65108 Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 

holidays. The Docket Office (telephone 

1–800–647–5527) is on the plaza level 

of the Department of Transportation 

NASSIF Building at the above address.

FOR FURTHER INFORMATION CONTACT:

Kathy Randolph, Air Traffic Division, 

Airspace Branch, ACE–520C, DOT 

Regional Headquarters Building, Federal 

Aviation Administration, 901 Locust, 

Kansas City, MO 64106; telephone: 

(816) 329–2525.

SUPPLEMENTARY INFORMATION: 

Comments Invited 

Interested parties are invited to 

participate in this proposed rulemaking 

by submitting such written data, views, 

or arguments, as they may desire. 

Comments that provide the factual basis 

supporting the views and suggestions 

presented are particularly helpful in 

developing reasoned regulatory 

decisions on the proposal. Comments 

are specifically invited on the overall 

regulatory, aeronautical, economic, 

environmental, and energy-related 

aspects of the proposal. 

Communications should identify both 

docket numbers and be submitted in 

triplicate to the address listed above. 

Commenters wishing the FAA to 

acknowledge receipt of their comments 

on this notice must submit with those 

comments a self-addressed, stamped 

postcard on which the following 

statement is made: ‘‘Comments to 

Docket No. FAA–2004–19504/Airspace 

Docket No. 04–ACE–64’’. The postcard 

will be date/time stamped and returned 

to the commenter. 

Availability of NPRM’s 

An electronic copy of this document 

may be downloaded through the 

Internet at http://dms.dot.gov. Recently 

published rulemaking documents can 

also be accessed through the FAA’s Web 

page at http://www.faa.gov or the 

Superintendent of Document’s Web 

page at http://www.access.gpo.gov/nara. 

Additionally, any person may obtain 

a copy of this notice by submitting a 

request to the Federal Aviation 

Administration, Office of Air Traffic 

Airspace Management, ATA–400, 800 

Independence Avenue, SW., 

Washington, DC 20591, or by calling 

(202) 267–8783. Communications must 

identify both docket numbers for this 

notice. Persons interested in being 

placed on a mailing list for future 

NPRM’s should contact the FAA’s 

Office of Rulemaking (202) 267–9677, to 

request a copy of Advisory Circular No. 

11–2A, Notice of Proposed Rulemaking 

Distribution System, which describes 

the application procedure. 

The Proposal 

This notice proposes to amend Part 71 

of the Federal Aviation Regulation (14 

CFR Part 71) to establish Class E 

airspace designated as a surface area for 

Colonel James Jabara Airport at Wichita, 

KS. Controlled airspace extending 

upward from the surface of the earth is 

needed to contain aircraft executing 

instrument approach procedures. 

Weather observations would be 

provided by an Automated Surface 

Observing System (ASOS) and 

communications would be direct with 

Wichita Approach Control. The area 

would be depicted on appropriate 

aeronautical charts. 

Class E airspace areas designated as 

surface areas are published in Paragraph 

6002 of FAA Order 7400.9M, dated 

August 30, 2004, and effective 

September 16, 2004, which is 

incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document would be 

published subsequently in the Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. It, 

therefore, (1) is not a ‘‘significant 

regulatory action’’ under Executive 

Order 12866; (2) is not a ‘‘significant 

rule’’ under DOT Regulatory Policies 

and Procedures (44 FR 11034; February 

26, 1979); and (3) does not warrant 

preparation of a Regulatory Evaluation 

as the anticipated impact is so minimal. 

Since this is a routine matter that will 

only affect air traffic procedures and air 

navigation, it is certified that this rule, 

when promulgated, will not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference, 

Navigation (Air).

The Proposed Amendment 

In consideration of the foregoing, the 

Federal Aviation Administration 

proposes to amend 14 CFR part 71 as 

follows:

PART 71—DESIGNATION OF CLASS A, 

CLASS B, CLASS C, CLASS D, AND 

CLASS E AIRSPACE AREAS; 

AIRWAYS; ROUTES; AND REPORTING 

POINTS 

1. The authority citation for part 71 

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of Federal Aviation 

Administration Order 7400.9M, 

Airspace Designations and Reporting 

Points, dated August 30, 2004, and 

effective September 16, 2004, is 

amended as follows:

Paragraph 6002 Class E Airspace 

Designated as Surface Areas.

* * * * *

ACE KS E2 Wichita Colonel James Jabara 

Airport, KS 

Wichita, Colonel James Jabara Airport, KS 

(Lat. 37°44′51′′ N., long. 97°13′16′′ W.)

Within a 4-mile radius of Colonel James 

Jabara Airport; excluding that airspace within 

the Wichita Mid-Continent Airport, KS Class 

C airspace area and the Wichita, McConnell 

AFB, KS Class D airspace area.

* * * * *

Issued in Kansas City, MO, on October 29, 

2004. 

Anthony D. Roetzel, 

Acting Area Director, Western Flight Services 

Operations.

[FR Doc. 04–24977 Filed 11–9–04; 8:45 am] 

BILLING CODE 4910–13–M

DEPARTMENT OF TREASURY

Internal Revenue Service 

26 CFR Part 1 

[REG–114726–04] 

RIN 1545–BD23 

Distributions From a Pension Plan 

Under a Phased Retirement Program

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This notice of proposed 

rulemaking contains proposed 

amendments to the Income Tax 

Regulations under section 401(a) of the 

Internal Revenue Code. These proposed 

regulations provide rules permitting 

distributions to be made from a pension 

plan under a phased retirement program 

and set forth requirements for a bona 

fide phased retirement program. The 

proposed regulations will provide the 

public with guidance regarding 

distributions from qualified pension 

plans and will affect administrators of, 

and participants in, such plans.

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by February 8, 2005.

Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 65109

1See, for example, Pension & Welfare Benefits 

Administration, U.S. Department of Labor, ‘‘Report 

on Working Group on Phased Retirement to the 

Advisory Council on Employee Welfare & Pension 

Benefit Plans,’’ 2000; Forman, Jonathan Barry, 

‘‘How Federal Pension Laws Influence Individual 

Work and Retirement Decisions,’’ 54 Tax Law. 143 

(2000); Littler Mendelson, ‘‘Employers Consider 

‘Phased Retirement’ to Retain Employees,’’

Maryland Employment Law Letter, Vol 10, Issue 6 

(April, 2000); Geisel, Jerry, ‘‘Rethinking Phased 

Retirement; IRS Call for Comment May Signal 

Pension Law Changes,’’ Business Insurance (June 

24, 2002); Flahaven, Brian, ‘‘Please Don’t Go! Why 

Phased Retirement May Make Sense For Your 

Government,’’ 18 Gov’t Finance Review 24 (Oct. 1, 

2002); NPR, Morning Edition, ‘‘Older Workers Turn 

to ‘Phased’ Retirement, ‘‘(May 18, 2004) at 

www.npr.org/features/feature.php?wfId=1900465.

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–114726–04), room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington, 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA:LPD:PR (REG–114726–04), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

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–114726–04).

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Cathy A. 

Vohs, (202) 622–6090; concerning 

submissions and requests for a public 

hearing, contact Sonya Cruse, (202) 

622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background 

As people are living longer, healthier 

lives, there is a greater risk that 

individuals may outlive their retirement 

savings. In addition, employers have 

expressed interest in encouraging older, 

more experienced workers to stay in the 

workforce. One approach that some 

employers have implemented is to offer 

employees the opportunity for ‘‘phased 

retirement.’’

While there is no single approach to 

phased retirement, these arrangements 

generally provide employees who are at 

or near eligibility for retirement with the 

opportunity for a reduced schedule or 

workload, thereby providing a smoother 

transition from full-time employment to 

retirement. These arrangements permit 

the employer to retain the services of an 

experienced employee and provide the 

employee with the opportunity to 

continue active employment at a level 

that also allows greater flexibility and 

time away from work. 

During such a transition arrangement, 

employees may wish to supplement 

their part-time income with a portion of 

their retirement savings. However, 

phased retirement can also increase the 

risk of outliving retirement savings for 

employees who begin drawing upon 

their retirement savings before normal 

retirement age. Even though the annuity 

distribution options offered by defined 

benefit plans preclude outliving 

benefits, early distribution of a portion 

of the employee’s benefit will reduce 

the benefits available after full 

retirement. On the other hand, phased 

retirement also can provide employees 

additional time to save for retirement 

because employees continue working 

while they are able to do so, and can 

accrue additional benefits and reduce or 

forgo early spending of their retirement 

savings. 

