Federal Register / Vol. 66, No. 118 / Tuesday, June 19, 2001 / Rules and Regulations 32897

figures discussed in AD rulemaking

actions represent only the time

necessary to perform the specific actions

actually required by the AD. These

figures typically do not include

incidental costs, such as the time

required to gain access and close up,

planning time, or time necessitated by

other administrative actions.

Regulatory Impact

The regulations adopted herein will

not have a substantial direct effect on

the States, on the relationship between

the national Government and the States,

or on the distribution of power and

responsibilities among the various

levels of government. Therefore, it is

determined that this final rule does not

have federalism implications under

Executive Order 13132.

For the reasons discussed above, I

certify that this action (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)

will not have a significant economic

impact, positive or negative, on a

substantial number of small entities

under the criteria of the Regulatory

Flexibility Act. A final evaluation has

been prepared for this action and it is

contained in the Rules Docket. A copy

of it may be obtained from the Rules

Docket at the location provided under

the caption ADDRESSES.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation

safety, Incorporation by reference,

Safety.

Adoption of the Amendment

Accordingly, pursuant to the

authority delegated to me by the

Administrator, the Federal Aviation

Administration amends part 39 of the

Federal Aviation Regulations (14 CFR

part 39) as follows:

PART 39—AIRWORTHINESS

DIRECTIVES

1. The authority citation for part 39

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]

2. Section 39.13 is amended by

adding the following new airworthiness

directive:

2001–12–09 Dassault Aviation:

Amendment 39–12264. Docket 2000–

NM–291–AD.

Applicability: Model Mystere-Falcon 900

series airplanes having serial numbers 1

through 177 inclusive; and Model Falcon

900EX series airplanes having serial numbers

1 through 41 inclusive; certificated in any

category.

Note 1: This AD applies to each airplane

identified in the preceding applicability

provision, regardless of whether it has been

modified, altered, or repaired in the area

subject to the requirements of this AD. For

airplanes that have been modified, altered, or

repaired so that the performance of the

requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (b) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required as indicated, unless

accomplished previously.

To prevent water from collecting and

freezing in the structure boxes at frame 25,

which could result in jamming of the flight

controls and consequent reduced

controllability of the airplane, accomplish

the following:

Screen Replacement

(a) Within 6 months after the effective date

of this AD: Remove the existing protective

screens that are riveted to the center beam

and are also bonded to the frame and to the

bottom of the underfloor structure boxes at

frame 25, and install new wider-mesh

screens that are riveted to the center beam

and bonded to the frame only. Accomplish

the actions in accordance with Dassault

Falcon 900 Service Bulletin 0232, dated

March 1999, or Dassault Service Bulletin

F900–232, Revision 1, dated November 12,

1999 (for Model Mystere-Falcon 900 series

airplanes); or Dassault Falcon 900EX Service

Bulletin 0093, dated March 1999, or Dassault

Service Bulletin F900EX–93, Revision 1,

dated November 12, 1999 (for Model Falcon

900EX series airplanes); as applicable.

Alternative Methods of Compliance

(b) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager,

International Branch, ANM–116, FAA,

Transport Airplane Directorate. Operators

shall submit their requests through an

appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, International Branch,

ANM–116.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the International Branch,

ANM–116.

Special Flight Permits

(c) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

Incorporation by Reference

(d) The actions shall be done in accordance

with Dassault Falcon 900 Service Bulletin

0232, dated March 1999; Dassault Service

Bulletin F900–232, Revision 1, dated

November 12, 1999; Dassault Falcon 900EX

Service Bulletin 0093, dated March 1999; or

Dassault Service Bulletin F900EX–93,

Revision 1, dated November 12, 1999; as

applicable. This incorporation by reference

was approved by the Director of the Federal

Register in accordance with 5 U.S.C. 552(a)

and 1 CFR part 51. Copies may be obtained

from Dassault Falcon Jet, P.O. Box 2000,

South Hackensack, New Jersey 07606. Copies

may be inspected at the FAA, Transport

Airplane Directorate, 1601 Lind Avenue,

SW., Renton, Washington; or at the Office of

the Federal Register, 800 North Capitol

Street, NW., suite 700, Washington, DC.

Note 3: The subject of this AD is addressed

in French airworthiness directive 1999–446–

028(B), dated November 3, 1999.

