| REG-156518-04 |
September 19, 2005 |
Notice of Proposed Rulemaking and Notice of Public Hearing
Section 411(d)(6) Protected Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
This document contains proposed regulations providing guidance on certain
issues relating to the anti-cutback rules of section 411(d)(6) of the Internal
Revenue Code, which generally protect accrued benefits, early retirement benefits,
retirement-type subsidies, and optional forms of benefit under qualified retirement
plans. The proposed regulations would address the interaction between the
anti-cutback rules of section 411(d)(6) and the nonforfeitability requirements
of section 411(a), and would also provide a utilization test under which certain
plan amendments would be permitted to eliminate or reduce certain early retirement
benefits, retirement-type subsidies, or optional forms of benefit. These
proposed regulations would generally affect sponsors of, and participants
in, qualified retirement plans.
Written or electronic comments must be received by November 10, 2005.
Requests to speak (with outlines of oral comments to be discussed) at
the public hearing scheduled for December 6, 2005, at 10 a.m. must be received
by November 15, 2005.
Send submissions to: CC:PA:LPD:PR (REG-156518-04), room 5203, Internal
Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-156518-04), Courier’s Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively,
taxpayers may submit comments electronically, via the IRS Internet site at www.irs.gov/regs or
via the Federal eRulemaking Portal at www.regulations.gov (indicate
IRS and REG-156518-04). The public hearing will be held in the Auditorium,
Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, Pamela R. Kinard at (202) 622-6060;
concerning submissions of comments, the hearing, and the requests to be placed
on the building access list to attend the hearing, contact Treena Garrett,
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
This document contains proposed amendments to 26 CFR part 1 under section
411(d)(6) of the Internal Revenue Code (Code). These proposed regulations,
when finalized, would revise Treasury Regulations §1.411(d)-3 to provide
guidance on when a plan amendment may alter a benefit entitlement with respect
to benefits accrued before the date of the amendment to add a condition that
is permitted under section 411(a). These rules are intended to reflect the
holding in Central Laborers’ Pension Fund v. Heinz,
541 U.S. 739 (June 7, 2004). The proposed regulations would also provide
a new method — a utilization test — under which a plan amendment
is permitted to eliminate or reduce an early retirement benefit, a retirement-type
subsidy, or an optional form of benefit.
Section 411(a) generally provides that an employee’s right to
the accrued benefit derived from employer contributions must become nonforfeitable
within a specified period of service. Section 411(a)(3) provides circumstances
under which an employee’s benefit is permitted to be forfeited without
violating section 411(a). Section 411(a)(3)(B) specifically provides that
a right to an accrued benefit derived from employer contributions is not treated
as forfeitable solely because the plan provides that the payment of benefits
is suspended for such period as the employee is employed, subsequent to the
commencement of payment of such benefits: (1) in the case of a plan other
than a multiemployer plan, by the employer who maintains the plan under which
such benefits were being paid; and (2) in the case of a multiemployer plan,
in the same industry, the same trade or craft, and the same geographic area
covered by the plan as when such benefits commenced.
The definition of employment for which benefit payments are permitted
to be suspended is further described in 29 CFR 2530.203-3 of the Department
of Labor Regulations, which interprets section 203(a)(3)(B) of the Employee
Retirement Income Security Act of 1974 (ERISA), as amended, the counterpart
to section 411(a)(3)(B) of the Code. Employment that satisfies the conditions
described in section 203(a)(3)(B) of ERISA and the regulations thereunder
is referred to as “section 203(a)(3)(B) service.” See 29 CFR
2530.203-3(c).
Section 411(d)(6)(A) provides that a plan is treated as not satisfying
the requirements of section 411 if the accrued benefit of a participant is
decreased by an amendment of the plan, other than an amendment described in
section 412(c)(8) of the Code or section 4281 of ERISA. Section 411(d)(6)(B)
provides that a plan amendment that has the effect of eliminating or reducing
an early retirement benefit or a retirement-type subsidy, or eliminating an
optional form of benefit, with respect to benefits attributable to service
before the amendment is treated as impermissibly reducing accrued benefits.
