[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Rules and Regulations]
[Pages 64123-64147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25941]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9505]
RIN 1545-BG36


Hybrid Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations providing guidance 
relating to certain provisions of the Internal Revenue Code (Code) that 
apply to hybrid defined benefit pension plans. These regulations 
provide guidance on changes made by the Pension Protection Act of 2006, 
as amended by the Worker, Retiree, and Employer Recovery Act of 2008. 
These regulations affect sponsors, administrators, participants, and 
beneficiaries of hybrid defined benefit pension plans.

DATES: Effective Date: These regulations are effective on October 19, 
2010.
    Applicability Date: These regulations generally apply to plan years 
that begin on or after January 1, 2011. However, see the ``Effective/
Applicability Dates'' section in this preamble for additional 
information regarding the applicability of these regulations.

FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu, Lauson C. Green, or 
Linda S. F. Marshall at (202) 622-6090 (not a toll-free number).

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 modify the minimum 
vesting standards of section 411(a) and the accrual requirements of 
section 411(b), were added to the Code by section 701(b) of the Pension 
Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA 
'06). Sections 411(a)(13) and 411(b)(5), as well as certain effective 
date provisions related to these sections, were subsequently amended by 
the Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110-
458 (122 Stat. 5092 (2008)) (WRERA '08).
    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(a)(11), 411(c), or 417(e), with respect to 
accrued benefits derived from employer 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 of 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), an applicable defined benefit plan 
is defined as 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

[[Page 64124]]

average compensation. Under section 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 rate of an employee's 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. For this purpose, 
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)(G) provides that, for purposes of 
section 411(b)(5), any reference to the accrued benefit of a 
participant refers to the participant's benefit accrued to date.
    Section 411(b)(5)(B) imposes certain requirements on an applicable 
defined benefit plan in order for the plan to satisfy 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 applicable defined benefit 
plan is treated as failing to meet the requirements of section 
411(b)(1)(H) unless the plan provides that an interest credit (or an 
equivalent amount) of less than zero can in no event result in the 
account balance or similar amount being less than the aggregate amount 
of contributions credited to the account. Section 411(b)(5)(B)(i)(III) 
authorizes the Secretary of the Treasury to 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) contains additional 
requirements 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 a single amendment.
    Section 411(b)(5)(B)(vi) provides special rules for determining 
benefits upon termination of an applicable defined benefit plan. Under 
section 411(b)(5)(B)(vi)(I), an applicable defined benefit plan is not 
treated as satisfying the requirements of section 411(b)(5)(B)(i) 
(regarding permissible interest crediting rates) unless the plan 
provides that, upon plan termination, if the interest crediting rate 
under the plan is a variable rate, the rate of interest used to 
determine accrued benefits under the plan is equal to the average of 
the rates of interest used under the plan during the 5-year period 
ending on the termination date. In addition, under section 
411(b)(5)(B)(vi)(II), the plan must provide that, upon plan 
termination, the interest rate and mortality table used to determine 
the amount of any benefit under the plan payable in the form of an 
annuity payable at normal retirement age is the rate and table 
specified under the plan for this purpose as of the termination date, 
except that if the interest rate is a variable rate, the rate used is 
the average of the rates used under the plan during the 5-year period 
ending on the termination date.
    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 otherwise 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

[[Page 64125]]

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 
(1974)) (ERISA), that are parallel to sections 411(a)(13) and 411(b)(5) 
of the Code. The guidance provided in these regulations with respect to 
the Code also applies for purposes of the parallel amendments to ERISA 
made by section 701(a) of PPA '06.\1\
---------------------------------------------------------------------------

    \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 regulations 
for purposes of ERISA, as well as the Code.
---------------------------------------------------------------------------

    Section 701(c) of PPA '06 added provisions to the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602 (1967)) (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, 
regulations, policies, procedures, or orders concerning equal 
employment opportunity. The Treasury Department and the IRS have 
consulted with the EEOC prior to the issuance of these 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 of 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 (the date PPA '06 was enacted).
    Under section 701(e) of PPA '06, the 3-year vesting rule under 
section 411(a)(13)(B) is generally effective for years beginning after 
December 31, 2007, for a plan in existence on June 29, 2005, while, 
pursuant to the amendments made by section 107(c) of WRERA '08, this 
vesting rule is generally effective for plan years ending on or after 
June 29, 2005, for a plan not in existence on June 29, 2005. The market 
rate of return limitation under section 411(b)(5)(B)(i) is generally 
effective for years beginning after December 31, 2007, for a plan in 
existence on June 29, 2005, while the limitation is generally effective 
for periods beginning on or after June 29, 2005, for a plan not in 
existence on 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, as amended by WRERA '08, 
sections 411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion 
amendment that is adopted on or after, and takes effect on or after, 
June 29, 2005.
    Under section 701(e)(6) of PPA '06, as added by WRERA '08, the 3-
year vesting rule under section 411(a)(13)(B) does not apply to a 
participant who does not have an hour of service after the date the 3-
year vesting rule would otherwise be effective.
    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.
    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).
    Section 1107 of PPA '06 also permits certain amendments to reduce 
or eliminate section 411(d)(6) protected benefits. Except to the extent 
permitted under section 1107 of PPA '06 (or under another statutory 
provision, including section 411(d)(6) and Sec. Sec.  1.411(d)-3 and 
1.411(d)-4), 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. 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.
    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\
---------------------------------------------------------------------------

    \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), 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), the Treasury 
Department and the IRS announced the withdrawal of the 2002 proposed 
regulations relating to age discrimination.
---------------------------------------------------------------------------

    Notice 96-8 (1996-1 CB 359), see Sec.  601.601(d)(2)(ii)(b), 
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 the right to future interest 
credits with respect to an employee's hypothetical account balance is 
not conditioned upon future service and thus accrues 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

[[Page 64126]]

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 were to be 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), cert. denied, 129 S. Ct. 895 (2009); 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 (2007-1 CB 272), see Sec.  601.601(d)(2)(ii)(b), 
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 defined as 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. 
Notice 2007-6 provides a safe 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 the other guidance provided in Part III of Notice 
2007-6, applies pending the issuance of further guidance and, thus, 
does not apply for periods to which these final regulations apply.
    Proposed regulations (REG-104946-07) under sections 411(a)(13) and 
411(b)(5) (2007 proposed regulations) were published by the Treasury 
Department and the IRS in the Federal Register on December 28, 2007 (72 
FR 73680). The Treasury Department and the IRS received written 
comments on the 2007 proposed regulations and a public hearing was held 
on June 6, 2008.
    Announcement 2009-82 (2009-48 IRB 720) and Notice 2009-97 (2009-52 
IRB 972), see Sec.  601.601(d)(2)(ii)(b), announced certain expected 
relief with respect to the requirements of section 411(b)(5). In 
particular, Announcement 2009-82 stated that the rules in the 
regulations specifying permissible market rates of return are not 
expected to go into effect before the first plan year that begins on or 
after January 1, 2011. In addition, Notice 2009-97 stated that, once 
final regulations under sections 411(a)(13) and 411(b)(5) are issued, 
it is expected that relief from the requirements of section 411(d)(6) 
will be granted for a plan amendment that eliminates or reduces a 
section 411(d)(6) protected benefit, provided that the amendment is 
adopted by the last day of the first plan year that begins on or after 
January 1, 2010, and the elimination or reduction is made only to the 
extent necessary to enable the plan to meet the requirements of section 
411(b)(5).\3\ Notice 2009-97 also extended the deadline for amending 
cash balance and other applicable defined benefit plans, within the 
meaning of section 411(a)(13)(C), to meet the requirements of section 
411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5), 
relating to vesting and other special rules applicable to these plans. 
Under Notice 2009-97, the deadline for these amendments is the last day 
of the first plan year that begins on or after January 1, 2010.
---------------------------------------------------------------------------

    \3\ However, see footnote 6 in the preamble to the 2010 proposed 
regulations described in the next paragraph.
---------------------------------------------------------------------------

    After consideration of the comments received in response to the 
2007 proposed regulations, these final regulations generally adopt the 
provisions of the 2007 proposed regulations with certain modifications 
as described under the heading ``Explanation of Provisions.'' In 
addition, the Treasury Department and the IRS are issuing proposed 
regulations (2010 proposed regulations) that address certain issues 
under sections 411(a)(13) and 411(b)(5) that have not been addressed in 
these final regulations (and that are generally indicated as 
``RESERVED'' in these final regulations), and that also address a 
related issue under section 411(b)(1). The 2010 proposed regulations 
are being issued at the same time as these final regulations.

Explanation of Provisions

Overview

    In general, these final regulations incorporate the transitional 
guidance provided under Notice 2007-6 as well as the provisions of the 
2007 proposed regulations. The regulations adopt the terminology used 
in the proposed regulations (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 
regulations also provide additional guidance with respect to sections 
411(a)(13) and 411(b)(5), taking into account comments received in 
response to the 2007 proposed regulations and also reflecting the 
enactment of WRERA '08.

I. Section 411(a)(13): Applicable Definitions, Relief of Section 
411(a)(13)(A), and Special Vesting Rules for Applicable Defined Benefit 
Plans

A. Definitions

    The regulations under section 411(a)(13) contain certain 
definitions

[[Page 64127]]

that apply both for purposes of the regulations under section 
411(a)(13) and the regulations under section 411(b)(5). 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 
final 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). As in 
the 2007 proposed regulations, the regulations use the term ``statutory 
hybrid plan'' to refer to an applicable defined benefit plan described 
in section 411(a)(13)(C). Under the regulations, a statutory hybrid 
plan is a defined benefit plan that contains a statutory hybrid benefit 
formula, and a ``statutory hybrid benefit formula'' is 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.
    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 accumulated benefit provided under 
the formula is expressed as the current 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. 
The final regulations adopt the rules of the 2007 proposed regulations 
whereby the determination as to whether a benefit formula is a lump 
sum-based benefit formula is made 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. Similarly, a formula does not fail to be 
a lump sum-based benefit formula merely because the plan's terms state 
that the participant's accrued benefit is an annuity at normal 
retirement age that is actuarially equivalent to the balance of a 
hypothetical account maintained for the participant.
    The preamble to the 2007 proposed regulations asked for comments on 
plan formulas that calculate benefits as the current value of an 
accumulated percentage of the participant's final average compensation 
(often referred to as ``pension equity plans'' or ``PEPs''). Commenters 
indicated that some of these plans never credit interest, directly or 
indirectly, some explicitly credit interest after cessation of PEP 
accruals, and some do not credit interest explicitly but provide for 
specific amounts to be payable after cessation of accruals (both 
immediately and at future dates) based on actuarial equivalence using 
specified actuarial factors applied after cessation of accruals.
    In response to these comments, the final regulations clarify that a 
benefit formula is expressed as the balance of a hypothetical account 
maintained for the participant if it is expressed as a current single-
sum dollar amount. A lump sum-based benefit formula that credits 
interest is subject to the market rate of return rules, so that in any 
case in which a PEP formula provides for interest credits after 
cessation of PEP accruals, the interest credits are subject to the 
market rate of return rules.
    The 2007 proposed regulations contained a rule whereby a benefit 
formula would not have been treated as a lump sum-based benefit formula 
with respect to a participant merely because the participant is 
entitled to a benefit that is not less than the benefit properly 
attributable to after-tax employee contributions. In response to 
comments received that this rule be broadened, the final regulations 
provide that the benefit properly attributable to after-tax employee 
contributions, rollover contributions, and other similar employee 
contributions is disregarded when determining whether a benefit formula 
is a lump sum-based benefit formula with respect to a participant. 
Thus, for example, a plan is not a statutory hybrid plan with a lump 
sum-based benefit formula with respect to a participant merely because 
the plan provides that the participant's benefit is equal to the sum-of 
or greater-of the benefit properly attributable to employee 
contributions and the benefit under a traditional defined benefit 
formula.
    The regulations provide that a benefit is not properly attributable 
to employee contributions if such contributions are credited with 
interest at a rate that exceeds a reasonable rate of interest or if the 
conversion factors used to calculate the benefit based on such employee 
contributions are not actuarially reasonable. The regulations clarify 
that section 411(c) merely provides an example of an acceptable 
methodology for purposes of determining the benefit that is properly 
attributable to employee contributions.
    The 2007 proposed regulations provided that 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 
accumulated 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 smaller annual benefit at normal retirement age 
(or at benefit commencement, if later) for the participant, when 
compared to a similarly situated, younger individual who is or could be 
a participant in the plan. A number of commenters suggested that the 
rule in the 2007 proposed regulations was too broad generally and also 
suggested that certain types of plans, such as plans described in 
section 411(b)(5)(E), be exempted entirely. However, the Treasury 
Department and the IRS believe that a key purpose of sections 
411(a)(13) and 411(b)(5) is to address defined benefit plan formulas 
where younger participants receive a larger annual benefit at normal 
retirement age when compared to similarly situated, older participants. 
Therefore, the final regulations do not significantly narrow the 
definition of a benefit formula that has an effect similar to a lump 
sum-based benefit formula.
    The regulations clarify that 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 accumulated benefit is 
expressed as a benefit that includes adjustments (including a formula 
that provides for indexed benefits described in section 411(b)(5)(E)) 
for a future period and the total dollar amount of the adjustments is 
reasonably expected to be smaller for the participant, when compared to 
a similarly situated, younger individual who is or could be a 
participant in the plan. Thus, a formula that provides that a 
participant's accumulated benefit is expressed as a benefit that 
includes the right to periodic adjustments is treated as having an 
effect similar to a lump sum-based benefit formula based on a 
comparison of the expected total dollar amount of the adjustments 
through benefit commencement, rather than the expected total 
accumulated benefit after application of these adjustments.
    As in the 2007 proposed regulations, the regulations provide that a 
benefit formula under a plan has an effect similar to a lump sum-based 
benefit formula where the right to future adjustments accrues at the 
same time as the benefit that is subject to those adjustments. In 
addition, the regulations provide that a benefit formula that does not 
include adjustments is nevertheless treated as a formula with an effect 
similar to a lump sum-based benefit formula where benefits are adjusted