Effective Date

(e) This amendment becomes effective on

July 24, 2001.

Issued in Renton, Washington, on June 6,

2001.

Donald L. Riggin,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 01–14724 Filed 6–18–01; 8:45 am]

BILLING CODE 4910–13–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8948]

RIN 1545–AY43

Minimum Cost Requirement Permitting

the Transfer of Excess Assets of a

Defined Benefit Pension Plan to a

Retiree Health Account

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

Income Tax Regulations relating to the

minimum cost requirement under

section 420, which permits the transfer

of excess assets of a defined benefit

pension plan to a retiree health account.

Pursuant to section 420(c)(3)(E), these

regulations provide that an employer

who significantly reduces retiree health

coverage during the cost maintenance

period does not satisfy the minimum

cost requirement of section 420(c)(3). In

addition, these regulations clarify the

circumstances under which an

employer is considered to have

significantly reduced retiree health

32898 Federal Register / Vol. 66, No. 118 / Tuesday, June 19, 2001 / Rules and Regulations

1Section 420(a)(1) and (2) provide that the trust

that is part of the plan is not treated as failing to

satisfy the qualification requirements of section

401(a) or (h) of the Code, and no amount is

includible in the gross income of the employer

maintaining the plan, solely by reason of such

transfer. Also, section 420(a)(3) provides that a

qualified transfer is not treated as either an

employer reversion for purposes of section 4980 or

a prohibited transaction for purposes of section

4975.

In addition, Title I of the Employee Retirement

Income Security Act of 1974 (88 Stat. 829), as

amended (ERISA), provides that a qualified transfer

pursuant to section 420 is not a prohibited

transaction under ERISA (ERISA section 408(b)(13))

or a prohibited reversion of assets to the employer

(ERISA section 403(c)(1)). ERISA also provides

certain notification requirements with respect to

such qualified transfers.

coverage during the cost maintenance

period.

DATES: Effective Date: These regulations

are effective June 19, 2001.

Applicability Date: These regulations

are applicable to transfers of excess

pension assets occurring on or after

December 18, 1999. See the Effective

Date portion of this preamble.

FOR FURTHER INFORMATION CONTACT:

Janet A. Laufer or Vernon S. Carter,

(202) 622–6060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final

regulations (26 CFR part 1) under

section 420 of the Internal Revenue

Code of 1986 (Code). These regulations

provide guidance concerning the

minimum cost requirement under

section 420. The Revenue

Reconciliation Act of 1990 (Public Law

101–508) (104 Stat. 1388), section

12011, added section 420 of the Code,

a temporary provision permitting

certain qualified transfers of excess

pension assets from a nonmultiemployer defined benefit pension

plan to a health benefits account. A

health benefit account is defined as an

account established and maintained

under section 401(h) of the Code (401(h)

account) that is part of the plan.1 One

of the conditions of a qualified section

420 transfer was that the employer

satisfy a maintenance of effort

requirement in the form of a ‘‘minimum

cost requirement’’ under which the

employer was required to maintain

employer-provided retiree health

expenditures for covered retirees, their

spouses, and dependents at a minimum

dollar level for a 5-year cost

maintenance period, beginning with the

taxable year in which the qualified

transfer occurs.

The Uruguay Round Agreements Act

(Public Law 103–465) (108 Stat. 4809)

(December 8, 1994), extended the

availability of section 420 through

December 31, 2000. In conjunction with

the extension, Congress modified the

maintenance of effort rules for plans

transferring assets for retiree health

benefits so that employers could take

into account cost savings realized in

their health benefit plans. As a result,

the focus of the maintenance of effort

requirement was shifted from health

costs to health benefits. Under this

‘‘benefit maintenance requirement,’’

which applied to qualified transfers

made after December 8, 1994, an

employer had to maintain substantially

the same level of employer-provided

retiree health coverage for the taxable

year of the transfer and the following 4

years. The level of coverage required to

be maintained was based on the

coverage provided in the taxable year

immediately preceding the taxable year

of the transfer.

The Tax Relief Extension Act of 1999

(title V of H.R. 1180, the Ticket to Work

and Work Incentives Improvement Act

of 1999) (Public Law 106–170,113 Stat.

