[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Rules and Regulations]
[Pages 66915-66918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27336]



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 Rules and Regulations
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  Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / 
Rules and Regulations  

[[Page 66915]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9601]
RIN 1545-BK94


Amendment of Prohibited Payment Option Under Single-Employer 
Defined Benefit Plan of Plan Sponsor in Bankruptcy

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
under the anti-cutback rules of section 411(d)(6) of the Internal 
Revenue Code, which generally prohibit plan amendments eliminating or 
reducing accrued benefits, early retirement benefits, retirement-type 
subsidies, and optional forms of benefit under qualified retirement 
plans. These regulations provide an additional limited exception to the 
anti-cutback rules to permit a plan sponsor that is a debtor in a 
bankruptcy proceeding to amend its single-employer defined benefit plan 
to eliminate a single-sum distribution option (or other optional form 
of benefit providing for accelerated payments) under the plan if 
certain specified conditions are satisfied. These regulations affect 
administrators, employers, participants, and beneficiaries of such a 
plan.

DATES: Effective date: These regulations are effective on November 8, 
2012.
    Applicability date: These regulations apply to plan amendments that 
are adopted and effective after November 8, 2012.

FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu or Linda S.F. Marshall 
at (202) 622-6090.

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 411(d)(6) of the Internal Revenue Code 
(Code). These final regulations amend Sec.  1.411(d)-4 of the Treasury 
regulations.
    Section 401(a)(7) provides that a trust does not constitute a 
qualified trust unless its related plan satisfies the requirements of 
section 411 (relating to minimum vesting standards). Section 
411(d)(6)(A) provides that a plan is treated as not satisfying the 
requirements of section 411 if the accrued benefit of a participant is 
decreased by an amendment of the plan, other than an amendment 
described in section 412(d)(2) of the Code or section 4281 of the 
Employee Retirement Income Security Act of 1974, Public Law 93-406 (88 
Stat. 829 (1974)), as amended (ERISA).
    Section 411(d)(6)(B) provides that a plan amendment that has the 
effect of eliminating or reducing an early retirement benefit or a 
retirement-type subsidy, or eliminating an optional form of benefit, 
with respect to benefits attributable to service before the amendment 
is treated as impermissibly reducing accrued benefits. For a 
retirement-type subsidy, this protection applies only with respect to a 
participant who satisfies (either before or after the amendment) the 
preamendment conditions for the subsidy. The last sentence of section 
411(d)(6)(B) provides that the Secretary may by regulations provide 
that section 411(d)(6)(B) does not apply to a plan amendment that 
eliminates an optional form of benefit (other than a plan amendment 
that has the effect of eliminating or reducing an early retirement 
benefit or a retirement-type subsidy).
    Section 436(d)(2) provides that a defined benefit plan which is a 
single-employer plan must provide that, during any period in which the 
plan sponsor is a debtor in a case under title 11, United States Code, 
or similar Federal or State law (a ``bankruptcy case''), the plan may 
not pay any ``prohibited payment.'' However, that limitation does not 
apply in a plan year on or after the date on which the enrolled actuary 
of the plan certifies that the adjusted funding target attainment 
percentage (as defined in section 436(j)(2)) of the plan for the plan 
year is not less than 100 percent.
    Section 436(d)(5) sets forth a definition of the term prohibited 
payment. Under this definition, a ``prohibited payment'' is: (1) Any 
payment in excess of the monthly amount paid under a single life 
annuity (plus any social security supplements described in the last 
sentence of section 411(a)(9)) to a participant or beneficiary whose 
annuity starting date (as defined in section 417(f)(2)) occurs during 
any period a limitation under section 436(d)(1) or section 436(d)(2) is 
in effect; (2) any payment for the purchase of an irrevocable 
commitment from an insurer to pay benefits; and (3) any other payment 
specified by the Secretary by regulations. The term ``prohibited 
payment'' does not include the payment of a benefit which under section 
411(a)(11) may be immediately distributed without the consent of the 
participant.
    Section 1.411(d)-4, Q&A-1(a) provides that the term section 
411(d)(6) protected benefit includes: (1) Benefits described in section 
411(d)(6)(A); (2) early retirement benefits (as defined in Sec.  
1.411(d)-3(g)(6)(i)) and retirement type subsidies (as defined in Sec.  
1.411(d)-3(g)(6)(iv)); and (3) optional forms of benefit described in 
section 411(d)(6)(B)(ii).
    Section 1.411(d)-4, Q&A-1(b)(1) provides that the term optional 
form of benefit for purposes of Sec.  1.411(d)-4 has the same meaning 
as in Sec.  1.411(d)-3(g)(6)(ii). Section 1.411(d)-3(g)(6)(ii)(A) 
defines the term ``optional form of benefit'' as ``a distribution 
alternative (including the normal form of benefit) that is available 
under the plan with respect to an accrued benefit or a distribution 
alternative with respect to a retirement-type benefit. Different 
optional forms of benefit exist if a distribution alternative is not 
payable on substantially the same terms as another distribution 
alternative. The relevant terms include all terms affecting the value 
of the optional form, such as the method of benefit calculation and the 
actuarial factors or assumptions used to determine the amount 
distributed. Thus, for example, different optional forms of benefit may 
result from differences in terms relating to the payment schedule, 
timing, commencement, medium of distribution (for example, in cash or 
in kind),

