Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 64197 

PART II—ASSET REVIEW 

INFORMATION 

Item 2.01 Findings and Conclusions of 

a Third Party Engaged by the Issuer To 

Review Assets 

Provide the disclosures required by 

Rule 15Ga–2 (17 CFR 240.15Ga–2) for 

any report by a third party engaged by 

the issuer for the purpose of reviewing 

assets underlying an asset-backed 

security. 

Item 2.02 Findings and Conclusions of 

a Third-Party Engaged by the 

Underwriter To Review Assets 

Provide the disclosures required by 

Rule 15Ga–2 (17 CFR 240.15Ga–2) for 

any third-party engaged by the 

underwriter for the purpose of 

reviewing assets underlying an assetbacked security. 

SIGNATURES 

Pursuant to the requirements of the 

Securities Exchange Act of 1934, the 

reporting entity has duly caused this 

report to be signed on its behalf by the 

undersigned hereunto duly authorized. 

lllllllllllllllllll

(Depositor, Securitizer, or Underwriter) 

Date llllllllllllllll

lllllllllllllllllll

(Signature)* 

*Print name and title of the signing 

officer under his signature. 

By the Commission. 

Dated: October 13, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–26172 Filed 10–18–10; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–132554–08] 

RIN 1545–BI16 

Additional Rules Regarding Hybrid 

Retirement Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: This document contains 

proposed regulations providing 

guidance relating to certain provisions 

of the Internal Revenue Code (Code) that 

apply to hybrid defined benefit pension 

plans. These regulations would provide 

guidance on changes made by the 

Pension Protection Act of 2006, as 

amended by the Worker, Retiree, and 

Employer Recovery Act of 2008. These 

regulations would affect sponsors, 

administrators, participants, and 

beneficiaries of hybrid defined benefit 

pension plans. This document also 

provides a notice of a public hearing on 

these proposed regulations. 

DATES: Written or electronic comments 

must be received by Wednesday, 

January 12, 2011. Outlines of topics to 

be discussed at the public hearing 

scheduled for Wednesday, January 26, 

2011, at 10 a.m. must be received by 

Friday, January 14, 2011. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–132554–08), 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–132554–08), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically, via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–132554– 

08). The public hearing will be held in 

the IRS Auditorium, Internal Revenue 

Building, 1111 Constitution Avenue, 

NW., Washington, DC. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the regulations, Neil S. 

Sandhu, Lauson C. Green, or Linda S.F. 

Marshall at (202) 622–6090; concerning 

submissions of comments, the hearing, 

and/or being placed on the building 

access list to attend the hearing, Regina 

Johnson, at (202) 622–7180 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains proposed 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

sections 411(a)(13), 411(b)(1), and 

411(b)(5) of the Code. Generally, a 

defined benefit pension plan must 

satisfy the minimum vesting standards 

of section 411(a) and the accrual 

requirements of section 411(b) in order 

to be qualified under section 401(a) of 

the Code. Sections 411(a)(13) and 

411(b)(5), which modify the minimum 

vesting standards of section 411(a) and 

the accrual requirements of section 

411(b), were added to the Code by 

section 701(b) of the Pension Protection 

Act of 2006, Public Law 109–280 (120 

Stat. 780 (2006)) (PPA ’06). Sections 

411(a)(13) and 411(b)(5), as well as 

certain effective date provisions related 

to these sections, were subsequently 

amended by the Worker, Retiree, and 

Employer Recovery Act of 2008, Public 

Law 110–458 (122 Stat. 5092 (2008)) 

(WRERA ’08). 