In light of this background, Treasury 

and the IRS issued Notice 2002–43 in 

the Cumulative Bulletin (2002–27 C.B. 

38 (July 8, 2002)), in which comments 

were requested regarding phased 

retirement. Notice 2002–43 specifically 

requested comments on a wide variety 

of issues, including the following: 

• Under what circumstances, if any, 

would permitting distributions from a 

defined benefit plan before an employee 

attains normal retirement age be 

consistent with the requirement that a 

defined benefit plan be established and 

maintained primarily for purposes of 

providing benefits after retirement, such 

as the extent to which an employee has 

actually reduced his or her workload? 

• If there are such circumstances, 

how should any early retirement 

subsidy be treated? 

Comments Received 

Sixteen written comments were 

formally submitted in response to 

Notice 2002–43. These comments are in 

addition to the substantial number of 

articles and other published materials 

addressing phased retirement.1

While some of the comments 

expressed concerns over the potential 

for both dissipation of retirement funds 

and violation of age discrimination 

laws, commentators generally 

responded favorably to the proposal to 

provide guidance on facilitating phased 

retirement arrangements. These 

commentators noted that permitting 

pension distributions during phased 

retirement would be attractive to both 

employers and employees. 

Commentators also indicated that any 

guidance issued should provide that 

establishment of phased retirement 

arrangements be optional on the part of 

the employer and that participation in 

any such arrangement be voluntary on 

the part of the employee. 

Most of the comments recommended 

that eligibility to participate in a phased 

retirement program be limited to 

employees who are eligible for 

immediately commencing retirement 

benefits under the plan (including those 

eligible for early retirement benefits). 

Other comments recommended that 

retirement benefits be permitted to start 

at a specific age or combination of age 

and service; however, they noted that 

current legislative constraints, notably 

the section 72(t) 10 percent additional 

income tax on early distributions, may 

limit the desirability of this option. 

Some commentators advocated that 

any phased retirement arrangement 

should be cost neutral and not create 

additional funding obligations for 

employers. Others recommended that 

any early retirement subsidy available to 

an employee upon full retirement 

continue to be available if the employee 

participates in phased retirement. For 

example, one such commentator 

recommended not only that any early 

retirement subsidy be available upon 

phased retirement, but also that the 

subsidy so paid not be permitted to be 

applied to reduce the remainder of the 

benefit that is earned by the employee, 

particularly if the employee continues 

working past normal retirement age. 

The comments were divided over 

what constituted phased retirement. 

Several recommended that phased 

retirement benefits be limited to cases in 

which there is a reduction in hours 

worked. Others recommended that a 

reduction in hours not be required and 

that a transition to a less stressful job 

also be considered phased retirement or 

that the full retirement benefit be 

payable after the attainment of a 

specified age or years of service without 

regard to any change in work. 

The commentators who recommended 

that phased retirement benefits be 

limited to cases in which there is a 

reduction in hours worked generally 

recommended that the phased 

retirement benefits payable be 

proportionate to the reduction in work, 

based on a ‘‘dual status’’ approach. 

Under this dual status approach, an 

employee who reduces his or her work 

schedule to, for example, 80 percent of 

full-time would be considered to be 20 

percent retired and thus entitled to 20 

percent of his or her retirement benefit. 

The employee would continue to accrue 

additional benefits based on the actual 

hours he or she continues to work.

Several of the commentators 

discussed the implications of phased 

retirement benefits for purposes of the 

nondiscrimination rules of section 

401(a)(4) and the anti-cutback rules of 

section 411(d)(6). Many of the 

comments said that phased retirement 

arrangements must be flexible and that 

65110 Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 

2Cf., Edwards v. Commissioner, T.C. Memo. 

1989–409, aff’d, 906 F.2d 114 (4th Cir. 1990).

it would be important for employers to 

be able to adopt a phased retirement 

arrangement on a temporary (even 

experimental) basis. 

Many commentators expressed 

concern over the effect that a reduction 

in hours and the corresponding 

reduction in compensation would have 

on the final average pay of an individual 

for purposes of the benefit calculation 

when the employee fully retires. These 

comments generally requested guidance 

on this issue, including clarification as 

to whether an employee’s final average 

pay is permitted to decline as a result 

of the employee’s reduction in hours 

pursuant to participation in a phased 

retirement arrangement. 

Explanation of Provisions 

Overview 

The proposed regulations would 

amend § 1.401(a)–1(b) and add 

§ 1.401(a)–3 in order to permit a pro rata 

share of an employee’s accrued benefit 

to be paid under a bona fide phased 

retirement program. The pro rata share 

is based on the extent to which the 

employee has reduced hours under the 

program. Under this pro rata approach, 

an employee maintains a dual status 

(i.e., partially retired and partially in 

service) during the phased retirement 

period. This pro rata or dual status 

approach to phased retirement was one 

of the approaches recommended by 

commentators. 

While all approaches suggested by 

commentators were considered, the pro 

rata approach is the most consistent 

with the requirement that benefits be 

maintained primarily for retirement. 

Other approaches, such as permitting 

benefits to be fully available if an 

employee works reduced hours as part 

of phased retirement or permitting 

distributions of the entire accrued 

benefit to be paid as of a specified age 

prior to normal retirement age, are 

fundamentally inconsistent with the 

§ 1.401(a)–1(b) principle that benefits be 

paid only after retirement. In addition, 

although a number of commentators 

suggested that guidance address the 

practice of terminating an employee 

with a prearranged rehiring of the 

employee (or similar sham transactions), 

the proposed regulations do not address 

this topic because it involves additional 

issues outside the scope of this project. 

Rules Relating to Phased Retirement 

Under the proposed regulations, a 

plan would be permitted to pay a pro 

rata portion of the employee’s benefits 

under a bona fide phased retirement 

program before attainment of normal 

retirement age. The proposed 

regulations define a bona fide phased 

retirement program as a written, 

employer-adopted program pursuant to 

which employees may reduce the 

number of hours they customarily work 

beginning on or after a retirement date 

specified under the program and receive 

phased retirement benefits. Payment of 

phased retirement benefits is permitted 

only if the program meets certain 

conditions, including that employee 

participation is voluntary and the 

employee and employer expect the 

employee to reduce, by 20 percent or 

more, the number of hours the employee 

works during the phased retirement 

period. 

Consistent with the pro rata approach 

discussed above, the maximum amount 

that is permitted to be paid is limited to 

the portion of the employee’s accrued 

benefit equal to the product of the 

employee’s total accrued benefit on the 

date the employee commences phased 

retirement (or any earlier date selected 

by the plan for administrative ease) and 

the employee’s reduction in work. The 

reduction in work is based on the 

employee’s work schedule fraction, 

which is the ratio of the hours that the 

employee is reasonably expected to 

work during the phased retirement 

period to the hours that would be 

worked if the employee were full-time. 

Based in part on commentators’

concerns regarding early retirement 

subsidies, the proposed regulations 

generally require that all early 

retirement benefits, retirement-type 

subsidies, and optional forms of benefit 

that would be available upon full 

retirement be available with respect to 

the phased retirement accrued benefit. 

However, the proposed regulations 

would not permit payment to be made 

in the form of a single-sum distribution 

(or other eligible rollover distribution) 

in order to prevent the premature 

distribution of retirement benefits. The 

phased retirement benefit is an optional 

form of benefit protected by section 

411(d)(6) and the election of a phased 

retirement benefit is subject to the 

provisions of section 417, including the 

required explanation of the qualified 

joint and survivor annuity. 