[[Page 66916]]

election rights, differences in eligibility requirements, or the 
portion of the benefit to which the distribution alternative applies.''
    Section 1.411(d)-4, Q&A-2(a)(1) provides that a plan is not 
permitted to be amended to eliminate or reduce a section 411(d)(6) 
protected benefit that has already accrued, except as provided in Sec.  
1.411(d)-3 or Sec.  1.411(d)-4. Under Sec.  1.411(d)-4, Q&A-2(b)(1), 
the Commissioner is authorized to provide for the elimination or 
reduction of an optional form of benefit to the extent that plan 
participants do not lose either a valuable right or an employer-
subsidized optional form of benefit when a similar optional form of 
benefit with a comparable subsidy is not provided.\1\ In addition, 
Sec.  1.411(d)-4, Q&A-2(b)(2)(i) through (xi) sets forth specific 
situations under which the elimination or reduction of certain section 
411(d)(6) protected benefits that have already accrued does not violate 
section 411(d)(6). These exceptions have been included in regulations 
pursuant to the IRS's authority under the last sentence of section 
411(d)(6)(B) to permit a plan amendment that eliminates or reduces 
optional forms of benefit (other than a plan amendment that has the 
effect of eliminating or reducing an early retirement benefit or a 
retirement-type subsidy).
---------------------------------------------------------------------------

    \1\ Such an amendment can be authorized only through the 
publication of revenue rulings, notices, and other documents of 
general applicability. See Sec.  601.601(d)(2)(ii)(b).
---------------------------------------------------------------------------