[[Page 64128]]

pursuant to a pattern of repeated plan amendments and the total dollar 
amount of those adjustments is reasonably expected to be smaller for 
the participant than for any similarly situated, younger individual who 
is or could be a participant. See Sec.  1.411(d)-4, A-1(c)(1).
    Like the 2007 proposed regulations, the regulations provide that 
certain benefits are disregarded when determining whether a benefit 
formula has an effect similar to a lump sum-based benefit formula. For 
example, the regulations 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, benefits properly attributable to certain 
employee contributions that are disregarded for purposes of determining 
whether a participant is treated as having a lump-sum based benefit 
formula are also disregarded for purposes of determining whether a 
formula has an effect similar to a lump sum-based benefit formula.
    The regulations include an example that illustrates that a defined 
benefit formula is not treated as a statutory hybrid benefit formula 
merely because the formula provides for actuarial increases after 
normal retirement age. This is because actuarial increases after normal 
retirement age do not provide smaller adjustments for older 
participants when compared to similarly situated, younger participants.
    The 2007 proposed regulations provided that variable annuity 
benefit formulas with assumed interest rates (sometimes referred to as 
``hurdle rates'') of at least 5 percent are not treated as having an 
effect similar to a lump sum-based benefit formula. A number of 
commenters requested that the regulations extend this rule to variable 
annuity plans with lower hurdle rates. However, plans with lower hurdle 
rates are more likely to provide positive adjustments for future 
periods than plans with higher hurdle rates and, as a result, younger 
participants are more likely to receive a meaningfully larger total 
dollar amount of adjustments than older participants under these plans. 
The Treasury Department and the IRS are concerned that exempting these 
plans would mean that participants would lose the protections afforded 
to participants in statutory hybrid plans (including 3-year vesting and 
conversion protection). Therefore, the final regulations retain the 
rule whereby 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 5 percent or higher. Such an 
annuity does not have an effect similar to a lump sum-based benefit 
formula even if post-annuity starting date adjustments are made using a 
specified assumed interest rate that is less than 5 percent.

B. Relief Under Section 411(a)(13)(A)

    The regulations reflect new section 411(a)(13)(A) by providing that 
a statutory hybrid plan is not treated as failing to meet the 
requirements of section 411(a)(2), or, with respect to the 
participant's accrued benefit derived from employer contributions, the 
requirements of sections 411(a)(11), 411(c), or 417(e), merely because 
the plan provides that the present value of benefits as determined 
under a lump sum-based benefit formula is equal to the then-current 
balance of the hypothetical account maintained for the participant or 
the then-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 the accrued benefit 
under section 411(a)(7)(A) (which generally defines the participant's 
accrued benefit as the annual benefit commencing at normal retirement 
age), nor does it alter the definition of the normal retirement benefit 
under section 411(a)(9) (which generally defines the participant's 
normal retirement benefit as the benefit under the plan commencing at 
normal retirement age).
    Section 411(a)(13)(A) applies only with respect to a benefit 
provided under a lump sum-based benefit formula. A statutory hybrid 
plan that provides benefits under a benefit formula that is a statutory 
hybrid benefit formula other than a lump sum-based benefit formula 
(such as a plan that provides for indexing as described in section 
411(b)(5)(E)) must comply with the present value rules of section 
417(e) with respect to an optional form of benefit that is subject to 
the requirements of section 417(e).
    The regulations do not provide guidance as to how section 
411(a)(13)(A) applies with respect to payments that are not made in the 
form of a single-sum distribution of the hypothetical account balance 
or accumulated percentage of final average compensation, such as 
payments made in the form of an annuity. That issue is being addressed 
in the 2010 proposed regulations.

C. Special Vesting Rules for Applicable Defined Benefit Plans

    Pursuant to section 411(a)(13)(B), the regulations 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 treated as failing to satisfy 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 derived from employer contributions if 
the participant has 3 or more years of service. As in the 2007 proposed 
regulations, the final regulations provide that this requirement 
applies on a participant-by-participant basis and applies to the 
participant's entire benefit derived from employer contributions under 
a statutory hybrid plan (not just the portion of the participant's 
benefit that is determined under a statutory hybrid benefit formula). 
Furthermore, the regulations retain the rule under which, if a 
participant is entitled to the greater of two (or more) benefit amounts 
under a plan, where each amount is determined under a different benefit 
formula (including a benefit determined pursuant to an offset among 
formulas within the plan or a benefit determined as the greater of a 
protected benefit under section 411(d)(6) and another benefit amount), 
at least one of which is a benefit calculated under a statutory hybrid 
benefit formula, the 3-year vesting requirement applies to that 
participant's entire accrued benefit under the plan even if the 
participant's benefit under the statutory hybrid benefit formula is 
ultimately smaller than under the other formula.
    The 2007 proposed regulations requested comments regarding the 
application of the 3-year vesting requirement to a floor plan that is 
not a statutory hybrid plan but that is part of a floor-offset 
arrangement with an independent plan that is a statutory hybrid plan. A 
number of commenters suggested that the 3-year vesting requirement 
should apply on a plan-by-plan basis, without regard to whether a plan 
is part of a floor-offset arrangement. In contrast, one commenter 
suggested that the 3-year vesting requirement should apply to both 
plans that are part of a floor-offset arrangement even if only one of 
the plans is a statutory hybrid plan, because the commenter felt that 
determining the amount of the offset in an arrangement involving plans 
with different vesting schedules would be inherently difficult. 
However, this concern is mitigated because, in the view of the Treasury

[[Page 64129]]

Department and the IRS, a floor-offset arrangement where the benefit 
payable under a floor plan is reduced by the benefit payable under an 
independent plan is only permissible if the arrangement limits the 
offset to amounts that are vested under the independent plan.\4\ 
Therefore, the regulations retain the rule whereby the 3-year vesting 
requirement is limited to plans that contain a statutory hybrid benefit 
formula and provide an example illustrating this rule with respect to a 
floor-offset arrangement where the benefit payable under a floor plan 
that does not include a statutory hybrid benefit formula is reduced by 
the vested accrued benefit payable under an independent plan that 
includes a statutory hybrid benefit formula.
---------------------------------------------------------------------------

    \4\ See Rev. Rul. 76-259 (1976-2 CB 111), see Sec.  
601.601(d)(2)(ii)(b).
---------------------------------------------------------------------------

II. Section 411(b)(5): Safe Harbor for Age Discrimination, Conversion 
Protection, and Market Rate of Return Limitation

A. Safe Harbor for Age Discrimination

    The regulations reflect new section 411(b)(5)(A), which provides 
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 age discrimination rule of section 
411(b)(1)(H)(i).
    As in the 2007 proposed regulations, the regulations provide that 
the safe harbor standard under section 411(b)(5)(A) is 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 current 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. Similarly, if the accumulated 
benefit of a participant is expressed under the plan terms as the 
current 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 current balance of a 
hypothetical account or the current value of the accumulated percentage 
of the participant's final average compensation, respectively.
    The regulations 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, as in the 2007 proposed 
regulations, the regulations 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. 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. For example, if the benefit formula under a plan is changed from 
one type to another for employees hired after the effective date of the 
change, employees hired after the relevant date would not be similarly 
situated with employees hired before that date because the benefit 
formula for new hires is not based directly nor indirectly on age.
    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, like the 2007 proposed regulations, the regulations 
provide that the safe harbor is generally not available with respect to 
a participant if the benefit of any similarly situated, younger 
individual is expressed in a different form than the participant's 
benefit. Thus, for example, 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 the current 
balance of a hypothetical account.
    Like the 2007 proposed regulations, the regulations generally 
permit a plan that provides the sum-of or 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 purposes of the safe harbor 
comparisons involving greater-of and sum-of benefit formulas, the 2007 
proposed regulations contained a rule where a similarly situated, 
younger participant would be treated as having an accumulated benefit 
of zero under a benefit formula that does not apply to the participant. 
While the sum-of and greater-of provisions are organized differently in 
these regulations, the regulations effectively retain this rule because 
sum-of and greater-of formulas are eligible for the safe harbor even 
where older participants receive benefits expressed in a different form 
than the benefits of similarly situated, younger participants, as long 
as younger participants are not entitled to benefits expressed in a 
different form than the benefits of similarly situated, older 
participants.
    Several commenters requested that the regulations clarify that the 
safe harbor is also available to plans that allow older participants to 
choose, at the time a new statutory hybrid benefit formula goes into 
effect, whether to receive a benefit under the statutory hybrid benefit 
formula or under the pre-existing traditional defined benefit formula. 
In response to such comments, the regulations adopt similar rules as 
the sum-of and greater-of rules for plans that provide participants 
with the choice of benefits that are expressed in two or more different 
forms.
    As part of the sum-of, greater-of, and choice-of rules, the 
regulations reflect the fact that the sum of benefits expressed in two 
or more forms is never less than the greater of the same benefits and 
that the greater of benefits expressed in two or more forms is never 
less than the choice of the same benefits. As a result, the regulations 
provide that in order for the safe harbor to be available with respect 
to a participant who is provided with the greater of benefits expressed 
in two or more different forms, the plan must not provide any similarly 
situated, younger participant with the sum of the same

[[Page 64130]]

benefits. Similarly, the regulations provide that in order for the safe 
harbor to be available with respect to a participant who is provided 
with the choice of benefits expressed in two or more different forms, 
the plan must not provide any similarly situated, younger participant 
with either the sum of or the greater of the same benefits. In 
addition, in order for the safe harbor to be available, the plan cannot 
provide for any other relationship between benefits expressed in 
different forms other than sum-of, greater-of, or choice-of benefits.
    The regulations 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 ERISA and ADEA. The regulations incorporate the 
provisions of section 411(b)(5)(D) (relating to permitted disparity 
under section 401(l)) without providing additional guidance. These 
rules are unchanged from the 2007 proposed regulations.
    The regulations contain a number of new examples that illustrate 
the application of the safe harbor under various fact patterns. One of 
these examples illustrates that the safe harbor is not satisfied in the 
case of a plan that contains a suspension of benefits provision that 
reduces or eliminates interest credits for participants who continue in 
service after normal retirement age.
    The regulations also reflect new section 411(b)(5)(E), which 
provides for the disregard of certain indexing of benefits for purposes 
of the age discrimination rules of section 411(b)(1)(H). As in the 2007 
proposed regulations, the regulations limit the disregard of indexing 
to formulas under defined benefit plans other than lump sum-based 
formulas. In addition, the regulations clarify that the disregard of 
indexing is limited 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 be accomplished by 
application of a recognized investment index or methodology. The 2007 
proposed regulations limited a recognized investment index or 
methodology to an eligible cost-of-living index as described in Sec.  
1.401(a)(9)-6, A-14(b), 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. The final regulations expand the list of what constitutes a 
recognized index or methodology by treating any rate of return that 
satisfies the market rate of return rules under these regulations as a 
recognized index or methodology.
    As under the 2007 proposed regulations, the section 
411(b)(5)(E)(ii) protection against loss (``no-loss'') requirement for 
an indexed plan (which requires that the indexing not result in a 
smaller accrued benefit than if no indexing had applied) is implemented 
under the final regulations 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 section II. C. of this preamble.) The 
final regulations clarify that variable annuity benefit formulas (as 
defined in the regulations) are exempt from the no-loss and 
preservation of capital rules.