For a retirement-type subsidy, this protection applies only with respect
to an employee who satisfies the preamendment conditions for the subsidy (either
before or after the amendment). Section 411(d)(6)(B) also authorizes the
Secretary of the Treasury to provide, through regulations, that section 411(d)(6)(B)
does not apply to any plan amendment that eliminates optional forms of benefit
(other than a plan amendment that has the effect of eliminating or reducing
an early retirement benefit or a retirement-type subsidy).
Section 645(b)(1) of the Economic Growth and Tax Relief Reconciliation
Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) amended section 411(d)(6)(B)
of the Code to direct the Secretary of the Treasury to issue regulations providing
that section 411(d)(6)(B) does not apply to any amendment that reduces or
eliminates early retirement benefits or retirement-type subsidies that create
significant burdens or complexities for the plan and plan participants unless
such amendment adversely affects the rights of any participant in a more than de
minimis manner.
Section 204(g) of ERISA contains parallel rules to section 411(d)(6)
of the Code, including a similar directive to the Secretary of the Treasury
to issue regulations providing that section 204(g) of ERISA does not apply
to any amendment that reduces or eliminates early retirement benefits or retirement-type
subsidies that create significant burdens or complexities for the plan and
plan participants unless such amendment adversely affects the rights of any
participant in a more than de minimis manner. Under
section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and section
204(g) of ERISA, the Secretary of the Treasury has interpretive jurisdiction
over the subject matter addressed in these proposed regulations for purposes
of ERISA, as well as the Code. Thus, these proposed Treasury regulations
issued under section 411(d)(6) of the Code apply as well for purposes of section
204(g) of ERISA.
On July 11, 1988, final regulations (T.D. 8212, 1988-2 C.B. 83) under
section 411(d)(6) were published in the Federal Register (53
FR 26050). These regulations are contained in §1.411(d)-4.
In conjunction with the publication of these proposed regulations, final
regulations (T.D. 9219) under sections 411(d)(6) and 4980F are being published
elsewhere in this issue of the Bulletin. Those final regulations are contained
in §1.411(d)-3, which sets forth conditions under which a plan amendment
is permitted to eliminate an optional form of benefit and to eliminate or
reduce an early retirement benefit or a retirement-type subsidy that creates
significant burdens or complexities for the plan and its participants, but
only if the elimination does not adversely affect the rights of any participant
in a more than de minimis manner. However, those regulations
reserve 2 topics for later guidance — the utilization test (currently
reserved in §1.411(d)-3(f)) and the interaction of the permitted forfeiture
rules under section 411(a) with the anti-cutback rules under section 411(d)(6)
(currently reserved in §1.411(d)-3(a)(3)). These proposed regulations
would address these 2 topics as described below.
In Central Laborers’, the plaintiffs were
2 inactive participants in a multiemployer pension plan who commenced payment
of their benefits in 1996 after qualifying for subsidized early retirement
payments. The plan terms required that payments be suspended if a participant
engaged in “disqualifying employment.” At the time of their commencement
of benefits, the plan defined disqualifying employment to include only employment
covered by the plan, but not work as a construction supervisor. Both participants
were employed as construction supervisors after they commenced payment of
benefits. Although the 2 participants’ benefit payments were not suspended
in 1996, the plan was amended in 1998 to expand its definition of disqualifying
employment to include any employment in the same trade or craft, industry,
and geographic area covered by the plan, and the plan stopped payments to
the 2 participants on account of their disqualifying employment as construction
supervisors. The 2 participants sued to recover the suspended payments, claiming
that the amendment expanding the plan’s suspension provisions violated
section 204(g) of ERISA (the counterpart to section 411(d)(6) of the Code).
The Supreme Court, holding for the 2 participants, ruled that section
204(g) of ERISA prohibits a plan amendment expanding the categories of post-retirement
employment that result in suspension of the payment of early retirement benefits
already accrued. The Court found that, while ERISA permits certain conditions
that are elements of the benefit itself (such as suspensions under section
411(a)(3)(B) of the Code or section 203(a)(3)(B) of ERISA), such a condition
may not be imposed after a benefit has accrued, and that the right to receive
benefit payments on a certain date may not be limited by a new condition narrowing
that right. The Court agreed with the 7th Circuit
that “[a] participant’s benefits cannot be understood without
reference to the conditions imposed on receiving those benefits, and an amendment
placing materially greater restrictions on the receipt of the benefit ‘reduces’
the benefit just as surely as a decrease in the size of the monthly benefit.”