    Section 1.436-1(d)(2) provides that a plan satisfies the 
requirements of section 436(d)(2) and Sec.  1.436-1(d)(2) only if the 
plan provides that a participant or beneficiary is not permitted to 
elect an optional form of benefit that includes a prohibited payment, 
and the plan will not pay any prohibited payment, with an annuity 
starting date that occurs during any period in which the plan sponsor 
is a debtor in a case under title 11, United States Code, or similar 
Federal or State law, except for payments made with an annuity starting 
date that occurs on or after the date within the plan year on which the 
enrolled actuary of the plan certifies that the plan's adjusted funding 
target attainment percentage for the plan year is not less than 100 
percent.
    Title IV of ERISA provides for a pension plan termination insurance 
program that is administered by the Pension Benefit Guaranty 
Corporation (PBGC). PBGC guarantees nonforfeitable benefits, up to 
specified limits, for defined benefit pension plans that are covered 
under the program.\2\ If a single-employer plan terminates in a 
distress termination under section 4041(c) of ERISA or an involuntary 
termination under section 4042 of ERISA, and the plan assets are not 
sufficient to provide all guaranteed benefits, PBGC pays benefits to 
participants and beneficiaries under the provisions of Title IV and 
PBGC's regulations.\3\ PBGC allows a participant who is not in pay 
status at the time of the termination to elect among the various 
annuity forms described in 29 CFR 4022.8. In addition, under 29 CFR 
4022.7, PBGC does not pay benefits in a single sum in excess of $5,000 
(except under certain limited circumstances).
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    \2\ See section 4021 of ERISA.
    \3\ See section 4022 of ERISA.
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    Section 204(g) of ERISA contains rules that are parallel to Code 
section 411(d)(6). Under section 101 of Reorganization Plan No. 4 of 
1978 (43 FR 47713) and section 204(g) of ERISA, the Secretary of the 
Treasury has interpretive jurisdiction over the subject matter 
addressed in these regulations for purposes of ERISA, as well as the 
Code. Thus, these regulations issued under section 411(d)(6) of the 
Code apply as well for purposes of section 204(g) of ERISA.
    On June 21, 2012, the IRS issued proposed regulations under section 
411(d)(6) (77 FR 37349) to provide an additional limited exception to 
the anti-cutback rules to permit a plan sponsor that is a debtor in a 
bankruptcy proceeding to amend its single-employer defined benefit plan 
to eliminate a single-sum distribution option (or other optional form 
of benefit providing for accelerated payments) under the plan if 
certain conditions are satisfied. Several comments were received on the 
proposed regulations. No public hearing was requested or held. After 
consideration of the comments received, the IRS and the Treasury 
Department are issuing these final regulations to adopt the rules set 
forth in the proposed regulations with minor modifications.

Explanation of Provisions

    These final regulations provide a limited exception under section 
411(d)(6)(B) to permit a plan sponsor that is a debtor in a bankruptcy 
proceeding to amend its single-employer defined benefit plan to 
eliminate a single-sum distribution option (or other optional form of 
benefit providing for accelerated payments) if certain conditions are 
satisfied.
    In particular, the regulations permit a single-employer plan that 
is covered under section 4021 of ERISA to be amended, effective for a 
plan amendment that is both adopted and effective after November 8, 
2012, to eliminate an optional form of benefit that includes a 
prohibited payment described in section 436(d)(5), provided that four 
conditions are satisfied on the later of the date the amendment is 
adopted or effective (the applicable amendment date, as defined in 
Sec.  1.411(d)-3(g)(4)). First, the enrolled actuary of the plan has 
certified that the plan's adjusted funding target attainment percentage 
(as defined in section 436(j)(2)) for the plan year that contains the 
applicable amendment date is less than 100 percent. Second, the plan is 
not permitted to pay any prohibited payment, due to application of the 
requirements of section 436(d)(2) of the Code and section 206(g)(3)(B) 
of ERISA, because the plan sponsor is a debtor in a bankruptcy case 
(that is, a case under title 11, United States Code, or under similar 
Federal or State law). Third, the court overseeing the bankruptcy case 
has issued an order, after notice to the affected parties and a 
hearing,\4\ finding that the adoption of the amendment eliminating that 
optional form of benefit is necessary to avoid a distress termination 
of the plan pursuant to section 4041(c) of ERISA or an involuntary 
termination of the plan pursuant to section 4042 of ERISA before the 
plan sponsor emerges from bankruptcy (or before the bankruptcy case is 
otherwise completed). Fourth, PBGC has issued a determination that the 
adoption of the amendment eliminating that optional form of benefit is 
necessary to avoid a distress or involuntary termination of the plan 
before the plan sponsor emerges from bankruptcy (or before the 
bankruptcy case is otherwise completed) and that the plan is not 
sufficient for guaranteed benefits within the meaning of section 
4041(d)(2) of ERISA.
---------------------------------------------------------------------------

    \4\ See 11 U.S.C. 102(1).
---------------------------------------------------------------------------