Some comments suggested that 

phased retirement be limited to 

employees who have attained an age or 

service (or combination thereof) that is 

customary for retirement, e.g., where the 

employer has reasonably determined in 

good faith that participants who cease 

employment with the employer after 

that age or service combination are 

typically not expected to continue to 

perform further services of a generally 

comparable nature elsewhere in the 

workforce. Such a retirement age might 

be considerably lower than age 65 in 

certain occupations (such as police or 

firefighters). As discussed further below 

(under the heading Application to Plans 

Other Than Qualified Pension Plans), 

the Treasury and IRS have concluded 

that they do not have the authority to 

permit payments to begin from a section 

401(k) plan under a bona fide phased 

retirement program before the employee 

attains age 591⁄2 or has a severance from 

employment.2 Further, section 

72(t)(3)(B) provides an additional 

income tax on early distributions if 

annuity distributions are made before 

the earlier of age 591⁄2 or separation 

from service. Accordingly, in lieu of a 

customary retirement age, the proposed 

regulations adopt a rule that is 

consistent with section 401(k) and 

section 72(t)(3)(B), under which phased 

retirement benefits may not be paid 

before an employee attains age 591⁄2.

Additional Accruals During Phased 

Retirement 

The regulations provide that, during 

the phased retirement period, in 

addition to being entitled to the phased 

retirement benefit, the employee must 

be entitled to participate in the plan in 

the same manner as if the employee 

were still maintaining a full-time work 

schedule (including calculation of 

average earnings) and must be entitled 

to the same benefits (including early 

retirement benefits, retirement-type 

subsidies, and optional forms of 

benefits) upon full retirement as a 

similarly situated employee who has not 

elected phased retirement, except that 

the years of service credited under the 

plan for any plan year during the 

phased retirement period is multiplied 

by the ratio of the employee’s actual 

hours of service during the year to the 

employee’s full-time work schedule, or 

by the ratio of the employee’s 

compensation to the compensation that 

would be paid for full-time work. Thus, 

for example, under a plan with a 1,000 

hours of service requirement to accrue 

a benefit, an employee participating in 

a phased retirement program will accrue 

proportionate additional benefits, even 

if the employee works fewer than 1,000 

hours of service. 

The requirement that full-time 

compensation be imputed, with a 

proportionate reduction based on an 

employee’s actual service, is intended to 

ensure that a participant is not 

disadvantaged by reason of choosing 

phased retirement. This rule precludes 

the need for extensive disclosure 

requirements, e.g., disclosure to alert 

Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 65111

3While a low normal retirement age may have a 

significant cost effect on a traditional defined 

benefit plan, this effect is not as significant for 

defined contribution plans or for hybrid defined 

benefit plans.

participants to rights that may be lost as 

a result of participating in a phased 

retirement program. To be consistent 

with the requirement to use full-time 

compensation, the proposed regulations 

require an employee who was a highly 

compensated employee before 

commencing phased retirement to be 

treated as a highly compensated 

employee during phased retirement. See

also § 1.414(q)–1T, A–4 & A–5. 

Under the proposed regulations, the 

employee’s final retirement benefit is 

comprised of the phased retirement 

benefit and the balance of the 

employee’s accrued benefit under the 

plan (i.e., the excess of the total plan 

formula benefit over the portion of the 

accrued benefit paid as a phased 

retirement benefit). Upon full 

retirement, the phased retirement 

benefit can continue unchanged or the 

plan is permitted to offer a new election 

with respect to that benefit. 

This bifurcation is consistent with 

commentators’ recommendation that an 

employee who is in a phased retirement 

program has a dual status, under which 

the employee is treated as retired to the 

extent of the reduction in hours and is 

treated as working to the extent of the 

employee’s continued work with the 

employer. This approach also ensures 

that a phased retirement program offers 

an early retirement subsidy to the extent 

the employee has reduced his or her 

hours, and that the remainder of the 

employee’s benefit rights is not 

adversely affected by participation in 

the phased retirement program.

Testing and Adjustment of Payments 

Subject to certain exceptions, the 

proposed regulations require periodic 

testing to ensure that employees in 

phased retirement are in fact working at 

the reduced schedule, as expected. 

Thus, unless an exception applies, a 

plan must provide for an annual 

comparison between the number of 

hours actually worked by an employee 

during a testing period and the number 

of hours the employee was reasonably 

expected to work. If the actual hours 

worked during the testing period are 

materially greater than the expected 

number of hours, then the employee’s 

phased retirement benefit must be 

reduced prospectively. For this purpose, 

the employee’s hours worked are 

materially greater than the employee’s 

work schedule if they exceed either 

1331⁄3 percent of the work schedule or 

90 percent of the hours that the 

employee would work under a full-time 

schedule. 

This annual comparison is not 

required after the employee is within 3 

months of attaining normal retirement 

age or if the amount of compensation 

paid to the employee by the employer 

during the phased retirement testing 

period does not exceed the 

compensation that would be paid to the 

employee if he or she had worked full 

time multiplied by the employee’s work 

schedule fraction. Further, no 

comparison is required during the first 

year of an employee’s phased retirement 

or if the employee has entered into an 

agreement with the employer that the 

employee will retire within 2 years. 

In the event that the employer and 

employee agree to increase 

prospectively the hours that the 

employee will work, then the 

employee’s phased retirement benefit 

must be adjusted based on a new work 

schedule. The date of the agreement to 

increase the employee’s hours is treated 

as a comparison date for testing 

purposes. 

In calculating the employee’s benefit 

at full retirement, if an employee’s 

phased retirement benefits have been 

reduced during phased retirement, the 

employee’s accrued benefit under the 

plan is offset by an amount that is 

actuarially equivalent to the additional 

payments made before the reduction. 

The potential for this offset, like other 

material features of the phased 

retirement optional form of benefit, 

must be disclosed as part of the QJSA 

explanation as required under 

§ 1.401(a)–20, Q&A–36, and 

§ 1.417(a)(3)–1(c)(1)(v) and (d)(1). 

If the employee’s phased retirement 

benefit is less than the maximum 

amount permitted or the employee’s 

work schedule is further reduced at a 

later date, the proposed regulations 

allow a plan to provide one or more 

additional phased retirement benefits to 

the employee. The additional phased 

retirement benefit, commencing a later 

annuity starting date, provides 

flexibility to reflect future reductions in 

the employee’s work hours. 

Provisions Relating to Payment After 

Normal Retirement Age 

The proposed regulations clarify that 

a pension plan (i.e., a defined benefit 

plan or money purchase pension plan) 

is permitted to pay benefits upon an 

employee’s attainment of normal 

retirement age. However, normal 

retirement age cannot be set so low as 

to be a subterfuge to avoid the 

requirements of section 401(a), and, 

accordingly, normal retirement age 

cannot be earlier than the earliest age 

that is reasonably representative of a 

typical retirement age for the covered 

workforce.3

Application to Plans Other Than 

Qualified Pension Plans 

The regulations that limit 

distributions that are modified by these 

proposed regulations only apply to 

pension plans (i.e., defined benefit or 

money purchase pension plans). Other 

types of plans may be subject to less 

restrictive rules regarding in-service 

distributions, including amounts held in 

or attributable to: (1) Qualified profit 

sharing and stock bonus plans to the 

extent not attributable to elective 

deferrals under section 401(k); (2) 

insurance annuities under section 

403(b)(1), and retirement income 

accounts under section 403(b)(9), to the 

extent not attributable to elective 

deferrals; (3) custodial accounts under 

section 403(b)(7) to the extent not 

attributable to elective deferrals; and (4) 

elective deferrals under section 401(k) 

or 403(b). In general, these types of 

plans are permitted to provide for 

distributions after attainment of age 

591⁄2, without regard to whether the 

employee has retired or had a severance 

from employment. Accordingly, they 

may either provide for the same phased 

retirement rules that are proposed in 

these regulations or may provide for 

other partial or full in-service 

distributions to be available after 

attainment of age 591⁄2. However, 

eligible governmental plans under 

section 457(b) are not generally 

permitted to provide for payments to be 

made before the earlier of severance 

from employment or attainment of age 

701⁄2. See generally § 1.457–6. 

Other Issues 

The proposed regulations also 

authorize the Commissioner to issue 

additional rules in guidance of general 

applicability regarding the coordination 

of partial retirement under a phased 

retirement program and the plan 

qualification rules under section 401(a). 

These proposed regulations do not 

address all of the issues that 

commentators raised in response to 

Notice 2002–43. Thus, as noted above, 

the proposed regulations do not address 

when a full retirement occurs and 

specifically do not endorse a 

prearranged termination and rehire as 

constituting a full retirement. Further, 

the proposed regulations only address 

certain tax issues. For example, 

although commentators pointed out that 

65112 Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 

the continued availability of heath 

coverage would be an important feature 

for employees in deciding whether to 

participate in phased retirement, the 

proposed regulations do not include any 

rules relating to heath coverage. 