B. Conversion Protection

    The regulations provide guidance on the new conversion protections 
under section 411(b)(5)(B)(ii), (iii), and (iv) which is similar to the 
2007 proposed regulations. Under the regulations, a participant whose 
benefits are affected by a conversion amendment that was both adopted 
and effective on or 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 assures 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 2007 proposed regulations included an alternative mechanism 
under which a plan could provide for the establishment of an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation as part of the conversion and 
keep separate track of (1) the benefit attributable to the opening 
hypothetical account balance (including interest credits attributable 
thereto) or attributable to the opening accumulated percentage of the 
participant's final average compensation and (2) the benefit 
attributable to post-conversion service under the post-conversion 
benefit formula. Comments on this rule were favorable and it is 
retained under the final regulations. A variety of examples 
illustrating application of the alternative are included in the 
regulations. Under this alternative, when a participant commences 
benefits, it must be determined whether the benefit attributable to the 
opening hypothetical account or attributable to the opening accumulated 
percentage that is 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 that was 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. If the benefit 
attributable to the opening hypothetical account balance or opening 
accumulated percentage is greater, then the plan must provide that such 
benefit is paid in lieu of the pre-conversion benefit, in addition to 
the benefit attributable to post-conversion service under the post-
conversion benefit formula. If the benefit attributable to the opening 
hypothetical account balance or opening accumulated percentage is less, 
then the plan must provide that such benefit will be increased 
sufficiently to provide the pre-conversion benefit, in addition to the 
benefit attributable to post-conversion service under the post-
conversion benefit formula.
    As in the 2007 proposed regulations, the final regulations provide 
under this alternative 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 (such as a single-sum 
distribution) 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.
    The preamble to the 2007 proposed regulations asked for comments on 
another alternative means of satisfying the conversion requirements 
that would involve establishing an opening hypothetical account 
balance, but would not require a comparison of benefits at the annuity 
starting date if certain requirements are met. Comments on this 
alternative were favorable, but some commenters requested that the 
alternative only be available where there was sufficient protection to 
ensure that

[[Page 64131]]

participants' benefits would not be less than would apply under the 
rules in the 2007 proposed regulations. While these final regulations 
do not permit this additional alternative, it is included in the 2010 
proposed regulations.
    The regulations also provide guidance that is unchanged from the 
2007 proposed regulations on what constitutes a conversion amendment 
under section 411(b)(5)(B)(v). Under the final regulations, whether an 
amendment is a conversion amendment is determined on a participant-by-
participant basis. The regulations provide that an amendment (including 
multiple 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 regulations clarify 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. As 
under the 2007 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 formula expressed as the balance of a 
hypothetical account). However, in the absence of coordination between 
the formulas, the special requirements for conversion amendments 
typically will be satisfied automatically.
    A number of commenters recommended that the effective date of a 
conversion amendment generally be the date accruals begin under a 
statutory hybrid benefit formula, rather than the date that future 
accruals are reduced under the non-statutory hybrid benefit formula. 
Several commenters suggested that, if this recommendation was not 
implemented generally, it should nevertheless apply at the effective 
date of an amendment which provides participants with the greater of 
benefits under the prior formula and a statutory hybrid benefit formula 
for a period of time before benefit accruals cease under the prior 
formula, especially if the amendment applies to a subgroup of existing 
older, long service employees. However, some comments expressed concern 
that such a change in the proposed definition of the effective date of 
a conversion amendment would allow plans to delay the statutory anti-
wearaway protections by adding a less valuable cash balance benefit for 
the grandfathered group at a date, even though ``the effect of 
converting'' (within the meaning of section 411(b)(5)(B)(v)(I)) their 
traditional benefit into a cash balance benefit would occur for them at 
the later date when their benefit accruals cease under the prior 
formula.
    The Treasury Department and the IRS are concerned that the 
requested change in the proposed rule would circumvent a key purpose 
behind the conversion protection requirements by allowing for a delayed 
wear-away that would occur at the time accruals cease under the prior 
formula. For example, if a plan were generally converted to a cash 
balance plan, but the plan were to provide for some class of 
participants, such as participants who are age 55 or older, to receive 
the greater of accruals under the prior formula or the new cash balance 
formula for a period of 5 years, the change requested in the comments 
would define the effective date of the conversion amendment for all 
participants to be the date the cash balance formula went into effect 
(rather than applying a participant by participant rule). As a result, 
5 years after the cash balance formula went into effect, the 
hypothetical account balance for these older participants could provide 
benefits that are less than the frozen amount under the prior formula, 
a circumstance that would produce no additional accruals for some 
period of time after the end of the 5-year period. Therefore, the 
approach suggested by these comments would allow the type of wear-away 
the statute was intended to prevent. Accordingly, like the 2007 
proposed regulations, the regulations adopt a rule whereby the 
effective date of a conversion amendment is, with respect to a 
participant, the date as of which the reduction occurs in 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 regulations 
provide that the date future benefit accruals are reduced cannot be 
earlier than the date of adoption of the conversion amendment.
    The regulations provide rules, similar to those in the 2007 
proposed regulations, prohibiting the avoidance of the conversion 
protections through the use of multiple plans or multiple employers. 
Under these rules, 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 employee's old and new 
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 regulations retain the rule from the 2007 proposed regulations 
under which a conversion amendment also includes multiple amendments 
that result in a conversion amendment, even if the amendments would not 
be conversion amendments individually. 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 benefits under a non-
statutory hybrid benefit formula, 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 is a presumption that the amendments are not 
consolidated unless the facts and circumstances indicate that adoption 
of an amendment to provide a benefit

[[Page 64132]]

under a statutory hybrid benefit formula was intended at the time of 
the reduction in the non-statutory hybrid benefit formula benefits.
    A number of commenters expressed concern that the interaction 
between employee transfers and the conversion protection effective date 
provisions was unclear under the 2007 proposed regulations. In response 
to such comments, the regulations clarify that a conversion amendment 
must be both adopted on or after June 29, 2005, and be effective on or 
after June 29, 2005, in order for the conversion protection provisions 
to apply to such amendment. Therefore, if a transfer provision was 
adopted before June 29, 2005, an employee transfer is not treated as 
part of a conversion amendment to which the conversion protection 
provisions apply, even if the transfer occurs on or after June 29, 
2005.

C. Market Rate of Return Limitation

    The regulations 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 with 
respect to benefits determined under a statutory hybrid benefit formula 
that is in excess of a market rate of return. Several commenters 
suggested that the definition of interest crediting rate in the 2007 
proposed regulations be revised to exclude not only adjustments 
conditioned on current service but also adjustments made as a result of 
past and imputed service as well as ad hoc adjustments. In response to 
the comments, the regulations expand the exclusions from the definition 
of interest credit to also exclude adjustments made as a result of 
imputed service, as well as certain one-time adjustments.
    The final regulations provide that an interest credit generally 
means any increase or decrease for a period to a participant's 
accumulated benefit under a statutory hybrid benefit formula, under the 
terms of the plan at the beginning of the period, that is calculated by 
applying a rate of interest or rate of return (including a rate of 
increase or decrease under an index) to the participant's accumulated 
benefit (or a portion thereof) as of the beginning of the period, to 
the extent the increase or decrease is not conditioned on current 
service and is not made on account of imputed service; as well as any 
other increase for a period to a participant's accumulated benefit 
under a statutory hybrid benefit formula, under the terms of the plan 
at the beginning of the period, to the extent the increase is not 
conditioned on current service and is not made on account of imputed 
service.
    Under the regulations, notwithstanding the general rule described 
in the previous paragraph, an increase to a participant's accumulated 
benefit is not treated as an interest credit to the extent the increase 
is made as a result of a plan amendment providing for a one-time 
adjustment to the participant's accumulated benefit. However, a pattern 
of repeated plan amendments each of which provides for a one-time 
adjustment to a participant's accumulated benefit will cause such 
adjustments to be treated as provided on a permanent basis under the 
terms of the plan.
    The interest crediting rate for a period with respect to a 
participant generally equals the total amount of interest credits for 
the period divided by the participant's accumulated benefit at the 
beginning of the period.
    Under the regulations, a principal credit means any increase to a 
participant's accumulated benefit under a statutory hybrid benefit 
formula that is not an interest credit. As a result, a principal credit 
includes an increase to a participant's accumulated benefit to the 
extent the increase is conditioned on current service or made on 
account of imputed service. Thus, for example, even if the plan 
denominates an increase to a hypothetical account balance as an 
interest credit, the increase is treated as a principal credit to the 
extent the increase is conditioned on current service. Similarly, a 
principal credit includes an increase to the current value of an 
accumulated percentage of the participant's final average compensation. 
For indexed benefits, a principal credit includes an increase to the 
participant's accrued benefit other than an increase provided by 
indexing. In addition, pursuant to the rule set forth earlier, a 
principal credit generally includes an increase to a participant's 
accumulated benefit to the extent the increase is made as a result of a 
plan amendment providing for a one-time adjustment to the participant's 
accumulated benefit. Thus, for example, a principal credit includes an 
opening hypothetical account balance or opening accumulated percentage 
of the participant's final average compensation.
    Consistent with the requirement under Sec.  1.401-1(b)(1)(i) that a 
pension plan provide definitely determinable benefits, a plan that 
credits interest must specify how the plan determines interest credits 
and must specify how and when interest credits are credited. Under the 
regulations, a plan must determine 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 using the applicable periodic 
interest crediting rate that applies over the current period or, for 
certain rates, using the rate that applied in a specified lookback 
month with respect to a 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 regulations require interest credits under a plan 
to be provided on an annual or more frequent periodic basis and also 
require interest credits for each period to be credited as of the end 
of the period. If, under a plan, interest is credited more frequently 
than annually (for example, daily, monthly or quarterly) based on one 
of the permissible annual interest rates, then the plan does not 
provide an above market rate of return if the periodic interest credits 
are provided under an interest crediting rate that is no greater than a 
pro rata portion of the applicable annual interest crediting rate. 
However, the regulations provide a special rule whereby a plan that 
credits interest daily based on one of these annual rates may credit 
interest at a rate which is 1[sol]360th of the applicable annual rate 
(instead of 1[sol]365th) without violating the general rule of the 
preceding sentence. In addition, the regulations provide that interest 
credits based on one of these annual rates are not treated as creating 
an effective rate of return in excess of a market rate of return merely 
because an otherwise permissible interest crediting rate for a plan 
year is compounded more frequently than annually. 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 and the applicable annual rate on 
these bonds for the plan year is 6 percent, then the accumulated 
benefit at the beginning of each month could be increased as a result 
of interest credits by as much as 0.5 percent per month during the plan 
year without resulting in an interest crediting rate that is in excess 
of a market rate of return. These rules are similar to those in the 
2007 proposed regulations.
    The 2007 proposed regulations provided that an interest crediting 
rate is not in excess of a market rate of return if it is always less 
than a particular interest crediting rate that meets the