1860) (TREA–99) extended section 420

through December 31, 2005. In

conjunction with this extension, the

minimum cost requirement was

reinstated as the applicable

‘‘maintenance of effort’’ provision (in

lieu of requiring the maintenance of the

level of coverage) for qualified transfers

made after December 17, 1999. Because

the minimum cost requirement relates

to per capita cost, an employer could

satisfy the minimum cost requirement

by maintaining the average cost even

though the employer defeats the

purpose of the maintenance of effort

requirement by reducing the number of

people covered by the health plan. In

response to concerns regarding this

possibility, TREA–99 also added section

420(c)(3)(E), which requires the

Secretary of the Treasury to prescribe

such regulations as may be necessary to

prevent an employer who significantly

reduces retiree health coverage during

the cost maintenance period from being

treated as satisfying the minimum cost

requirement of section 420(c)(3). If the

minimum cost requirement of section

420(c)(3) is not satisfied, the transfer of

assets from the pension plan to the

401(h) account is not a ‘‘qualified

transfer’’ to which the provisions of

section 420(a) apply.

On January 5, 2001, a notice of

proposed rulemaking (REG–116468–00)

was published in the Federal Register

(66 FR 1066). Written comments were

received on the proposed regulations. A

public hearing scheduled for March 15,

2001 was canceled because no one had

requested to speak (66 FR 13864). After

consideration of all the comments

received on the proposed regulations,

the regulations are adopted as modified

by this Treasury decision.

Explanation of Provisions

General Framework

Following the approach taken in the

proposed regulations, these regulations

provide that the minimum cost

requirement of section 420(c)(3) is not

met if an employer significantly reduces

retiree health coverage during the cost

maintenance period. Whether an

employer has significantly reduced

retiree health coverage is determined by

looking at the number of individuals

(retirees, their spouses, and dependents)

who lose coverage during the cost

maintenance period as a result of

employer actions, measured on both an

annual basis and a cumulative basis.

In determining whether an employer

has significantly reduced retiree health

coverage, the regulations provide that

the employer does not satisfy the

minimum cost requirement if the

percentage decrease in the number of

individuals provided with applicable

health benefits that is attributable to

employer action exceeds 10 percent in

any year, or if the sum of the annual

percentage decreases during the cost

maintenance period exceeds 20 percent.

Employer Action

The regulations retain the broad

definition of employer action contained

in the proposed regulations. Thus,

employer action includes not only plan

amendments but also situations in

which other employer actions, such as

the sale of all or part of the employer’s

business, operate in conjunction with

the existing plan terms to have the

indirect effect of ending an individual’s

coverage.

The proposed regulations contained

no exceptions from the rule that treats

individuals as losing health coverage by

reason of employer action if those

individuals’ coverage ends by reason of

a sale of all or part of the employer’s

business, even if the buyer provides

coverage for such individuals (on the

implicit assumption that a buyer of less

than an entire corporation rarely

undertakes to provide such coverage to

retirees in these transactions). The

preamble to the proposed regulations

specifically requested comments as to

(1) the circumstances, if any, in which

buyers commonly provide the seller’s

retirees, and their spouses and

dependents, with health coverage

following a corporate transaction, and

(2) in such cases, criteria that should

apply to the replacement coverage in

determining whether to treat those

individuals as not having lost coverage.

Federal Register / Vol. 66, No. 118 / Tuesday, June 19, 2001 / Rules and Regulations 32899

Commentators disagreed with the

assumption stated in the preamble to

the proposed regulations that a buyer

acquiring a portion of a seller’s business

rarely undertakes to provide retiree

health coverage to retirees in these

transactions and expressed concern

about the approach taken in the

proposed regulations concerning

individuals who lose retiree health

coverage in such situations. One

commentator stated that in the case of

business combinations involving

organizations that contract with the

United States Government, the relevant

procurement regulations encourage

buyers to assume a seller’s obligations

for retirees’ pension and retiree medical

benefits. Other commentators expressed

a desire to retain flexibility in

structuring future business dispositions

so that a buyer or transferee of a

business could undertake to provide

retiree health coverage for the seller’s

employees.

Generally, commentators requested

that the regulations allow an employer

who sells or transfers a business to take

into account health coverage that a

buyer or transferee provides to retired

employees of the employer. Various

approaches were suggested, most of

them centering around allowing an

employer to take credit for retiree health

benefits provided by a buyer or

transferee that are substantially similar

to the benefits provided by the

employer.