    These regulations exercise the Secretary's authority under the last 
sentence of section 411(d)(6)(B) in order to permit this type of 
amendment that eliminates an optional form of benefit in these limited 
circumstances. The legislative history of section 411(d)(6)(B), which 
was added by section 301(a) of the Retirement Equity Act of 1984, 
Public Law 98-397, states the intent that Treasury regulations could 
permit the elimination of an optional form of benefit if ``(1) the 
elimination of the option does not eliminate a valuable right of a 
participant or beneficiary, and (2) the option is not subsidized or a 
similar benefit with a comparable subsidy is

[[Page 66917]]

provided.'' \5\ The legislative history further states that the 
committee ``expects that the regulations will not permit the 
elimination of a `lump-sum distribution option' because, for a 
participant or beneficiary with substandard mortality, the elimination 
of that option could eliminate a valuable right even if a benefit of 
equal actuarial value (based on standard mortality) is available under 
the plan.'' \6\
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    \5\ S. Rep. No. 98-575, at 30 (1984).
    \6\ Id.
---------------------------------------------------------------------------

    If the four conditions set forth in the regulations are satisfied, 
a single-sum distribution option or other optional form of benefit that 
includes a prohibited payment (generally a payment that is in excess of 
the monthly amounts payable under a single life annuity) would not 
currently be available and would not be available in the future. The 
plan would not currently be permitted to pay that optional form of 
benefit because section 436(d)(2) (which imposes restrictions on the 
payment of prohibited payments while the plan sponsor is in bankruptcy) 
bars the payment of such an optional form of benefit under these 
conditions. Furthermore, the bankruptcy court and the PBGC would each 
have issued a determination that the plan would be terminated in a 
distress or involuntary termination unless that optional form of 
benefit were eliminated. In addition, the PBGC would have determined 
that the plan is not sufficient for guaranteed benefits. In such a 
case, pursuant to Sec.  4022.7 and Sec.  4022.8 of the PBGC 
regulations, the optional form of benefit would not have been available 
after the plan termination. Accordingly, the elimination of the 
optional form of benefit would not result in the loss of a valuable 
right of a participant or beneficiary.
    In addition, the plan amendment would not eliminate or reduce early 
retirement benefits or retirement-type subsidies, which would continue 
to be available under the plan. Because the plan would not be 
terminated in a distress or involuntary termination, participants would 
continue to be credited with additional service under the plan and 
could become eligible for early retirement benefits and retirement-type 
subsidies, regardless of whether participants received benefit accruals 
with respect to the additional service. Moreover, because the plan 
would not be terminated, the plan might have the opportunity to recover 
from its underfunded status.
    Under these final regulations, a judicial determination must be 
made, after notice to the plan participants and beneficiaries, each 
employee organization representing plan participants, and the PBGC, and 
a hearing, that the amendment is necessary to avoid termination of the 
plan in a distress or involuntary termination before the plan sponsor 
emerges from bankruptcy (or before the bankruptcy case is otherwise 
completed). The primary purpose of this notice and hearing requirement 
is to afford plan participants who may be affected the opportunity to 
be heard on whether the amendment is necessary to avoid plan 
termination. The proposed regulations required notice to each affected 
party, within the meaning of section 4001(a)(21) of ERISA, and a 
hearing. At the suggestion of a commenter, the language with respect to 
this notice and hearing requirement has been modified slightly from the 
proposed regulations to clarify that a failure to notify a particular 
participant or beneficiary does not automatically invalidate the 
amendment. Specifically, the change clarifies that the standard in 11 
U.S.C. 102(1) applies for purposes of determining whether adequate 
notice has been provided under the requirement in the final regulations 
that there be a notice and a hearing before the order is issued by the 
Bankruptcy Court. The final regulations require that notice be provided 
to the affected parties, as defined in section 4001(a)(21) of ERISA.
    The preamble to the proposed regulations requests comments on 
whether the regulations should impose additional conditions on the 
prospective elimination of the single-sum distribution option (or other 
optional form of benefit that includes a prohibited payment), such as a 
condition that, after the amendment, the plan must offer annuity 
distribution options that provide substantial survivor benefits, such 
as both (1) a life annuity with a term certain of 15 or more years and 
(2) a 100% joint and survivor annuity, in order to give participants 
who have substandard mortality the opportunity to protect their 
survivors. Two commenters indicated support for these additional 
conditions, and one commenter questioned their value to participants. 
After consideration of the comments received on this issue, the IRS and 
the Treasury Department have determined not to impose this requirement 
as a condition of making a plan amendment permitted under these 
regulations.
    If a plan sponsor eliminates a single-sum distribution option (or 
other optional form of benefit that includes a prohibited payment) 
pursuant to these regulations under a plan that does not offer other 
optional forms of benefit that provide substantial survivor benefits, 
then, in order to continue to provide participants who have substandard 
mortality the opportunity to protect their survivors, the plan sponsor 
can add other optional forms of benefit that provide substantial 
survivor benefits (including other optional forms of benefit that are 
prohibited payments under section 436(d)(5)) as part of the same 
amendment that eliminates the single-sum distribution option (or other 
optional form of benefit that includes a prohibited payment). All 
provisions of such a plan amendment (including both the elimination of 
the single-sum distribution option and the addition of optional forms 
of benefit that provide substantial survivor benefits) would be 
considered together for purposes of determining whether the plan 
amendment would be permitted to take effect in accordance with the 
rules of section 436(c).