Similarly, the proposed regulations do 

not address any potential age 

discrimination issues, other than 

through the requirement that 

participation in a bona fide phased 

retirement program be voluntary. 

Proposed Effective Date 

The rules in these regulations are 

proposed to apply to plan years 

beginning on or after the date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register. These proposed 

regulations cannot be relied on before 

they are adopted as final regulations.

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is 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 proposed regulations, and, 

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 

Internal Revenue Code, this notice of 

proposed rulemaking will be submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on its impact on small 

business. 

Comments and Requests for a 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. All 

comments will be available for public 

inspection and copying. 

Comments are specifically requested 

on the following issues: 

• Should eligibility to participate in a 

phased retirement program be extended 

to employees that reduce their workload 

using a standard, other than counting 

hours, to identify the reduction, and, if 

so, are there administrable methods for 

measuring the reduction? 

• The proposed regulations require 

periodic testing of the hours an 

employee actually works during phased 

retirement, and if the hours are 

materially greater than the employee’s 

phased retirement work schedule, the 

phased retirement benefit must be 

adjusted. As discussed above (under the 

heading Testing), there are a number of 

exceptions to this requirement. Are 

there other, less complex alternatives 

that also would ensure that phased 

retirement benefits correspond to the 

employee’s reduction in hours? 

• The proposed regulations require an 

offset for the actuarial value of 

additional payments made before a 

reduction in phased retirement benefits. 

Should the regulations permit this offset 

to be calculated without regard to any 

early retirement subsidy and, if so, how 

should a subsidy be quantified? 

• The proposed regulations clarify 

that the right to receive a phased 

retirement benefit as a partial payment 

is a separate optional form of benefit for 

purposes of section 411(d)(6) and, thus, 

is a benefit, right, or feature for purposes 

of the special nondiscrimination rules at 

§ 1.401(a)(4)–4. Comments are requested 

on whether there are facts and 

circumstances under which the age and 

service conditions for a particular 

employer’s phased retirement program 

should be disregarded in applying 

§ 1.401(a)(4)–4 (even if the program may 

only be in place for a temporary period), 

or under which the rules at 

§ 1.401(a)(4)–4 should otherwise be 

modified with respect to phased 

retirement. 

• Should any special rules be adopted 

to coordinate the rules regarding 

distributions and continued accruals 

during phased retirement with a plan’s 

provisions regarding employment after 

normal retirement age, such as 

suspension of benefits? 

A public hearing may be scheduled if 

requested in writing by a person that 

timely submits written comments. If a 

public hearing is scheduled, notice of 

the date, time and place for the hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal author of these 

proposed regulations is Cathy A. Vohs 

of the Office of the Division Counsel/

Associate Chief Counsel (Tax Exempt 

and Government Entities). However, 

other personnel from the IRS and 

Treasury participated in their 

development.

List of Subjects 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements.

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows:

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order to read in part as 

follows:

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

Section 1.401(a)–1 also issued under 

26 U.S.C. 401. 

Section 1.401(a)–3 also issued under 

26 U.S.C. 401.

Par. 2. In § 1.401(a)–1, paragraph 

(b)(1)(i) is amended by adding text 

before the period at the end of the 

current sentence and a new second 

sentence, and paragraph (b)(1)(iv) is 

added to read as follows:

§ 1.401(a)–1 Post-ERISA qualified plans 

and qualified trusts; in general.

* * * * *

(b) * * * 

(1) * * * 

(i) * * * or attainment of normal 

retirement age. However, normal 

retirement age cannot be set so low as 

to be a subterfuge to avoid the 

requirements of section 401(a), and, 

accordingly, normal retirement age 

cannot be earlier than the earliest age 

that is reasonably representative of a 

typical retirement age for the covered 

workforce.

* * * * *

(iv) Benefits may not be distributed 

prior to normal retirement age solely 

due to a reduction in hours. However, 

notwithstanding anything provided 

elsewhere in paragraph (b) of this 

section (including the pre-ERISA rules 

under § 1.401–1), an employee may be 

treated as partially retired for purposes 

of paragraph (b)(1)(i) of this section to 

the extent provided under § 1.401(a)–3 

relating to a bona fide phased retirement 

program.

* * * * *

Par. 3. Section 1.401(a)–3 is added to 

read as follows:

§ 1.401(a)–3 Benefits during phased 

retirement. 

(a) Introduction—(1) General rule.

Under section 401(a), a qualified 

pension plan may provide for the 

distribution of phased retirement 

benefits in accordance with the 

limitations of this paragraph (a) to the 

extent that an employee is partially 

retired under a bona fide phased 

retirement program, as defined in 

paragraph (c) of this section, provided 

the requirements set forth in paragraphs 

(d) and (e) of this section are satisfied.

(2) Limitation on benefits paid during 

phased retirement period—(i) Benefits 

limited to pro rata retirement benefit.

The phased retirement benefits paid 

Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 65113

during the phased retirement period 

cannot exceed the phased retirement 

accrued benefit payable in the optional 

form of benefit applicable at the annuity 

starting date for the employee’s phased 

retirement benefit. 

(ii) Availability of early retirement 

subsidies, etc. Except as provided in 

paragraph (a)(2)(iii) of this section, all 

early retirement benefits, retirementtype subsidies, and optional forms of 

benefit available upon full retirement 

must be available with respect to the 

portion of an employee’s phased 

retirement accrued benefit that is 

payable as a phased retirement benefit. 

(iii) Limitation on optional forms of 

payment. Phased retirement benefits 

may not be paid in the form of a single 

sum or other form that constitutes an 

eligible rollover distribution under 

section 402(c)(4). 

(3) Limited to full-time employees 

who are otherwise eligible to commence 

benefits. Phased retirement benefits are 

only permitted to be made available to 

an employee who, prior to the phased 

retirement period, normally maintains a 

full-time work schedule and who would 

otherwise be eligible to commence 

retirement benefits immediately if he or 

she were to fully retire. 

(4) Authority of Commissioner to 

adopt other rules. The Commissioner, in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin (see

§ 601.601(d)(2)(ii)(b) of this chapter), 

may adopt additional rules regarding 

the coordination of partial retirement 

under a phased retirement program and 

the qualification rules of section 401(a). 

(b) Definitions—(1) In general. The 

definitions set forth in this paragraph (b) 

apply for purposes of this section. 

(2) Phased retirement program. The 

term phased retirement program means 

a written, employer-adopted program 

pursuant to which employees may 

reduce the number of hours they 

customarily work beginning on or after 

a date specified under the program and 

commence phased retirement benefits 

during the phased retirement period, as 

provided under the plan. 

(3) Phased retirement period. The 

term phased retirement period means 

the period of time that the employee 

and employer reasonably expect the 

employee to work reduced hours under 

the phased retirement program. 

(4) Phased retirement accrued benefit.

The term phased retirement accrued 

benefit means the portion of the 

employee’s accrued benefit equal to the 

product of the employee’s total accrued 

benefit on the annuity starting date for 

the employee’s phased retirement 

benefit, and one minus the employee’s 

work schedule fraction. 

(5) Phased retirement benefit. The 

term phased retirement benefit means 

the benefit paid to an employee upon 

the employee’s partial retirement under 

a phased retirement program, based on 

some or all of the employee’s phased 

retirement accrued benefit, and payable 

in the optional form of benefit 

applicable at the annuity starting date. 

(6) Work schedule. With respect to an 

employee, the term work schedule

means the number of hours the 

employee is reasonably expected to 

work annually during the phased 

retirement period (determined in 

accordance with paragraph (c)(4) of this 

section). 

(7) Full-time work schedule. With 

respect to an employee, the term fulltime work schedule means the number 

of hours the employee would normally 

work during a year if the employee were 

to work on a full-time basis, determined 

in a reasonable and consistent manner. 

(8) Work schedule fraction. With 

respect to an employee, the term work 

schedule fraction means a fraction, the 

numerator of which is the employee’s 

work schedule and the denominator of 

which is the employee’s full-time work 

schedule. 

(c) Bona fide phased retirement 

program—(1) Definition generally. The 

term bona fide phased retirement 

program means a phased retirement 

program that satisfies paragraphs (c)(2) 

through (5) of this section. 