In cases in which a buyer acquires the

entire employer sponsoring the pension

plan that is the subject of the

maintenance of effort requirement under

section 420(c)(3)(E), no special rule is

required, because the buyer as the

successor employer maintaining the

plan is responsible for continuing to

satisfy the minimum cost requirements

of section 420(c)(3) with respect to that

transfer. However, based upon

comments received, these final

regulations include a special rule that

allows the employer responsible for

satisfying the maintenance of effort

requirement of section 420(c)(3)(E) to

take credit for a buyer’s or transferee’s

provision of retiree health benefits in

certain other situations.

Under the final regulations, an

employer may, but is not required to,

treat retiree health coverage as not

having ended for individuals whose

coverage is provided by a buyer. In such

a case, for the year of the sale and future

taxable years of the cost maintenance

period, the employer must apply the

minimum cost requirement contained in

section 420(c)(3) by treating the

individuals whose coverage is provided

by the buyer as individuals to whom

coverage for applicable health benefits

is provided during the year (i.e.,

including all such individuals in the

denominator in the determination of

applicable employer cost) and treating

amounts the buyer spends on health

benefits for those individuals as

qualified current retiree health

liabilities. After the buyer commences

providing the retiree health benefits,

action of the buyer is attributed to the

employer for purposes of determining

whether an individual’s coverage ends

by reason of employer action.

Accordingly, if a buyer initially

provides retiree health benefits to

individuals affected by the sale, but

later amends its plan to stop providing

benefits to those individuals, the

employer must treat those individuals

as having lost coverage by reason of

employer action.

These final regulations also add a

definition of ‘‘sale’’ to clarify that the

rule for sales applies as well to other

transfers of a business. In the case of a

transfer, the transferee is treated as the

buyer. Thus, for example, the rule

applies in a situation in which an

employer spins off all or part of its

business, and also applies when a

contractor that operates a governmentowned facility is replaced by another

contractor and the replacement

contractor hires the employees of the

prior contractor to operate the facility.

Effective Date

The proposed regulations provided

that the 10 percent annual limit would

not apply to a taxable year beginning

before February 5, 2001 (30 days after

publication of the proposed regulations

in the Federal Register). However,

under the proposed regulations, the 20

percent cumulative limit applied with

respect to cost maintenance periods

pertaining to any transfers made on or

after December 18, 1999. Thus, if an

employer reduced coverage by more

than 20 percent prior to issuance of the

proposed regulations, the employer

would have failed the cumulative test.

Several commentators expressed

concern about the proposed effective

date of transfers occurring on or after

December 18, 1999. None of the

comments indicated that any employers

had in fact reduced coverage by more

than 20 percent prior to issuance of the

proposed regulations, and one of the

commentators stated that as a practical

matter, the issue of retroactivity is moot.

However, a number of the commentators

expressed concern over retroactive

effective dates in Treasury regulations

as a matter of principle.

These final regulations, like the

proposed regulations, provide that the

20 percent cumulative test will apply

with respect to transfers of excess

pension assets occurring on or after

December 18, 1999. In order to address

concerns raised by commentators,

however, the final regulations take into

account any reinstatement of coverage

that occurs during the portion of a cost

maintenance period that precedes the

first day of the first taxable year

beginning on or after January 1, 2002

(the initial period). Thus, for purposes

of the cumulative test, if an employer

reduced retiree health coverage by more

than 20 percent, the employer can,

before the end of the initial period,

resume providing coverage for

individuals who lost coverage and treat

those individuals as not having lost

coverage. However, if an employer

reduces retiree health coverage by more

than 20 percent during the initial period

and does not ‘‘correct’’ by again

providing coverage for individuals who

lost coverage, the employer would fail

the cumulative test. Also, the annual

test of significant reduction applies only

to taxable years beginning on or after

January 1, 2002, which reflects a further

delay from the date in the proposed

regulation.