Section 411(a)(13)(A) provides that an 

applicable defined benefit plan (which 

is defined in section 411(a)(13)(C)) is 

not treated as failing to meet either (i) 

the requirements of section 411(a)(2) 

(subject to a special vesting rule in 

section 411(a)(13)(B) with respect to 

benefits derived from employer 

contributions) or (ii) the requirements of 

section 411(a)(11), 411(c), or 417(e), 

with respect to accrued benefits derived 

from employer contributions, merely 

because the present value of the accrued 

benefit (or any portion thereof) of any 

participant is, under the terms of the 

plan, equal to the amount expressed as 

the balance of a hypothetical account or 

as an accumulated percentage of the 

participant’s final average 

compensation. Section 411(a)(13)(B) 

requires an applicable defined benefit 

plan to provide that an employee who 

has completed at least 3 years of service 

has a nonforfeitable right to 100 percent 

of the employee’s accrued benefit 

derived from employer contributions. 

Under section 411(a)(13)(C)(i), an 

applicable defined benefit plan is 

defined as a defined benefit plan under 

which the accrued benefit (or any 

portion thereof) of a participant is 

calculated as the balance of a 

hypothetical account maintained for the 

participant or as an accumulated 

percentage of the participant’s final 

average compensation. Under section 

411(a)(13)(C)(ii), the Secretary of the 

Treasury is to issue regulations which 

include in the definition of an 

applicable defined benefit plan any 

defined benefit plan (or portion of such 

a plan) which has an effect similar to a 

plan described in section 

411(a)(13)(C)(i). 

Section 411(a) requires that a defined 

benefit plan satisfy the requirements of 

section 411(b)(1). Section 411(b)(1) 

provides that a defined benefit plan 

must satisfy one of the three accrual 

rules of section 411(b)(1)(A), (B), and (C) 

with respect to benefits accruing under 

the plan. The three accrual rules are the 

3 percent method of section 

411(b)(1)(A), the 1331⁄3 percent rule of 

section 411(b)(1)(B), and the fractional 

rule of section 411(b)(1)(C). 

Section 411(b)(1)(B) provides that a 

defined benefit plan satisfies the 

requirements of the 1331⁄3 percent rule 

for a particular plan year if, under the 

plan, the accrued benefit payable at the 

normal retirement age is equal to the 

normal retirement benefit, and the 

annual rate at which any individual 

who is or could be a participant can 

accrue the retirement benefits payable at 

normal retirement age under the plan 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64198 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

for any later plan year is not more than 

1331⁄3 percent of the annual rate at 

which the individual can accrue 

benefits for any plan year beginning on 

or after such particular plan year and 

before such later plan year. 

For purposes of applying the 1331⁄3

percent rule, section 411(b)(1)(B)(i) 

provides that any amendment to the 

plan which is in effect for the current 

year is treated as in effect for all other 

plan years. Section 411(b)(1)(B)(ii) 

provides that any change in an accrual 

rate which does not apply to any 

individual who is or could be a 

participant in the current plan year is 

disregarded. Section 411(b)(1)(B)(iii) 

provides that the fact that benefits under 

the plan may be payable to certain 

participants before normal retirement 

age is disregarded. Section 

411(b)(1)(B)(iv) provides that social 

security benefits and all other relevant 

factors used to compute benefits are 

treated as remaining constant as of the 

current plan year for all years after the 

current year. 

Section 411(b)(1)(H)(i) provides that a 

defined benefit plan fails to comply 

with section 411(b) if, under the plan, 

an employee’s benefit accrual is ceased, 

or the rate of an employee’s benefit 

accrual is reduced, because of the 

attainment of any age. Section 411(b)(5), 

which was added to the Code by section 

701(b)(1) of PPA ’06, provides 

additional rules related to section 

411(b)(1)(H)(i). Section 411(b)(5)(A) 

generally provides that a plan is not 

treated as failing to meet the 

requirements of section 411(b)(1)(H)(i) if 

a participant’s accrued benefit, as 

determined as of any date under the 

terms of the plan, would be equal to or 

greater than that of any similarly 

situated, younger individual who is or 

could be a participant. For this purpose, 

section 411(b)(5)(A)(iv) provides that 

the accrued benefit may, under the 

terms of the plan, be expressed as an 

annuity payable at normal retirement 

age, the balance of a hypothetical 

account, or the current value of the 

accumulated percentage of the 

employee’s final average compensation. 