Central Laborers’ at 744, quoting Heinz
v. Central Laborers’ Pension Fund, 303 F.3d 802, 805 (7th Cir.
2002).
Rev. Proc. 2005-23, 2005-18 I.R.B. 991, limits the retroactive application
of Central Laborers’ for qualified plans under
section 401(a) pursuant to the Commissioner’s authority under section
7805(b)(8). The revenue procedure provides that the IRS will not disqualify
a plan solely on account of a plan amendment adopted before June 7, 2004 that
violated section 411(d)(6) by adding or expanding a suspension of benefit
provision permitted under section 411(a)(3) if certain requirements are satisfied.
These requirements include the adoption of a reforming amendment that provides
for the payment of benefits retroactive to June 7, 2004, to affected plan
participants. Rev. Proc. 2005-23 does not address participants’ rights
to recover benefits under Title I of ERISA.
Rev. Proc. 2005-23 states that Treasury and the IRS intend to propose
regulations that reflect the holding in Central Laborers’.
The revenue procedure provides that the proposed regulations will provide
guidance on when an amendment may add a benefit entitlement condition that
is permitted under the vesting rules with respect to benefits accrued before
the date of the amendment. Those rules are contained in these proposed regulations.
Explanation of Provisions
Interaction of the Permitted Forfeiture Rules Under Section
411(a) with the Anti-Cutback Rules Under Section 411(d)(6)
The proposed regulations would address the interaction of the vesting
rules in section 411(a) with the anti-cutback rules in section 411(d)(6),
taking into account the decision in Central Laborers’.
The regulations would provide that a plan amendment that decreases accrued
benefits, or otherwise places greater restrictions on the rights to section
411(d)(6) protected benefits violates section 411(d)(6), even if the amendment
merely adds a restriction or condition on receipt of section 411(d)(6) protected
benefits that is otherwise permitted under the vesting rules in section 411(a)(3)
through (11). The proposed regulations would further provide that such a
plan amendment is permitted under section 411(d)(6) to the extent it applies
with respect to benefits accruing after the applicable amendment date.
The proposed regulations include 3 examples illustrating this rule.
One example includes facts similar to Central Laborers’.
Another example illustrates the interaction of section 411(d)(6) with the
rule of parity in section 411(a)(6)(D). The final example addresses how a
plan amendment that changes the plan’s vesting schedule would violate
section 411(d)(6) if the amendment were to place greater restrictions on the
rights to section 411(d)(6) protected benefits. This example illustrates
that the application of this section 411(d)(6) rule to a plan amendment changing
a plan’s vesting schedule is in addition to the requirements under section
411(a)(10)(A) (requiring that the nonforfeitable percentage of a participant’s
accrued benefit as of the applicable amendment date not be decreased by the
plan amendment) and under section 411(a)(10)(B) (requiring that the plan permit
each participant having not less than 3 years of service to elect to have
his or her nonforfeitable percentage computed without regard to the plan amendment).
Thus, if a plan amendment changes the plan’s vesting schedule, the
amendment must not place greater restrictions (including vesting restrictions)
on a participant’s rights to previously accrued benefits, and must also
comply with section 411(a)(10). As indicated in the example, both of these
requirements are satisfied for an amendment changing a plan’s vesting
schedule if each plan participant is entitled to benefits based on the greater
of the new and old vesting schedules.
While the proposed regulations address the addition of conditions specifically
described in section 411(a), these rules would also apply in other situations.
For example, if a plan provides section 411(d)(6) protected benefits that
are conditioned on the reemployment of the participant, then a plan amendment
adding additional restrictions with respect to benefits already accrued on
those benefits is required to satisfy section 411(d)(6). However, a plan
amendment is permitted to add restrictions with respect to future accruals.
The proposed regulations would provide that a plan is permitted to be
amended to eliminate optional forms of benefit that comprise a generalized
optional form[8] for a participant with respect to benefits accrued before the
applicable amendment date if certain requirements relating to the use of the
generalized optional form are satisfied. However, under the utilization test,
a plan is not permitted to be amended to eliminate core options (i.e.,
a straight life annuity, a 75% joint and contingent annuity, a 10-year term
certain and life annuity, and the most valuable option for a participant with
a short life expectancy). In order to eliminate a noncore optional form of
benefit under the proposed utilization test, 2 conditions must be satisfied:
(1) the generalized optional form is available to a substantial number of
participants during the relevant look-back period and (2) no participant must
have elected any optional form of benefit that is within its generalized optional
form during such relevant look-back period.