Additional Changes

The proposed regulations contained a

special rule that addresses situations in

which an employer adopts plan terms

that establish eligibility for health

coverage for some individuals, but

provide that those same individuals lose

health coverage upon the occurrence of

a particular event or after a stated period

of time. In those cases, an individual is

not counted as having lost health

coverage by reason of employer action

merely because that individual’s

coverage ends upon the occurrence of

the event or after a certain period of

time, such as when health benefits are

provided to employees retiring as a

result of a plant closing only for the

period during which they receive

severance pay (see example 2 of the

regulations). As a result of the changes

discussed above that address

‘‘corrections’’ through restoration of

coverage during the initial period and

sale transactions, these final regulations

contain two modifications of the special

rule for contemporaneously-adopted

plan terms. First, the special rule is not

available with respect to an amendment

that restores coverage before the end of

the initial period. Second, in the context

of an amendment of a buyer’s health

plan to provide retiree health coverage

for a seller’s employees, the special rule

is available only to the extent that any

terms that have the effect of ending an

individual’s coverage are the same as

32900 Federal Register / Vol. 66, No. 118 / Tuesday, June 19, 2001 / Rules and Regulations

the terms of the plan maintained by the

seller, and only if the terms of the

seller’s plan that terminate coverage

were adopted contemporaneously with

the provision under which the

individual became eligible for retiree

health coverage under the seller’s plan.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in

Executive Order 12866. Therefore, a

regulatory assessment is not required. It

has also been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply

to these regulations, and, because the

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, the notice

of proposed rulemaking preceding these

regulations was submitted to the Chief

Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Drafting Information

The principal authors of these

regulations are Janet A. Laufer and

Vernon S. Carter, Office of Division

Counsel/Associate Chief Counsel (Tax

Exempt and Government Entities).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2 Section 1.420–1 is added under

the undesignated centerheading

‘‘Pension, Profit-Sharing, Stock Bonus

Plans, etc.’’ to read as follows:

§ 1.420–1 Significant reduction in retiree

health coverage during the cost

maintenance period.

(a) In general. Notwithstanding

section 420(c)(3)(A), the minimum cost

requirements of section 420(c)(3) are not

met if the employer significantly

reduces retiree health coverage during

the cost maintenance period.

(b) Significant reduction—(1) In

general. An employer significantly

reduces retiree health coverage during

the cost maintenance period if, for any

taxable year beginning on or after

January 1, 2002, that is included in the

cost maintenance period, either —

(i) The employer-initiated reduction

percentage for that taxable year exceeds

10 percent; or

(ii) The sum of the employer-initiated

reduction percentages for that taxable

year and all prior taxable years during

the cost maintenance period exceeds 20

percent.

(2) Employer-initiated reduction

percentage. The employer-initiated

reduction percentage for any taxable

year is the fraction B/A, expressed as a

percentage, where:

A = The total number of individuals (retired

employees plus their spouses plus their

dependents) receiving coverage for

applicable health benefits as of the day

before the first day of the taxable year.

B = The total number of individuals included

in A whose coverage for applicable

health benefits ended during the taxable

year by reason of employer action.

(3) Special rules for taxable years

beginning before January 1, 2002. The

following rules apply for purposes of

computing the amount in paragraph

(b)(1)(ii) of this section if any portion of

the cost maintenance period precedes

the first day of the first taxable year

beginning on or after January 1, 2002—

(i) Aggregation of taxable years. The

portion of the cost maintenance period

that precedes the first day of the first

taxable year beginning on or after

January 1, 2002 (the initial period) is

treated as a single taxable year and the

employer-initiated reduction percentage

for the initial period is computed as set

forth in paragraph (b)(2) of this section,

except that the words ‘‘initial period’’

apply instead of ‘‘taxable year.’’

(ii) Loss of coverage. If coverage for

applicable health benefits for an

individual ends by reason of employer

action at any time during the initial

period, an employer may treat that

coverage as not having ended if the

employer restores coverage for

applicable health benefits to that

individual by the end of the initial

period.

(4) Employer action—(i) General rule.

For purposes of paragraph (b)(2) of this

section, an individual’s coverage for

applicable health benefits ends during a

taxable year by reason of employer

action, if on any day within the taxable

year, the individual’s eligibility for

applicable health benefits ends as a

result of a plan amendment or any other

action of the employer (e.g., the sale of

all or part of the employer’s business)

that, in conjunction with the plan terms,

has the effect of ending the individual’s

eligibility. An employer action is taken

into account for this purpose regardless

of when the employer action actually

occurs (e.g., the date the plan

amendment is executed), except that

employer actions occurring before the

later of December 18, 1999, and the date

that is 5 years before the start of the cost

maintenance period are disregarded.