Section 411(b)(5)(G) provides that, for 

purposes of section 411(b)(5), any 

reference to the accrued benefit of a 

participant refers to the participant’s 

benefit accrued to date. 

Section 411(b)(5)(B) imposes certain 

requirements on an applicable defined 

benefit plan in order for the plan to 

satisfy section 411(b)(1)(H). Section 

411(b)(5)(B)(i) provides that such a plan 

is treated as failing to meet the 

requirements of section 411(b)(1)(H) if 

the terms of the plan provide for an 

interest credit (or an equivalent amount) 

for any plan year at a rate that is greater 

than a market rate of return. Under 

section 411(b)(5)(B)(i)(I), a plan is not 

treated as having an above-market rate 

merely because the plan provides for a 

reasonable minimum guaranteed rate of 

return or for a rate of return that is equal 

to the greater of a fixed or variable rate 

of return. Section 411(b)(5)(B)(i)(II) 

provides that an applicable defined 

benefit plan is treated as failing to meet 

the requirements of section 411(b)(1)(H) 

unless the plan provides that an interest 

credit (or an equivalent amount) of less 

than zero can in no event result in the 

account balance or similar amount being 

less than the aggregate amount of 

contributions credited to the account. 

Section 411(b)(5)(B)(i)(III) authorizes the 

Secretary of the Treasury to provide by 

regulation for rules governing the 

calculation of a market rate of return for 

purposes of section 411(b)(5)(B)(i)(I) and 

for permissible methods of crediting 

interest to the account (including fixed 

or variable interest rates) resulting in 

effective rates of return meeting the 

requirements of section 

411(b)(5)(B)(i)(I). 

Sections 411(b)(5)(B)(ii), 

411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) 

contain additional requirements that 

apply if, after June 29, 2005, an 

applicable plan amendment is adopted. 

Section 411(b)(5)(B)(v)(I) defines an 

applicable plan amendment as an 

amendment to a defined benefit plan 

which has the effect of converting the 

plan to an applicable defined benefit 

plan. Under section 411(b)(5)(B)(ii), if, 

after June 29, 2005, an applicable plan 

amendment is adopted, the plan is 

treated as failing to meet the 

requirements of section 411(b)(1)(H) 

unless the requirements of section 

411(b)(5)(B)(iii) are met with respect to 

each individual who was a participant 

in the plan immediately before the 

adoption of the amendment. Section 

411(b)(5)(B)(iii) specifies that, subject to 

section 411(b)(5)(B)(iv), the 

requirements of section 411(b)(5)(B)(iii) 

are met with respect to any participant 

if the accrued benefit of the participant 

under the terms of the plan as in effect 

after the amendment is not less than the 

sum of: (I) the participant’s accrued 

benefit for years of service before the 

effective date of the amendment, 

determined under the terms of the plan 

as in effect before the amendment; plus 

(II) the participant’s accrued benefit for 

years of service after the effective date 

of the amendment, determined under 

the terms of the plan as in effect after 

the amendment. Section 411(b)(5)(B)(iv) 

provides that, for purposes of section 

411(b)(5)(B)(iii)(I), the plan must credit 

the participant’s account or similar 

amount with the amount of any early 

retirement benefit or retirement-type 

subsidy for the plan year in which the 

participant retires if, as of such time, the 

participant has met the age, years of 

service, and other requirements under 

the plan for entitlement to such benefit 

or subsidy. 

Section 411(b)(5)(B)(v) sets forth 

certain provisions related to an 

applicable plan amendment. Section 

411(b)(5)(B)(v)(II) provides that if the 

benefits under two or more defined 

benefit plans of an employer are 

coordinated in such a manner as to have 

the effect of adoption of an applicable 

plan amendment, the plan sponsor is 

treated as having adopted an applicable 

plan amendment as of the date the 

coordination begins. Section 

411(b)(5)(B)(v)(III) directs the Secretary 

of the Treasury to issue regulations to 

prevent the avoidance of the purposes of 

section 411(b)(5)(B) through the use of 

two or more plan amendments rather 

than a single amendment. 