[[Page 64133]]

market rate of return limitation. A number of commenters suggested that 
this rule be revised to clarify that rates that may sometimes equal but 
are never greater than another permissible rate are also permissible. 
In response to these comments, the final regulations provide that an 
interest crediting rate is not in excess of a market rate of return if 
it can never be in excess of a particular rate that meets the market 
rate of return limitation. Thus, a rate that is a percentage (no 
greater than 100 percent) of a particular rate that meets the market 
rate of return limitation is not in excess of a market rate of return 
and a rate that is a fixed amount less than a particular rate that 
meets the market rate of return limitation is also not in excess of a 
market rate of return. Similarly, an interest crediting rate is not in 
excess of a market rate of return if it always equals the lesser of two 
or more rates where at least one of the rates meets the market rate of 
return limitation.
    In addition, the regulations clarify that a statutory hybrid plan 
does not provide an effective interest crediting rate that is in excess 
of a market rate of return merely because the plan determines an 
interest credit by applying different rates to different predetermined 
portions of the accumulated benefit, provided each rate would 
separately satisfy the market rate of return limitations if the rate 
applied to the entire accumulated benefit. Thus, under this rule, 
statutory hybrid plans may, in effect, provide participants with rates 
that are a blend of two or more rates and may also apply different 
rates to portions of the benefit attributable to different principal 
credits. However, as in the 2007 proposed regulations, the final 
regulations provide that interest credits that are determined by 
applying the greater of two or more rates generally exceed a market 
rate of return except under certain limited circumstances.
    The regulations 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 the 
rate of interest provided under one of several specified indices. Like 
the 2007 proposed regulations, these rates include 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 rate used under 
section 430(h) for subsequent plan years), the interest rate on 30-year 
Treasury securities, the interest rates on shorter term Treasuries with 
the associated margins that were safe harbor rates described in Notice 
96-8, as well as certain cost-of-living indices. Several commenters on 
the 2007 proposed regulations suggested that this list be expanded to 
also include all of the interest rates permissible under section 
417(e). The Treasury Department and the IRS agree with this suggestion 
and, as a result, the regulations expand the list of safe-harbor rates 
to include the first and second segment rates, as defined in either 
section 417(e) or 430(h) and whether calculated with or without regard 
to the transition rules of section 417(e)(3) or 430(h)(2)(G).
    The regulations provide that an interest crediting rate based on a 
specified index must be adjusted on at least an annual basis. These 
rates are market yields to maturity on outstanding bonds and, as a 
result, these rates do not reflect defaults nor do these rates 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. Because the 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 relatively small.
    The regulations also set forth certain interest crediting rates 
that satisfy the statutory market rate of return requirement but that 
are not safe harbor rates. The regulations provide that, in the case of 
indexed benefits as described in section 411(b)(5)(E), an interest 
crediting rate equal to the actual rate of return on the aggregate 
assets of the plan, including both positive returns and negative 
returns, is not in excess of a market rate of return if the plan's 
assets are diversified so as to minimize the volatility of returns. The 
regulations further provide that this requirement that plan assets be 
diversified so as to minimize the volatility of returns does not 
require greater diversification than is required under section 
404(a)(1)(C) of Title I of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406 (88 Stat. 829 (1974)) with respect to 
defined benefit pension plans. Furthermore, the regulations provide 
that the rate of return on the annuity contract for the employee issued 
by an insurance company licensed under the laws of a State is not in 
excess of a market rate of return, subject to an anti-abuse rule. The 
2010 proposed regulations provide that certain additional interest 
crediting rates satisfy the market rate of return limitation.
    The regulations 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 2007 proposed regulations, this 
requirement applied at the participant's annuity starting date. In 
addition, the 2007 proposed regulations provided that the combination 
of this preservation of capital protection with a rate of return that 
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. Responses to these rules were favorable and they 
are retained in these regulations. Hypothetical allocations are 
referred to as principal credits in the regulations, as described 
earlier in this preamble. The regulations clarify that the preservation 
of capital requirement applies to all principal credits that were 
credited under the plan as of the annuity starting date, including 
principal credits that were credited before the statutory effective 
date of the preservation of capital requirement under section 
411(b)(5)(b)(i)(II).
    These regulations do not address section 411(b)(5)(B)(vi), which 
requires that a plan's provisions reflect special rules applicable upon 
plan termination. These plan termination rules are addressed in the 
2010 proposed regulations.
    Section 123 of WRERA '08 amended ADEA to provide that, in the case 
of a governmental plan that is described in the first sentence of 
section 414(d) of the Code,\5\ a rate of return or a method of 
crediting interest established pursuant to any provision of Federal, 
State, or local law is treated as a market rate of return for certain 
purposes under ADEA as long as such rate or method does not violate any 
other requirement of ADEA. No changes have been made to these 
regulations as a result of section 123 of WRERA '08 because that 
provision does not amend the Internal Revenue Code.
---------------------------------------------------------------------------

    \5\ A governmental plan in the first sentence of section 414(d) 
means a plan that is established and maintained for its employees by 
the Government of the United States, by the government of any State 
or political subdivision thereof, or by an agency or instrumentality 
of any of the foregoing.
---------------------------------------------------------------------------

III. Section 411(d)(6): Changes in a Plan's Interest Crediting Rate

    The 2007 proposed regulations provided that, 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

[[Page 64134]]

could result in a lower interest crediting rate as of any date after 
the applicable amendment date of the amendment changing the interest 
crediting rate. Several commenters on the 2007 proposed regulations 
requested clarification of this rule. In particular, one commenter 
noted that there are several circumstances in which an amendment that 
results in a lower interest credit for a particular period after 
amendment than would have been provided for the same period under the 
old rate may not result in a reduction under section 411(d)(6), such as 
where the plan's aggregate interest credits after the applicable 
amendment date but before the period at issue exceeded the interest 
credits that would have been provided under the old rate or where the 
plan was also amended to increase benefits under other provisions, such 
as providing for larger principal credits than were provided before the 
change in interest crediting rates.
    In response to these comments, the regulations clarify that the 
right to interest credits in the future that are not conditioned on 
future service constitutes a section 411(d)(6) protected benefit. Thus, 
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 must comply 
with section 411(d)(6) if the revised rate under any circumstances 
could result in interest credits that are smaller as of any date after 
the applicable amendment date of the plan amendment than the interest 
credits that would have been provided without regard to the amendment.
    The regulations retain the rule in the 2007 proposed regulations 
under which a plan is not treated as providing smaller interest credits 
in the future for purposes of section 411(d)(6) merely because of an 
amendment that changes the plan's interest crediting rate with respect 
to future interest credits from one of the safe harbor market rates of 
interest (for example, a rate based on an eligible cost-of-living index 
or a rate based on Treasury bonds with the margins specified in the 
regulations) to the rate of interest on long-term investment grade 
corporate bonds (the third segment rate under section 417(e) or 
430(h)), if certain requirements are satisfied. Under this rule, the 
change in the interest crediting rates would not result in a reduction 
in accrued benefits in violation of section 411(d)(6) because it is 
expected that an interest crediting rate that equals the third segment 
rate would not provide smaller interest credits as of any date after 
the applicable amendment date than the prior safe harbor interest 
crediting rate, except in rare and unusual circumstances. This special 
rule is only available if the change applies to interest credits to be 
credited after the effective date of the amendment, the effective date 
of the amendment is at least 30 days after adoption and, on the 
effective date of the amendment, the new interest crediting rate is not 
lower than the interest crediting rate that would have applied in the 
absence of the amendment.
    The 2010 proposed regulations provide additional guidance with 
respect to the market rate of return requirements where a plan is 
amended to change its interest crediting rate in the absence of the 
application of a special rule under section 411(d)(6). In such a case, 
in order to satisfy section 411(d)(6), a participant's benefit can 
never be less than the pre-amendment benefit increased for periods 
after the amendment using the pre-amendment interest crediting rate, 
thereby effectively requiring a minimum interest crediting rate.

Effective/Applicability Dates

    The regulations reflect the statutory effective dates set forth in 
section 701(e) of PPA '06. 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)(6) of PPA '06, as amended by WRERA '08, set 
forth a number of special effective/applicability date rules that are 
described earlier in the Background section of the preamble of these 
regulations.
    In addition, these regulations reflect the delayed effective date 
for collectively bargained plans as set forth in section 701(e)(4) of 
PPA '06. This rule delays the effective date for section 
411(b)(5)(B)(i) with respect to 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 2007 proposed regulations included a rule for determining 
whether a plan was collectively bargained if a collective bargaining 
agreement applies to some, but not all, of the plan participants. Under 
that rule, a plan would be considered a collectively bargained plan 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. The same 
proposed rule was included in proposed regulations under section 436 
(REG-113891-07, 72 FR 50544) and, in response to comments, this rule 
was modified in final regulations under section 436 (TD 9467, 74 FR 
53004). Rather than repeat the rule, these regulations incorporate by 
reference the rule under the final section 436 regulations.
    These regulations generally apply to plan years that begin on or 
after January 1, 2011. However, Sec.  1.411(b)(5)-1(d)(1)(iii), 
(d)(1)(vi), and (d)(6)(i), which provide that the regulations set forth 
the exclusive list of interest crediting rates and combinations of 
interest crediting rates that satisfy the market rate of return 
requirement under section 411(b)(5), apply to plan years that begin on 
or after January 1, 2012. For plan years that begin before January 1, 
2012, statutory hybrid plans may utilize a rate that is permissible 
under these final regulations or the 2010 proposed regulations for 
purposes of satisfying the statutory market rate of return requirement. 
In addition, certain paragraphs which are reserved in these regulations 
(at Sec.  1.411(a)(13)-1(b)(2), (b)(3), and (b)(4) and Sec.  
1.411(b)(5)-1(c)(3)(iii), (d)(1)(iv)(D), (d)(2)(ii), (d)(4)(iv), 
(d)(5)(iv), (d)(6)(ii), (d)(6)(iii), (e)(2), (e)(3)(iii), and (e)(4)) 
are addressed in proposed regulations that are being published at the 
same time as these regulations and those paragraphs are proposed to 
apply to plan years that begin on or after January 1, 2012.
    The regulations provide that a benefit formula is not treated as 
having an effect similar to a lump sum-based benefit formula with 
respect to a participant who does not have an hour of service after the 
regulatory effective date. In addition, the regulations provide that, 
with respect to a conversion amendment, where the effective date of the 
conversion amendment (as defined in the regulations) is on or after the 
statutory effective date, the conversion protection requirements in the 
regulations apply only to a participant who has an hour of service on 
or after the regulatory effective date. As a result, participants who 
have an hour of service on or after the regulatory effective date must 
be provided with the minimum benefit required under the regulations 
beginning as of the effective date of a conversion amendment (as 
defined in the regulations), even if the effective date of the 
conversion amendment is before the regulatory effective date.
    For periods after the statutory effective date and before the 
regulatory effective date, the relief of sections 411(a)(13) and 
411(b)(5) applies and the

[[Page 64135]]

requirements of sections 411(a)(13) and 411(b)(5) must be satisfied. 
During the periods set forth in the preceding sentence, a plan is 
permitted to rely on the provisions of these regulations for purposes 
of applying the relief and satisfying the requirements of sections 
411(a)(13) and 411(b)(5). Further, for periods after the statutory 
effective date and before the regulatory effective date, a plan is 
permitted to rely on the provisions of the 2010 proposed regulations, 
the 2007 proposed regulations, and Notice 2007-6 for purposes of 
applying the relief and 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. In 
addition, these regulations should not be construed to create any 
inference concerning sections 411(a)(13) and 411(b)(5) prior to the 
effective date of the regulations.