(2) Limitation to individuals who have 

attained age 591⁄2. A bona fide phased 

retirement program must be limited to 

employees who have attained age 591⁄2. 

A plan is permitted to impose 

additional requirements for eligibility to 

participate in a bona fide phased 

retirement program, such as limiting 

eligibility to either employees who have 

satisfied additional age or service 

conditions (or combination thereof) 

specified in the program or employees 

whose benefit may not be distributed 

without consent under section 

411(a)(11). 

(3) Participation must be voluntary.

An employee’s participation in a bona 

fide phased retirement program must be 

voluntary. 

(4) Reduction in hours requirement.

An employee who participates in a bona 

fide phased retirement program must 

reasonably be expected (by both the 

employer and employee) to reduce, by 

20 percent or more, the number of hours 

the employee customarily works. This 

requirement is satisfied if the employer 

and employee enter into an agreement, 

in good faith, under which they agree 

that the employee will reduce, by 20 

percent or more, the number of hours 

the employee works during the phased 

retirement period. 

(5) Limited to employees who are not 

key-employee owners. Phased 

retirement benefits are not permitted to 

be made available to a key employee 

who is described in section 

416(i)(1)(A)(ii) or (iii). 

(d) Conditions for commencement of 

phased retirement benefit—(1) Imputed 

accruals based on full-time schedule—

(i) General rule. During the phased 

retirement period, in addition to being 

entitled to payment of the phased 

retirement benefit, the employee must 

be entitled to participate in the plan in 

the same manner as if the employee still 

maintained a full-time work schedule 

(including calculation of average 

earnings, imputation of compensation in 

accordance with § 1.414(s)–1(f), and 

imputation of service in accordance 

with the service-crediting rules under 

§ 1.401(a)(4)–11(d)), and must be 

entitled to the same benefits (including 

early retirement benefits, retirementtype subsidies, and optional forms of 

benefits) upon full retirement as a 

similarly situated employee who has not 

elected phased retirement, except that 

the years of service credited under the 

plan for any plan year during the 

phased retirement period is determined 

under paragraph (d)(1)(ii) or (iii) of this 

section, whichever is applicable.

(ii) Method for crediting years of 

service for full plan years. The years of 

service credited under the plan for any 

full plan year during the phased 

retirement period is multiplied by an 

adjustment ratio that is equal to the ratio 

of the employee’s actual hours worked 

during that year to the number of hours 

that would be worked by the employee 

during that year under a full-time work 

schedule. Alternatively, on a reasonable 

and consistent basis, the adjustment 

ratio may be based on the ratio of an 

employee’s actual compensation during 

the year to the compensation that would 

be paid to the employee during the year 

if he or she had maintained a full-time 

work schedule. 

(iii) Method for crediting years of 

service for partial plan years. In the case 

of a plan year only a portion of which 

is during a phased retirement period for 

an employee, the method described in 

paragraphs (d)(1)(i) and (ii) of this 

section is applied with respect to that 

portion of the plan year. Thus, for 

example, if an employee works full time 

until October 1 of a calendar plan year 

and works one-third time from October 

1 through December 31 of the year, then 

the employee is credited with 10 

months for that year (9 months plus 1⁄3

of 3 months). 

65114 Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 

(2) Ancillary benefits during phased 

retirement period—(i) Death benefits. If 

an employee dies while receiving 

phased retirement benefits, death 

benefits are allocated between the 

phased retirement benefit and the 

benefit that would be payable upon 

subsequent full retirement. See also 

§ 1.401(a)–20, A–9. Thus, if an 

employee dies after the annuity starting 

date for the phased retirement benefit, 

death benefits are paid with respect to 

the phased retirement benefit in 

accordance with the optional form 

elected for that benefit, and death 

benefits are paid with respect to the 

remainder of the employee’s benefit in 

accordance with the plan’s provisions 

regarding death during employment. 

(ii) Other ancillary benefits. To the 

extent provided under the terms of the 

plan, ancillary benefits, other than death 

benefits described in paragraph (d)(2)(i) 

of this section, are permitted to be 

provided during the phased retirement 

period. 

(3) Calculation of benefit at full 

retirement—(i) In general. Upon full 

retirement following partial retirement 

under a phased retirement program, the 

employee’s total accrued benefit under 

the plan (including the employee’s 

accruals during the phased retirement 

period, determined in accordance with 

paragraph (d)(1) of this section) is offset 

by the portion of the employee’s phased 

retirement accrued benefit that is being 

distributed as a phased retirement 

benefit at the time of full retirement. 

(ii) Adjustment for prior payments. If, 

before full retirement, the employee’s 

phased retirement benefit has been 

reduced under paragraph (d)(4) of this 

section, then the employee’s accrued 

benefit under the plan is also offset 

upon full retirement by an amount that 

is actuarially equivalent to the phased 

retirement benefit payments that have 

been made during the phased retirement 

period that were not made with respect 

to the portion of the phased retirement 

accrued benefit that is applied as an 

offset under paragraph (d)(3)(i) of this 

section at the time of full retirement. 

(iii) Election of optional form with 

respect to net benefit. Upon full 

retirement, an employee is entitled to 

elect, in accordance with section 417, an 

optional form of benefit with respect to 

the net accrued benefit determined 

under paragraph (d)(3)(i) and (ii) of this 

section. 

(iv) New election permitted for 

phased retirement benefit. A plan is 

permitted to provide that, upon full 

retirement, an employee may elect, in 

accordance with section 417 and 

without regard to paragraph (a)(2)(iii) of 

this section, a new optional form of 

benefit with respect to the portion of the 

phased retirement accrued benefit that 

is being distributed as a phased 

retirement benefit. Any such new 

optional form of benefit is calculated at 

the time of full retirement as the 

actuarial equivalent of the future phased 

retirement benefits (without offset for 

the phased retirement benefits 

previously paid). 

(4) Prospective reduction in phased 

retirement benefit if hours are materially 

greater than expected—(i) General rule.

Except as otherwise provided in this 

paragraph (d)(4), a plan must compare 

annually the number of hours actually 

worked by an employee during the 

phased retirement testing period and the 

number of hours the employee was 

reasonably expected to work during the 

testing period for purposes of 

calculating the work schedule fraction. 

For this purpose, the phased retirement 

testing period is the 12 months 

preceding the comparison date (or such 

longer period permitted under 

paragraph(d)(4)(iv) of this section, or 

any shorter period that applies if there 

is a comparison date as a result of an 

agreed increase under paragraph 

(d)(4)(vi) of this section). In the event 

that the actual hours worked 

(determined on an annual basis) during 

the phased retirement testing period 

exceeds the work schedule, then, except 

as provided in paragraph (d)(4)(ii) or (v) 

of this section, the employee’s phased 

retirement benefit must be reduced in 

accordance with the method provided 

in paragraph (d)(4)(iii) of this section, 

effective as of an adjustment date 

specified in the plan that is not more 

than 3 months later than the comparison 

date. 

(ii) Permitted variance in hours. A 

plan is not required to reduce the 

phased retirement benefit unless the 

hours worked during the phased 

retirement testing period are materially 

greater than the hours that would be 

expected to be worked under the work 

schedule. For this purpose, the 

employee’s hours worked (determined 

on annual basis) are materially greater 

than the employee’s work schedule if 

either—

(A) The employee’s hours worked 

(determined on an annual basis) are 

more than 1331⁄3 percent of the 

employee’s work schedule; or 

(B) The employee’s hours worked 

(determined on an annual basis) exceed 

90 percent of the full-time work 

schedule. 

(iii) Adjustment method. If a phased 

retirement benefit must be reduced 

under paragraph (d)(4) of this section, a 

new (i.e., reduced) phased retirement 

benefit must be calculated as provided 

in this paragraph (d)(4)(iii). First, an 

adjusted work schedule is determined. 