Section 411(b)(5)(B)(vi) provides 

special rules for determining benefits 

upon termination of an applicable 

defined benefit plan. Under section 

411(b)(5)(B)(vi)(I), an applicable defined 

benefit plan is not treated as satisfying 

the requirements of section 

411(b)(5)(B)(i) (regarding permissible 

interest crediting rates) unless the plan 

provides that, upon plan termination, if 

the interest crediting rate under the plan 

is a variable rate, the rate of interest 

used to determine accrued benefits 

under the plan is equal to the average 

of the rates of interest used under the 

plan during the 5-year period ending on 

the termination date. In addition, under 

section 411(b)(5)(B)(vi)(II), the plan 

must provide that, upon plan 

termination, the interest rate and 

mortality table used to determine the 

amount of any benefit under the plan 

payable in the form of an annuity 

payable at normal retirement age is the 

rate and table specified under the plan 

for this purpose as of the termination 

date, except that if the interest rate is a 

variable rate, the rate used is the average 

of the rates used under the plan during 

the 5-year period ending on the 

termination date. 

Section 411(b)(5)(C) provides that a 

plan is not treated as failing to meet the 

requirements of section 411(b)(1)(H)(i) 

solely because the plan provides offsets 

against benefits under the plan to the 

extent the offsets are otherwise 

allowable in applying the requirements 

of section 401(a). Section 411(b)(5)(D) 

provides that a plan is not treated as 

failing to meet the requirements of 

section 411(b)(1)(H) solely because the 


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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 64199 

1Under section 101 of Reorganization Plan No. 4 

of 1978 (43 FR 47713), the Secretary of the Treasury 

has interpretive jurisdiction over the subject matter 

addressed by these regulations for purposes of 

ERISA, as well as the Code. 

plan provides a disparity in 

contributions or benefits with respect to 

which the requirements of section 401(l) 

(relating to permitted disparity for 

Social Security benefits and related 

matters) are met. 

Section 411(b)(5)(E) provides that a 

plan is not treated as failing to meet the 

requirements of section 411(b)(1)(H) 

solely because the plan provides for 

indexing of accrued benefits under the 

plan. Under section 411(b)(5)(E)(iii), 

indexing means the periodic adjustment 

of the accrued benefit by means of the 

application of a recognized investment 

index or methodology. Section 

411(b)(5)(E)(ii) requires that, except in 

the case of a variable annuity, the 

indexing not result in a smaller benefit 

than the accrued benefit determined 

without regard to the indexing. 

Section 701(a) of PPA ’06 added 

provisions to the Employee Retirement 

Income Security Act of 1974, Public 

Law 93–406 (88 Stat. 829 (1974)) 

(ERISA), that are parallel to sections 

411(a)(13) and 411(b)(5) of the Code. 

The guidance provided in these 

regulations with respect to sections 

411(a)(13) and 411(b)(5) of the Code 

would also apply for purposes of the 

parallel amendments to ERISA made by 

section 701(a) of PPA ’06, and the 

guidance provided in these regulations 

with respect to section 411(b)(1) of the 

Code would also apply for purposes of 

section 204(b)(1) of ERISA.1

Section 701(c) of PPA ’06 added 

provisions to the Age Discrimination in 

Employment Act of 1967, Public Law 

90–202 (81 Stat. 602 (1967)), that are 

parallel to section 411(b)(5) of the Code. 

Executive Order 12067 requires all 

Federal departments and agencies to 

advise and offer to consult with the 

Equal Employment Opportunity 

Commission (EEOC) during the 

development of any proposed rules, 

regulations, policies, procedures, or 

orders concerning equal employment 

opportunity. The Treasury Department 

and the IRS have consulted with the 

EEOC prior to the issuance of these 

regulations. 