(ii) Special rule. Notwithstanding

paragraph (b)(4)(i) of this section,

coverage for an individual will not be

treated as having ended by reason of

employer action merely because such

coverage ends under the terms of the

plan if those terms were adopted

contemporaneously with the provision

under which the individual became

eligible for retiree health coverage. This

paragraph (b)(4)(ii) does not apply with

respect to plan terms adopted

contemporaneously with a plan

amendment that restores coverage for

applicable health benefits before the end

of the initial period in accordance with

paragraph (b)(3)(ii) of this section.

(iii) Sale transactions. If a purchaser

provides coverage for retiree health

benefits to one or more individuals

whose coverage ends by reason of a sale

of all or part of the employer’s business,

the employer may treat the coverage of

those individuals as not having ended

by reason of employer action. In such a

case, for the remainder of the year of the

sale and future taxable years of the cost

maintenance period —

(A) For purposes of computing the

applicable employer cost under section

420(c)(3), those individuals are treated

as individuals to whom coverage for

applicable health benefits was provided

(for as long as the purchaser provides

retiree health coverage to them), and

any amounts expended by the purchaser

of the business to provide for health

benefits for those individuals are treated

as paid by the employer;

(B) For purposes of determining

whether a subsequent termination of

coverage is by reason of employer action

under this paragraph (b)(4), the

purchaser is treated as the employer.

However, the special rule in paragraph

(b)(4)(ii) of this section applies only to

the extent that any terms of the plan

maintained by the purchaser that have

the effect of ending retiree health

coverage for an individual are the same

as terms of the plan maintained by the

employer that were adopted

contemporaneously with the provision

under which the individual became

eligible for retiree health coverage under

the plan maintained by the employer.

Federal Register / Vol. 66, No. 118 / Tuesday, June 19, 2001 / Rules and Regulations 32901

(c) Definitions. The following

definitions apply for purposes of this

section:

(1) Applicable health benefits.

Applicable health benefits means

applicable health benefits as defined in

section 420(e)(1)(C).

(2) Cost maintenance period. Cost

maintenance period means the cost

maintenance period as defined in

section 420(c)(3)(D).

(3) Sale. A sale of all or part of an

employer’s business means a sale or

other transfer in connection with which

the employees of a trade or business of

the employer become employees of

another person. In the case of such a

transfer, the term purchaser means a

transferee of the trade or business.

(d) Examples. The following examples

illustrate the application of this section:

Example 1. (i) Employer W maintains a

defined benefit pension plan that includes a

401(h) account and permits qualified

transfers that satisfy section 420. The number

of individuals receiving coverage for

applicable health benefits as of the day before

the first day of Year 1 is 100. In Year 1,

Employer W makes a qualified transfer under

section 420. There is no change in the

number of individuals receiving health

benefits during Year 1. As of the last day of

Year 2, applicable health benefits are

provided to 99 individuals, because 2

individuals became eligible for coverage due

to retirement and 3 individuals died in Year

2. During Year 3, Employer W amends its

health plan to eliminate coverage for 5

individuals, 1 new retiree becomes eligible

for coverage and an additional 3 individuals

are no longer covered due to their own

decision to drop coverage. Thus, as of the last

day of Year 3, applicable health benefits are

provided to 92 individuals. During Year 4,

Employer W amends its health plan to

eliminate coverage under its health plan for

8 more individuals, so that as of the last day

of Year 4, applicable health benefits are

provided to 84 individuals. During Year 5,

Employer W amends its health plan to

eliminate coverage for 8 more individuals.

(ii) There is no significant reduction in

retiree health coverage in either Year 1 or

Year 2, because there is no reduction in

health coverage as a result of employer action

in those years.

(iii) There is no significant reduction in

Year 3. The number of individuals whose

health coverage ended during Year 3 by

reason of employer action (amendment of the

plan) is 5. Since the number of individuals

receiving coverage for applicable health

benefits as of the last day of Year 2 is 99, the

employer-initiated reduction percentage for

Year 3 is 5.05 percent (5/99), which is less

than the 10 percent annual limit.

(iv) There is no significant reduction in

Year 4. The number of individuals whose

health coverage ended during Year 4 by

reason of employer action is 8. Since the

number of individuals receiving coverage for

applicable health benefits as of the last day

of Year 3 is 92, the employer-initiated

reduction percentage for Year 4 is 8.70

percent (8/92), which is less than the 10

percent annual limit. The sum of the

employer-initiated reduction percentages for

Year 3 and Year 4 is 13.75 percent, which is

less than the 20 percent cumulative limit.

