) is a statutory hybrid plan (because 
it has an effect similar to a lump sum-based plan), unless the plan 
either solely provides for post-retirement adjustment of the amounts 
payable to a participant or is a variable annuity plan under which the 
assumed interest rate used to determine adjustments is at least 5 
percent. The Notice provides a safe

[[Page 73683]]

harbor for applying the rules set forth in section 701 of PPA '06 where 
the conversion of a defined benefit pension plan into an applicable 
defined benefit plan is made with respect to a group of employees who 
become employees by reason of a merger, acquisition, or similar 
transaction. This transitional guidance, along with other guidance 
provided in Part III of Notice 2007-6, applies pending the issuance of 
further guidance and, thus, will cease to apply when these regulations 
are finalized and become effective.

Explanation of Provisions

Overview

    In general, these proposed regulations would incorporate the 
transitional guidance provided under Notice 2007-6. However, the 
proposed regulations would utilize new terminology (such as statutory 
hybrid benefit formula and lump sum-based benefit formula) to take into 
account situations where plans provide more than one benefit formula. 
These proposed regulations would also provide additional guidance with 
respect to sections 411(a)(13) and 411(b)(5), taking into account 
comments received in response to Notice 2007-6.

Section 411(a)(13): Special Vesting Rules for Applicable Defined 
Benefit Plans and Applicable Definitions

    The proposed regulations would reflect new section 411(a)(13)(A) by 
providing that an applicable defined benefit plan does not violate the 
requirements of section 411(a)(2), or the requirements of section 
411(c) or 417(e), with respect to a participant's accrued benefit 
derived from employer contributions, merely because the plan determines 
the present value of benefits determined under a lump sum-based benefit 
formula as the amount of the hypothetical account maintained for the 
participant or as the current value of the accumulated percentage of 
the participant's final average compensation under that formula. 
However, section 411(a)(13) does not alter the definition of an accrued 
benefit under section 411(a)(7)(A) (which generally defines a 
participant's accrued benefit as the annual benefit commencing at 
normal retirement age), nor does it alter the definition of a normal 
retirement benefit under section 411(a)(9) (which generally defines a 
participant's normal retirement benefit as the benefit under the plan 
commencing at normal retirement age).
    Section 411(b)(5)(G) provides that, for purposes of section 
411(b)(5), any reference to the accrued benefit means the benefit 
accrued to date. The proposed regulations refer to this as the 
accumulated benefit, which is distinct from the participant's accrued 
benefit under section 411(a)(7) (an annuity beginning at normal 
retirement age that is actuarially equivalent to the participant's 
accumulated benefit).
    The regulations define a lump sum-based benefit formula as a 
benefit formula used to determine all or any part of a participant's 
accumulated benefit under which the benefit provided under the formula 
is expressed as the balance of a hypothetical account maintained for 
the participant or as the current value of the accumulated percentage 
of the participant's final average compensation. Under the proposed 
regulations, whether a benefit formula is a lump sum-based benefit 
formula would be determined based on how the accumulated benefit of a 
participant is expressed under the terms of the plan, and would not 
depend on whether the plan provides an optional form of benefit in the 
form of a single sum payment. Similarly, a formula would not fail to be 
a lump sum-based benefit formula merely because the plan's terms state 
that the accrued benefit is an annuity at normal retirement age that is 
actuarially equivalent to a hypothetical account balance. In addition, 
the regulations would provide that a participant is not treated as 
having a lump sum-based benefit formula merely because the participant 
is entitled to a benefit under a defined benefit plan that is not less 
than the benefit properly attributable to after-tax employee 
contributions.
    Section 411(a)(13)(A) applies only with respect to a benefit 
provided under a lump sum-based benefit formula. Accordingly, if the 
present value rules of section 417(e) apply to a form of benefit under 
a plan and the plan provides benefits under a benefit formula that is 
not a lump sum-based benefit formula (including, for example, a plan 
that provides for indexing as described in section 411(b)(5)(E)), then 
the plan must set forth a methodology to determine the projected 
benefit under that formula at normal retirement age for purposes of 
applying the rules of section 417(e), as described in the ``Analysis'' 
section of Notice 96-8.
    The proposed regulations use the term statutory hybrid benefit 
formula to describe the portion of a defined benefit plan that is an 
applicable defined benefit plan described in section 411(a)(13)(C)(i) 
or the portion of the plan that has a similar effect. Specifically, the 
proposed regulations would define a statutory hybrid benefit formula as 
a benefit formula that is either a lump sum-based benefit formula or a 
formula that has an effect similar to a lump sum-based benefit formula. 
For this purpose, under the proposed regulations, a benefit formula 
under a defined benefit plan has an effect similar to a lump sum-based 
benefit formula if the formula provides that a participant's accrued 
benefit payable at normal retirement age (or at benefit commencement, 
if later) is expressed as a benefit that includes periodic adjustments 
(including a formula that provides for indexed benefits described in 
section 411(b)(5)(E)) that are reasonably expected to result in a 
larger annual benefit at normal retirement age (or at commencement of 
benefits, if later) for the participant, when compared to a similarly 
situated, younger individual who is or could be a participant in the 
plan. Thus, a benefit formula under a plan has an effect similar to a 
lump sum-based benefit formula if the right to future adjustments 
accrues at the same time as the benefit that is subject to the 
adjustments.
    The proposed regulations would set forth certain additional rules 
that are used in determining whether a benefit formula has an effect 
similar to a lump sum-based benefit formula. For example, the proposed 
regulations provide that a benefit formula that does not include 
periodic adjustments is treated as a formula with an effect similar to 
a lump sum-based benefit formula if the formula is otherwise described 
in the preceding paragraph and the adjustments are provided pursuant to 
a pattern of repeated plan amendments. See Sec.  1.411(d)-4, A-1(c)(1). 
The proposed regulations would provide that, for purposes of 
determining whether a benefit formula has an effect similar to a lump 
sum-based benefit formula, indexing that applies to adjust benefits 
after the annuity starting date (for example, cost-of-living increases) 
is disregarded. In addition, the proposed regulations would provide 
that a benefit formula under a defined benefit plan that provides for a 
benefit properly attributable to after-tax employee contributions does 
not have an effect similar to a lump sum-based benefit formula. The 
proposed regulations would also provide that adjustments under a 
variable annuity do not have an effect similar to a lump sum-based 
benefit formula if the assumed interest rate used to determine the 
adjustments is at least 5 percent. Such an annuity does not have an 
effect similar to a lump sum-based benefit formula even if post-annuity 
starting date adjustments are

[[Page 73684]]

made using a specified assumed interest rate that is less than 5 
percent.
    Pursuant to new section 411(a)(13)(B), the proposed regulations 
would provide that, in the case of a participant whose accrued benefit 
(or any portion thereof) under a defined benefit plan is determined 
under a statutory hybrid benefit formula, the plan is not treated as 
meeting the requirements of section 411(a)(2) unless the plan provides 
that the participant has a nonforfeitable right to 100 percent of the 
participant's accrued benefit if the participant has 3 or more years of 
service. This requirement would apply on a participant-by-participant 
basis and would apply to the participant's entire benefit (not just the 
portion of the participant's benefit that is determined under a 
statutory hybrid benefit formula). Furthermore, if the participant is 
entitled to the greater of two benefits under a plan, one of which is a 
benefit calculated under a statutory hybrid benefit formula, the 
proposed regulations would provide that the 3-year vesting requirement 
applies to that participant even if the participant's benefit under the 
statutory hybrid benefit formula is ultimately smaller than under the 
other formula. The proposed regulations do not address how the 3-year 
vesting requirement applies in the case of floor-offset 
arrangements.\3\ See the discussion in this preamble under the heading 
``Comments and Requests for Public Hearing.''
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    \3\ See Rev. Rul. 76-259 (1976-2 CB 111), see Sec.  
601.601(d)(2)(ii)(b) of this chapter, for certain standards 
applicable to floor-offset arrangements.
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Section 411(b)(5): Safe Harbor for Age Discrimination, Conversion 
Protection, and Market Rate of Return Limitation

A. Safe Harbor for Age Discrimination
    The proposed regulations under new section 411(b)(5)(A) would 
provide that a plan is not treated as failing to meet the requirements 
of section 411(b)(1)(H)(i) with respect to certain benefit formulas if, 
as determined as of any date, a participant's accumulated benefit 
expressed under one of those formulas would not be less than any 
similarly situated, younger participant's accumulated benefit expressed 
under the same formula. A plan that does not satisfy this test is 
required to satisfy the general nondiscrimination test of section 
411(b)(1)(H)(i).
    Under the proposed regulations, the safe harbor standard for 
satisfying section 411(b)(5)(A) would be available only where a 
participant's accumulated benefit under the terms of the plan is 
expressed as an annuity payable at normal retirement age (or current 
age, if later), the balance of a hypothetical account, or the current 
value of the accumulated percentage of the employee's final average 
compensation. For this purpose, if the accumulated benefit of a 
participant is expressed as an annuity payable at normal retirement age 
(or current age, if later) under the plan terms, then the comparison of 
benefits is made using such an annuity. If the accumulated benefit of a 
participant is expressed under the plan terms as the balance of a 
hypothetical account or the current value of an accumulated percentage 
of the participant's final average compensation, then the comparison of 
benefits is made using the balance of a hypothetical account or the 
current value of the accumulated percentage of the participant's final 
average compensation, respectively.
    The proposed regulations would require a comparison of the 
accumulated benefit of each possible participant in the plan to the 
accumulated benefit of each other similarly situated, younger 
individual who is or could be a participant in the plan. For this 
purpose, the proposed regulations would provide that an individual is 
similarly situated to another individual if the individual is identical 
to that other individual in every respect that is relevant in 
determining a participant's benefit under the plan (including but not 
limited to period of service, compensation, position, date of hire, 
work history, and any other respect) except for age.\4\ In determining 
whether an individual is similarly situated to another individual, any 
characteristic that is relevant for determining benefits under the plan 
and that is based directly or indirectly on age is disregarded. For 
example, if a particular benefit formula applies to a participant on 
account of the participant's age, an individual to whom the benefit 
formula does not apply and who is identical to a participant in all 
respects other than age is similarly situated to the participant. By 
contrast, an individual is not similarly situated to a participant if a 
different benefit formula applies to the individual and the application 
of the different formula is based neither directly nor indirectly on 
age.
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    \4\ For example, if a plan provides for an election extended to 
all participants that affects a participant's accumulated benefit, 
then someone who makes such an election is similarly situated to a 
participant who makes such an election, and someone who does not 
make an election is similarly situated to a participant who does not 
make such an election.
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    The comparison of accumulated benefits is made without regard to 
any subsidized portion of any early retirement benefit that is included 
in a participant's accumulated benefit. For this purpose, the 
subsidized portion of an early retirement benefit is the retirement-
type subsidy within the meaning of Sec.  1.411(d)-3(g)(6) that is 
contingent on a participant's severance from employment and 
commencement of benefits before normal retirement age.
    In addition, the comparison of accumulated benefits generally must 
be made using the same form of benefit. Thus, the safe harbor is not 
available for comparing the accumulated benefit of a participant 
expressed as an annuity at normal retirement age with the accumulated 
benefit of a similarly situated, younger participant expressed as a 
hypothetical account balance. Nevertheless, the proposed regulations 
would permit a plan that provides the sum of benefits that are 
expressed in two or more different forms of benefit to satisfy the safe 
harbor if the plan would separately satisfy the safe harbor for each 
separate form of benefit. Similarly, the proposed regulations would 
permit a plan that provides the greater of benefits that are expressed 
in two or more different forms of benefit to satisfy the safe harbor if 
the plan would separately satisfy the safe harbor for each separate 
form of benefit. For this purpose, a similarly situated, younger 
participant is treated as having an accumulated benefit of zero with 
respect to a benefit formula that does not apply to the participant. 
Thus, the safe harbor would be available if an older participant is 
entitled to benefits under more than one type of benefit formula, even 
if not all of those types of benefit formulas are available to every 
similarly situated participant who is younger.
    The proposed regulations would reflect new section 411(b)(5)(C), 
which provides that a plan is not treated as failing to meet the 
requirements of section 411(b)(1)(H) solely because the plan provides 
offsets of benefits under the plan to the extent such offsets are 
allowable in applying the requirements under section 401 and the 
applicable requirements of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406 (88 Stat. 829) (ERISA) and the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602) (ADEA). The proposed regulations incorporate the provisions of 
section 411(b)(5)(D) (relating to permitted disparity under section 
401(l)) without providing additional guidance.
    The proposed regulations would reflect new section 411(b)(5)(E), 
which