Section 701(d) of PPA ’06 provides 

that nothing in the amendments made 

by section 701 should be construed to 

create an inference concerning the 

treatment of applicable defined benefit 

plans or conversions of plans into 

applicable defined benefit plans under 

section 411(b)(1)(H), or concerning the 

determination of whether an applicable 

defined benefit plan fails to meet the 

requirements of section 411(a)(2), 

411(c), or 417(e), as in effect before such 

amendments, solely because the present 

value of the accrued benefit (or any 

portion thereof) of any participant is, 

under the terms of the plan, equal to the 

amount expressed as the balance of a 

hypothetical account or as an 

accumulated percentage of the 

participant’s final average 

compensation. 

Section 701(e) of PPA ’06 sets forth 

the effective date provisions with 

respect to amendments made by section 

701 of PPA ’06. Section 701(e)(1) 

specifies that the amendments made by 

section 701 generally apply to periods 

beginning on or after June 29, 2005. 

Thus, the age discrimination safe 

harbors under section 411(b)(5)(A) and 

section 411(b)(5)(E) are effective for 

periods beginning on or after June 29, 

2005. Section 701(e)(2) provides that the 

special present value rules of section 

411(a)(13)(A) are effective for 

distributions made after August 17, 

2006 (the date PPA ’06 was enacted). 

Under section 701(e) of PPA ‘06, the 

3-year vesting rule under section 

411(a)(13)(B) is generally effective for 

years beginning after December 31, 

2007, for a plan in existence on June 29, 

2005, while, pursuant to the 

amendments made by section 107(c) of 

WRERA ’08, the rule is generally 

effective for plan years ending on or 

after June 29, 2005, for a plan not in 

existence on June 29, 2005. The market 

rate of return limitation under section 

411(b)(5)(B)(i) is generally effective for 

years beginning after December 31, 

2007, for a plan in existence on June 29, 

2005, while the limitation is generally 

effective for periods beginning on or 

after June 29, 2005, for a plan not in 

existence on June 29, 2005. Section 

701(e)(4) of PPA ’06 contains special 

effective date provisions for collectively 

bargained plans that modify these 

effective dates. 

Under section 701(e)(5) of PPA ’06, as 

amended by WRERA ’08, sections 

411(b)(5)(B)(ii), (iii), and (iv) apply to a 

conversion amendment that is adopted 

on or after, and takes effect on or after, 

June 29, 2005. 

Under section 701(e)(6) of PPA ’06, as 

added by WRERA ’08, the 3-year vesting 

rule under section 411(a)(13)(B) does 

not apply to a participant who does not 

have an hour of service after the date the 

3-year vesting rule would otherwise be 

effective. 

Section 702 of PPA ’06 provides for 

regulations to be prescribed by August 

16, 2007, addressing the application of 

rules set forth in section 701 of PPA ’06 

where the conversion of a defined 

benefit pension plan into an applicable 

defined benefit plan is made with 

respect to a group of employees who 

become employees by reason of a 

merger, acquisition, or similar 

transaction. 

Under section 1107 of PPA ’06, a plan 

sponsor is permitted to delay adopting 

a plan amendment pursuant to statutory 

provisions under PPA ’06 (or pursuant 

to any regulation issued under PPA ’06) 

until the last day of the first plan year 

beginning on or after January 1, 2009 

(January 1, 2011, in the case of 

governmental plans). As described in 

Rev. Proc. 2007–44 (2007–28 IRB 54), 

this amendment deadline applies to 

both interim and discretionary 

amendments that are made pursuant to 

PPA ’06 statutory provisions or any 

regulation issued under PPA ‘06. See 

§ 601.601(d)(2)(ii)(b). 