Effective/Applicability Dates

    These regulations apply to plan amendments that are adopted and 
effective after November 8, 2012. This date is modified from the 
proposed regulations to avoid a retroactive effective date.

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 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 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.

[[Page 66918]]

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

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


0
Par. 2. Section 1.411(d)-4 is amended by adding a new paragraph A-
2(b)(2)(xii) to read as follows:


Sec.  1.411(d)-4  Section 411(d)(6) protected benefits.

* * * * *
    A-2: * * *
    (b) * * *
    (2) * * *
    (xii) Prohibited payment option under single-employer defined 
benefit plan of plan sponsor in bankruptcy. A single-employer plan that 
is covered under section 4021 of the Employee Retirement Income 
Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as 
amended (ERISA), may be amended, effective for a plan amendment that is 
both adopted and effective after November 8, 2012, to eliminate an 
optional form of benefit that includes a prohibited payment described 
in section 436(d)(5), provided that the following conditions are 
satisfied on the applicable amendment date (as defined in Sec.  
1.411(d)-3(g)(4)):
    (A) The enrolled actuary of the plan has certified that the plan's 
adjusted funding target attainment percentage (as defined in section 
436(j)(2)) for the plan year that contains the applicable amendment 
date is less than 100 percent.
    (B) The plan is not permitted to pay any prohibited payment, due to 
application of the requirements of section 436(d)(2) of the Internal 
Revenue Code and section 206(g)(3)(B) of ERISA, because the plan 
sponsor is a debtor in a bankruptcy case (that is, a case under title 
11, United States Code, or under similar Federal or State law).
    (C) The court overseeing the bankruptcy case has issued an order, 
after notice to the affected parties (as defined in section 4001(a)(21) 
of ERISA) and a hearing, within the meaning of 11 U.S.C. 102(1), 
finding that the adoption of the amendment eliminating that optional 
form of benefit is necessary to avoid a distress termination of the 
plan pursuant to section 4041(c) of ERISA or an involuntary termination 
of the plan pursuant to section 4042 of ERISA before the plan sponsor 
emerges from bankruptcy (or before the bankruptcy case is otherwise 
completed).
    (D) The Pension Benefit Guaranty Corporation has issued a 
determination that--
    (1) The adoption of the amendment eliminating that optional form of 
benefit is necessary to avoid a distress or involuntary termination of 
the plan before the plan sponsor emerges from bankruptcy (or before the 
bankruptcy case is otherwise completed); and
    (2) The plan is not sufficient for guaranteed benefits within the 
meaning of section 4041(d)(2) of ERISA.
* * * * *

    Approved: November 2, 2012.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-27336 Filed 11-7-12; 8:45 am]
BILLING CODE 4830-01-P