(v) In Year 5, there is a significant

reduction under paragraph (b)(1)(ii) of this

section. The number of individuals whose

health coverage ended during Year 5 by

reason of employer action (amendment of the

plan) is 8. Since the number of individuals

receiving coverage for applicable health

benefits as of the last day of Year 4 is 84, the

employer-initiated reduction percentage for

Year 5 is 9.52 percent (8/84), which is less

than the 10 percent annual limit. However,

the sum of the employer-initiated reduction

percentages for Year 3, Year 4, and Year 5 is

5.05 percent + 8.70 percent + 9.52 percent =

23.27 percent, which exceeds the 20 percent

cumulative limit.

Example 2. (i) Employer X, a calendar year

taxpayer, maintains a defined benefit pension

plan that includes a 401(h) account and

permits qualified transfers that satisfy section

420. X also provides lifetime health benefits

to employees who retire from Division A as

a result of a plant shutdown, no health

benefits to employees who retire from

Division B, and lifetime health benefits to all

employees who retire from Division C. In

2000, X amends its health plan to provide

coverage for employees who retire from

Division B as a result of a plant shutdown,

but only for the 2-year period coinciding

with their severance pay. Also in 2000, X

amends the health plan to provide that

employees who retire from Division A as a

result of a plant shutdown receive health

coverage only for the 2-year period

coinciding with their severance pay. A plant

shutdown that affects Division A and

Division B employees occurs in 2000. The

number of individuals receiving coverage for

applicable health benefits as of the last day

of 2001 is 200. In 2002, Employer X makes

a qualified transfer under section 420. As of

the last day of 2002, applicable health

benefits are provided to 170 individuals,

because the 2-year period of benefits ends for

10 employees who retired from Division A

and 20 employees who retired from Division

B as a result of the plant shutdown that

occurred in 2000.

(ii) There is no significant reduction in

retiree health coverage in 2002. Coverage for

the 10 retirees from Division A who lose

coverage as a result of the end of the 2-year

period is treated as having ended by reason

of employer action, because coverage for

those Division A retirees ended by reason of

a plan amendment made after December 17,

1999. However, the terms of the health plan

that limit coverage for employees who retired

from Division B as a result of the 2000 plant

shutdown (to the 2-year period) were

adopted contemporaneously with the

provision under which those employees

became eligible for retiree coverage under the

health plan. Accordingly, under the rule

provided in paragraph (b)(4)(ii) of this

section, coverage for those 20 retirees from

Division B is not treated as having ended by

reason of employer action. Thus, the number

of individuals whose health benefits ended

by reason of employer action in 2002 is 10.

Since the number of individuals receiving

coverage for applicable health benefits as of

the last day of 2001 is 200, the employerinitiated reduction percentage for 2002 is 5

percent (10/200), which is less than the 10

percent annual limit.

(e) Regulatory effective date. This

section is applicable to transfers of

excess pension assets occurring on or

after December 18, 1999.

David A. Mader,

Acting Deputy Commissioner of Internal

Revenue.

Approved: June 12, 2001.

Mark A. Weinberger,

Assistant Secretary of the Treasury (Tax

Policy).

[FR Doc. 01–15255 Filed 6–14–01; 2:45 pm]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8949]

RIN 1545–AY80

Special Aggregate Stock Ownership

Rules

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the aggregation of

stock ownership in a corporation of

members of a consolidated group. These

regulations reflect a technical correction

enacted in section 311(c) of the

Community Renewal Tax Relief Act of

2000, that, in substance, provides that

the special aggregate stock ownership

rules shall apply for purposes of section

732(f) of the Code. These final

regulations may affect all consolidated

groups.

DATES: Effective Date: June 19, 2001.

FOR FURTHER INFORMATION CONTACT:

Frances L. Kelly or David H. Kessler,

(202) 622–7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the Income Tax Regulations (26 CFR

part 1) under section 1502 of the

Internal Revenue Code of 1986 (Code).

Section 1.1502–34 generally provides

that, for purposes of the consolidated

return regulations, the stock ownership

of all members of a consolidated group

in another corporation is aggregated in

determining the application of certain