The adjusted work schedule is an 

annual schedule based on the number of 

hours the employee actually worked 

during the phased retirement testing 

period. The adjusted work schedule is 

applied to the employee’s accrued 

benefit that was used to calculate the 

prior phased retirement benefit. This 

results in a new phased retirement 

accrued benefit for purposes of 

paragraph (b)(4) of this section. Second, 

a new phased retirement benefit is 

determined, based on the new phased 

retirement accrued benefit and payable 

in the same optional form of benefit (i.e., 

using the same annuity starting date and 

the same early retirement factor and 

other actuarial adjustments) as the prior 

phased retirement benefit. If an 

employee is receiving more than one 

phased retirement benefit (as permitted 

under paragraph (e)(2) of this section) 

and a reduction is required under 

paragraph (d)(4) of this section, then the 

reduction is applied first to the most 

recently commencing phased retirement 

benefit (and then, if necessary, to the 

next most recent phased retirement 

benefit, etc.). 

(iv) Comparison date for phased 

retirement testing period. The 

comparison date is any date chosen by 

the employer on a reasonable and 

consistent basis and specified in the 

plan, such as the last day of the plan 

year, December 31, or the anniversary of 

the annuity starting date for the 

employee’s phased retirement benefit. 

As an alternative to testing the hours 

worked during the 12 months preceding 

the comparison date, the plan may, on 

a reasonable and consistent basis, 

provide that the comparison of actual 

hours worked to the work schedule be 

based on a cumulative period that 

exceeds 12 months beginning with 

either the annuity starting date for the 

employee’s phased retirement benefit or 

any later date specified in the plan. 

(v) Exceptions to comparison 

requirement—(A) In general. The 

comparison of hours described in 

paragraph (d)(4) of this section is not 

required in the situations set forth in 

this paragraph (d)(4)(v). 

(B) Employees recently commencing 

phased retirement. No comparison is 

required for an employee who 

commenced phased retirement benefits 

within the 12-month period preceding 

the comparison date.

(C) Employees with short phased 

retirement periods. No comparison is 

required during the first 2 years of an 

employee’s phased retirement period 

if—

Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 65115

(1) The employee has entered into an 

agreement with the employer under 

which the employee’s phased retirement 

period will not exceed 2 years and the 

employee will fully retire at the end of 

such period; and 

(2) The employee fully retires after a 

phased retirement period not in excess 

of 2 years. 

(D) Employees with proportional pay 

reduction. No comparison is required 

for any phased retirement testing period 

if the amount of compensation paid to 

the employee during that period does 

not exceed the compensation that would 

be paid to the employee if he or she had 

maintained a full-time work schedule 

multiplied by the work schedule 

fraction. 

(E) Employees at or after normal 

retirement age. No comparison is 

required for any phased retirement 

testing period ending within 3 months 

before the employee’s normal retirement 

age or any time thereafter. 

(vi) Agreement to increase hours—(A) 

General rule. In the event that the 

employer and the employee agree to 

increase prospectively the hours under 

the employee’s work schedule prior to 

normal retirement age, then, 

notwithstanding the exceptions 

provided in paragraphs (d)(4)(v)(B) 

through (D) of this section, the plan 

must treat the effective date of the 

agreement to increase the employee’s 

hours as a comparison date for purposes 

of paragraph (d)(4)(iv) of this section. 

For purposes of this paragraph (d)(4)(vi), 

with respect to an employee, the term 

new work schedule means the greater of 

the actual number of hours the 

employee worked (determined on an 

annual basis) during the prior phased 

retirement testing period or the annual 

number of hours the employee 

reasonably expects to work under the 

new agreement. 

(B) Required adjustments. If the 

employee’s hours under the new work 

schedule are materially greater (within 

the meaning of paragraph (d)(4)(ii) of 

this section) than the hours the 

employee would be expected to work 

(based on the employee’s prior work 

schedule), the employer is required to 

reduce the employee’s phased 

retirement benefit, effective as of the 

date of the increase, based on the new 

work schedule. In this case, the 

employee’s new work schedule is used 

for future comparisons under paragraph 

(d)(4) of this section. 

(C) Permitted adjustments. If the 

employee’s hours under the new work 

schedule are not materially greater 

(within the meaning of paragraph 

(d)(4)(ii) of this section) than the hours 

the employee would be expected to 

work (based on the employee’s prior 

work schedule), the employer is 

permitted, but not required, to reduce 

the employee’s phased retirement 

benefit, effective as of the date of the 

increase, based on the new work 

schedule. If the benefit is so reduced, 

the employee’s new work schedule is 

used for future comparisons under 

paragraph (d)(4) of this section. If the 

employee’s phased retirement benefit is 

not so reduced, future comparisons are 

determined using the employee’s prior 

work schedule. 

(e) Other rules—(1) Highly 

compensated employees. An employee 

who partially retires under a phased 

retirement program and who was a 

highly compensated employee, as 

defined in section 414(q), immediately 

before the partial retirement is 

considered to be a highly compensated 

employee during the phased retirement 

period, without regard to the 

compensation actually paid to the 

employee during the phased retirement 

period. 

(2) Multiple phased retirement 

benefits permitted—(i) In general. A 

plan is permitted to provide one or more 

additional phased retirement benefits 

prospectively to an employee who is 

receiving a phased retirement benefit if 

the conditions set forth in paragraph 

(e)(2)(ii) of this section are satisfied. At 

the later annuity starting date for the 

additional phased retirement benefit, 

the additional phased retirement 

benefits may not exceed the amount 

permitted to be paid based on the excess 

of—

(A) The employee’s phased retirement 

accrued benefit at the later annuity 

starting date, over 

(B) The portion of the employee’s 

phased retirement accrued benefit at the 

earlier annuity starting date that is being 

distributed as a phased retirement 

benefit. 

(ii) Conditions. The additional phased 

retirement benefit described in 

paragraph (e)(2)(i) of this section may be 

provided only if—

(A) The prior phased retirement 

benefit was not based on the employee’s 

entire phased retirement accrued benefit 

at the annuity starting date for the prior 

phased retirement benefit, or 

(B) The employee’s work schedule at 

the later annuity starting date is less 

than the employee’s work schedule that 

was used to calculate the prior phased 

retirement benefit.

(3) Application of section 411(d)(6). In 

accordance with § 1.411(d)–4, A–1(b)(1), 

the right to receive a partial distribution 

of an employee’s accrued benefit as a 

phased retirement benefit is treated as 

an optional form of payment that is 

separate from the right to receive a full 

distribution of the accrued benefit upon 

full retirement. 

(4) Application of nondiscrimination 

rules. The right to receive a phased 

retirement benefit is a benefit, right, or 

feature that is subject to § 1.401(a)(4)–4. 

(f) Examples. The following examples 

illustrate the application of this section:

Example 1. (i) Employer’s Plans. Plan X (as 

in effect prior to amendment to reflect the 

phased retirement program described below) 

is a defined benefit plan maintained by 

Employer M. Plan X provides an accrued 

benefit of 1.5% of the average of an 

employee’s highest three years of pay (based 

on the highest 36 consecutive months of 

pay), times years of service (with 1,000 hours 

of service required for a year of service), 

payable as a life annuity beginning at age 65. 

Plan X permits employees to elect to 

commence actuarially reduced distributions 

at any time after the later of termination of 

employment or attainment of age 50, except 

that if an employee retires after age 55 and 

completion of 20 years of service, the 

applicable reduction is only 3% per year for 

the years between ages 65 and 62 and 6% per 

year for the years between ages 62 to 55. Plan 

X permits employees to select, with spousal 

consent, a single life annuity, a joint and 

contingent annuity with the employee having 

the right to select any beneficiary and a 

continuation percentage of 50%, 75%, or 

100%, or a 10-year certain and life annuity. 

(ii) Phased Retirement Program. Employer 

M adopts a voluntary phased retirement 

program that will only be available for 

employees who retire during the two-year 

period from February 1, 2006 to January 31, 

2008. The program will not be available to 

employees who are not entitled to an 

immediate pension or who are 1 percent 

owners. Employer M has determined that 

employees typically begin to retire after 

attainment of age 55 with at least 15 years of 

service. Accordingly, to increase retention of 

certain employees, the program will provide 

that employees in certain specified work 

positions who have reached age 591⁄2 and 

completed 15 years of service may elect 

phased retirement. The program permits 

phased retirement to be implemented 

through a reduction of 25%, 50%, or 75% in 

the number of hours expected to be worked 

for up to 5 years following phased retirement 

(other reduced schedules may be elected 

with the approval of M), with the employee’s 

compensation during the phased retirement 

period to be based on what a similar full-time 

employee would be paid, reduced by the 

applicable percentage reduction in hours 

expected to be worked. In order to participate 

in the program, the employee and the 

employer must enter into an agreement under 

which the employee will reduce his or her 

hours accordingly. The agreement also 

provides that the employee’s compensation 

during phased retirement will be reduced by 

that same percentage. The program is 

announced to employees in the fall of 2005. 