If the utilization test is satisfied, the plan could be amended to eliminate
all of the optional forms of benefit that comprise a generalized optional
form without having to satisfy the burdensome and de minimis requirements
of §1.411(d)-3(e). Treasury and the IRS believe that the utilization
test, by its nature, implicitly determines — by reference to participant’s
elections — which optional forms of benefit are considered valuable
to plan participants. The fact that no participant in a substantial sample
elected any optional form of benefit that is within a generalized optional
form is a compelling indication that elimination of that the entire generalized
optional form would not adversely affect the rights of any participant in
a more than de minimis manner.
The utilization test would provide that the generalized optional form
being eliminated must have been available to at least 100 participants who
are taken into account during the look-back period. The look-back period
under the utilization test in the proposed regulations is the 2 plan years
immediately preceding the plan year in which the plan amendment eliminating
the optional form of benefit is adopted. At least one of the plan years during
the look-back period must be a 12-month plan year. If a plan does not have
at least 100 participants who are taken into account during those 2 plan years,
the look-back period is permitted to be expanded to be the 3, 4, or 5 plan
years immediately preceding the plan year in which the plan amendment eliminating
the optional form of benefit is adopted in order to have a look-back period
that has at least 100 participants who are taken into account. If a plan
does not have at least 100 participants who can be taken into account during
the relevant 5-year period, the plan is not permitted to use the utilization
test.
For purposes of the utilization test, a participant is generally taken
into account only if during the look-back period the participant was eligible
to elect to commence payment of an optional form of benefit that is part of
the generalized optional form being eliminated. However, a participant would
not be taken into account if the participant: did not elect any optional
form of benefit with an annuity commencement date that is within the look-back
period; elected an optional form of benefit that includes a single-sum distribution
that applies with respect to at least 25% of the participant’s accrued
benefit; elected an optional form of benefit that was only available during
a limited period of time that contained a retirement-type subsidy that was
not extended to the generalized optional form being eliminated; or elected
an optional form of benefit with an annuity commencement date that is more
than 10 years before normal retirement age.[9] Treasury and the IRS believe that, in light of these restrictions
on participants who are permitted to be taken into account in applying the
utilization test, the sample size of 100 participants who are eligible to
elect the generalized optional form is sufficiently large to demonstrate that
elimination of the generalized optional form would not adversely affect the
rights of any plan participant in a more than de minimis manner.
Under the proposed regulations, a plan amendment eliminating a generalized
optional form under the utilization rule cannot be applicable with respect
to an optional form of benefit with an annuity commencement date that is earlier
than the number of days in the maximum QJSA explanation period (as defined
in §1.411(d)-3(g)(9)) after the date the amendment is adopted. This
waiting period is the same as the waiting period for the elimination of an
optional form of benefit under the redundancy rule in §1.411(d)-3(c)(1)(ii).
The rules relating to section 411(a) nonforfeitability provisions are
proposed to be effective June 7, 2004, the date of the Central Laborers’ decision.
The rules relating to the utilization test are proposed to be effective for
amendments adopted after December 31, 2006. With respect to the rules relating
to the utilization test, these proposed regulations cannot be relied upon
until they are adopted in final form in the Federal
Register.
It has been determined that these proposed regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore a regulatory
assessment is not required. It also has been determined that section 553(b)
of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. Because these regulations do not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section 7805(f) of the Code, these proposed
regulations will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original and
eight (8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury and IRS specifically request comments on the clarity of
the proposed rules and how they can be made easier to understand. All comments
will be available for public inspection and copying.
A public hearing has been scheduled for December 6, 2005, beginning
at 10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC. Due to building security procedures, visitors
must enter at the main entrance, located at 1111 Constitution Avenue, NW.
In addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing starts.
For information about having your name placed on the building access list
to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT”
portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written or electronic comments and
an outline of the topics to be discussed and time to be devoted to each topic
(signed original and eight (8) copies) by November 15, 2005. A period of
10 minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the deadline
for receiving comments has passed. Copies of the agenda will be available
free of charge at the hearing.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and section
645(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub.