[[Page 73685]]

provides for the disregard of certain indexing of benefits for purposes 
of the age discrimination rules of section 411(b)(1)(H). The proposed 
regulations limit the disregard of indexing to formulas under defined 
benefit plans other than lump sum-based formulas. In addition, the 
proposed regulations limit the disregard of indexing to situations in 
which the extent of the indexing for a participant would not be less 
than the indexing applicable to a similarly situated, younger 
participant. Thus, the disregard of indexing is only available if the 
indexing is neither terminated nor reduced on account of the attainment 
of any age.
    Section 411(b)(5)(E) requires that the indexing methodology be a 
recognized methodology. The proposed regulations would treat only the 
following indexing methodologies as recognized for this purpose: 
indexing using an eligible cost-of-living index as described in Sec.  
1.401(a)(9)-6, A-14(b); indexing using the rate of return on the 
aggregate assets of the plan; and indexing using the rate of return on 
the annuity contract for the employee issued by an insurance company 
licensed under the laws of a State.
    Under the proposed regulations, the section 411(b)(5)(E)(ii) 
protection against loss (``no-loss'') requirement for an indexed plan 
(which provides that the indexing not result in a smaller accrued 
benefit) would be implemented by applying the ``preservation of 
capital'' rule of section 411(b)(5)(b)(i)(II) to indexed plans. (The 
preservation of capital rule is discussed in this preamble paragraph 
heading ``C. Market rate of return limitation.'') For this purpose, the 
exemption from the application of the no-loss rule for variable 
annuities would be limited to situations in which the variable annuity 
adjustment is based on the rate of return on the aggregate assets of 
the plan or the annuity contract. Thus, the exemption from the 
application of the no-loss rule would not apply if the variable annuity 
adjustment is based on the rate of return of a portion of the assets of 
the plan. In addition, this exemption would also apply for purposes of 
the preservation of capital requirement that applies to statutory 
hybrid plans.
B. Conversion Protection
    The regulations would provide guidance on the new conversion 
protections under section 411(b)(5)(B)(ii), (iii), and (iv). Under the 
proposed regulations, a participant whose benefits are affected by a 
conversion amendment which occurred after June 29, 2005, must generally 
be provided with a benefit after the conversion that is at least equal 
to the sum of the benefits accrued through the date of the conversion 
and benefits earned after the conversion, with no permitted interaction 
between these two portions. This would assure participants that there 
will be no ``wear-away'' as a result of a conversion, both with respect 
to the participant's accrued benefits and any early retirement subsidy 
to which the participant is entitled based on the pre-conversion 
benefits.
    The proposed regulations would provide an alternative mechanism 
under which the plan provides for the establishment of an opening 
hypothetical account balance as part of the conversion and keeps 
separate track of (1) The opening hypothetical account balance and 
interest credits attributable thereto, and (2) The post-conversion 
hypothetical contributions and interest credits attributable thereto. 
Under this alternative, the plan must provide that, when a participant 
commences benefits, the plan will determine whether the benefit 
attributable to the opening hypothetical account payable in the 
particular optional form of benefit selected is greater than or equal 
to the benefit accrued under the plan prior to the date of conversion 
and payable in the same generalized optional form of benefit (within 
the meaning of Sec.  1.411(d)-3(g)(8)) at the same annuity starting 
date. For example, if a participant elects a straight life annuity 
payable at age 60, the plan must determine if the straight life annuity 
payable at age 60 that is attributable to the opening hypothetical 
account balance is greater than or equal to the straight life annuity 
payable at age 60 based on service prior to the conversion and 
determined under the terms of the pre-conversion plan. If the benefit 
attributable to the opening hypothetical account balance is greater, 
then the plan must provide that such benefit is paid in lieu of the 
pre-conversion benefit together with the benefit attributable to post-
conversion contribution credits. If the benefit attributable to the 
opening hypothetical account balance is less, then the plan must 
provide that such benefit will be increased sufficiently to provide the 
pre-conversion benefit. In such a case, the participant must also be 
entitled to the benefit attributable to post-conversion contribution 
credits.
    The proposed regulations would provide that, if an optional form of 
benefit is available on the annuity starting date with respect to the 
benefit attributable to the opening hypothetical account balance or 
opening accumulated percentage, but no optional form within the same 
generalized optional form of benefit was available at that annuity 
starting date under the terms of a plan as in effect immediately prior 
to the effective date of the conversion amendment, then the comparison 
must still be made by assuming that the pre-conversion plan had such an 
optional form of benefit. For example, if the pre-conversion plan did 
not provide for a single sum distribution option, the alternative would 
require that any single sum distribution option that is attributable to 
the opening hypothetical account balance be greater than or equal to 
the present value of the pre-conversion benefit, where present value is 
determined in accordance with section 417(e).
    The IRS and the Treasury Department are seeking comments on another 
alternative means of satisfying the conversion requirements that would 
involve establishing an opening hypothetical account balance, but in 
limited situations would not require the subsequent comparison. Any 
such alternative would be permitted only if it were designed to provide 
adequate protection to participants in plans that adopt conversion 
amendments. For example, such an alternative might be limited to 
situations in which the participant elects a single sum distribution, 
and where the pre-conversion plan either did not provide a single sum 
option or had a single sum option that was based on the benefit payable 
at normal retirement age (rather than the benefit payable at early 
retirement age). In those situations, the alternative might provide 
that the comparison is not necessary if (1) The opening hypothetical 
account balance is equal to the present value of the pre-conversion 
benefit determined in accordance with section 417(e), (2) The interest 
credits on the opening hypothetical account balance are reasonably 
expected to be no lower than the interest rate used to determine the 
opening hypothetical account balance, and (3) Either the plan provides 
a death benefit equal to the hypothetical account balance or no pre-
retirement mortality decrement is applied in establishing the opening 
hypothetical account balance. Such an alternative could result in a 
single sum distribution attributable to the pre-conversion benefit that 
is lower, or higher, than the present value of the pre-conversion 
benefit, depending on whether the actual interest credits applicable to 
the opening hypothetical account balance during the interim are lower, 
or higher, than the interest rate used in determining the opening 
hypothetical account balance and whether the

[[Page 73686]]

applicable interest rate and applicable mortality table under section 
417(e)(3) have changed in the interim.
    The proposed regulations also would provide guidance on what 
constitutes a conversion amendment under section 411(b)(5)(B)(v). Under 
the proposed regulations, whether an amendment is a conversion 
amendment is determined on a participant-by-participant basis. The 
proposed regulations would provide that an amendment (or amendments) is 
a conversion amendment with respect to a participant if it meets two 
criteria: (1) The amendment reduces or eliminates the benefits that, 
but for the amendment, the participant would have accrued after the 
effective date of the amendment under a benefit formula that is not a 
statutory hybrid benefit formula and under which the participant was 
accruing benefits prior to the amendment, and (2) After the effective 
date of the amendment, all or a portion of the participant's benefit 
accruals under the plan are determined under a statutory hybrid benefit 
formula.
    The proposed regulations would provide that only amendments that 
reduce or eliminate accrued benefits described in section 411(a)(7), or 
retirement-type subsidies described in section 411(d)(6)(B)(i), that 
would otherwise accrue as a result of future service are treated as 
amendments that reduce or eliminate the participant's benefits that 
would have accrued after the effective date of the amendment under a 
benefit formula that is not a statutory hybrid benefit formula. Under 
the proposed regulations, a plan is treated as having been amended for 
this purpose if, under the terms of the plan, a change in the 
conditions of a participant's employment results in a reduction or 
elimination of the benefits that the participant would have accrued in 
the future under a benefit formula that is not a statutory hybrid 
benefit formula (for example, a job transfer from an operating division 
covered by a non-statutory hybrid defined benefit plan to an operating 
division that is covered by a cash balance formula). However, in the 
absence of coordination between the formulas, the special requirements 
for conversion amendments typically will be satisfied automatically.
    The proposed regulations would provide rules prohibiting the 
avoidance of the conversion protections through the use of multiple 
plans or multiple employers. Under the proposed regulations, an 
employer is treated as having adopted a conversion amendment if the 
employer adopts an amendment under which a participant's benefits under 
a plan that is not a statutory hybrid plan are coordinated with a 
separate plan that is a statutory hybrid plan, such as through a 
reduction (offset) of the benefit under the plan that is not a 
statutory hybrid plan. In addition, if an employee's employer changes 
as a result of a merger, acquisition, or other transaction described in 
Sec.  1.410(b)-2(f), then the two employers would be treated as a 
single employer for this purpose. Thus, for example, in an acquisition, 
if the buyer adopts an amendment to its statutory hybrid plan under 
which a participant's benefits under the seller's plan (that is not a 
statutory hybrid plan) are coordinated with benefits under the buyer's 
plan, such as through a reduction (offset) of the buyer's plan 
benefits, the seller and buyer would be treated as a single employer 
and as having adopted a conversion amendment. However, if there is no 
coordination between the plans, there is no conversion amendment.
    The proposed regulations would provide that a conversion amendment 
also includes multiple amendments that result in a conversion 
amendment, even if the amendments would not be conversion amendments 
individually. Under the proposed regulations, if an amendment to 
provide a benefit under a statutory hybrid benefit formula is adopted 
within 3 years after adoption of an amendment to reduce non-statutory 
hybrid benefit formula benefits, then those amendments would be 
consolidated in determining whether a conversion amendment has been 
adopted. In the case of an amendment to provide a benefit under a 
statutory hybrid benefit formula that is adopted more than 3 years 
after adoption of an amendment to reduce non-statutory hybrid benefit 
formula benefits, there would be a presumption that the amendments are 
not consolidated unless the facts and circumstances indicate that 
adoption of an amendment to provide a statutory hybrid benefit formula 
was intended at the time of the reduction in the non-statutory hybrid 
benefit formula.
    The proposed regulations would provide that the effective date of a 
conversion amendment is, with respect to a participant, the date as of 
which the reduction occurs of the benefits that the participant would 
have accrued after the effective date of the amendment under a benefit 
formula that is not a statutory hybrid benefit formula. In accordance 
with section 411(d)(6), the proposed regulations would provide that the 
date of a reduction of those benefits cannot be earlier than the date 
of adoption of the conversion amendment.
C. Market Rate of Return Limitation
    The proposed regulations would reflect the rule in section 
411(b)(5)(B)(i)(I) under which a statutory hybrid plan is treated as 
failing to satisfy section 411(b)(1)(H) if it provides an interest 
crediting rate that is in excess of a market rate of return. The 
proposed regulations would define an interest crediting rate as the 
rate by which a participant's benefit is increased under the ongoing 
terms of a plan to the extent the amount of the increase is not 
conditioned on current service, regardless of how the amount of that 
increase is calculated. Thus, whether the amount is an interest credit 
for this purpose is determined without regard to whether the amount is 
calculated by reference to a rate of interest, a rate of return, an 
index, or otherwise.
    The proposed regulations would require a plan to specify the timing 
for determining the plan's interest crediting rate that will apply for 
each plan year (or portion of a plan year) using one of two permitted 
methods--either pursuant to a daily interest crediting rate based on 
permissible interest crediting rates specified in the proposed 
regulations, or pursuant to a specified lookback month and stability 
period. For this purpose, the plan's lookback month and stability 
period must satisfy the rules for selecting the lookback month and 
stability period under Sec.  1.417(e)-1(d)(4). However, the stability 
period and lookback month need not be the same as those used under the 
plan for purposes of section 417(e)(3).
    In addition, the proposed regulations would require a plan to 
specify the periodic (at least annual) frequency at which interest 
credits are made under the plan. If, under a plan, interest is credited 
more frequently than annually (for example, monthly or quarterly), then 
the interest credit for that period must be a pro rata portion of the 
annual interest credit. Thus, for example, in the case of a plan the 
terms of which provide for interest to be credited at an interest 
crediting rate that would be permitted under the proposed regulations, 
if the plan provides for monthly interest credits and if the interest 
rate for a plan year has a value of 6 percent, then the accumulated 
benefits at the beginning of each month would be increased by 0.5 
percent per month during the plan year. The proposed regulations would 
provide that interest credits are not treated as creating an effective 
rate of return in excess of a market rate of return merely because an 
otherwise permissible

[[Page 73687]]

interest crediting rate is compounded more frequently than annually.
    The proposed regulations would provide that an interest crediting 
rate for a plan year is not in excess of a market rate of return if it 
is based on specified indices. As in Notice 2007-6, these include the 
safe harbor rates described in Notice 96-8, the interest rates on 30-
Year Treasury securities, and the rate of interest on long-term 
investment grade corporate bonds (as described in section 
412(b)(5)(B)(ii)(II) prior to amendment by PPA '06 for plan years 
beginning before January 1, 2008, and the third-segment bond rate used 
under section 430 for subsequent plan years). For this purpose, the 
third-segment bond rate is permitted to be determined with or without 
regard to the transition rules of section 430(h)(2)(G).
    These rates would be required to change on at least an annual 
basis.\5\ These rates are market yields to maturity on outstanding 
bonds and do not reflect the change in the market value of an 
outstanding bond as a result of future changes in the interest rate 
environment or in a bond issuer's risk profile.\6\ As noted in the 
preceding paragraph, the proposed rules generally are similar to those 
described in Notice 2007-6 but do not provide guidance on a number of 
issues related to market rate of return. It is expected that these 
issues will be addressed in the first part of 2008.
---------------------------------------------------------------------------

    \5\ The requirement that an interest crediting rate change not 
less frequently than annually is intended to distinguish these rates 
from fixed rates, which are discussed later in this preamble. See 
also Sec.  31.3121(v)(2)-1(d)(2)(i)(C)(2) of the Employment Tax 
Regulations, which permits a rate to be fixed for up to 5 years.
    \6\ Because this interest rate does not reflect the change in 
the market value of an outstanding bond when an issuer becomes 
higher risk or the bond goes into default, the bonds have been 
limited to investment grade bonds in the top three quality levels 
where the risk of default is small.
---------------------------------------------------------------------------