Special Analyses

    It has been determined that these 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 final 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, the proposed regulations 
preceding these final regulations were submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal authors of these regulations are Neil S. Sandhu, 
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.

Adoption of Amendments to the Regulations

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding the 
following entries:

    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).
* * * * *

0
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--(1) Payment of a current balance or 
current value under a lump sum-based benefit formula. 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 following requirements 
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 then-current balance of the hypothetical account 
maintained for the participant or to the then-current value of the 
accumulated percentage of the participant's final average compensation 
under that formula--
    (i) Section 411(a)(2); or
    (ii) With respect to the participant's accrued benefit derived from 
employer contributions, section 411(a)(11), 411(c), or 417(e).
    (2) Requirements that lump sum-based benefit formula must satisfy 
to obtain relief. [Reserved].
    (3) Alternative forms of distribution under a lump sum-based 
benefit formula. [Reserved].
    (4) Rules of application. [Reserved].
    (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 treated as failing to satisfy 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 three 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 or a benefit determined as the 
greater of a protected benefit under section 411(d)(6) and another 
benefit amount) 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) Examples. The provisions of this paragraph (c) are illustrated 
by the following examples:

    Example 1.  Employer M sponsors Plan X, a defined benefit plan 
under 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 
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 based on 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.
    Example 3.  Employer N sponsors defined benefit Plan Y, an 
independent plan that provides benefits based solely on a lump sum-
based benefit formula, and defined

[[Page 64136]]

benefit Plan Z, which provides benefits based on a formula which is 
not a statutory hybrid benefit formula, but which is a floor plan 
that provides for the benefits payable to a participant under Plan Z 
to be reduced by the amount of the vested accrued benefit payable 
under Plan Y. The formula under Plan Y is a statutory hybrid benefit 
formula. Accordingly, Plan Y is subject to the 3-year vesting 
requirement described in paragraph (c)(1) of this section. The 
formula provided under Plan Z, even taking into account the offset 
for vested accrued benefits under Plan Y, is not a statutory hybrid 
benefit formula. Therefore, Plan Z is not subject to the 3-year 
vesting requirement in paragraph (c)(1) of this section.

    (d) Definitions--(1) In general. The definitions in this paragraph 
(d) 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, if a participant's 
benefit is expressed under the terms of the plan as the current balance 
of a hypothetical account or the current value of an accumulated 
percentage of the participant's final average compensation, the 
participant's accumulated benefit is expressed in that manner 
regardless of how the plan defines the participant's accrued benefit. 
Thus, for example, the accumulated benefit of a participant may be 
expressed under the terms of the plan as either the current 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 accumulated benefit provided under the formula is 
expressed as the current balance of a hypothetical account maintained 
for the participant or as the current value of an accumulated 
percentage of the participant's final average compensation. A benefit 
formula is expressed as the current balance of a hypothetical account 
maintained for the participant if it is expressed as a current single-
sum dollar amount. 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 employee contributions. For purposes of the 
definition of a lump sum-based benefit formula in paragraph (d)(3)(i) 
of this section, the benefit properly attributable to after-tax 
employee contributions, rollover contributions from eligible retirement 
plans under section 402(c)(8), and other similar employee contributions 
(such as repayments of distributions pursuant to section 411(a)(7)(C) 
and employee contributions that are pickup contributions pursuant to 
section 414(h)(2)) is disregarded. However, a benefit is not properly 
attributable to contributions described in this paragraph (d)(3)(ii) if 
the contributions are credited with interest at a rate that exceeds a 
reasonable rate of interest or if the conversion factors used to 
calculate such benefit are not actuarially reasonable. See section 
411(c) for an example of a calculation of a benefit that is properly 
attributable to employee contributions.
    (4) 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--(A) In 
general. Except as provided in paragraphs (d)(4)(ii)(B) through (D) 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 is expressed as a benefit that includes the right 
to adjustments (including a formula that provides for indexed benefits 
under Sec.  1.411(b)(5)-1(b)(2)) for a future period and the total 
dollar amount of those adjustments is reasonably expected to be smaller 
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 
adjustments for any future period is treated as a formula with an 
effect similar to a lump sum-based benefit formula if the formula would 
be described in the preceding sentence except for the fact that the 
adjustments are provided pursuant to a pattern of repeated plan 
amendments. See Sec.  1.411(d)-4, A-1(c)(1).
    (B) Exception for post-retirement benefit adjustments. Post-annuity 
starting date adjustments in the amount 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.
    (C) Exception for 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 5 
percent or higher, then the variable annuity benefit formula is not 
treated as being reasonably expected to provide a smaller total dollar 
amount of future adjustments for the participant than for a similarly 
situated, younger individual 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.
    (D) Exception for employee contributions. Benefits that are 
disregarded under paragraph (d)(3)(ii) of this section (benefits 
properly attributable to certain employee contributions) are also 
disregarded for purposes of determining whether a benefit formula has 
an effect similar to a lump sum-based benefit formula.
    (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 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 on 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 that begin on or 
after January 1, 2008.
    (2) 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).

[[Page 64137]]

    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(a)(13)(B) applies to 
plan years that end on or after June 29, 2005.
    (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 to plan years that begin 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 with respect to 
which 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 it is considered a collectively bargained plan under the rules of 
Sec.  1.436-1(a)(5)(ii)(B).
    (E) Hour of service required. Section 411(a)(13)(B) does not apply 
to a participant who does not have an hour of service after section 
411(a)(13)(B) but would otherwise apply to the participant under the 
rules of paragraph (e)(1)(iii)(A), (B), or (C) of this section.
    (2) Effective/applicability date of regulations--(i) In general. 
Except as provided in paragraph (e)(2)(ii) of this section, this 
section applies to plan years that begin on or after January 1, 2011. 
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, the relief of section 
411(a)(13)(A) applies and the 3-year vesting requirement of section 
411(a)(13)(B) must be satisfied. During these periods, a plan is 
permitted to rely on the provisions of this section for purposes of 
applying the relief of section 411(a)(13)(A) and satisfying the 
requirements of section 411(a)(13)(B).
    (ii) Special effective date. [Reserved].
    (iii) Hour of service required. A benefit formula is not treated as 
having an effect similar to a lump sum-based benefit formula under 
paragraph (d)(4)(ii) of this section with respect to a participant who 
does not have an hour of service after the regulatory effective date 
set forth in paragraph (e)(2)(i) of this section.

0
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--(1) Organization of regulation. This section sets 
forth certain rules for determining whether a reduction occurs in the 
rate of benefit accrual under a defined benefit plan because of the 
attainment of any age for purposes of section 411(b)(1)(H)(i). 
Paragraph (b) of this section describes safe harbors for certain plan 
designs (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. Paragraph (e) of this section 
contains additional rules related to market rates of return. Paragraph 
(f) of this section contains effective/applicability dates.
    (2) Definitions. The definitions of accumulated benefit, lump sum-
based benefit formula, statutory hybrid benefit formula, statutory 
hybrid plan, and variable annuity benefit formula in Sec.  
1.411(a)(13)-1(d) apply for purposes of this section.
    (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) with 
respect to an individual who is or could be a participant if, as of any 
date, the accumulated benefit of the individual would not be less than 
the accumulated benefit of any similarly situated, younger individual 
who is or could be a participant. Thus, this test involves a comparison 
of the accumulated benefit of an individual who is or could be a 
participant in the plan with the accumulated benefit of each 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 
a 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 any one of the following benefit measures, each 
of which is referred to as a safe-harbor formula measure:
    (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 an annuity payable at normal retirement age (or current 
age, if later).
    (B) The current balance of a hypothetical account maintained for 
the participant if the accumulated benefit of the participant under the 
terms of the plan is a balance of a hypothetical account.
    (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 an accumulated 
percentage of final average compensation.
    (ii) Benefit formulas for comparison--(A) In general. Except as 
provided in paragraphs (b)(1)(ii)(B), (C), and (D) of this section, the 
safe harbor provided by section 411(b)(5)(A) and paragraph (b)(1)(i) of 
this section is available only with respect to an individual if the 
individual's accumulated benefit under the plan is expressed in terms 
of only one safe-harbor formula measure and no similarly situated, 
younger individual who is or could be a participant has an accumulated 
benefit that is expressed in terms of any measure other than that same 
safe-harbor formula measure. Thus, for example, if a plan provides that 
the accumulated benefit of participants who are age 55 or over is 
expressed under the terms of the plan as a life annuity payable at 
normal retirement age (or current age if later) as described in 
paragraph (b)(1)(i)(A) of this section and the plan provides that the 
accumulated benefit of participants who are younger than age 55 is 
expressed as the current balance of a hypothetical account as described 
in paragraph (b)(1)(i)(B) of this section, then the safe harbor 
described in section 411(b)(5)(A) and paragraph (b)(1)(i) of this 
section does not apply to individuals who are or could be participants 
who are age 55 or over.
    (B) Sum-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is expressed as the sum of benefits 
determined in terms of two or more benefit formulas, each of which is 
expressed in terms of a different safe-harbor formula measure, then the 
plan is deemed to satisfy paragraph (b)(1)(i) of this section with 
respect to an individual who is or could be a participant, provided 
that the plan satisfies the comparison described in paragraph (b)(1)(i) 
of this section separately for benefits determined in terms of each 
safe-harbor formula measure and no accumulated benefit of a similarly 
situated, younger individual

[[Page 64138]]

who is or could be a participant is expressed other than as--
    (1) The sum of benefits under two or more benefit formulas, each of 
which is expressed in terms of one of those same safe-harbor formula 
measures as is used for the participant's ``sum-of'' benefit;
    (2) The greater of benefits under two or more benefit formulas, 
each of which is expressed in terms of any one of those same safe-
harbor formula measures;
    (3) The choice of benefits under two or more benefit formulas, each 
of which is expressed in terms of any one of those same safe-harbor 
formula measures; or
    (4) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures.
    (C) Greater-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is expressed as the greater of 
benefits under two or more benefit formulas, each of which is 
determined in terms of a different safe-harbor formula measure, then 
the plan is deemed to satisfy paragraph (b)(1)(i) of this section with 
respect to an individual who is or could be a participant, provided 
that the plan satisfies the comparison described in paragraph (b)(1)(i) 
of this section separately for benefits determined in terms of each 
safe-harbor formula measure and no accumulated benefit of a similarly 
situated, younger individual who is or could be a participant is 
expressed other than as--
    (1) The greater of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same 
safe-harbor formula measures as is used for the participant's 
``greater-of'' benefit;
    (2) The choice of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same 
safe-harbor formula measures; or
    (3) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures.
    (D) Choice-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is determined pursuant to a choice by 
the participant between benefits determined in terms of two or more 
different safe-harbor formula measures, then the plan is deemed to 
satisfy paragraph (b)(1)(i) of this section with respect to an 
individual who is or could be a participant, provided that the plan 
satisfies the comparison described in paragraph (b)(1)(i) of this 
section separately for benefits determined in terms of each safe-harbor 
formula measure and no accumulated benefit of a similarly situated, 
younger individual who is or could be a participant is expressed other 
than as--
    (1) The choice of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same 
safe-harbor formula measures as is used for the participant's ``choice-
of'' benefit; or
    (2) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures.
    (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.
    (iv) Examples. The provisions of this paragraph (b)(1) are 
illustrated by the following examples:

    Example 1.  (i) Facts relating to formulas described in 
paragraph (b)(1)(i)(A) of this section. Employer X maintains a 
defined benefit plan that provides a straight life annuity payable 
commencing at normal retirement age (which is age 65) equal to 1 
percent of the participant's highest 3 consecutive years' 
compensation times years of service and provides for suspension of 
benefits as permitted under section 411(a)(3)(B). In the case of a 
participant whose service continues after normal retirement age, the 
amount payable is the greater of (i) the benefit payable at normal 
retirement age, and for each year thereafter, actuarially increased 
to account for delayed commencement, and (ii) the retirement benefit 
determined under the formula at the date the employee's service 
ceases (calculated by including years of service and increases in 
compensation after normal retirement age).
    (ii) Conclusion. Under these facts, the plan formula is a 
formula described in paragraph (b)(1)(i)(A) of this section. The 
formula is not a statutory hybrid benefit formula merely because the 
plan formula includes a benefit that is based on the participant's 
benefit at normal retirement age (and each year thereafter) that is 
actuarially increased for commencement after attainment of normal 
retirement age. In addition, the plan formula would satisfy the 
comparison under paragraph (b)(1)(i) of this section for each 
individual who is or could be a participant because, as of any date 
(including any date after normal retirement age), the accumulated 
benefit of the individual would not be less than the accumulated 
benefit of any similarly situated, younger individual who is or 
could be a participant.
    Example 2.  (i) Facts relating to formulas described in 
paragraph (b)(1)(i)(B) of this section. Employer Y maintains a 
defined benefit plan that expresses each participant's accumulated 
benefit as the balance of a hypothetical account. Under the formula, 
the hypothetical account balance of each participant is credited 
monthly with interest at a specified rate and the hypothetical 
account balance of each employee who is a participant is also 
credited with a pay credit under the plan equal to 7 percent of the 
participant's compensation for the month.
    (ii) Conclusion. The plan formula is a lump sum-based benefit 
formula described in paragraph (b)(1)(i)(B) of this section and the 
formula would satisfy the comparison under paragraph (b)(1)(i) of 
this section for each individual who is or could be a participant 
because, as of any date, the hypothetical account balance of the 
individual would not be less than the hypothetical account balance 
of any similarly situated, younger individual who is or could be a 
participant.
    Example 3.  (i) Facts where plan suspends interest credits after 
normal retirement age. The facts are the same as in Example 2 except 
that the plan provides for suspension of benefits as permitted under 
section 411(a)(3)(B). Pursuant to the plan's suspension of benefits 
provision, the plan provides for interest credits to cease during 
service after normal retirement age or for the amount of the 
interest credits during this service to be reduced to reflect 
principal credits credited.
    (ii) Conclusion. The plan does not satisfy the safe harbor in 
paragraph (b)(1)(i) of this section. Applying the rule of paragraph 
(b)(1)(i) of this section, the plan formula would fail to satisfy 
the safe harbor comparison under paragraph (b)(1)(i) of this section 
with respect to an individual whose benefits have been suspended 
because, as of any date after attainment of normal retirement age, 
the hypothetical account balance of this individual would be less 
than the hypothetical account balance of one or more similarly 
situated individuals who have not attained normal retirement age.
    Example 4.  (i) Facts providing greater-of benefits as described 
in paragraph (b)(1)(ii)(C) of this section. Employer Z sponsors a 
defined benefit plan that provides an accumulated benefit expressed 
as a straight life annuity commencing at the plan's normal 
retirement age (age 65), based on a percentage of average annual 
compensation times the participant's years of service. On November 
2, 2011, the plan is amended effective as of January 1, 2012, to 
provide participants who have attained age 55 by January 1, 2012, 
with a benefit that is the greater of the benefit under the average 
annual compensation formula and a benefit that is based on the 
balance of a hypothetical account, which provides for annual pay 
credits of a specified percentage of the participant's compensation 
and annual interest credits based on the third segment rate.
    (ii) Conclusion where plan provides greater-of benefits to older 
participants. The plan satisfies the safe harbor of paragraph 
(b)(1)(i) of this section with respect to all individuals who are or 
could be participants. Pursuant to the rules of paragraph 
(b)(1)(ii)(C) of this section, the plan satisfies the safe harbor 
with respect to individuals who have attained age 55 by January 1, 
2012, because (A) with respect to the benefit described in

[[Page 64139]]

paragraph (b)(1)(i)(A) of this section (the benefit based on average 
annual compensation, disregarding the benefit based on the balance 
of a hypothetical account), the accumulated benefit for any 
individual who is or could be a participant and who is at least age 
55 on January 1, 2012, would in no event be less than the 
accumulated benefit for a similarly situated, younger individual who 
is or could be participant and who has not yet attained age 55 by 
January 1, 2012, (B) with respect to the benefit described in 
paragraph (b)(1)(i)(B) of this section (the benefit based on the 
balance of a hypothetical account, disregarding the benefit based on 
average annual compensation), the accumulated benefit for any 
individual who is or could be a participant and who is at least age 
55 on January 1, 2012, would in no event be less than the 
accumulated benefit for a similarly situated, younger individual who 
is or could be a participant and who has not yet attained age 55 by 
January 1, 2012, and (C) the benefit of any individual who is or 
could be a participant who has not yet attained age 55 by January 1, 
2012, is only expressed as an annuity payable at normal retirement 
age as described in paragraph (b)(1)(i)(A) of this section, and this 
safe-harbor formula measure applies also to participants who have 
attained age 55 by January 1, 2012. Furthermore, the plan satisfies 
the safe harbor with respect to individuals who have not yet 
attained age 55 by January 1, 2012, because the benefit of these 
individuals satisfies the general rule of paragraph (b)(1)(ii)(A) of 
this section.
    (iii) Conclusion where plan provides greater-of benefits only to 
younger participants. If, instead of the facts in paragraph (i) of 
this Example 4, the plan had been amended to provide only 
participants who have not yet attained age 55 by January 1, 2012, 
with a benefit that is the greater of the benefit under the average 
annual compensation formula and a benefit that is based on the 
balance of a hypothetical account then, the safe harbor would not be 
satisfied with respect to individuals who have attained age 55 by 
January 1, 2012. Under paragraph (b)(1)(ii)(A) of this section, 
except as provided in paragraphs (b)(1)(ii)(B), (C), and (D) of this 
section, the safe harbor of paragraph (b)(1)(i) of this section is 
available only with respect to individuals over age 55, whose 
benefit is expressed in terms of only one safe-harbor formula 
measure, if no similarly situated, younger individual has an 
accumulated benefit that is expressed in terms of any measure other 
than that same safe-harbor formula measure. This is not the case 
under these facts. The greater-of rule of paragraph (b)(1)(ii)(C) of 
this section would not apply to individuals who have attained age 55 
because the accumulated benefits of these individuals is not equal 
to the greater of benefits under two or more benefit formulas.
    Example 5.  (i) Facts where plan provides choice-of benefits to 
older participants. The facts are the same as in paragraph (i) of 
Example 4, except that for service after December 31, 2011, the 
amendment permits participants who have attained age 55 by January 
1, 2012, to choose between benefits under the average annual 
compensation benefit formula or benefits under the hypothetical 
account balance formula (but, if a participant chooses the 
hypothetical account balance formula, his or her benefit under the 
plan is in no event to be less than the benefit determined under the 
average annual compensation benefit formula for service before 
January 1, 2012), while other participants receive benefits solely 
under the hypothetical account balance formula (but individuals who 
are participants on December 31, 2011, are in no event to receive 
less than the benefit determined under the average annual 
compensation benefit formula for service before January 1, 2012).
    (ii) Conclusion where plan provides choice to older 
participants. The plan satisfies the safe harbor with respect to all 
individuals who are or could be participants. Pursuant to the rule 
of paragraph (b)(1)(ii)(D) of this section, the plan satisfies the 
safe harbor of paragraph (b)(1)(i) of this section with respect to 
individuals who have attained age 55 by January 1, 2012, and, 
pursuant to the rule of paragraph (b)(1)(ii)(A), the plan satisfies 
the safe harbor with respect to individuals who have not yet 
attained 55 by January 1, 2012.
    (iii) Conclusion where plan provides choice-of benefits to older 
workers and greater-of benefits to younger participants. If, in 
addition to the facts in paragraph (i) of this Example 5, the plan 
were also to provide participants who had not yet attained age 55 by 
January 1, 2012, the greater of the benefits under the average 
annual compensation benefit formula or the benefits under the 
hypothetical account balance formula, then pursuant to the rules of 
paragraph (b)(1)(ii)(A) and (D) of this section, the safe harbor 
would not be satisfied with respect to participants who have 
attained age 55 by January 1, 2012.

    (2) Indexed benefits--(i) In general. Except as provided in 
paragraph (b)(2)(iii) 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) with respect 
to a participant solely because a benefit formula (other than a lump 
sum-based benefit formula) under the plan provides for the periodic 
adjustment of the participant's accrued benefit under the plan by means 
of the application of a recognized index or methodology. For purpose of 
the preceding sentence, a rate that does not exceed a market rate of 
return, as defined in paragraph (d) of this section, is deemed to be a 
recognized index or methodology. However, such a plan must 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) and paragraph (c) of this section 
(relating to plan conversion amendments).
    (ii) Similarly situated participant test. Paragraph (b)(2)(i) of 
this section does not apply unless the aggregate adjustments made to a 
participant's accrued benefit under the plan (determined as a 
percentage of the unadjusted accrued benefit) in a period would not be 
less than the aggregate adjustments for any similarly situated, younger 
participant. This test requires a comparison, for each period, of the 
aggregate adjustments for each individual who is or could be a 
participant in the plan for the period with the aggregate adjustments 
of each other similarly situated, younger individual who is or could be 
a participant in the plan for that 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.
    (iii) 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) of this section (relating to 
preservation of capital).
    (B) Exception for variable annuity benefit formulas. The 
requirement to satisfy section 411(b)(5)(B)(i)(II), as set forth in 
paragraph (d)(2) of this section, as well as section 411(b)(5)(E)(ii), 
as set forth in this paragraph (b)(2)(iii), does not apply in the case 
of a benefit provided under a variable annuity benefit formula as 
defined in Sec.  1.411(a)(13)-1(d)(6).
    (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 (1974)), and the 
Age Discrimination in Employment Act of 1967, Public Law 90-202 (81 
Stat. 602 (1967)).
    (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

[[Page 64140]]

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 
conversion 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 conversion 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 paragraphs (c)(2)(i)(A) and (c)(2)(i)(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 conversion amendment must be available thereafter to the extent of 
the plan's benefits for service prior to the effective date of the 
conversion amendment.
    (3) Establishment of opening hypothetical account balance or 
opening accumulated percentage--(i) In general. Provided that the 
requirements of paragraph (c)(3)(ii) or (c)(3)(iii) 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 at annuity starting date--(A) Testing 
requirement. The requirements of this paragraph (c)(3)(ii) are 
satisfied with respect to an optional form of benefit payable at an 
annuity starting date only if the plan provides that the amount of the 
benefit payable in that optional form under the lump sum-based benefit 
formula that is attributable to the opening hypothetical account 
balance or opening accumulated percentage as described in paragraph 
(c)(3)(i) of this section is not less than the benefit under the 
comparable optional form of benefit under paragraph (c)(2)(i)(A) of 
this section. To satisfy this requirement, if the benefit under the 
optional form attributable to the opening hypothetical account balance 
or opening accumulated percentage is less than the benefit under the 
comparable optional form of 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). Thus, if a plan is using the 
option under this paragraph (c)(3)(ii) 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 benefit described in paragraph (c)(2)(i)(B) of this 
section; and
    (2) The greater of--
    (i) The benefit attributable to the opening hypothetical account 
balance or attributable to the opening accumulated percentage of the 
participant's final average compensation as described in this paragraph 
(c)(3)(ii); or
    (ii) The benefit described in paragraph (c)(2)(i)(A) of this 
section.
    (B) Comparable optional form of benefit. If there was an optional 
form of benefit within the same generalized optional form of benefit 
(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, then that optional form of benefit is the 
comparable optional form of benefit.
    (C) Special rule for new 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 the plan as in effect 
immediately prior to the effective date of the conversion 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 for purposes of this 
paragraph (c)(3)(ii). 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 optional 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 this paragraph (c)(3)(ii), the plan is treated as if a 
single sum (which satisfies the requirements of section 417(e)(3)) were 
available under the terms of the plan as in effect immediately prior to 
the effective date of the conversion amendment.
    (iii) Comparison of benefits at effective date of conversion 
amendment. [Reserved].
    (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