L. 107-16 (115 Stat. 38).* * *
Par. 2. Section 1.411(d)-3 is amended by:
1. Revising paragraph (a)(3).
2. Adding Examples 3 and 4 to
paragraph (a)(4).
3. Adding Example 3 to paragraph (b)(4).
4. Revising paragraph (f).
5. Adding Example 6 to paragraph (h).
6. Adding paragraphs (j)(3) and (j)(4).
The revisions and additions read as follows:
§1.411(d)-3 Section 411(d)(6) Protected Benefits.
* * * * *
(a) * * *
(3) Application of section 411(a) nonforfeitability provisions
with respect to section 411(d)(6) protected benefits. The rules
of this paragraph (a) apply to a plan amendment that decreases a participant’s
accrued benefits, or otherwise places greater restrictions or conditions on
a participant’s rights to section 411(d)(6) protected benefits, even
if the amendment merely adds a restriction or condition that is otherwise
permitted under the vesting rules in section 411(a)(3) through (11). However,
such an amendment does not violate section 411(d)(6) to the extent it applies
with respect to benefits that accrue after the applicable amendment date.
* * * * *
(4) * * *
Example 3. (i) Facts. Employer
N maintains Plan C, a qualified defined benefit plan under which an employee
participates upon completion of 1 year of service and is vested in 100% of
the employer-derived accrued benefit upon completion of 5 years of service.
Plan C provides that a former employee’s years of service prior to
a break in service will be reinstated upon completion of 1 year of service
after being rehired. Plan C has participants who have fewer than 5 years
of service and who are accordingly 0% vested in their employer-derived accrued
benefits. On December 31, 2007, effective January 1, 2008, Plan C is amended,
in accordance with section 411(a)(6)(D), to provide that any nonvested participant
who has 5 consecutive 1-year breaks in service and whose number of consecutive
1-year breaks in service exceeds his or her number of years of service before
the breaks will have his or her pre-break service disregarded in determining
vesting under the plan.
(ii) Conclusion. Under paragraph (a)(3) of this
section, the plan amendment does not satisfy the requirements of paragraph
(a) of this section, and thus violates section 411(d)(6), because the amendment
places greater restrictions or conditions on the rights to section 411(d)(6)
protected benefits, as of January 1, 2008, for participants who have fewer
than 5 years of service, by restricting the ability of those participants
to receive further vesting protections on benefits accrued as of that date.
Example 4. (i) Facts—(A)
Employer O sponsors Plan D, a qualified profit sharing plan under which each
employee has a nonforfeitable right to a percentage of his or her employer-derived
accrued benefit based on the following table:
(B) In January 2005, Employer O acquires Company X, which maintains
Plan E, a qualified profit sharing plan under which each employee who has
completed 5 years of service has a nonforfeitable right to 100% of the employer-derived
accrued benefit. In 2006, Plan E is merged into Plan D. On the effective
date for the merger, Plan D is amended to provide that the vesting schedule
for participants of Plan E is the 7-year graded vesting schedule of Plan D.
In accordance with section 411(a)(10)(A), the plan amendment provides that
any participant of Plan E who had completed 5 years of service prior to the
amendment is fully vested. In addition, as required under section 411(a)(10)(B),
the amendment provides that any participant in Plan E who has at least 3 years
of service prior to the amendment is permitted to make an irrevocable election
to have the vesting of his or her nonforfeitable right to the employer-derived
accrued benefit determined under either the 5-year cliff vesting schedule
or the 7-year graded vesting schedule. Participant G, who has an account
balance of $10,000 on the applicable amendment date, is a participant in Plan
E with 2 years of service as of the applicable amendment date. As of the
date of the merger, Participant G’s nonforfeitable right to G’s
employer-derived accrued benefit is 0% under both the 7-year graded vesting
schedule of Plan D and the 5-year cliff vesting schedule of Plan E.