(iii) Plan Provisions Regarding Phased 

Retirement Benefit. (A) Plan X is amended, 

prior to February 1, 2006, to provide that an 

employee who elects phased retirement 

65116 Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 

under M’s phased retirement program is 

permitted to commence benefits with respect 

to a portion of his or her accrued retirement 

benefit (the employee’s phased retirement 

accrued benefit), based on the applicable 

percentage reduction in hours expected to be 

worked. For example, for a 25% reduction in 

hours, the employee is entitled to commence 

benefits with respect to 25% of his or her 

accrued benefit. Plan X permits an employee 

who commences phased retirement to elect, 

with spousal consent, from any of the 

optional forms provided under the plan. 

(B) During the phased retirement period, 

the employee will continue to accrue benefits 

(without regard to the plan’s 1,000 hour 

requirement), with his or her pay for 

purposes of calculating benefits under Plan X 

increased by the ratio of 100 percent to the 

percentage of full-time pay that will be paid 

during phased retirement and with the 

employee’s service credit to be equal to the 

product of the same percentage times the 

service credit that would apply if the 

employee were working full time. Upon the 

employee’s subsequent full retirement, his or 

her total accrued benefit will be based on the 

resulting highest three years of pay and total 

years of service, offset by the phased 

retirement accrued benefit. The retirement 

benefit payable upon subsequent full 

retirement is in addition to the phased 

retirement benefit. Plan X does not provide 

for a new election with respect to the phased 

retirement benefit. 

(C) In the case of death during the phased 

retirement period, the employee will be 

treated as a former employee to the extent of 

his or her phased retirement benefit and as 

an active employee to the extent of the 

retirement benefit that would be due upon 

full retirement. 

(D) Because the terms of the phased 

retirement program provide that the 

employee’s compensation during phased 

retirement will be reduced by that same 

percentage as applies to calculate phased 

retirement benefits, Plan X does not have 

provisions requiring annual testing of hours 

actually worked. 

(iv) Application to a Specific Employee—

(A) Phased retirement benefit. Employee E is 

age 591⁄2 with 20 years of credited service. 

Employee E’s compensation is $90,000, and 

E’s highest three years of pay is $85,000. 

Employee E elects phased retirement on 

April 1, 2006 and elects to reduce hours by 

50% beginning on July 1, 2006. Thus, E’s 

annuity starting date for the phased 

retirement benefit is July 1, 2006. Employee 

E’s total accrued benefit as of July 1, 2006 as 

a single life annuity payable at normal 

retirement age is equal to $25,500 per year 

(1.5% times $85,000 times 20 years of 

service). Thus, Employee E’s phased 

retirement accrued benefit as of July 1, 2006 

as a single life annuity payable at normal 

retirement age is equal to $12,750 per year 

($25,500 times 1 minus E’s work schedule 

fraction of 50%). Accordingly, Employee E’s 

phased retirement benefit payable as a 

straight life annuity commencing on July 1, 

2006 is equal to $9,690 per year ($12,750 per 

year times 76% (100% minus the applicable 

reduction for early retirement equal to 3% for 

3 years and 6% for an additional 21⁄2 years)). 

Employee E elects a joint and 50% survivor 

annuity, with E’s spouse as the contingent 

annuitant. Under Plan X, the actuarial factor 

for this form of benefit is 90%, so E’s benefit 

is $8,721 per year. 

(B) Death during phased retirement. If 

Employee E were to die on or after July 1, 

2006 and before subsequent full retirement, 

E’s spouse would be entitled to a 50% 

survivor annuity based on the joint and 50% 

survivor annuity being paid to E, plus a 

qualified preretirement survivor annuity that 

complies with section 417 with respect to the 

additional amount that would be paid to E 

if he or she had fully retired on the date of 

E’s death. 

(C) Subsequent full retirement benefit.

Three years later, Employee E fully retires 

from Employer M. Throughout this period, 

E’s compensation has been 50% of the 

compensation that would have been paid to 

E if he or she were working full time. 

Consequently, no adjustment in E’s phased 

retirement benefit is required. E’s highest 

consecutive 36 months of compensation 

would be $95,000 if E had not elected phased 

retirement and E has been credited with 11⁄2

years of service credit for the 3 years of 

phased retirement (.50 times 3 years). 

Accordingly, prior to offset for E’s phased 

retirement accrued benefit, E’s total accrued 

benefit as of July 1, 2009 as a single life 

annuity commencing at normal retirement 

age is equal to $30,637.50 per year ($95,000 

times 1.5% times 21.5 years of service) and, 

after the offset for E’s phased retirement 

accrued benefit, E’s retirement benefit as a 

single life annuity commencing at normal 

retirement age is equal to $17,887.50 

($30,637.50 minus $12,750). Thus, the 

amount of E’s additional early retirement 

benefit payable as a straight life annuity at 

age 621⁄2 is equal to $16,545.94 per year 

($17,887.50 per year times 92.5% (100% 

minus 3% for 21⁄2 years)). Employee E elects, 

with spousal consent, a 10-year certain and 

life annuity that applies to the remainder of 

E’s accrued benefit. This annuity is in 

addition to the previously elected joint and 

50% survivor annuity payable as E’s phased 

retirement benefit.

Example 2. (i) Same Plan and Phased 

Retirement Program, Except Annual Testing 

Required. The facts with respect to the Plan 

X and M’s phased retirement program are the 

same as in Example 1, except that the 

program does not provide that the 

employee’s compensation during phased 

retirement will be reduced by that same 

percentage as is applied to calculate phased 

retirement benefits, but instead the 

compensation depends on the number of 

hours worked by the employee. Plan X 

provides for annual testing on a calendar year 

basis and for an employee’s phased 

retirement benefit to be reduced 

proportionately if the hours worked exceed a 

threshold, under provisions which reflect the 

variance permitted paragraph (d)(4)(ii) of this 

section. 

(ii) Employee Has Small Increase in Hours.

The facts with respect to Employee E are the 

same as in Example 1, except that E’s full 

time work schedule would result in 2,000 

hours worked annually, E’s work schedule 

fraction is 50%, and E works 500 hours from 

July 1, 2006 through December 31, 2006, 

1,000 hours in 2007, 1,200 hours in 2008, 

and 600 hours from January 1, 2009 through 

E’s full retirement on June 30, 2009. 

(iii) Application of Testing Rules. No 

comparison of hours is required for the 

partial testing period that occurs in 2006. For 

2007, no reduction is required in E’s phased 

retirement benefit as a result of the hours 

worked by E during 2007 because the hours 

did not exceed E’s work schedule (50% of 

2,000). For 2008, although the hours worked 

by E exceeded E’s work schedule, no 

reduction is required because the hours 

worked in 2008 were not materially greater 

than E’s work schedule (1,200 is not more 

than the variance permitted under paragraph 

(d)(4)(ii) of this section, which is 1331⁄3% of 

1,000). E’s total accrued benefit upon E’s 

retirement on July 1, 2009 would be based on 

21.65 years of service to reflect the actual 

hours worked from July 1, 2006 through June 

30, 2009.

Example 3. (i) Same Plan and Phased 

Retirement Program, Except Material 

Increase in Hours. The facts with respect to 

the Plan X and M’s phased retirement 

program are the same as in Example 2, except 

E works 1,400 hours in 2008 and 700 hours 

in the first half of 2009. 