    The proposed regulations would reflect the preservation of capital 
rule in section 411(b)(5)(B)(i)(II) that requires a statutory hybrid 
plan to provide that interest credits will not result in a hypothetical 
account balance (or similar amount) being less than the aggregate 
amount of the hypothetical allocations. Under the proposed regulations, 
this requirement would be applied at the participant's annuity starting 
date. In addition, the proposed regulations would provide that the 
combination of this preservation of capital protection with a rate of 
return which otherwise satisfies the market rate of return limitation 
will not result in an effective interest crediting rate that is in 
excess of a market rate of return.
    While the second sentence of section 411(b)(5)(B)(i)(I) provides 
that a statutory hybrid plan is not treated as having an above-market 
rate merely because the plan provides for a reasonable minimum 
guaranteed rate of return or for a rate of return that is equal to the 
greater of a fixed or variable rate of return, these proposed 
regulations do not provide guidance for these alternatives. Moreover, 
the presence of a preservation of capital requirement indicates that 
Congress considered that a rate of return that could be negative in 
some years (such as a rate of return on an equity portfolio) could be 
permissible. However, as discussed in the following paragraphs, the 
Treasury Department and the IRS have concerns that the use of a minimum 
guaranteed rate of return or the use of the greater of a fixed and a 
variable rate could result in effective interest crediting rates that 
are above market rates of return and are soliciting comments on how to 
avoid that result.
    Some commentators have suggested that it should be acceptable for a 
plan to adopt a fixed interest crediting rate that would apply without 
regard to changes in the interest rate environment. This is 
particularly important where the plan provides for hypothetical 
contributions that increase with age or service and the plan needs a 
minimum interest crediting rate in order to satisfy the accrual rules 
of section 411(b). While this issue is reserved under these proposed 
regulations, the approach suggested by commentators could be 
accomplished in two different ways. Under one possibility, the 
regulations might set forth a specific interest crediting rate (such as 
4 percent or 5 percent) that a plan may be permitted to use. Under an 
alternative approach, the regulations might set forth a permitted 
methodology under which a plan would be permitted to establish a fixed 
interest crediting rate based on the then-applicable level of a 
permissible rate, such as the 3rd segment rate. For example, if the 3rd 
segment rate were 5.5 percent at the time the fixed rate is established 
under the plan, then under the alternative approach the plan might be 
permitted to fix the interest crediting rate at 5.5 percent. Comments 
are requested on these alternatives. In particular, comments are 
requested as to rules that the regulations could set forth that would 
avoid the potential for the fixed rate to be established at a time when 
interest rates are unusually high, such as occurred in the early 1980s.
    With respect to the option for a plan to use an interest crediting 
rate that is the greater of a fixed or variable interest rate, the 
Treasury Department and the IRS believe that the interaction between 
the two interest rates must be taken into account in determining 
whether the effective interest crediting rate under a plan which 
provides an interest crediting rate that is equal to the greater of a 
fixed or variable interest rate is above a market rate of return. 
Whether a statutory hybrid plan that is providing interest credits 
based on the greater of a fixed or variable interest rate effectively 
provides an interest crediting rate that exceeds a market rate of 
return depends on a number of factors, including how high the fixed 
interest rate is, how frequently the ``greater of'' determination is 
applied, and the volatility of the variable interest rate.
    As noted earlier, the proposed regulations would provide that 
including the preservation of capital rule does not cause the plan's 
effective interest crediting rate to be in excess of a market rate of 
return. This rule reflects the fact that the minimum rate under the 
preservation of capital rule is an interest rate of 0 percent which is 
applied on a one-time basis at the annuity starting date, and is 
premised on the expectation that the variable rate would rarely be 
negative for extended periods of time (so that the inclusion of the 
capital preservation rule should not significantly increase the 
effective rate of return under the plan). If the variable rate is the 
rate of interest on bonds that would be permitted under the proposed 
regulations, then that expectation is easily met.
    By contrast, if the variable interest rate is the rate of return on 
an equity investment, the expectation that the capital preservation 
rule does not significantly increase the effective interest crediting 
rate is only applicable if the equity investment is a well-diversified 
portfolio. This is because a well-diversified portfolio should have 
sufficiently limited volatility so that the inclusion of the 
preservation of capital rule should not significantly increase the 
effective rate of return resulting from interest credits that are based 
on that portfolio. Accordingly, if the regulations were to permit the 
use of an interest crediting rate based on an asset portfolio as an 
interest credit, the regulations might limit the choice of portfolio to 
the actual plan assets (relying on the fiduciary rules to ensure that 
the portfolio is adequately diversified). Of course, any such 
regulations would only permit the use of an interest crediting rate 
based on an asset portfolio if the use of such a rate is prospective 
and is selected before the period during which the rate is determined.

[[Page 73688]]

    Comments are requested on what other asset portfolios have 
sufficiently constrained volatility that they should be permitted to 
form the basis of a market rate of return for interest crediting under 
a statutory hybrid plan and whether it is appropriate to base an 
interest crediting rate on the value of an index. For example, are the 
assets under a regulated investment company (RIC) described in section 
851 sufficiently diversified such that a statutory hybrid plan will not 
be treated as providing an effective interest crediting rate in excess 
of a market rate of return where it credits interest based on the rate 
of return on the RIC and also provides for the preservation of capital 
(as required for a statutory hybrid plan under section 
411(b)(5)(B)(i)(II))? Similarly, if a statutory hybrid plan credits 
interest based on the rate of return on an equity index that is not a 
narrow-based equity index (as defined under section 3(a)(55) of the 
Securities Exchange Act of 1934) and which also provides for the 
preservation of capital, is the plan providing an interest crediting 
rate that is not in excess of a market rate of return?
    If the determination of the greater of a fixed interest crediting 
rate and a variable interest crediting rate is made more frequently 
than required to comply with the capital preservation rule, the added 
frequency is more likely to result in an effective interest crediting 
rate that is in excess of a market rate of return. For example, if a 
statutory hybrid plan were to credit interest each day based on the 
greater of the actual rate of return on the plan assets for that day or 
0 percent, the effective interest crediting rate would be far in excess 
of a market rate of return.
    The Treasury Department and the IRS are considering providing that 
a plan will not have an effective interest crediting rate in excess of 
a market rate of return merely because it provides annual interest 
credits based on the greater of a reasonable fixed rate (such as 3 
percent or 4 percent) and one of the rates of interest set forth in the 
proposed regulations. However, if a statutory hybrid plan were to 
provide interest credits based on the greater of a fixed rate 
(including a fixed rate of 0 percent) and the rate of return on plan 
assets or the value of an equity-based index, determined on an annual 
basis, then the effective interest crediting rate would typically be in 
excess of a market interest rate. Comments are requested on what types 
of reductions to the variable rate would be appropriate in order to 
ensure that the effective interest crediting rate under these 
situations does not exceed a market rate of return. In addition, 
comments are requested on whether regulations should establish 
reductions in these situations where the determination of whether the 
fixed or variable interest crediting rate is greater is made more 
frequently than annually.
    Pending issuance of guidance addressing this issue, plan sponsors 
should be cautious in adopting interest crediting rates other than 
those explicitly permitted in these proposed regulations. If such a 
rate were adopted, and it did not satisfy the requirement not to be in 
excess of a market rate of return under rules provided in future 
guidance, the rate would have to be reduced in order to satisfy the 
requirement.
    The proposed regulations would provide that, to the extent that 
interest credits (or equivalent amounts) have accrued under the terms 
of a statutory hybrid plan, section 411(d)(6) is violated by a plan 
amendment that changes the interest crediting rate if the revised rate 
under any circumstances could result in a lower rate of return after 
the applicable amendment date of the plan amendment. An exception is 
provided that would permit certain changes in a plan's interest 
crediting rate without violating section 411(d)(6). Under this 
exception, the proposed regulations would permit an amendment to change 
the plan's interest crediting rate for future periods from the safe 
harbor market rates of interest (for example, rates based on eligible 
cost-of-living indices, or rates based on Treasury bonds with the 
margins specified in the proposed regulations) to the rate of interest 
on long-term investment grade corporate bonds. Such a change would not 
constitute a reduction in accrued benefits in violation of section 
411(d)(6) because it is expected that the change would result in a 
reduction only in rare and unusual circumstances, and the change would 
be permitted only if the amendment is effective not less than 30 days 
after adoption and, on the effective date of the amendment, the new 
interest crediting rate is not less than the interest crediting rate 
that would have applied in the absence of the amendment. In addition, 
the IRS and the Treasury Department may provide additional guidance 
regarding changes to the ongoing interest crediting rate under a plan 
that would or would not constitute a reduction of accrued benefits in 
violation of section 411(d)(6).

Pension Equity Plans (PEPs)

    These proposed regulations do not include any rules specifically 
relating to plans that are often referred to as pension equity plans, 
or PEPs (other than defining a participant's accumulated benefit under 
a PEP as the accumulated percentage of final average compensation). 
Notice 2007-6 requested comments on the application of qualification 
requirements other than sections 411(b)(1)(H) and 417(e) to such plans, 
including the treatment of interest credited with respect to terminated 
vested participants. See Sec.  601.601(d)(2)(ii)(b) of this chapter. 
The IRS and the Treasury Department have received a number of comments 
pursuant to this request. These comments indicate that, apart from 
determining the accumulated benefit as a percentage of final average 
compensation, this design often provides explicit or implicit interest 
credits by determining the normal retirement benefit to be: (1) The 
accumulated percentage of final average compensation divided by a 
deferred annuity factor (thus implicitly providing interest and 
mortality credits for deferred benefits); or (2) The lesser of (a) the 
current single sum benefit projected to normal retirement age and using 
an interest rate set forth in the plan or (b) the projected single sum 
benefit based on projected service to normal retirement age (taking 
into account the plan's formula for the accumulated percentage of final 
average compensation without salary increases), with the lesser of 
these two amounts converted to an annuity. The right to future interest 
credits under these designs is earned at the same time as the related 
percentage of final average compensation; however, the comments 
indicated that the interest typically commences only after active 
participation ceases.
    The IRS and the Treasury Department will continue to evaluate 
comments received regarding PEPs and are focusing on the following 
questions in situations where the interest credit is credited only 
after active participation ceases:
     Are these designs properly treated as plans under which 
the accrued benefit is expressed ``as an accumulated percentage of the 
participant's final average compensation'' within the meaning of 
section 411(a)(13)(A)? After the date on which interest credits 
commence, should these designs be treated as plans under which the 
accrued benefit is expressed ``as the balance of a hypothetical 
account'' within the meaning of section 411(a)(13)(A)?
     Do any of the designs in (1) or (2) of the preceding 
paragraph provide for a lower rate of accrual for additional years of 
service (because no interest is credited if service is continued)? See

[[Page 73689]]

section 411(b)(1)(G). Alternatively, can this issue be avoided by 
treating the annual rate at which the normal retirement benefit accrues 
as declining with each additional year of service?
     How should the backloading rules of section 411(b)(1)(A)-
(C) apply to these designs and do they raise issues on which comments 
were requested in Notice 2007-14 (2007-7 IRB 501)? See Sec.  
601.601(d)(2)(ii)(b) of this chapter.

Section 1107 of PPA '06 and Code Section 411(d)(6)

    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to statutory provisions under PPA 
'06 (or pursuant to any regulation issued under PPA '06) until the last 
day of the first plan year beginning on or after January 1, 2009 
(January 1, 2011 in the case of governmental plans). As described in 
Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to 
both interim and discretionary amendments that are made pursuant to PPA 
'06 statutory provisions or any regulation issued under PPA '06. See 
Sec.  601.601(d)(2)(ii)(b) of this chapter. If section 1107 of PPA '06 
applies to an amendment of a plan, section 1107 provides that the plan 
does not fail to meet the requirements of section 411(d)(6) by reason 
of such amendment, except as provided by the Secretary of the 
Treasury.\7\
---------------------------------------------------------------------------

    \7\ Except to the extent permitted under section 411(d)(6) and 
Sec. Sec.  1.411(d)-3 and 1.411(d)-4, or under a statutory provision 
such as section 1107 of PPA '06, section 411(d)(6) prohibits a plan 
amendment that decreases a participant's accrued benefits or that 
has the effect of eliminating or reducing an early retirement 
benefit or retirement-type subsidy, or eliminating an optional form 
of benefit, with respect to benefits attributable to service before 
the amendment. However, an amendment that eliminates or decreases 
benefits that have not yet accrued does not violate section 
411(d)(6), provided that the amendment is adopted and effective 
before the benefits accrue.
---------------------------------------------------------------------------