(ii) Conclusion. Under paragraph (a)(3) of this
section, the plan amendment does not satisfy the requirements of paragraph
(a) of this section and violates section 411(d)(6), because the amendment
places greater restrictions or conditions on the rights to section 411(d)(6)
protected benefits with respect to G and any participant who has fewer than
7 years of service and who elected (or was made subject to) the new vesting
schedule. A method of avoiding a section 411(d)(6) violation with respect
to account balances attributable to benefits accrued as of the applicable
amendment date and earnings thereon, would be for Plan D to provide for the
vested percentage of G and each other participant in Plan E to be no less
than the greater of the 2 vesting schedules (e.g., for
G and each other participant in Plan E to be fully vested if the participant
completes 5 years of service) for those account balances and earnings.
* * * * *
(b) * * *
(4)* * *
Example 3. (i) Facts. Plan
C, a multiemployer defined benefit plan in a particular industry, provides
that a participant may elect to commence distributions only if the participant
is not currently employed by an employer maintaining the plan and provides
that, if the participant has a specified number of years of service and attains
a specified age, the distribution is without any actuarial reduction for commencement
before normal retirement age. Since the plan’s inception, Plan C has
provided for suspension of pension benefits during periods of disqualifying
employment (ERISA section 203(a)(3)(B) service). Before 2007, the plan defined
disqualifying employment to include any job as an electrician in the particular
industry and geographic location to which Plan C applies. This definition
of disqualifying employment did not cover a job as an electrician supervisor.
In 2005, Participant E, having rendered the specified number of years of
service and attained the specified age to retire with a fully subsidized early
retirement benefit, retires from E’s job as an electrician with Employer
Y and starts a position with Employer Z as an electrician supervisor. Employer
Z is not a participating employer in Plan C but is an employer in the same
industry and geographic location as Employer Y. When E left service with
Employer Y, E’s position as a electrician supervisor was not disqualifying
employment for purposes of Plan C’s suspension of pension benefit provision,
and E elects to commence benefit payments in 2005. In 2006, effective January
1, 2007, Plan C, in accordance with section 411(a)(3)(B), is amended to expand
the definition of disqualifying employment to include any job (including supervisory
positions) as an electrician in the same industry and geographic location
to which Plan C applies. On January 1, 2007, E’s pension benefits are
suspended because of E’s disqualifying employment as an electrician
supervisor. (These facts are generally comparable to the facts in Central
Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (June 7, 2004).)
(ii) Conclusion. Under paragraphs (a)(3) and
(b)(1) of this section, the 2007 plan amendment violates section 411(d)(6),
because the amendment places greater restrictions or conditions on a participant’s
rights to section 411(d)(6) protected benefits to the extent it applies with
respect to benefits that accrued before January 1, 2007. The result would
be the same even if the amendment did not apply to former employees and instead
applied only to participants who were actively employed at the time of the
applicable amendment.
* * * * *
(f) Utilization test—(1) General
rule. A plan is permitted to be amended to eliminate all of the
optional forms of benefit that comprise a generalized optional form (as defined
in paragraph (g)(8) of this section) for a participant with respect to benefits
accrued before the applicable amendment date if—
(i) None of the optional forms of benefit being eliminated is a core
option, within the meaning of paragraph (g)(5) of this section;
(ii) The plan amendment is not applicable with respect to an optional
form of benefit with an annuity commencement date that is earlier than the
number of days in the maximum QJSA explanation period (as defined in paragraph
(g)(9) of this section) after the date the amendment is adopted;
(iii) The generalized optional form has been available to at least
100 participants who are taken into account during the look-back period; and
(iv) No participant has elected any optional form of benefit that is
part of the generalized optional form with an annuity commencement date that
is within the look-back period.
(2) Look-back period. For purposes of this paragraph
(f), the look-back period is the 2 plan years immediately preceding the plan
year in which the plan amendment eliminating the generalized optional form
is adopted. At least one of the plan years during the look-back period must
be a 12-month plan year. However, if a plan does not have at least 100 participants
who are taken into account under this paragraph (f) during those 2 plan years,
the look-back period is permitted to be expanded to be the 3, 4, or 5 plan
years immediately preceding the plan year in which the plan amendment eliminating
the generalized optional form is adopted in order to have a look-back period
that has at least 100 participants who are taken into account under this paragraph
(f). If a plan does not have at least 100 participants who are taken into
account under this paragraph (f) during the relevant 5-year period, the plan
is not permitted to add more plan years to the look-back period and, accordingly,
such a plan is not permitted to use the utilization test in this paragraph
(f).