(ii) Application of Testing Rules. No 

comparison of hours is required for the 

partial testing period that occurs in 2006. For 

2007, no reduction is required in E’s phased 

retirement benefit as a result of the hours 

worked by E during 2007 because the hours 

did not exceed 50% of 2,000. However, the 

hours worked by E during 2008 exceed 

1331⁄3% of E’s work schedule (50% of 2,000), 

so that the phased retirement benefit paid to 

E during 2009 must be reduced. The 

reduction is effective March 1, 2009. The 

new phased retirement benefit of $5,232.60 is 

based on 30% of the participant’s accrued 

benefit as of July 1, 2006, payable as a joint 

and 50% survivor annuity commencing on 

that date (30% times $25,500 times the early 

retirement factor of 76% times the joint and 

50% factor of 90%). This is equivalent to 

reducing the previously elected joint and 

50% survivor annuity payable with respect to 

E by 40% (400 ‘‘excess’’ hours divided by the 

1,000 hour expected reduction). When E 

retires fully on July 1, 2009, E’s total accrued 

benefit as of July 1, 2009 as a single life 

annuity commencing at normal retirement 

age is $31,065 per year ($95,000 times 1.5% 

times 21.8 years of service). This accrued 

benefit is offset by (A) E’s phased retirement 

accrued benefit (which is $7,650 (600 

divided by 2,000 times $25,500)) plus (B) the 

actuarial equivalent of 40% of the payments 

that were made to E from January 1, 2008 

through February 28, 2009.

Example 4. (i) Same Plan and Phased 

Retirement Program, Except Employer and 

Employee Agree to Decrease Hours. The facts 

with respect to the Plan X and M’s phased 

retirement program are the same as in 

Example 2, except before 2008, E enters into 

an agreement with M to decrease E’s number 

of hours worked from 50% of full time to 

25% of full time. E works 500 hours in 2008 

and 250 hours in 2009. 

(ii) Application of Multiple Benefit Rule.

Under paragraph (e)(2) of this section, Plan 

Federal Register / Vol. 69, No. 217 / Wednesday, November 10, 2004 / Proposed Rules 65117

M may provide for an additional phased 

retirement benefit to be offered to E for 2008. 

The maximum increase would be for the 

phased retirement benefit paid to E during 

2009 to be increased based on a phased 

retirement accrued benefit equal to 75% of 

E’s accrued benefit (1,500 divided by 2,000). 

Thus, the amount being paid to E would be 

increased, effective January 1, 2008, based on 

the excess of 75% of E’s total accrued benefit 

on December 31, 2007, over E’s original 

phased retirement accrued benefit of $12,750. 

Employee E would have the right to elect, 

with spousal consent, any annuity form 

offered under Plan X (with the actuarial 

adjustment for time of commencement and 

form of payment to be based on the age of 

E and any contingent beneficiary (and E’s 

service, if applicable) on June 1, 2008), which 

would be in addition to the previously 

elected joint and 50% survivor annuity 

payable as E’s original phased retirement 

benefit. When E retires fully on July 1, 2009, 

Employee E’s total accrued benefit as of July 

1, 2009 would be offset by (A) E’s original 

phased retirement accrued benefit plus (B) 

the phased retirement accrued benefit for 

which additional phased retirement benefits 

were payable beginning in 2008.

(g) Effective date. The rules of this 

section apply to plan years beginning on 

or after the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register.

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement.

[FR Doc. 04–24874 Filed 11–9–04; 8:45 am] 

BILLING CODE 4830–01–P

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52 

[R05–OAR–2004–WI–0001; FRL–7829–5] 

Approval and Promulgation of 

Implementation Plans; Wisconsin

AGENCY: Environmental Protection 

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: The EPA is proposing to 

approve revisions to Wisconsin’s State 

Implementation Plan (SIP) regarding the 

control of nitrogen oxide (NOX) 

emissions. On August 29, 2003, the EPA 

published a final rulemaking approving 

the emission averaging program for 

existing sources subject to the state’s 

rule limiting NOX emissions in 

southeast Wisconsin. By its submittal 

dated May 25, 2004, the Wisconsin 

Department of Natural Resources 

requested that EPA approve 

modifications to existing requirements 

regarding the control of NOX emissions 

in the Wisconsin SIP. The SIP revisions 

modify language to clarify which 

sources are eligible to participate in the 

NOX emission averaging program. In 

addition, the revision creates a separate 

categorical emission limit for new 

combustion turbines burning 

biologically derived gaseous fuels. The 

request is approvable because it meets 

the requirements of the Clean Air Act. 

Wisconsin held a public hearing on the 

submittal on August 6, 2003. 

In the final rules section of this 

Federal Register, EPA is approving the 

SIP revision as a direct final rule 

without prior proposal, because EPA 

views this as a noncontroversial 

revision and anticipates no adverse 

comments. A detailed rationale for the 

approval is set forth in the direct final 

rule. If no adverse comments are 

received in response to this proposed 

rule, no further activity is contemplated 

in relation to this proposed rule. If EPA 

receives adverse comments, EPA will 

withdraw the direct final rule and 

address all public comments received in 

a subsequent final rule based on this 

proposed rule. EPA will not institute a 

second comment period on this action. 

Any parties interested in commenting 

on this action should do so at this time.

DATES: Written comments must be 

received on or before December 10, 

2004.

ADDRESSES: Submit comments, 

identified by Regional Material in 

EDocket ID No. R05–OAR–2004–WI–

0001 by one of the following methods: 

Federal eRulemaking Portal: http://

www.regulations.gov. Follow the on-line 

instructions for submitting comments. 

Agency Web site: http://

docket.epa.gov/rmepub/index.jsp

material in Edocket(RME), EPA’s 

electronic public docket and connect 

system, is EPA’s preferred method for 

receiving comments. Once in the 

system, select ‘‘quick search’’ then key 

in the appropriate RME Docket 

identification number. Follow the online instructions for submitting 

comments. 

E-mail: bortzer.jay@epa.gov.

Fax: (312) 886–5824. 

Mail: You may send written 

comments to: J. Elmer Bortzer, Chief, 

Air Programs Branch, (AR–18J), 

Environmental Protection Agency, 77 

West Jackson Boulevard, Chicago, 

Illinois 60604. 

Hand delivery: Deliver your 

comments to: J. Elmer Bortzer, Chief, 

Air Programs Branch (AR–18J), U.S. 

Environmental Protection Agency, 

Region 5, 77 West Jackson Boulevard, 

18th floor, Chicago, Illinois 60604. Such 

deliveries are only accepted during the 

Regional Office’s normal hours of 

operation, which are Monday through 

Friday, 8:30 a.m. to 4:30 p.m. excluding 

Federal holidays. 

Instructions: Direct your comments to 

the appropriate rulemaking by including 

in the text ‘‘Public comment on the 

proposed rulemaking Region 5 in 

Regional Material in EDocket ID No. 

R05–OAR–2004–WI–0001’’ in the 

subject line on the first page of your 

comment. EPA’s policy is that all 

comments received will be included in 

the public docket without change, 

including any personal information 

provided, unless the comment includes 

information claimed to be Confidential 

Business Information (CBI) or other 

information whose disclosure is 

restricted by statute. Do not submit 

information that you consider to be CBI 

or otherwise protected through Regional 

Material in Edocket, regulations.gov, or 

e-mail. The EPA RME Web site and the 

Federal regulations.gov Web site are 

‘‘anonymous access’’ systems, which 

means EPA will not know your identity 

or contact information unless you 

provide it in the body of your comment. 

If you send an e-mail comment directly 

to EPA without going through RME or 

regulations.gov, your e-mail address 

will be automatically captured and 

included as part of the comment that is 

placed in the public docket and made 

available on the Internet. If you submit 

an electronic comment, EPA 

recommends that you include your 

name and other contact information in 

the body of your comment and with any 

disk or CD–ROM you submit. If EPA 

cannot read your comment due to 

technical difficulties and cannot contact 

you for clarification, EPA may not be 

able to consider your comment. 

Electronic files should avoid the use of 

special characters, any form of 

encryption, and be free of any defects or 

viruses. For additional instructions on 

submitting comments, go to Section I of 

the SUPPLEMENTARY INFORMATION section 

of this document. 

Docket: All documents in the 

electronic docket are listed in the 

Regional Material in Edocket (RME) 

index at http://www.epa.gov/edocket.

Although listed in the index, some 

information is not publicly available, 

i.e., Confidential Business Information 

(CBI) or other information whose 

disclosure is restricted by statute. 

Publicly available docket materials are 

available either electronically in RME or 

in hard copy at Environmental 

Protection Agency, Region 5, Air and 

Radiation Division, 77 West Jackson 

Boulevard, Chicago, Illinois 60604. (We 

recommend that you telephone Charles 

Hatten, Environmental Engineer, at 

(312) 886–6031 before visiting the