    The IRS and the Treasury Department are considering whether relief 
from section 411(d)(6) should be provided for particular amendments 
that would be made pursuant to section 701 of PPA '06 or these proposed 
regulations. In the following provisions of this section of the 
preamble, the IRS and the Treasury Department have set forth a 
description of amendments that are and are not entitled to section 
411(d)(6) relief. Comments are requested on whether section 411(d)(6) 
relief is or is not appropriate for any additional amendments related 
to section 701 of PPA '06 or these proposed regulations.
    Until further guidance is provided by the IRS and the Treasury 
Department, section 411(d)(6) relief is not available for the following 
amendments that are described in section 1107 of PPA '06:
     A conversion amendment where the effective date of the 
reduction in benefits that a participant, but for the amendment, would 
have accrued under a benefit formula that is not a statutory hybrid 
benefit formula is earlier than the date of adoption of the reduction 
amendment.
     An amendment that reduces a participant's hypothetical 
account balance or accumulated percentage of final average compensation 
below the amount on the date the amendment is adopted.
     An amendment to change the interest crediting rate from 
one of the rates specified in Notice 96-8 using a margin that is less 
than or equal to the maximum margin for that rate to the same or 
another rate specified in Notice 96-8 with an associated margin where 
the excess (if any) of the maximum margin under the second rate over 
the margin used for that second rate exceeds the excess (if any) of the 
maximum margin under the first rate over the margin used for that first 
rate.
    Until further guidance is provided by the IRS and the Treasury 
Department, section 411(d)(6) is available for the following amendments 
that are described in section 1107 of PPA '06:
     As provided in Notice 2007-6, in the case of a plan that 
provides for a single sum distribution to a participant that exceeds 
the participant's hypothetical account balance or accumulated 
percentage of final average compensation, the plan may be amended to 
eliminate the excess for distributions made after August 17, 2006. See 
Sec.  601.601(d)(2)(ii)(b) of this chapter.
     An amendment to change the interest crediting rate from 
one of the rates specified in Notice 96-8 using a margin that is less 
than or equal to the maximum margin for that rate to one of the other 
rates specified in Notice 96-8 with an associated margin where the 
excess (if any) of the maximum margin under the second rate over the 
margin used for that second rate does not exceed the excess (if any) of 
the maximum margin under the first rate over the margin used for that 
first rate.
    These rules under section 1107 of PPA '06 will be reflected in 
future guidance on the market rate of return rules under section 
411(b)(5)(B)(i). The IRS and the Treasury Department expect that 
section 411(d)(6) relief under section 1107 of PPA '06 will be 
available in the case of an amendment pursuant to that future guidance 
to change a plan's interest crediting rate (including credits on pre-
August 18, 2006 accruals) from an interest rate that is above a market 
rate of return to an interest rate that constitutes a market rate of 
return, provided that any retroactive change in the crediting rate does 
not apply for periods before the date that section 411(b)(5)(B)(i) 
first applies to the plan. In addition, to the extent permitted under 
future guidance, the IRS and the Treasury Department expect that 
section 411(d)(6) relief under section 1107 of PPA '06 will be 
available in the case of an amendment to change the plan's interest 
crediting rate to a rate that is expected to be higher than the plan's 
current rate (such as an amendment to change to an equity-based rate of 
return).

Effective/Applicability Dates

    Pursuant to section 701(e)(1) of PPA '06, the amendments made by 
section 701 of PPA '06 are generally effective for periods beginning on 
or after June 29, 2005. However, sections 701(e)(2) through 701(e)(5) 
of PPA '06 set forth a number of special effective/applicability date 
rules that are described earlier in the Background section of the 
preamble of these proposed regulations.
    These proposed regulations reflect the statutory effective dates 
set forth in section 701(e) of PPA '06. Thus, the proposed regulations 
would reflect that section 411(a)(13)(A) applies to distributions made 
after August 17, 2006. In addition, the proposed regulations would 
reflect that, in the case of a plan that is in existence on June 29, 
2005, section 411(a)(13)(B) applies to plan years beginning on or after 
January 1, 2008. At the date of issuance of these proposed regulations, 
bills have been introduced in the House of Representatives and the 
Senate which provide that (1) section 411(a)(13)(B) only applies to a 
participant who performs at least one hour of service on or after the 
effective date of section 411(a)(13)(B) with respect to the plan, and 
(2) in the case of a plan other than a plan described in section 
701(e)(3) or 701(e)(4) of PPA '06, section 411(a)(13)(B) applies to 
years ending on or after June 29, 2005.\8\ Proposed Sec.  1.411(a)(13)-
1(e)(1)(iii)(A)(2 ) and Sec.  1.411(a)(13)-1(e)(1)(iii)(B)(2 ) have 
been reserved in order to accommodate these changes.
---------------------------------------------------------------------------

    \8\ H.R. 3361 (Aug. 3, 2007) and S. 1974 (Aug. 2, 2007), at 
section 8(3)(B)(iv).
---------------------------------------------------------------------------

    These regulations are proposed to be effective for plan years 
beginning on or after January 1, 2009 (or, if later, the date that 
applies to certain collectively bargained plans pursuant to section 
701(e)(4) of PPA '06). For periods after the statutory effective date 
and before

[[Page 73690]]

the regulatory effective date set forth in the preceding sentence, a 
plan must comply with sections 411(a)(13) and 411(b)(5). During these 
periods, a plan is permitted to rely on the provisions set forth in the 
proposed regulations for purposes of satisfying the requirements of 
sections 411(a)(13) and 411(b)(5).
    These regulations should not be construed to create any inference 
concerning the applicable law prior to the effective dates of sections 
411(a)(13) and 411(b)(5). See also section 701(d) of PPA '06.

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, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, these regulations will 
be submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (one signed and eight (8) 
copies) or electronic comments that are submitted timely to the IRS.
    The IRS and the Treasury Department specifically request comments 
on the clarity of the proposed regulations and how they may be made 
easier to understand.
    In addition to the comments requested under the ``Conversion 
protection'' and ``Market rate of return limitation'' headings of this 
preamble (and in Part V of Notice 2007-6), comments are also requested 
on issues not addressed in these proposed regulations, including:
     The application of the 3-year vesting requirement in 
section 411(a)(13)(B) to a plan that is not a statutory hybrid plan 
when the plan is part of a floor-offset arrangement with a plan that 
includes a lump sum-based benefit formula.
     Whether guidance should be issued under section 411(b)(5) 
as to whether a characteristic is indirectly on account of age.
     Whether the age discrimination safe harbor in section 
411(b)(5)(A) should be available in the case of any plan that does not 
express a participant's accumulated benefit as either an annuity 
payable at normal retirement age (or current age, if later), the 
balance of a hypothetical account, or the current value of the 
accumulated percentage of a participant's final average compensation.
    All comments will be available for public inspection and copying. A 
public hearing will be scheduled if requested in writing by any person 
who timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place of the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Lauson C. Green and 
Linda S. F. Marshall, Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel 
from the IRS and the Treasury Department participated in the 
development of these regulations.

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 
entries as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.411(a)(13)-1 also issued under 26 U.S.C. 411(a)(13). 
Section 1.411(b)(5)-1 also issued under 26 U.S.C. 411(b)(5). * * *

    Par. 2. Section 1.411(a)(13)-1 is added to read as follows:


Sec.  1.411(a)(13)-1  Statutory hybrid plans.

    (a) In general. This section sets forth certain rules that apply to 
statutory hybrid plans under section 411(a)(13). Paragraph (b) of this 
section describes special rules for certain statutory hybrid plans that 
determine benefits under a lump sum-based benefit formula. Paragraph 
(c) of this section describes the vesting requirement for statutory 
hybrid plans. Paragraphs (d) and (e) of this section contain 
definitions and effective/applicability dates, respectively.
    (b) Calculation of benefit by reference to hypothetical account 
balance or accumulated percentage. Pursuant to section 411(a)(13)(A), a 
statutory hybrid plan that determines any portion of a participant's 
benefits under a lump sum-based benefit formula is not treated as 
failing to meet the requirements of section 411(a)(2), or the 
requirements of section 411(c) or 417(e) with respect to the 
participant's accrued benefit derived from employer contributions, 
solely because, with respect to benefits determined under that formula, 
the present value of those benefits is, under the terms of the plan, 
equal to the balance of the hypothetical account maintained for the 
participant or to the current value of the accumulated percentage of 
the participant's final average compensation under that formula.
    (c) Three-year vesting requirement--(1) In general. Pursuant to 
section 411(a)(13)(B), if any portion of the participant's accrued 
benefit under a defined benefit plan is determined under a statutory 
hybrid benefit formula, the plan is not treated as meeting the 
requirements of section 411(a)(2) unless the plan provides that the 
participant has a nonforfeitable right to 100 percent of the 
participant's accrued benefit if the participant has 3 or more years of 
service. Thus, this 3-year vesting requirement applies with respect to 
the entire accrued benefit of a participant under a defined benefit 
plan even if only a portion of the participant's accrued benefit under 
the plan is determined under a statutory hybrid benefit formula. 
Similarly, if the participant's accrued benefit under a defined benefit 
plan is, under the plan's terms, the larger of two (or more) benefit 
amounts, where each amount is determined under a different benefit 
formula (including a benefit determined pursuant to an offset among 
formulas within the plan) and at least one of those formulas is a 
statutory hybrid benefit formula, the participant's entire accrued 
benefit under the defined benefit plan is subject to the 3-year vesting 
rule of section 411(a)(13)(B) and this paragraph (c). The rule 
described in the preceding sentence applies even if the larger benefit 
is ultimately the benefit determined under a formula that is not a 
statutory hybrid benefit formula.
    (2) Floor-offset arrangements involving a statutory hybrid plan. 
[Reserved]
    (3) Examples. The provisions of this paragraph (c) are illustrated 
by the following examples:

    Example 1. Employer M sponsors Plan X, pursuant to which each 
participant's accrued benefit is equal to the sum of the benefit 
provided under two benefit formulas. The first benefit formula is a 
statutory hybrid benefit formula, and the second formula is not. 
Because a portion of each participant's

[[Page 73691]]

accrued benefit provided under Plan X is determined under a 
statutory hybrid benefit formula, the 3-year vesting requirement 
described in paragraph (c)(1) of this section applies to each 
participant's entire accrued benefit provided under Plan X.
    Example 2. The facts are the same as in Example 1, except that 
the benefit formulas described in Example 1 only apply to 
participants for service performed in Division A of Employer M and a 
different benefit formula applies to participants for service 
performed in Division B of Employer M. Pursuant to the terms of Plan 
X, the accrued benefit of a participant attributable to service 
performed in Division B is equal to the benefit provided by a 
benefit formula that is not a statutory hybrid benefit formula. 
Therefore, the 3-year vesting requirement described in paragraph 
(c)(1) of this section does not apply to a participant with an 
accrued benefit under Plan X if the participant's benefit is solely 
attributable to service performed in Division B.

    (d) Definitions--(1) In general. The definitions in this paragraph 
(d) apply for purposes of this section.
    (2) Lump sum-based benefit formula. The term lump sum-based benefit 
formula means a lump sum-based benefit formula as defined in Sec.  
1.411(b)(5)-1(e)(3).
    (3) Statutory hybrid benefit formula--(i) In general. A statutory 
hybrid benefit formula means a benefit formula that is either a lump 
sum-based benefit formula or a formula that is not a lump sum-based 
benefit formula but that has an effect similar to a lump sum-based 
benefit formula.
    (ii) Effect similar to a lump sum-based benefit formula. Except as 
provided in paragraph (d)(3)(iii) of this section, a benefit formula 
under a defined benefit plan that is not a lump sum-based benefit 
formula has an effect similar to a lump sum-based benefit formula if 
the formula provides that a participant's accumulated benefit (within 
the meaning of Sec.  1.411(b)(5)-1(e)(2)) payable at normal retirement 
age (or benefit commencement, if later) is expressed as a benefit that 
includes the right to periodic adjustments (including a formula that 
provides for indexed benefits under Sec.  1.411(b)(5)-1(b)(2)) that are 
reasonably expected to result in a larger annual benefit at normal 
retirement age (or benefit commencement, if later) for the participant 
than for a similarly situated, younger individual (within the meaning 
of Sec.  1.411(b)(5)-1(b)(5)) who is or could be a participant in the 
plan. A benefit formula that does not include periodic adjustments is 
treated as a formula with an effect similar to a lump sum-based benefit 
formula if the formula is otherwise described in the preceding sentence 
and the adjustments are provided pursuant to a pattern of repeated plan 
amendments. See Sec.  1.411(d)-4, A-1(c)(1).
    (iii) Exceptions--(A) Post-retirement benefit adjustments. Post-
annuity starting date adjustments of the amounts payable to a 
participant (such as cost-of-living increases) are disregarded in 
determining whether a benefit formula under a defined benefit plan has 
an effect similar to a lump sum-based benefit formula.
    (B) Certain variable annuity benefit formulas. If the assumed 
interest rate used for purposes of the adjustment of amounts payable to 
a participant under a variable annuity benefit formula is at least 5 
percent, then the adjustments under the variable annuity benefit 
formula are not treated as being reasonably expected to result in a 
larger annual benefit at normal retirement age (or benefit 
commencement, if later) for the participant than for a similarly 
situated, younger individual (within the meaning of Sec.  1.411(b)(5)-
1(b)(5)) who is or could be a participant in the plan, and thus such a 
variable annuity benefit formula does not have an effect similar to a 
lump sum-based benefit formula.
    (C) Contributory plans. A benefit formula under a defined benefit 
plan that provides for a benefit equal to the benefit properly 
attributable to after-tax employee contributions does not have an 
effect similar to a lump sum-based benefit formula. See section 
411(c)(2) for rules for determining benefits attributable to after-tax 
employee contributions.
    (4) Variable annuity benefit formula. A variable annuity benefit 
formula means any benefit formula under a defined benefit plan which 
provides that the amount payable is periodically adjusted by reference 
to the difference between the rate of return of plan assets (or 
specified market indices) and a specified assumed interest rate.
    (e) Effective/applicability date--(1) Statutory effective/
applicability date--(i) In general. Except as provided in paragraphs 
(e)(1)(ii) and (e)(1)(iii) of this section, section 411(a)(13) applies 
for periods beginning on or after June 29, 2005.
    (ii) Calculation of benefits. Section 411(a)(13)(A) applies to 
distributions made after August 17, 2006.
    (iii) Vesting--(A) Plans in existence on June 29, 2005--(1) General 
rule. In the case of a plan that is in existence on June 29, 2005 
(regardless of whether the plan is a statutory hybrid plan on that 
date), section 411(a)(13)(B) applies to plan years beginning on or 
after January 1, 2008.
    (2) Hour of service required. [Reserved]
    (3) Exception for plan sponsor election. See Sec.  1.411(b)(5)-
1(f)(1)(iii)(A)(2) for a special election for early application of 
section 411(a)(13)(B).
    (B) Plans not in existence on June 29, 2005--(1) In general. In the 
case of a plan not in existence on June 29, 2005, section 411(a)(13)(B) 
applies for periods beginning on or after June 29, 2005.
    (2) Hour of service required. [Reserved]
    (C) Collectively bargained plans. Notwithstanding paragraphs 
(e)(1)(iii)(A) and (B) of this section, in the case of a collectively 
bargained plan maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified on or before August 17, 2006, the requirements of section 
411(a)(13)(B) do not apply for plan years beginning before the earlier 
of--
    (1) The later of--
    (i) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006), or
    (ii) January 1, 2008; or
    (2) January 1, 2010.
    (D) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan where a 
collective bargaining agreement applies to some, but not all, of the 
plan participants, the plan is considered a collectively bargained plan 
for purposes of paragraph (e)(1)(iii)(C) of this section if at least 25 
percent of the participants in the plan are members of collective 
bargaining units for which the benefit levels under the plan are 
specified under a collective bargaining agreement.
    (2) Effective/applicability date of regulations. This section 
applies for plan years beginning on or after January 1, 2009 (or, if 
later, the date applicable under paragraph (e)(1)(iii)(C) of this 
section). For the periods after the statutory effective date set forth 
in paragraph (e)(1) of this section and before the regulatory effective 
date set forth in the preceding sentence, a plan must comply with 
section 411(a)(13). During these periods, a plan is permitted to rely 
on the provisions of this section for purposes of satisfying the 
requirements of section 411(a)(13).
    Par. 3. Section 1.411(b)(5)-1 is added to read as follows:


Sec.  1.411(b)(5)-1  Reduction in rate of benefit accrual under a 
defined benefit plan.

    (a) In general. This section sets forth certain rules related to 
reduction in the rate of benefit accrual under a defined

[[Page 73692]]

benefit plan. Paragraph (b) of this section describes certain plan 
design-based safe harbors (including statutory hybrid plans) that are 
deemed to satisfy the age discrimination rules under section 
411(b)(1)(H). Paragraph (c) of this section describes rules relating to 
statutory hybrid plan conversion amendments. Paragraph (d) of this 
section describes rules restricting interest credits (or equivalent 
amounts) under a statutory hybrid plan to a market rate of return. 
Paragraphs (e) and (f) of this section contain definitions and 
effective/applicability dates, respectively.
    (b) Safe harbors for certain plan designs--(1) Accumulated benefit 
testing--(i) In general. Pursuant to section 411(b)(5)(A), and subject 
to paragraph (b)(1)(ii) of this section, a plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H)(i) if, as of 
any date, the accumulated benefit of a participant would not be less 
than the accumulated benefit of any similarly situated, younger 
participant. This test requires a comparison of the accumulated benefit 
of each individual who is or could be a participant in the plan with 
the accumulated benefit of each other similarly situated, younger 
individual who is or could be a participant in the plan. See paragraph 
(b)(5) of this section for rules regarding whether each younger 
individual who is or could be a participant is similarly situated to a 
participant. The comparison described in this paragraph (b)(1)(i) is 
based on--
    (A) The annuity payable at normal retirement age (or current age, 
if later) if the accumulated benefit of the participant under the terms 
of the plan is expressed as an annuity payable at normal retirement age 
(or current age, if later);
    (B) The balance of a hypothetical account if the accumulated 
benefit of the participant under the terms of the plan is expressed as 
a hypothetical account balance; or
    (C) The current value of an accumulated percentage of the 
participant's final average compensation if the accumulated benefit of 
the participant under the terms of the plan is expressed as an 
accumulated percentage of final average compensation.
    (ii) Benefit formulas for comparison--(A) In general. The safe 
harbor provided by section 411(b)(5)(A) and paragraph (b)(1)(i) of this 
section does not apply to a plan if the accumulated benefit of a 
participant under the plan is not described in paragraph (b)(1)(i)(A), 
(B), or (C) of this section. In addition, except as provided in 
paragraph (b)(1)(ii)(B) of this section, that safe harbor also does not 
apply to a plan if the comparison required under paragraph (b)(1)(i) of 
this section involves comparing accumulated benefits that are described 
in different subparagraphs of paragraph (b)(1)(i) of this section. 
Thus, for example, if a plan provides an accumulated benefit that is 
expressed under the terms of the plan as an annuity payable at normal 
retirement age as described in paragraph (b)(1)(i)(A) of this section 
for participants who are age 55 or over, and the plan provides an 
accumulated benefit that is expressed as the balance of a hypothetical 
account as described in paragraph (b)(1)(i)(B) of this section for 
participants who are younger than age 55, the safe harbor described in 
section 411(b)(5)(A) and paragraph (b)(1)(i) of this section does not 
apply to the plan.
    (B) Greater-of and sum-of benefit formulas. If a plan provides that 
a participant's accumulated benefit is equal to the sum of accumulated 
benefits that are described in different subparagraphs of paragraph 
(b)(1)(i) of this section, then the plan is deemed to satisfy paragraph 
(b)(1)(i) of this section if the plan satisfies the comparison 
described in paragraph (b)(1)(i) of this section separately for each of 
the different accumulated benefits. Similarly, if a plan provides that 
a participant's accumulated benefit is equal to the greater of 
accumulated benefits that are described in different subparagraphs of 
paragraph (b)(1)(i) of this section, then the plan is deemed to satisfy 
paragraph (b)(1)(i) of this section if the plan satisfies the 
comparison described in paragraph (b)(1)(i) of this section separately 
for each of the different accumulated benefits. For purposes of this 
paragraph (b)(1)(ii)(B), a similarly situated, younger participant is 
treated as having an accumulated benefit of zero under a benefit 
formula if the benefit formula does not apply to the participant.
    (iii) Disregard of certain subsidized benefits. For purposes of 
paragraph (b)(1)(i) of this section, any subsidized portion of any 
early retirement benefit that is included in a participant's 
accumulated benefit is disregarded. For this purpose, the subsidized 
portion of an early retirement benefit is the retirement-type subsidy 
within the meaning of Sec.  1.411(d)-3(g)(6) that is contingent on a 
participant's severance from employment and commencement of benefits 
before normal retirement age.
    (2) Indexed benefits--(i) In general. Except as provided in 
paragraph (b)(2)(iv) of this section, pursuant to section 411(b)(5)(E) 
and this paragraph (b)(2)(i), a defined benefit plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H) solely because 
a benefit formula under the plan (other than a lump sum-based benefit 
formula) provides for the periodic adjustment of accrued benefits under 
the plan, but only if the adjustment is by means of the application of 
a recognized investment index or methodology described in paragraph 
(b)(2)(ii) of this section and the plan satisfies paragraph (b)(2)(iii) 
of this section. A statutory hybrid plan that is not treated as failing 
to satisfy section 411(b)(1)(H) pursuant to the preceding sentence must 
nevertheless satisfy the qualification requirements otherwise 
applicable to statutory hybrid plans, including the requirements of 
Sec.  1.411(a)(13)-1(c) (relating to minimum vesting standards), 
paragraph (c) of this section (relating to plan conversion amendments), 
and paragraph (d) of this section (relating to market rates of return).
    (ii) Recognized investment index or methodology. An adjustment is 
made pursuant to a recognized investment index or methodology if it is 
made pursuant to--
    (A) An eligible cost-of-living index as described in Sec.  
1.401(a)(9)-6, A-14(b);
    (B) The rate of return on the aggregate assets of the plan; or
    (C) The rate of return on the annuity contract for the employee 
issued by an insurance company licensed under the laws of a State.
    (iii) Similarly situated participant test. A plan satisfies this 
paragraph (b)(2)(iii) if the aggregate periodic adjustments of each 
participant's accrued benefit under the plan (determined as a 
percentage of the unadjusted accrued benefit) would not be less than 
the aggregate periodic adjustments of any similarly situated younger 
participant. This test requires a comparison of the aggregate periodic 
adjustments of each individual who is or could be a participant in the 
plan for any specified period with the aggregate periodic adjustments 
of each other similarly situated, younger individual who is or could be 
a participant in the plan for the same period. See paragraph (b)(5) of 
this section for rules regarding whether each younger individual who is 
or could be a participant is similarly situated to a participant.
    (iv) Protection against loss--(A) In general. Paragraph (b)(2)(i) 
of this section does not apply unless the plan satisfies section 
411(b)(5)(E)(ii) and paragraph (d)(2)(ii) of this section (relating to 
preservation of capital).
    (B) Exception for variable annuity benefit formulas. The 
requirement to

[[Page 73693]]

satisfy section 411(b)(5)(E)(ii) and paragraph (d)(2)(ii) of this 
section does not apply in the case of a benefit provided under a 
variable annuity benefit formula, but only if the adjustments under the 
variable annuity benefit formula are based on the rate of return on the 
aggregate assets of the plan or the rate of return on the annuity 
contract for the employee issued by an insurance company licensed under 
the laws of a State.
    (3) Certain offsets permitted. A plan is not treated as failing to 
meet the requirements of section 411(b)(1)(H) solely because the plan 
provides offsets against benefits under the plan to the extent the 
offsets are allowable in applying the requirements of section 401(a) 
and the applicable requirements of the Employee Retirement Income 
Security Act of 1974, Public Law 93-406 (88 Stat. 829), and the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602).
    (4) Permitted disparities in plan contributions or benefits. A plan 
is not treated as failing to meet the requirements of section 
411(b)(1)(H) solely because the plan provides a disparity in 
contributions or benefits with respect to which the requirements of 
section 401(l) are met.
    (5) Definition of similarly situated. For purposes of paragraphs 
(b)(1) and (b)(2) of this section, an individual is similarly situated 
to another individual if the individual is identical to that other 
individual in every respect that is relevant in determining a 
participant's benefit under the plan (including period of service, 
compensation, position, date of hire, work history, and any other 
respect) except for age. In determining whether an individual is 
similarly situated to another individual, any characteristic that is 
relevant for determining benefits under the plan and that is based 
directly or indirectly on age is disregarded. For example, if a 
particular benefit formula applies to a participant on account of the 
participant's age, an individual to whom the benefit formula does not 
apply and who is identical to the participant in all other respects is 
similarly situated to the participant. By contrast, an individual is 
not similarly situated to a participant if a different benefit formula 
applies to the individual and the application of the different formula 
is not based directly or indirectly on age.
    (c) Special rules for plan conversion amendments--(1) In general. 
Pursuant to section 411(b)(5)(B)(ii), (iii), and (iv), if there is a 
conversion amendment within the meaning of paragraph (c)(4) of this 
section with respect to a defined benefit plan, then the plan is 
treated as failing to meet the requirements of section 411(b)(1)(H) 
unless the plan, after the amendment, satisfies the requirements of 
paragraph (c)(2) of this section.
    (2) Separate calculation of post-conversion benefit--(i) In 
general. A statutory hybrid plan satisfies the requirements of this 
paragraph (c)(2) if the plan provides that, in the case of an 
individual who was a participant in the plan immediately before the 
date of adoption of the conversion amendment, the participant's benefit 
at any subsequent annuity starting date is not less than the sum of:
    (A) The participant's section 411(d)(6) protected benefit (as 
defined in Sec.  1.411(d)-3(g)(14)) with respect to service before the 
effective date of the conversion amendment, determined under the terms 
of the plan as in effect immediately before the effective date of the 
amendment; and
    (B) The participant's section 411(d)(6) protected benefit with 
respect to service on and after the effective date of the conversion 
amendment, determined under the terms of the plan as in effect after 
the effective date of the amendment.
    (ii) Rules of application. For purposes of this paragraph (c)(2), 
except as provided in paragraph (c)(3) of this section, the benefits 
under paragraph (c)(2)(i)(A) and (B) of this section must each be 
determined in the same manner as if they were provided under separate 
plans that are independent of each other (for example, without any 
benefit offsets), and, except to the extent permitted under Sec.  
1.411(d)-3 or Sec.  1.411(d)-4 (or other applicable law), each optional 
form of payment provided under the terms of the plan with respect to a 
participant's section 411(d)(6) protected benefit as in effect before 
the amendment must be available thereafter to the extent of the plan's 
benefits for service prior to the effective date of the amendment.
    (3) Establishment of opening hypothetical account balance--(i) In 
general. Provided that the requirements of paragraph (c)(3)(ii) of this 
section are satisfied, a statutory hybrid plan under which an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation is established as of the 
effective date of the conversion amendment does not fail to satisfy the 
requirements of paragraph (c)(2) of this section merely because 
benefits attributable to that opening hypothetical account balance or 
opening accumulated percentage (that is, benefits that are not 
described in paragraph (c)(2)(i)(B) of this section) are substituted 
for benefits described in paragraph (c)(2)(i)(A) of this section.
    (ii) Comparison of benefits--(A) Testing requirement. For any 
optional form of benefit payable at an annuity starting date where 
there was an optional form of benefit within the same generalized 
optional form of benefits (within the meaning of Sec.  1.411(d)-
3(g)(8)) that would have been available to the participant at that 
annuity starting date under the terms of the plan as in effect 
immediately before the effective date of the conversion amendment, the 
requirements of this paragraph (c)(3)(ii) are satisfied only if the 
plan provides that the amount of the benefit under that optional form 
of benefit available to the participant under the lump sum-based 
formula that is attributable to the opening hypothetical account 
balance or opening accumulated percentage as described in paragraph 
(c)(3)(i) of this section, determined under the terms of the plan as of 
the annuity starting date (including actuarial conversion factors), is 
not less than the benefit under that optional form of benefit described 
in paragraph (c)(2)(i)(A) of this section. To satisfy this requirement, 
if the benefit under an optional form attributable to the opening 
hypothetical account balance or opening accumulated percentage is less 
than the benefit described in paragraph (c)(2)(i)(A) of this section, 
then the benefit attributable to the opening hypothetical account 
balance or opening accumulated percentage must be increased to the 
extent necessary to provide the minimum benefit described in this 
paragraph (c)(3)(ii)(A). Thus, if a plan is using the option under this 
paragraph (c)(3) to satisfy paragraph (c)(2) of this section with 
respect to a participant, the participant must receive a benefit equal 
to not less than the sum of:
    (1) The greater of the benefit attributable to the opening 
hypothetical account balance as described in this paragraph (c)(3)(ii) 
and the benefit described in paragraph (c)(2)(i)(A) of this section, 
and
    (2) The benefit described in paragraph (c)(2)(i)(B) of this 
section.
    (B) Special rule for post-conversion optional forms of benefit. If 
an optional form of benefit is available on the annuity starting date 
with respect to the benefit attributable to the opening hypothetical 
account balance or opening accumulated percentage, but no optional form 
within the same generalized optional form of benefit (within the 
meaning of Sec.  1.411(d)-3(g)(8)) was available at that annuity 
starting date under the terms of a plan as in effect immediately prior 
to the effective date of the conversion