[[Page 64141]]

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 
and the effective date of the conversion amendment is the date of the 
transfer. For purposes of applying the effective date rule of paragraph 
(f)(1)(ii) of this section, the date that the relevant plan terms were 
adopted is treated as the adoption date of the amendment.
    (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 determining whether a 
conversion amendment has been adopted, an amendment to provide a 
benefit under a statutory hybrid benefit formula is consolidated with a 
prior amendment to reduce non-statutory hybrid benefit formula benefits 
if the amendment providing benefits under a statutory hybrid benefit 
formula is adopted within three years after adoption of the amendment 
reducing non-statutory hybrid benefit formula benefits. Thus, the later 
adoption of the statutory hybrid benefit formula will cause the earlier 
amendment to be treated as part of 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 
this paragraph (c):

    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 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, 
2012, Plan E is amended to eliminate future accruals under the 
highest average compensation benefit formula and to base future 
benefit accruals under a hypothetical account balance formula. For 
service on or after January 1, 2012, 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

[[Page 64142]]

430(h)(2)(C)(iii). With respect to benefits under the hypothetical 
account balance attributable to service on and after January 1, 
2012, a participant is permitted to elect (with spousal consent if 
applicable) 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, 2012, and also as a 
single-sum distribution. The plan provides for the benefit 
attributable to service before January 1, 2012, to be determined 
under the terms of the plan as in effect immediately before the 
effective date of the amendment, and the benefit attributable to 
service on and after January 1, 2012, 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 benefit is equal to the sum of the 
benefit attributable to service before January 1, 2012 (to be 
determined under the terms of the plan as in effect immediately 
before the effective date of the amendment), plus the benefit 
attributable to the participant's hypothetical account balance.
    (iii) Facts relating to an affected participant. Participant A 
is age 62 on January 1, 2012. On December 31, 2011, A's benefit for 
years of service before January 1, 2012, payable as a straight life 
annuity commencing at A's normal retirement age (age 65), which is 
January 1, 2015, is $1,000 per month. On January 1, 2015, when 
Participant A has a severance from employment, the then-current 
hypothetical account balance, with pay credits and interest from 
January 1, 2012, to January 1, 2015, is $11,000. Using the 
conversion factors applicable under the plan on January 1, 2015, 
that balance is equivalent to a straight life annuity of $100 per 
month commencing on January 1, 2015. This benefit is in addition to 
the benefit attributable to service before January 1, 2012. 
Participant A elects (with spousal consent) a straight life annuity 
of $1,100 per month commencing January 1, 2015.
    (iv) Conclusion. Participant A's benefit satisfies the 
requirements of paragraph (c) 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. Except 
as indicated in this Example 2, the facts are the same as the facts 
under paragraph (i) of Example 1.
    (ii) Facts relating to the conversion amendment. On January 1, 
2012, Plan E is amended to eliminate future accruals under the 
highest average compensation benefit formula and to provide future 
benefit accruals under a hypothetical account balance formula. 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, 2011 (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, 2012. 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, 2012. The 
hypothetical account balance maintained for each participant for 
accruals on or after January 1, 2012, 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, if applicable) payment in 
the same generalized optional forms of benefit as under the plan in 
effect prior to January 1, 2012, 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 equal to or greater than 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 equal to or greater than the pre-
conversion benefit, the plan provides that such benefit is paid in 
lieu of the pre-conversion benefit, together with the benefit 
attributable to post-conversion pay-based principal credits. If the 
benefit attributable to the opening hypothetical account balance is 
less than the pre-conversion benefit, the plan provides that such 
benefit is increased sufficiently to provide the pre-conversion 
benefit, together with the benefit attributable to post-conversion 
pay-based principal credits.
    (v) Facts relating to an affected participant. On January 1, 
2012, 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, 2015, using the applicable interest rate and applicable mortality 
table under section 417(e)(3) in effect on January 1, 2012. On 
January 1, 2012, the applicable interest rate for Participant A is 
equivalent to a level rate of 5.5 percent. Thereafter, Participant 
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, 2015 at 
age 65, and elects (with spousal consent) a straight life annuity 
commencing January 1, 2015. On January 1, 2015, the opening 
hypothetical account balance, with interest credits from January 1, 
2012, to January 1, 2015, has become $95,000, which, using the 
conversion factors under the plan on January 1, 2015, is equivalent 
to a straight life annuity of $1,005 per month commencing on January 
1, 2015 (which is greater than the $1,000 a month payable at age 65 
under the terms of the plan in effect before January 1, 2012). This 
benefit is in addition to the benefit determined using the 
hypothetical account balance for service after January 1, 2012.
    (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.
    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, 2012, and before 
January 1, 2015, the rate of interest credited in that period 
averages less than 5.5 percent, and, on January 1, 2015, 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, 2015, and, using the 
conversion factors under the plan on January 1, 2015, is equivalent 
to a straight life annuity commencing on January 1, 2015, 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, 2015, is $1,000 per month. This 
benefit is in addition to the benefit attributable to the 
hypothetical account balance for service after January 1, 2012.
    (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--

[[Page 64143]]

    (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, 2011, 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, 2013, when A is age 63 and 
has 30 years of service. On January 1, 2013, A's opening 
hypothetical account balance, with interest from January 1, 2012, to 
January 1, 2013, has become $86,000, which, using the conversion 
factors under the plan (as amended) on January 1, 2013, is 
equivalent to a straight life annuity commencing on January 1, 2013, 
of $850 per month.
    (ii) Facts relating to calculation of the participant's benefit. 
Under the terms of Plan E on December 31, 2011, Participant A is 
entitled to a straight life annuity commencing on January 1, 2013, 
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, 
2015. This benefit is in addition to the benefit determined using 
the hypothetical account balance for service after January 1, 2012.
    (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, 2012, 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, 2012, 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, 2012. In 
addition, Plan E, as amended on January 1, 2012, offers payment in 
the form of a single sum attributable to service before January 1, 
2012, 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, 2011. Participant B is age 40 on January 1, 2012, 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, 2012, 
of Participant B's straight life annuity of $1,000 per month 
commencing at January 1, 2037, which is when B will be age 65). 
Participant B has a severance from employment on January 1, 2015, 
and elects (with spousal consent) an immediate single-sum 
distribution. Participant B's opening hypothetical account balance 
(increased by attributable interest) on January 1, 2015, is $45,000. 
The present value, on January 1, 2015, 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, 
2011, 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, 2015, hypothetical account balance 
for benefit accruals for service after January 1, 2012.
    (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, 2012, using the actuarial factors for mandatory cashout 
distributions under the terms of the plan on December 31, 2011); and
    (B) An amount equal to B's hypothetical account balance for 
benefit accruals for service after January 1, 2012, 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, 2015, 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, 2012.
    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, 2011, and before January 1, 2015, 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, 2015, 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, 2011), commencing 
immediately on January 1, 2015, 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, 2015, 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, 2015. 
This benefit is in addition to the benefit determined using the 
January 1, 2015, hypothetical account balance for service after 
January 1, 2012.
    (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 commencing immediately on January 1, 2015. 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 commencing at age 65 (under Plan E as in 
effect on December 31, 2011) would result in a straight life annuity 
commencing immediately on January 1, 2015, 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, 
2015, 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 age 65, and the $221 straight life 
annuity is in addition to the benefit accruals for service after 
January 1, 2012, payment of 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 the rules of paragraph (e) 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 with 
respect to benefits determined under a statutory hybrid benefit formula 
is not greater than a market rate of return.
    (ii) Definitions relating to market rate of return--(A) Interest 
credit. Subject to other rules in this paragraph (d), an interest 
credit for purposes of this paragraph (d) and section 411(b)(5)(B) 
means the following adjustments to a participant's accumulated benefit 
under a statutory hybrid benefit formula, to the extent not conditioned 
on current

[[Page 64144]]

service and not made on account of imputed service (as defined in Sec.  
1.401(a)(4)-11(d)(3)(ii)(B))--
    (1) Any increase or decrease for a period, under the terms of the 
plan at the beginning of the period, that is calculated by applying a 
rate of interest or rate of return (including a rate of increase or 
decrease under an index) to the participant's accumulated benefit (or a 
portion thereof) as of the beginning of the period; and
    (2) Any other increase for a period, under the terms of the plan at 
the beginning of the period.
    (B) Treatment of plan amendments. An increase to a participant's 
accumulated benefit is not treated as an interest credit to the extent 
the increase is made as a result of a plan amendment providing for a 
one-time adjustment to the participant's accumulated benefit. However, 
a pattern of repeated plan amendments each of which provides for a one-
time adjustment to a participant's accumulated benefit will cause such 
adjustments to be treated as provided on a permanent basis under the 
terms of the plan. See Sec.  1.411(d)-4, A-1(c)(1).
    (C) Interest crediting rate. Except as otherwise provided in this 
paragraph (d), the interest crediting rate, or effective rate of 
return, for a period with respect to a participant equals the total 
amount of interest credits for the period divided by the participant's 
accumulated benefit at the beginning of the period.
    (D) Principal credit. For purposes of this paragraph (d), a 
principal credit means any increase to a participant's accumulated 
benefit under a statutory hybrid benefit formula that is not an 
interest credit. Thus, for example, a principal credit includes an 
increase to a participant's accumulated benefit to the extent the 
increase is conditioned on current service or made on account of 
imputed service. As a result, a principal credit includes an increase 
to the value of an accumulated percentage of the participant's final 
average compensation. For indexed benefits described in paragraph 
(b)(2) of this section, a principal credit includes an increase to the 
participant's accrued benefit other than an increase provided by 
indexing. In addition, pursuant to the rule in paragraph (d)(1)(ii)(B) 
of this section, a principal credit generally includes an increase to a 
participant's accumulated benefit to the extent the increase is made as 
a result of a plan amendment providing for a one-time adjustment to the 
participant's accumulated benefit. As a result, a principal credit 
includes an opening hypothetical account balance or opening accumulated 
percentage of the participant's final average compensation, as 
described in paragraph (c)(3) of this section.
    (iii) Market rate of return for 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 terms 
provide that the interest credit for each plan year is determined using 
one of the following specified interest crediting rates:
    (A) The interest rate on long-term investment grade corporate bonds 
(as described in paragraph (d)(3) of this section).
    (B) An interest rate that, under paragraph (d)(4) of this section, 
is deemed to be not in excess of the interest rate described in 
paragraph (d)(3) of this section.
    (C) A rate of return that, under paragraph (d)(5) of this section, 
is not in excess of a market rate of return.
    (iv) Timing and other rules related to interest crediting rate--(A) 
In general. A plan that provides interest credits must specify how the 
plan determines interest credits and must specify how and when interest 
credits are credited. The plan must specify the method for determining 
interest credits in accordance with the requirements of paragraph 
(d)(1)(iv)(B) of this section, the frequency of interest crediting in 
accordance with the requirements of paragraph (d)(1)(iv)(C) of this 
section, and the treatment of interest credits on distributed amounts, 
as well as other debits and credits during the period, in accordance 
with the rules of paragraph (d)(1)(iv)(D) of this section. See 
paragraph (e) of this section for additional rules that apply to 
changes in the interest crediting rate.
    (B) Methods to determine interest credits. A plan that is using any 
specified interest crediting rate can determine interest credits for 
each current interest crediting period based on the effective periodic 
interest crediting rate that applies over the period. Alternatively, a 
plan that is using one of the interest crediting rates described in 
paragraph (d)(3) or (d)(4) of this section can determine interest 
credits for a stability period based on the interest crediting rate for 
a specified lookback month with respect to that stability period. For 
purposes of the preceding sentence, 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), although the interest 
crediting rate can be any one of the rates in paragraph (d)(3) or 
(d)(4) 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 provided on an annual or more frequent periodic basis and 
interest credits for each interest crediting period must be credited as 
of the end of the period. If a plan provides for the crediting of 
interest more frequently than annually (for example, daily, monthly or 
quarterly) based on one of the annual interest rates described in 
paragraph (d)(3) or (d)(4) of this section, then the plan generally 
provides an above market rate of return unless each periodic interest 
credit is determined using an interest crediting rate that is no 
greater than a pro rata portion of the applicable annual interest 
crediting rate. However, a plan that credits interest daily based on 
one of the annual interest rates described in paragraph (d)(3) or 
(d)(4) of this section is not treated as providing an above market rate 
of return merely because the plan determines each daily interest credit 
using a daily interest crediting rate that is 1/360 of the applicable 
annual interest crediting rate. In addition, interest credits 
determined, under the terms of a plan, based on one of the annual 
interest rates described in paragraph (d)(3) or (d)(4) of this section 
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 for a plan year is compounded more 
frequently than annually. 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)(3) of this section) and 
the applicable annual rate on these bonds for the plan year is 6 
percent, then the accumulated benefit at the beginning of each month 
could be increased as a result of interest credits by as much as 0.5 
percent per month during the plan year without resulting in an interest 
crediting rate that is in excess of a market rate of return.
    (D) Debits and credits during the interest crediting period. 
[Reserved].
    (v) Lesser rates. An interest crediting rate is not in excess of a 
market rate of return if the rate can never be in excess of a 
particular rate that is described in paragraph (d)(1)(iii) of this 
section. Thus, for example, an interest crediting rate that always 
equals the rate described in paragraph (d)(3) of this section minus 200 
basis points is not in excess of a market rate of return because it can 
never be in excess of the rate described in paragraph (d)(3) of this 
section. Similarly, an interest crediting