(3) Participants taken into account. Except as
provided in this paragraph (f)(3), a participant is taken into account for
purposes of this paragraph (f) only if the participant was eligible to elect
to commence payment of an optional form of benefit that is part of the generalized
optional form being eliminated with an annuity commencement date that is within
the look-back period. However, a participant is not taken into account if
the participant either—
(i) Did not elect any optional form of benefit with an annuity commencement
date that was within the look-back period;
(ii) Elected an optional form of benefit that included a single-sum
distribution that applied with respect to at least 25% of the participant’s
accrued benefit;
(iii) Elected an optional form of benefit that was only available during
a limited period of time and that contained a retirement-type subsidy which
at that annuity commencement date was not extended to the optional form of
benefit with the same annuity commencement date that is part of the generalized
optional form being eliminated; or
(iv) Elected an optional form of benefit with an annuity commencement
date that was more than 10 years before normal retirement age.
(4) Default elections. For purposes of this paragraph
(f), an election includes the payment of an optional form of benefit that
applies in the absence of an affirmative election.
* * * * *
(h) * * *
Example 6. (i) Facts involving elimination
of noncore options using utilization test—(A) In
general. Plan G is a calendar year defined benefit plan under
which participants may elect to commence distributions after termination of
employment in the following actuarially equivalent forms, with spousal consent,
if applicable: a straight life annuity; a 50%, 75%, or 100% joint and contingent
annuity; or a 5-year, 10-year, or a 15-year term certain and life annuity.
Participants whose benefits are under $5,000 are permitted to elect a single-sum
distribution. The annuities offered under the plan are generally available
both with and without a social security leveling feature. The social security
leveling feature provides for an assumed commencement of social security benefits
at any age selected by the participant between the ages of 62 and 67. Under
Plan G, the normal retirement age is defined as age 65.
(B) Utilization test. In 2007, the plan sponsor
of Plan G, after reviewing participants’ benefit elections, determines
that no participant in the 2 prior plan years (2005 and 2006) elected a 5-year
term certain and life annuity with a social security leveling option. During
the 2 prior plan years, Plan G has made the 5-year term certain and life annuity
with a social security leveling option available to 142 participants who were
at least age 55 and who elected an optional form of benefit with an annuity
commencement date during that 2-year period. In addition, during 2005-06
plan years, 20 of the 142 participants elected a single-sum distribution and
there was no retirement-type subsidy available for a limited period of time.
Plan G, in accordance with paragraph (f)(1) of this section, is amended on
September 1, 2007, effective as of January 1, 2008, to eliminate all 5-year
term certain and life annuities with a social security leveling option for
all annuity commencement dates on or after January 1, 2008.
(ii) Conclusion. The amendment satisfies the requirements
of paragraph (f) of this section. First, the 5-year term certain and life
annuity with a social security leveling option is not a core option as defined
in paragraph (g)(5) of this section. Second, the plan amendment is not applicable
with respect to an optional form of benefit with an annuity commencement date
that is earlier than the number of days in the maximum QJSA explanation period
after the date the amendment is adopted. Third, the 5-year term certain and
life annuity with a social security leveling option has been available to
at least 100 participants who are taken into account for purposes of paragraph
(f)(4) of this section during the look-back period of 2005 and 2006. Fourth,
during that period, no participant elected any optional form that is part
of the generalized optional form being eliminated (i.e.,
the 5-year term and life annuity with a social security leveling option).
* * * * *
(j) * * *
(3) Effective date for rules relating to section 411(a) nonforfeitability
provisions. The rules provided in paragraph (a)(3) of this section
are effective June 7, 2004.
(4) Effective date for rules relating to utilization test.
The rules provided in paragraph (f) of this section are effective for amendments
adopted after December 31, 2006.
* * * * *
Mark E. Matthews,
Deputy
Commissioner for
Services and Enforcement.
Note
(Filed by the Office of the Federal Register on August 11, 2005, 8:45
a.m., and published in the issue of the Federal Register for August 12, 2005,
70 F.R. 47155)
The principal author of these proposed regulations is Pamela R. Kinard,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities), Internal Revenue Service. However, personnel from other offices
of the Internal Revenue Service and Treasury Department participated in their
development.
* * * * *
Internal Revenue Bulletin 2005-38
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