[[Page 73694]]

amendment, then, for purposes of this paragraph (c)(3)(ii), the plan is 
treated as if such an optional form of benefit were available 
immediately prior to the effective date of the conversion amendment. In 
that event, paragraph (c)(3)(ii)(A) of this section must be applied by 
taking into account the optional form of benefit that is treated as if 
it were available on the annuity starting date under the terms of the 
plan as in effect immediately prior to the effective date of the 
conversion amendment. Thus, for example, if a single sum optional form 
of payment is not available under the plan terms applicable to the 
accrued benefit described in paragraph (c)(2)(i)(A) of this section, 
but a single sum form of payment is available with respect to the 
benefit attributable to the opening hypothetical account balance or 
opening accumulated percentage as of the annuity starting date, then, 
for purposes of paragraph (c)(3)(ii)(A) of this section, the plan is 
treated as if a single sum (to which section 417(e)(3) applies) were 
available under the terms of the plan as in effect immediately prior to 
the effective date of the conversion amendment.
    (4) Conversion amendment--(i) In general. An amendment is a 
conversion amendment that is subject to the requirements of this 
paragraph (c) with respect to a participant if--
    (A) The amendment reduces or eliminates the benefits that, but for 
the amendment, the participant would have accrued after the effective 
date of the amendment under a benefit formula that is not a statutory 
hybrid benefit formula (and under which the participant was accruing 
benefits prior to the amendment); and
    (B) After the effective date of the amendment, all or a portion of 
the participant's benefit accruals under the plan are determined under 
a statutory hybrid benefit formula.
    (ii) Rules of application--(A) In general. Paragraphs (c)(4)(iii), 
(iv), and (v) of this section describe special rules that treat certain 
arrangements as conversion amendments. The rules described in those 
paragraphs apply both separately and in combination. Thus, for example, 
in an acquisition described in Sec.  1.410(b)-2(f), if the buyer adopts 
an amendment under which a participant's benefits under the seller's 
plan that is not a statutory hybrid plan are coordinated with a 
separate plan of the buyer that is a statutory hybrid plan, such as 
through an offset of the participant's benefit under the buyer's plan 
by the participant's benefit under the seller's plan, the seller and 
buyer are treated as a single employer under paragraph (c)(4)(iv) of 
this section and they are treated as having adopted a conversion 
amendment under paragraph (c)(4)(iii) of this section. However, 
pursuant to paragraph (c)(4)(iii) of this section, if there is no 
coordination between the two plans, there is no conversion amendment.
    (B) Covered amendments. Only amendments that eliminate or reduce 
accrued benefits described in section 411(a)(7), or a retirement-type 
subsidy described in section 411(d)(6)(B)(i), that would otherwise 
accrue as a result of future service are treated as amendments 
described in paragraph (c)(4)(i)(A) of this section.
    (C) Operation of plan terms treated as covered amendment. If, under 
the terms of a plan, a change in the conditions of a participant's 
employment results in a reduction of the participant's benefits that 
would have accrued in the future under a benefit formula that is not a 
statutory hybrid benefit formula, the plan is treated for purposes of 
this paragraph (c)(4) as if such plan terms constitute an amendment 
that reduces the participant's benefits that would have accrued after 
the effective date of the change under a benefit formula that is not a 
statutory hybrid benefit formula. Thus, for example, if a participant 
transfers from an operating division that is covered by a non-statutory 
hybrid benefit formula to an operating division that is covered by a 
statutory hybrid benefit formula, there has been a conversion amendment 
as of the date of the transfer.
    (iii) Multiple plans. An employer is treated as having adopted a 
conversion amendment if the employer adopts an amendment under which a 
participant's benefits under a plan that is not a statutory hybrid plan 
are coordinated with a separate plan that is a statutory hybrid plan, 
such as through a reduction (offset) of the benefit under the plan that 
is not a statutory hybrid plan.
    (iv) Multiple employers. If the employer of an employee changes as 
a result of a transaction described in Sec.  1.410(b)-2(f), then the 
two employers are treated as a single employer for purposes of this 
paragraph (c)(4).
    (v) Multiple amendments--(A) In general--(1) General rule. For 
purposes of this paragraph (c)(4), a conversion amendment includes 
multiple amendments that result in a conversion amendment even if the 
amendments are not conversion amendments individually. For example, an 
employer is treated as having adopted a conversion amendment if the 
employer first adopts an amendment described in paragraph (c)(4)(i)(A) 
of this section and, at a later date, adopts an amendment that adds a 
benefit under a statutory hybrid benefit formula as described in 
paragraph (c)(4)(i)(B) of this section, if they are consolidated under 
paragraph (c)(4)(v)(A)(2) of this section.
    (2) Delay between plan amendments. In the case of an amendment to 
provide a benefit under a statutory hybrid benefit formula that is 
adopted within three years after adoption of an amendment to reduce 
non-statutory hybrid benefit formula benefits, those amendments are 
consolidated in determining whether a conversion amendment has been 
adopted. Thus, the later adoption of the statutory hybrid benefit 
formula will cause the earlier amendment to be treated as a conversion 
amendment. In the case of an amendment to provide a benefit under a 
statutory hybrid benefit formula that is adopted more than three years 
after adoption of an amendment to reduce benefits under a non-statutory 
hybrid benefit formula, there is a presumption that the amendments are 
not consolidated unless the facts and circumstances indicate that 
adoption of the amendment to provide a benefit under a statutory hybrid 
benefit formula was intended at the time of reduction in the non-
statutory hybrid benefit formula.
    (B) Multiple conversion amendments. If an employer adopts multiple 
amendments reducing benefits described in paragraph (c)(4)(i)(A) of 
this section, each amendment is treated as a separate conversion 
amendment, provided that paragraph (c)(4)(i)(B) of this section is 
applicable at the time of the amendment (taking into account the rules 
of this paragraph (c)(4)).
    (vi) Effective date of a conversion amendment. The effective date 
of a conversion amendment is, with respect to a participant, the date 
as of which the reduction of the participant's benefits described in 
paragraph (c)(4)(i)(A) of this section occurs. In accordance with 
section 411(d)(6), the date of a reduction of those benefits cannot be 
earlier than the date of adoption of the conversion amendment.
    (5) Examples. The following examples illustrate the application of 
paragraph (c) of this section:

    Example 1. (i) Facts where plan does not establish opening 
hypothetical account balance for participants and participant elects 
life annuity at normal retirement age. Employer N sponsors Plan E, a 
defined benefit plan that provides an accumulated benefit, payable 
as a straight life annuity commencing at age 65 (which is Plan E's 
normal retirement age), based on a percentage of highest average 
compensation

[[Page 73695]]

times the participant's years of service. Plan E permits any 
participant who has had a severance from employment to elect payment 
in the following optional forms of benefit (with spousal consent if 
applicable), with any payment not made in a straight life annuity 
converted to an equivalent form based on reasonable actuarial 
assumptions: a straight life annuity; and a 50 percent, 75 percent, 
or 100 percent joint and survivor annuity. The payment of benefits 
may commence at any time after attainment of age 55, with an 
actuarial reduction if the commencement is before normal retirement 
age. In addition, the plan offers a single sum payment after 
attainment of age 55 equal to the present value of the normal 
retirement benefit using the applicable interest rate and mortality 
table under section 417(e)(3) in effect under the terms of the plan 
on the annuity starting date.
    (ii) Facts relating to the conversion amendment. On January 1, 
2010, Plan E is amended to eliminate future accruals under the 
highest average compensation benefit formula and to base future 
benefit accruals on a hypothetical account balance. For service on 
or after January 1, 2010, each participant's hypothetical account 
balance is credited monthly with a pay credit equal to a specified 
percentage of the participant's compensation during the month and 
also with interest based on the third segment rate described in 
section 430(h)(2)(C)(iii). With respect to benefits under the 
hypothetical account balance attributable to service on and after 
January 1, 2010, a participant is permitted to elect (with spousal 
consent) payment in the same generalized optional forms of benefit 
(even though different actuarial factors apply) as under the terms 
of the plan in effect before January 1, 2010, and also as a single 
sum distribution. The plan provides for the benefits attributable to 
service before January 1, 2010, to be determined under the terms of 
the plan as in effect immediately before the effective date of the 
amendment, and the benefits attributable to service on and after 
January 1, 2010 to be determined separately, under the terms of the 
plan as in effect after the effective date of the amendment, with 
neither benefit offsetting the other in any manner. Thus, each 
participant's benefits are equal to the sum of the benefits 
attributable to service before January 1, 2010 (to be determined 
under the terms of the plan as in effect immediately before the 
effective date of the amendment), plus the benefits attributable to 
the participant's hypothetical account balance.
    (iii) Facts relating to an affected participant. Participant A 
is age 62 on January 1, 2010 and, on December 31, 2009, A's benefit 
for years of service before January 1, 2010, payable as a straight 
life annuity commencing at A's normal retirement age (age 65) which 
is January 1, 2013, is $1,000 per month. Participant A has a 
severance from employment on January 1, 2013, and, on January 1, 
2013, the hypothetical account balance, with pay credits and 
interest from January 1, 2010, to January 1, 2013, has become 
$11,000. Using the conversion factors under the plan as amended on 
January 1, 2013, that balance is equivalent to a straight life 
annuity of $100 per month commencing on January 1, 2013. This 
benefit is in addition to the benefit attributable to service before 
January 1, 2010. Participant A elects (with spousal consent) a 
straight life annuity of $1,100 per month commencing January 1, 
2013.
    (iv) Conclusion. Participant A's benefit satisfies the 
requirements of paragraph (c)(3)(ii)(A) of this section because 
Participant A's benefit is not less than the sum of Participant A's 
section 411(d)(6) protected benefit (as defined in Sec.  1.411(d)-
3(g)(14)) with respect to service before the effective date of the 
conversion amendment, determined under the terms of the plan as in 
effect immediately before the effective date of the amendment, and 
Participant A's section 411(d)(6) protected benefit with respect to 
service on and after the effective date of the conversion amendment, 
determined under the terms of the plan as in effect after the 
effective date of the amendment.
    Example 2. (i) Facts involving plan's establishment of opening 
hypothetical account balance and payment of pre-conversion 
accumulated benefit in life annuity at normal retirement age. The 
facts in this Example 2 are the same as the facts under paragraph 
(i) of Example 1.
    (ii) Facts relating to the conversion amendment. On January 1, 
2010, Plan E is amended to eliminate future accruals under the 
highest average compensation benefit formula and to base future 
benefit accruals on a hypothetical account balance. An opening 
hypothetical account balance is established for each participant, 
and, under the plan's terms, that balance is equal to the present 
value of the participant's accumulated benefit on December 31, 2009 
(payable as a straight life annuity at normal retirement age or 
immediately, if later), using the applicable interest rate and 
applicable mortality table under section 417(e)(3) on January 1, 
2010. Under Plan E, the account based on this opening hypothetical 
account balance is maintained as a separate account from the account 
for accruals on or after January 1, 2010. The hypothetical account 
balance maintained for each participant for accruals on or after 
January 1, 2010, is credited monthly with a pay credit equal to a 
specified percentage of the participant's compensation during the 
month. A participant's hypothetical account balance (including both 
of the separate accounts) is credited monthly with interest based on 
the third segment rate described in section 430(h)(2)(C)(iii).
    (iii) Facts relating to optional forms of benefit. Following 
severance from employment and attainment of age 55, a participant is 
permitted to elect (with spousal consent) payment in the same 
generalized optional forms of benefit as under the plan in effect 
prior to January 1, 2010, with the amount payable calculated based 
on the hypothetical account balance on the annuity starting date and 
the applicable interest rate and applicable mortality table on the 
annuity starting date. The single sum distribution is equal to the 
hypothetical account balance.
    (iv) Facts relating to conversion protection. The plan provides 
that, as of a participant's annuity starting date, the plan will 
determine whether the benefit attributable to the opening 
hypothetical account payable in the particular optional form of 
benefit selected is greater than or equal to the benefit accrued 
under the plan through the date of conversion and payable in the 
same generalized optional form of benefit with the same annuity 
starting date. If the benefit attributable to the opening 
hypothetical account balance is greater, the plan provides that such 
benefit is paid in lieu of the pre-conversion benefit, together with 
the benefit attributable to post-conversion contribution credits. If 
the benefit attributable to the opening hypothetical account balance 
is less, the plan provides that such benefit is increased 
sufficiently to provide the pre-conversion benefit, together with 
the benefit attributable to post-conversion contribution credits.
    (v) Facts relating to an affected participant. On January 1, 
2010, the opening hypothetical account balance established for 
Participant A is $80,000, which is the present value of Participant 
A's straight life annuity of $1,000 per month commencing at January 
1, 2013, using the applicable interest rate and applicable mortality 
table under section 417(e)(3) in effect on January 1, 2010. On 
January 1, 2010, the applicable interest rate for Participant A is 
equivalent to a level rate of 5.5 percent. Thereafter, Participant's 
A's hypothetical account balance for subsequent accruals is credited 
monthly with a pay credit equal to a specified percentage of the 
participant's compensation during the month. In addition, 
Participant A's hypothetical account balance (including both of the 
separate accounts) is credited monthly with interest based on the 
third segment rate described in section 430(h)(2)(C)(iii).
    (vi) Facts relating to calculation of the participant's benefit. 
Participant A has a severance from employment on January 1, 2013 at 
age 65, and elects (with spousal consent) a straight life annuity 
commencing January 1, 2013. On January 1, 2013, the opening 
hypothetical account balance, with interest credits from January 1, 
2010, to January 1, 2013, has become $95,000, which, using the 
conversion factors under the plan on January 1, 2013, is equivalent 
to a straight life annuity of $1,005 per month commencing on January 
1, 2013 (which is greater than the $1,000 a month payable at age 65 
under the terms of the plan in effect before January 1, 2010). This 
benefit is in addition to the benefit determined using the 
hypothetical account balance for service after January 1, 2010.
    (vii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant 
A because A's benefit is not less than the sum of (A) the greater of 
Participant A's benefits attributable to the opening hypothetical 
account balance and A's section 411(d)(6) protected benefit (as 
defined in Sec.  1.411(d)-3(g)(14)) with respect to service before 
the effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately before the effective date 
of the amendment, and (B) Participant A's section 411(d)(6) 
protected benefit with respect to service on and after the effective 
date of the conversion amendment, determined under the terms of the 
plan as in effect after the effective date of the amendment.