[[Page 64145]]

rate that always equals the lesser of the yield on 30-year Treasury 
bonds and a fixed 6 percent interest rate is not in excess of a market 
rate of return because it can never be in excess of the yield on 30-
year Treasury bonds.
    (vi) Greater-of rates. If a statutory hybrid plan determines an 
interest credit by applying the greater of 2 or more different rates to 
the accumulated benefit, the effective interest crediting rate is not 
in excess of a market rate of return only if each of the different 
rates would separately satisfy the requirements of this paragraph (d) 
and the requirements of paragraph (d)(6) of this section are also 
satisfied.
    (vii) Blended rates. A statutory hybrid plan does not provide an 
effective interest crediting rate that is in excess of a market rate of 
return merely because the plan determines an interest credit by 
applying different rates to different predetermined portions of the 
accumulated benefit, provided each rate would separately satisfy the 
requirements of this paragraph (d) if the rate applied to the entire 
accumulated benefit.
    (2) Preservation of capital requirement--(i) General rule. A 
statutory hybrid plan satisfies the requirements of section 
411(b)(1)(H) only if the plan provides that the participant's benefit 
under the statutory hybrid benefit formula determined as of the 
participant's annuity starting date is no less than the benefit based 
on the sum of all principal credits (as described in paragraph 
(d)(1)(ii)(D) of this section) credited under the plan to the 
participant as of that date (including principal credits that were 
credited before the applicable statutory effective date of paragraph 
(f)(1) of this section).
    (ii) Application to multiple annuity starting dates. [Reserved].
    (iii) Exception for variable annuity benefit formulas. See 
paragraph (b)(2)(iii)(B) of this section for an exception to this 
paragraph (d)(2).
    (3) 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 
417(e)(3)(D) or 430(h)(2)(C)(iii) (determined with or without regard to 
the transition rules of section 417(e)(3)(D)(ii) or 430(h)(2)(G)). 
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 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).
    (4) Safe harbor rates of interest--(i) In general. This paragraph 
(d)(4) identifies interest rates that are deemed to be not in excess of 
the interest rate described in paragraph (d)(3) of this section. The 
Commissioner may, in guidance of general applicability, specify 
additional interest crediting rates that are deemed to be not in excess 
of the rate described in paragraph (d)(3) of this section. See Sec.  
601.601(d)(2)(ii)(b).
    (ii) Rates based on bonds with margins--(A) In general. An interest 
crediting rate is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section if the rate is equal to 
the sum of any of the following rates of interest for bonds and the 
associated margin for that interest rate:

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

     (B) Rule of application. For purposes of this paragraph (d)(4), 
the first and second segment rates mean the first and second segment 
rates described in section 417(e)(3)(D) or 430(h)(2)(C), determined 
with or without regard to the transition rules of section 
417(e)(3)(D)(ii) or 430(h)(2)(G).
    (iii) Eligible cost-of-living indices. An interest crediting rate 
is deemed to be not in excess of the interest rate described in 
paragraph (d)(3) of this section 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)(4)(iii), the eligible cost-of-living index described in Sec.  
1.401(a)(9)-6, A-14(b)(2) is increased by 300 basis points.
    (iv) Fixed rate of interest. [Reserved].
    (5) Other rates of return--(i) General rule. This paragraph (d)(5) 
sets forth additional methods for determining an interest crediting 
rate that is not in excess of a market rate of return.
    (ii) Actual rate of return on plan assets. In the case of indexed 
benefits described in paragraph (b)(2) of this section, an interest 
crediting rate equal to the actual rate of return on the aggregate 
assets of the plan, including both positive returns and negative 
returns, is not in excess of a market rate of return if the plan's 
assets are diversified so as to minimize the volatility of returns. 
This requirement that plan assets be diversified so as to minimize the 
volatility of returns does not require greater diversification than is 
required under section 404(a)(1)(C) of Title I of the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 
(1974)) with respect to defined benefit pension plans.
    (iii) Annuity contract rates. The rate of return on the annuity 
contract for the employee issued by an insurance company licensed under 
the laws of a State is not in excess of a market rate of return. 
However, this paragraph (d)(5)(iii) does not apply if the Commissioner 
determines that the annuity contract has been structured to provide an 
interest crediting rate that is in excess of a market rate of return.
    (iv) Rate of return on certain RICs. [Reserved].
    (6) Combinations of rates of return--(i) In general. A plan that 
determines interest credits based, in whole or in part, on the greater 
of two or more different interest crediting rates provides an effective 
interest crediting rate in excess of a market rate of return unless the 
combination of rates is described in paragraph (d)(6)(ii), (d)(6)(iii), 
(e)(3)(iii), or (e)(4) of this section. However, a plan is not treated 
as providing the greater of two or more interest crediting rates merely 
because the plan satisfies the requirements of paragraph (d)(2) of this 
section. In addition, a plan is not treated as providing the greater of 
two or more interest crediting rates merely because a

[[Page 64146]]

rate of return described in paragraph (d)(5)(iii) of this section is 
itself based on the greater of two or more rates.
    (ii) Annual or more frequent floor applied to bond-based rates. 
[Reserved].
    (iii) Cumulative floor applied to equity-based or bond-based rates. 
[Reserved].
    (e) Other rules regarding market rates of return--(1) In general. 
This paragraph (e) sets forth additional rules regarding the 
application of the market rate of return requirement with respect to 
benefits determined under a statutory hybrid benefit formula.
    (2) Plan termination. [Reserved].
    (3) Rules relating to section 411(d)(6)--(i) General rule. The 
right to interest credits in the future that are not conditioned on 
future service constitutes a section 411(d)(6) protected benefit (as 
defined in Sec.  1.411(d)-3(g)(14)). Thus, 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 must satisfy section 411(d)(6) if 
the revised rate under any circumstances could result in interest 
credits that are smaller as of any date after the applicable amendment 
date (within the meaning of Sec.  1.411(d)-3(g)(4)) than the interest 
credits that would be provided without regard to the amendment. For 
additional rules, see Sec.  1.411(d)-3(b). Paragraphs (e)(3)(ii) and 
(e)(3)(iii) of this section set forth special rules that apply 
regarding the interaction of section 411(d)(6) and changes to a plan's 
interest crediting rate. The Commissioner may, in guidance of general 
applicability, prescribe additional rules regarding the interaction of 
section 411(d)(6) and section 411(b)(5), including changes to a plan's 
interest crediting rate. See Sec.  601.601(d)(2)(ii)(b).
    (ii) Adoption of long-term investment grade corporate bond rate. 
For purposes of applying section 411(d)(6) and this paragraph (e) to an 
amendment to change to the interest crediting rate described in 
paragraph (d)(3) of this section, a plan is not treated as providing 
interest credits that are smaller as of any date after the applicable 
amendment date than the interest credits that would be provided using 
an interest crediting rate described in paragraph (d)(4) of this 
section merely because the plan credits interest after the applicable 
amendment date using the interest crediting rate described in paragraph 
(d)(3) of this section, provided--
    (A) The amendment only applies to interest credits to be credited 
after the effective date of the amendment;
    (B) The effective date of the amendment is at least 30 days after 
adoption of the amendment; and
    (C) On the effective date of the amendment, the new interest 
crediting rate is not lower than the interest crediting rate that would 
have applied in the absence of the amendment.
    (iii) Coordination of section 411(d)(6) and market rate of return 
limitation. [Reserved].
    (4) Actuarial increases after normal retirement age. [Reserved].
    (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), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) apply to a 
conversion amendment (as defined in paragraph (c)(4) of this section) 
that both is adopted on or after June 29, 2005, and takes effect on or 
after June 29, 2005.
    (iii) Market rate of return--(A) Plans in existence on June 29, 
2005--(1) In general. In the case of a plan that was in existence on 
June 29, 2005 (regardless of whether the plan was a statutory hybrid 
plan on that date), section 411(b)(5)(B)(i) applies to plan years that 
begin 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 was in 
existence on June 29, 2005 (regardless of whether the plan was 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 on or 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.
    (iv) Collectively bargained plans--(A) 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 that begin 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.
    (B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which 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 this paragraph (f)(1)(iv) if it is 
considered a collectively bargained plan under the rules of Sec.  
1.436-1(a)(5)(ii)(B).
    (2) Effective/applicability date of regulations--(i) In general--
(A) General effective date. Except as provided in paragraph 
(f)(2)(i)(B) of this section, this section applies to plan years that 
begin on or after January 1, 2011.
    (B) Special effective date. Paragraphs (d)(1)(iii), (d)(1)(vi), and 
(d)(6)(i) of this section apply to plan years that begin on or after 
January 1, 2012.
    (ii) Conversion amendments. With respect to a conversion amendment 
(within the meaning of paragraph (c)(4) of this section), where the 
effective date of the conversion amendment (as defined in paragraph 
(c)(4)(vi) of this section) is on or after the statutory effective date 
set forth in paragraph (f)(1)(ii) of this section, the requirements of 
paragraph (c)(2) of this section apply only to a participant who has an 
hour of service on or after the regulatory effective date set forth in 
paragraph (f)(2)(i) of this section.
    (iii) Reliance before regulatory effective date. For the periods 
after the statutory effective date set forth in paragraph (f)(1) of 
this section and before the regulatory effective date set forth in 
paragraph (f)(2)(i) of this section, the safe harbor and other relief 
of section 411(b)(5) applies and the market rate of return and other 
requirements of section 411(b)(5) must be satisfied. During these 
periods, a plan is permitted to rely on the provisions of this section 
for purposes of applying the

[[Page 64147]]

relief and satisfying the requirements of section 411(b)(5).

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: September 17, 2010.
Michael F. Mundaca,
Assistant Secretary of the Treasury for Tax Policy.
[FR Doc. 2010-25941 Filed 10-18-10; 8:45 am]
BILLING CODE 4830-01-P