[[Page 73696]]

    Example 3. (i) Facts involving a subsequent decrease in interest 
rates. The facts are the same as in Example 2, except that, because 
of a decrease in bond rates after January 1, 2010, and before 
January 1, 2013, the rate of interest credited in that period 
averages less than 5.5 percent, and, on January 1, 2013, the 
effective applicable interest rate under section 417(e)(3) under the 
plan's terms is 4.7 percent. As a result, Participant A's opening 
hypothetical account balance plus attributable interest credits has 
increased to only $87,000 on January 1, 2013, and, using the 
conversion factors under the plan on January 1, 2013, is equivalent 
to a straight life annuity commencing on January 1, 2013, of $775 
per month. Under the terms of Plan E, the benefit attributable to 
A's opening account balance is increased so that A's straight life 
annuity commencing on January 1, 2013, is $1,000 per month. This 
benefit is in addition to the benefit attributable to the 
hypothetical account balance for service after January 1, 2010.
    (ii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant 
A because A's benefit is not less than the sum of (A) the greater of 
A's benefits attributable to the opening hypothetical account 
balance and A's section 411(d)(6) protected benefit (as defined in 
Sec.  1.411(d)-3(g)(14)) with respect to service before the 
effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately before the effective date 
of the amendment, and (B) A's section 411(d)(6) protected benefit 
with respect to service on and after the effective date of the 
conversion amendment, determined under the terms of the plan as in 
effect after the effective date of the amendment.
    Example 4. (i) Facts involving payment of a subsidized early 
retirement benefit. The facts are the same as in Example 2, except 
that under the terms of Plan E on December 31, 2009, a participant 
who retires before age 65 and after age 55 with 30 years of service 
has only a 3 percent per year actuarial reduction. Participant A has 
a severance from employment on January 1, 2011, when A is age 63 and 
has 30 years of service. On January 1, 2011, A's opening 
hypothetical account balance, with interest from January 1, 2010, to 
January 1, 2011, has become $86,000, which, using the conversion 
factors under the plan (as amended) on January 1, 2011, is 
equivalent to a straight life annuity commencing on January 1, 2011, 
of $850 per month.
    (ii) Facts relating to calculation of the participant's benefit. 
Under the terms of Plan E on December 31, 2009, Participant A is 
entitled to a straight life annuity commencing on January 1, 2011, 
equal to at least $940 per month ($1,000 reduced by 3 percent for 
each of the 2 years that A's benefits commence before normal 
retirement age). Under the terms of Plan E, the benefit attributable 
to A's opening account balance is increased so that A is entitled to 
a straight life annuity of $940 per month commencing on January 1, 
2013. This benefit is in addition to the benefit determined using 
the hypothetical account balance for service after January 1, 2010.
    (iii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant 
A because A's benefit is not less than the sum of (A) the greater of 
Participant A's benefits attributable to the opening hypothetical 
account balance (increased by attributable interest credits) and A's 
section 411(d)(6) protected benefit (as defined in Sec.  1.411(d)-
3(g)(14)) with respect to service before the effective date of the 
conversion amendment, determined under the terms of the plan as in 
effect immediately before the effective date of the amendment, and 
(B) Participant A's section 411(d)(6) protected benefit with respect 
to service on and after the effective date of the conversion 
amendment, determined under the terms of the plan as in effect after 
the effective date of the amendment.
    Example 5. (i) Facts involving addition of a single sum payment 
option. The facts are the same as in Example 2, except that, before 
January 1, 2010, Plan E did not offer payment in a single sum 
distribution for amounts in excess of $5,000. Plan E, as amended on 
January 1, 2010, offers payment in any of the available annuity 
distribution forms commencing at any time following severance from 
employment as were provided under Plan E before January 1, 2010. In 
addition, Plan E, as amended on January 1, 2010, offers payment in 
the form of a single sum attributable to service before January 1, 
2010, which is the greater of the opening hypothetical account 
balance (increased by attributable interest credits) or a single sum 
distribution of the straight life annuity payable at age 65 using 
the same actuarial factors as are used for mandatory cashouts for 
amounts equal to $5,000 or less under the terms of the plan on 
December 31, 2009. Participant B is age 40 on January 1, 2010, and 
B's opening hypothetical account balance (increased by attributable 
interest credits) is $33,000 (which is the present value, using the 
conversion factors under the plan (as amended) on January 1, 2010, 
of Participant B's straight life annuity of $1,000 per month 
commencing at January 1, 2035, which is when B will be age 65). 
Participant B has a severance from employment on January 1, 2013, 
and elects (with spousal consent) an immediate single sum 
distribution. Participant B's opening hypothetical account balance 
(increased by attributable interest) on January 1, 2013, is $45,000. 
The present value, on January 1, 2013, of Participant B's benefit of 
$1,000 per month, commencing immediately using the actuarial factors 
for mandatory cashouts under the terms of the plan on December 31, 
2009, would result in a single sum payment of $44,750. Participant B 
is paid a single sum distribution equal to the sum of $45,000 plus 
an amount equal to B's January 1, 2013, hypothetical account balance 
for benefit accruals for service after January 1, 2010.
    (ii) Conclusion. Because, under Plan E, Participant B is 
entitled to the sum of (A) The greater of the $45,000 opening 
hypothetical account balance (increased by attributable interest 
credits) and $44,750 (present value of the benefit with respect to 
service prior to January 1, 2010, using the actuarial factors for 
mandatory cashout distributions under the terms of the plan on 
December 31, 2009), plus (B) An amount equal to B's hypothetical 
account balance for benefit accruals for service after January 1, 
2010, the benefit satisfies the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant B. If 
Participant B's hypothetical account balance under Plan E was 
instead less than $44,750 on January 1, 2013, Participant B would be 
entitled to a single sum payment equal to the sum of $44,750 and an 
amount equal to B's hypothetical account balance for benefit 
accruals for service after January 1, 2010.

    Example 6. (i) Facts involving addition of new annuity optional 
form of benefit. The facts are the same as in Example 2, except 
that, after December 31, 2009, and before January 1, 2013, Plan E is 
amended to offer payment in a 5-, 10-, or 15-year term certain and 
life annuity, using the same actuarial assumptions that apply for 
other optional forms of distribution. When Participant A has a 
severance from employment on January 1, 2013, A elects (with spousal 
consent) a 5-year term certain and life annuity commencing 
immediately equal to $935 per month. Application of the same 
actuarial assumptions to Participant A's benefit of $1,000 per month 
(under Plan E as in effect on December 31, 2009), commencing 
immediately on January 1, 2013, would result in a 5-year term 
certain and life annuity commencing immediately equal to $955 per 
month. Under the terms of Plan E, the benefit attributable to A's 
opening account balance is increased so that, using the conversion 
factors under the plan (as amended) on January 1, 2013, A's opening 
hypothetical account balance (increased by attributable interest 
credits) produces a 5-year term certain and life annuity commencing 
immediately equal to $955 per month commencing on January 1, 2013. 
This benefit is in addition to the benefit determined using the 
January 1, 2013, hypothetical account balance for service after 
January 1, 2010.
    (ii) Conclusion. This benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant 
A.
    Example 7. (i) Facts involving addition of distribution option 
before age 55. The facts are the same as in Example 5, except that 
Participant B (age 43) elects (with spousal consent) a straight life 
annuity. Under Plan E, the straight life annuity attributable to 
Participant B's opening hypothetical account balance at age 43 is 
$221 per month. Application of the same actuarial assumptions to 
Participant B's benefit of $1,000 per month (under Plan E as in 
effect on December 31, 2009), commencing immediately on January 1, 
2013, would result in a straight life annuity at age 43 equal to 
$219 per month.
    (ii) Conclusion. Because, under its terms, Plan E provides that 
Participant B is entitled to an amount not less than the present 
value (using the same actuarial assumptions as apply on January 1, 
2013, in converting the $45,000 hypothetical account balance 
attributable to the opening hypothetical account balance to the $221 
straight life annuity) of Participant B's straight life annuity of 
$1,000 per month commencing at January 1, 2035, and the $221 
straight life annuity is in addition to the benefit accruals for 
service after January 1, 2010, payment of

[[Page 73697]]

the $221 monthly annuity would satisfy the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant B.

    (d) Market rate of return--(1) In general--(i) Basic test. Subject 
to paragraph (d)(3) of this section, a statutory hybrid plan satisfies 
the requirements of section 411(b)(1)(H) and this paragraph (d) only 
if, for any plan year, the interest crediting rate under the terms of 
the plan is no greater than a market rate of return.
    (ii) Definition of interest crediting rate and interest credit. For 
purposes of this paragraph (d), a plan's interest crediting rate means 
the rate by which a participant's benefit is increased under the 
ongoing terms of the plan to the extent the amount of the increase is 
not conditioned on current service, regardless of how the amount of 
that increase is calculated. The amount of such an increase is an 
interest credit. Thus, whether the amount is an interest credit for 
this purpose is determined without regard to whether the amount is 
calculated by reference to a rate of interest, a rate of return, an 
index, or otherwise.
    (iii) Single rates. Except as is otherwise provided in this 
paragraph (d)(1), an interest crediting rate is not in excess of a 
market rate of return only if the plan provides an interest credit for 
the year at a rate that is equal to one of the following rates that is 
specified in the terms of the plan:
    (A) The interest rate on long-term investment grade corporate bonds 
(as described in paragraph (d)(4) of this section);
    (B) An interest rate that is deemed to be not in excess of a market 
rate of return under paragraph (d)(5) of this section; or
    (C) An interest rate that is described in paragraph (d)(6) of this 
section.
    (iv) Timing rules--(A) In general. A plan must specify the timing 
for determining the plan's interest crediting rate that will apply for 
each plan year (or portion of a plan year) using either of the methods 
described in paragraph (d)(1)(iv)(B) of this section and must specify 
the frequency of interest crediting under the plan pursuant to 
paragraph (d)(1)(iv)(C) of this section.
    (B) Methods to determine interest crediting rate. A plan is 
permitted to provide daily interest credits using a daily interest 
crediting rate based on the permitted rates specified in paragraph 
(d)(1)(iii) of this section. Alternatively, a plan is permitted to 
provide an interest credit for a stability period that is based on the 
interest crediting rate for a specified lookback month with respect to 
that stability period. The stability period and lookback month must 
satisfy the rules for selecting the stability period and lookback month 
under Sec.  1.417(e)-1(d)(4). (However, the interest rates can be any 
of the rates in paragraph (d)(1)(iii) of this section and the stability 
period and lookback month need not be the same as those used under the 
plan for purposes of section 417(e)(3).)
    (C) Frequency of interest crediting. Interest credits under a plan 
must be made on an annual or more frequent periodic basis. If a plan 
provides for the crediting of interest more frequently than annually 
(for example, monthly or quarterly), then the interest credit for that 
period must be a pro rata portion of the annual interest credit. Thus, 
for example, if a plan's terms provide for interest to be credited 
monthly and for the interest crediting rate to be equal to the interest 
rate on long-term investment grade corporate bonds (as described in 
paragraph (d)(4) of this section), and that interest rate for a plan 
year is 6 percent, the accumulated benefits at the beginning of each 
month would be increased by 0.5 percent per month during the plan year. 
Interest credits under the terms of a plan are not treated as creating 
an effective rate of return that is in excess of a market rate of 
return merely because an otherwise permissible interest crediting rate 
is compounded more frequently than annually.
    (v) Lesser rates. An interest crediting rate is not in excess of a 
market rate of return if the plan provides an interest crediting rate 
that, under all circumstances, is always less than one of the rates 
described in paragraph (d)(1)(iii) of this section.
    (vi) Greater-of rates. If a statutory hybrid plan provides for an 
interest credit that is equal to the interest credits determined under 
the greater of 2 or more different interest crediting rates, the 
effective interest crediting rate is not in excess of a market rate of 
return only if each of the different rates satisfies the requirements 
of paragraph (d)(1)(ii) of this section and the additional requirements 
of paragraph (d)(7) of this section are satisfied.
    (2) Preservation of capital requirement--(i) In general. A 
statutory hybrid plan is treated as failing to meet the requirements of 
section 411(b)(1)(H) if the requirements of paragraph (d)(2)(ii) of 
this section are not satisfied.
    (ii) Preservation of capital defined--(A) In general. The 
requirements of this paragraph (d)(2)(ii) are satisfied if the plan 
provides that, as of the participant's annuity starting date, the 
participant's benefit under the plan is no less than the benefit 
determined as of that date based on the sum of the hypothetical 
contributions credited under the plan (or the accumulated percentage of 
the participant's final average compensation, or the participant's 
accrued benefits determined without regard to any indexing under 
section 411(b)(5)(E), as applicable).
    (B) Hypothetical contributions defined. For purposes of this 
paragraph (d)(2)(ii), a hypothetical contribution is any amount 
credited under a statutory hybrid plan other than an interest credit 
(as defined in paragraph (d)(1)(ii) of this section). Thus, if an 
opening hypothetical account balance or opening accumulated percentage 
of the participant's final average compensation is established pursuant 
to paragraph (c)(3) of this section, that opening hypothetical account 
balance or opening accumulated percentage as of the date established is 
treated as a hypothetical contribution and, thus, is taken into account 
for purposes of the preservation of capital requirement of this 
paragraph (d)(2)(ii).
    (3) Plan termination--(i) In general. Except as provided in 
paragraph (d)(3)(ii) of this section, a statutory hybrid plan is 
treated as meeting the requirements of paragraph (d)(1) of this section 
only if the terms of the plan provide that, upon termination of the 
plan, a participant's benefit as of the termination is determined using 
the interest rate and mortality table otherwise applicable for 
determining that benefit under the plan (without regard to termination 
of the plan).
    (ii) Variable interest rates. A statutory hybrid plan is treated as 
meeting the requirements of paragraph (d)(1) of this section only if 
the terms of the plan provide that, upon termination of the plan, any 
interest rate used to determine a participant's benefits under the plan 
(including any interest crediting rate and any interest rate used to 
determine annuity benefits) that is a variable rate is determined as 
the average of the rates of interest used under the plan for that 
purpose during the 5-year period ending on the termination date.
    (4) Long-term investment grade corporate bonds. For purposes of 
this paragraph (d), the rate of interest on long-term investment grade 
corporate bonds means the third segment rate described in section 
430(h)(2)(C)(iii) (determined with or without regard to the transition 
rules of section 430(h)(2)(G)), provided that such rate floats on a 
periodic basis not less frequently than annually. However, for plan 
years beginning prior to January 1, 2008, the rate of interest on long-
term investment grade corporate bonds means the rate described in 
section

[[Page 73698]]

412(b)(5)(B)(ii)(II) prior to amendment by the Pension Protection Act 
of 2006, Public Law 109-280 (120 Stat. 780) (PPA '06).
    (5) Safe harbor rates of interest--(i) Rates based on Treasury 
bonds with margins. An interest crediting rate is deemed to be not in 
excess of a market rate of return if the rate is adjusted at least 
annually and is equal to the sum of any of the following rates of 
interest for Treasury bonds and the associated margin for that interest 
rate:

------------------------------------------------------------------------
       Treasury bond interest rates               Associated margin
------------------------------------------------------------------------
The discount rate on 3-month Treasury       175 basis points.
 Bills.
The discount rate on 12-month or shorter    150 basis points.
 Treasury Bills.
The yield on 1-year Treasury Constant       100 basis points.
 Maturities.
The yield on 3-year or shorter Treasury     50 basis points.
 bonds.
The yield on 7-year or shorter Treasury     25 basis points.
 bonds.
The yield on 30-year or shorter Treasury    0 basis points.
 bonds.
------------------------------------------------------------------------

    (ii) Eligible cost-of-living indices. An interest crediting rate is 
deemed to be not in excess of a market rate of return if the rate is 
adjusted no less frequently than annually and is equal to the rate of 
increase with respect to an eligible cost-of-living index described in 
Sec.  1.401(a)(9)-6, A-14(b), except that for purposes of this 
paragraph (d)(5)(ii), the eligible cost-of-living index described in 
Sec.  1.401(a)(9)-6, A-14(b)(2), is increased by 300 basis points.
    (iii) Additional safe harbors. The Commissioner may, in guidance of 
general applicability, specify additional interest crediting rates that 
are deemed to be not in excess of a market rate of return. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (6) Other interest rates--(i) Reasonable minimum guaranteed rate of 
return. [Reserved]
    (ii) Equity-based rates. [Reserved]
    (7) Combinations of rates of return--(i) In general. If a plan 
provides an interest crediting rate that is equal to the interest 
credits determined under the greater of 2 or more different interest 
crediting rates where each of the different rates satisfies the 
requirements of paragraph (d)(1)(iii) of this section, then the 
interest credits provided by the plan satisfy this paragraph (d)(7) 
only if one or more of the different interest crediting rates under the 
plan are adjusted as provided in paragraphs (d)(7)(iii) or (d)(7)(iv) 
of this section in order to provide that the effective interest 
crediting rate resulting from the use of the greater of 2 or more rates 
does not exceed a market rate of return. This paragraph (d)(7) provides 
the exclusive rules that may be used for this purpose and, therefore, a 
plan does not satisfy the requirements of this paragraph (d) if the 
plan provides for interest credits determined using the greater of 2 or 
more interest crediting rates and that combination of interest 
crediting rates is not specifically permitted by this paragraph (d)(7).
    (ii) Coordination with preservation of capital rule. No adjustment 
under this paragraph (d)(7) is required merely because the plan 
satisfies the requirements of paragraph (d)(2) of this section.
    (iii) Combination of fixed and variable interest rates. [Reserved]
    (iv) Other combinations. [Reserved]
    (8) Section 411(d)(6)--(i) General rule. Except as provided in this 
paragraph (d)(8), to the extent that benefits have accrued under the 
terms of a statutory hybrid plan that entitle the participant to future 
interest credits, an amendment to the plan to change the interest 
crediting rate for such interest credits violates section 411(d)(6) if 
the revised rate under any circumstances could result in a lower 
interest crediting rate as of any date after the applicable amendment 
date of the amendment (within the meaning of Sec.  1.411(d)-3(g)(4)) 
changing the interest crediting rate. For additional rules, see Sec.  
1.411(d)-3(a)(1).
    (ii) Adoption of long-term investment grade corporate bond rate or 
safe harbor rate. An amendment to a statutory hybrid plan to change the 
interest crediting rate for future periods from an interest crediting 
rate described in paragraph (d)(5) of this section to the interest 
crediting rate described in paragraph (d)(4) of this section does not 
constitute a decrease of an accrued benefit and, therefore, does not 
violate section 411(d)(6). However, an amendment described in this 
paragraph (d)(8)(ii) cannot be effective less than 30 days after 
adoption and, on the effective date of the amendment, the new interest 
crediting rate cannot be less than the interest crediting rate that 
would have applied in the absence of the amendment.
    (iii) Other changes not treated as prohibited reduction of accrued 
benefit. [Reserved].
    (e) Definitions--(1) In general. The definitions in this paragraph 
(e) apply for purposes of this section.
    (2) Accumulated benefit. A participant's accumulated benefit at any 
date means the participant's benefit, as expressed under the terms of 
the plan, accrued to that date. For this purpose, the accumulated 
benefit of a participant may be expressed under the terms of the plan 
as either the balance of a hypothetical account or the current value of 
an accumulated percentage of the participant's final average 
compensation, even if the plan defines the participant's accrued 
benefit as an annuity beginning at normal retirement age that is 
actuarially equivalent to that balance or value.
    (3) Lump sum-based benefit formula--(i) In general. A lump sum-
based benefit formula means a benefit formula used to determine all or 
any part of a participant's accumulated benefit under a defined benefit 
plan under which the benefit provided under the formula is expressed as 
the balance of a hypothetical account maintained for the participant or 
as the current value of the accumulated percentage of the participant's 
final average compensation. Whether a benefit formula is a lump sum-
based benefit formula is determined based on how the accumulated 
benefit of a participant is expressed under the terms of the plan, and 
does not depend on whether the plan provides an optional form of 
benefit in the form of a single sum payment.
    (ii) Exception for contributory plans. A participant is not treated 
as having a lump sum-based benefit formula merely because the 
participant is entitled to a benefit under a defined benefit plan that 
is equal to the greater of the otherwise applicable benefit formula and 
the benefit properly attributable to after-tax employee contributions.
    (4) Statutory hybrid benefit formula. A statutory hybrid benefit 
formula means a statutory hybrid benefit formula as defined in Sec.  
1.411(a)(13)-1(d)(3).
    (5) Statutory hybrid plan. A statutory hybrid plan means a defined 
benefit plan that contains a statutory hybrid benefit formula.
    (6) Variable annuity benefit formula. A variable annuity benefit 
formula means a variable annuity benefit formula as defined in Sec.  
1.411(a)(13)-1(d)(4).
    (f) Effective/applicability date--(1) Statutory effective/
applicability dates--(i) In general. Except as provided in paragraph 
(f)(1)(iii) of this section, section 411(b)(5) applies for periods 
beginning on or after June 29, 2005.
    (ii) Conversion amendments. The requirements of section 
411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion amendment (as 
defined in paragraph (c)(4) of this section) that is adopted after, and 
takes effect after, June 29, 2005.

[[Page 73699]]

    (iii) Market rate of return--(A) Plans in existence on June 29, 
2005--(1) In general. In the case of a plan that is in existence on 
June 29, 2005 (regardless of whether the plan is a statutory hybrid 
plan on that date), section 411(b)(5)(B)(i) only applies to plan years 
beginning on or after January 1, 2008.
    (2) Exception for plan sponsor election. Notwithstanding paragraph 
(f)(1)(iii)(A)(1) of this section, a plan sponsor of a plan that is in 
existence on June 29, 2005 (regardless of whether the plan is a 
statutory hybrid plan on that date) may elect to have the requirements 
of section 411(a)(13)(B) and section 411(b)(5)(B)(i) apply for any 
period after June 29, 2005, and before the first plan year beginning 
after December 31, 2007. In accordance with section 1107 of the PPA 
'06, an employer is permitted to adopt an amendment to make this 
election as late as the last day of the first plan year that begins on 
or after January 1, 2009 (January 1, 2011, in the case of a 
governmental plan as defined in section 414(d)) if the plan operates in 
accordance with the election.
    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(b)(5)(B)(i) applies to 
the plan on and after the later of June 29, 2005, and the date the plan 
becomes a statutory hybrid plan.
    (2) Effective/applicability date of regulations. This section 
applies for plan years beginning on or after January 1, 2009 (or, if 
later, the date applicable under paragraph (f)(3) of this section). For 
the periods after the statutory effective date set forth in paragraph 
(f)(1) or (f)(3) of this section and before the regulatory effective 
date set forth in the preceding sentence, a plan must comply with 
section 411(b)(5). During these periods, a plan is permitted to rely on 
the provisions of this section for purposes of satisfying the 
requirements of section 411(b)(5).
    (3) Collectively bargained plans--(i) In general. Notwithstanding 
paragraph (f)(1)(iii) of this section, in the case of a collectively 
bargained plan maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified on or before August 17, 2006, the requirements of section 
411(b)(5)(B)(i) do not apply to plan years beginning before the earlier 
of--
    (A) The later of--
    (1) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006), or
    (2) January 1, 2008; or
    (B) January 1, 2010.
    (ii) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan where a 
collective bargaining agreement applies to some, but not all, of the 
plan participants, the plan is considered a collectively bargained plan 
for purposes of paragraph (f)(3)(i) of this section if at least 25 
percent of the participants in the plan are members of collective 
bargaining units for which the benefit levels under the plan are 
specified under the collective bargaining agreement.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-25025 Filed 12-27-07; 8:45 am]
BILLING CODE 4830-01-P