Section 1107 of PPA ’06 also permits 

certain amendments to reduce or 

eliminate section 411(d)(6) protected 

benefits. Except to the extent permitted 

under section 1107 of PPA ’06 (or under 

another statutory provision, including 

section 411(d)(6) and §§ 1.411(d)–3 and 

1.411(d)–4), section 411(d)(6) prohibits 

a plan amendment that decreases a 

participant’s accrued benefits or that has 

the effect of eliminating or reducing an 

early retirement benefit or retirementtype subsidy, or eliminating an optional 

form of benefit, with respect to benefits 

attributable to service before the 

amendment. However, an amendment 

that eliminates or decreases benefits that 

have not yet accrued does not violate 

section 411(d)(6), provided that the 

amendment is adopted and effective 

before the benefits accrue. If section 

1107 of PPA ’06 applies to an 

amendment of a plan, section 1107 

provides that the plan does not fail to 

meet the requirements of section 

411(d)(6) by reason of such amendment, 

except as provided by the Secretary of 

the Treasury. 

Section 1.411(b)–1(a)(1) of the 

Treasury Regulations provides that a 

defined benefit plan is not a qualified 

plan unless the method provided by the 

plan for determining accrued benefits 

satisfies at least one of the alternative 

methods in § 1.411(b)–1(b) for 

determining accrued benefits with 

respect to all active participants under 

the plan. Section 1.411(b)–1(b)(2)(i) 

provides that a defined benefit plan 

satisfies the 1331⁄3 percent rule of 

section 411(b)(1)(B) for a particular plan 

year if (A) under the plan the accrued 

benefit payable at the normal retirement 

age (determined under the plan) is equal 

to the normal retirement benefit 

(determined under the plan), and (B) the 

annual rate at which any individual 

who is or could be a participant can 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64200 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

2On December 11, 2002, the Treasury Department 

and the IRS issued proposed regulations regarding 

the age discrimination requirements of section 

411(b)(1)(H) that specifically addressed cash 

balance plans as part of a package of regulations 

that also addressed section 401(a)(4) 

nondiscrimination cross-testing rules applicable to 

cash balance plans (67 FR 76123). The 2002 

proposed regulations were intended to replace the 

1988 proposed regulations. In Ann. 2003–22 (2003– 

1 CB 847), see § 601.601(d)(2)(ii)(b), the Treasury 

Department and the IRS announced the withdrawal 

of the 2002 proposed regulations under section 

401(a)(4), and in Ann. 2004–57 (2004–2 CB 15), see 

§ 601.601(d)(2)(ii)(b), the Treasury Department and 

the IRS announced the withdrawal of the 2002 

proposed regulations relating to age discrimination. 

accrue the retirement benefits payable at 

normal retirement age under the plan 

for any later plan year cannot be more 

than 1331⁄3 percent of the annual rate at 

which the participant can accrue 

benefits for any plan year beginning on 

or after such particular plan year and 

before such later plan year. Section 

1.411(b)–1(b)(2)(ii)(A) through (D) sets 

forth a series of rules that correspond to 

the rules of section 411(b)(1)(B)(i) 

through (iv). Section 1.411(b)– 

1(b)(2)(ii)(D) provides that, for purposes 

of the 1331⁄3 percent rule, for any plan 

year, social security benefits and all 

relevant factors used to compute 

benefits, e.g., consumer price index, are 

treated as remaining constant as of the 

beginning of the current plan year for all 

subsequent plan years. 

Proposed regulations (EE–184–86) 

under sections 411(b)(1)(H) and 

411(b)(2) were published by the 

Treasury Department and the IRS in the 

Federal Register on April 11, 1988 (53 

FR 11876), as part of a package of 

regulations that also included proposed 

regulations under sections 410(a), 

411(a)(2), 411(a)(8), and 411(c) (relating 

to the maximum age for participation, 

vesting, normal retirement age, and 

actuarial adjustments after normal 

retirement age, respectively).2

Notice 96–8 (1996–1 CB 359), see 

§ 601.601(d)(2)(ii)(b), described the 

application of sections 411 and 417(e)(3) 

to a single-sum distribution under a 

cash balance plan where interest credits 

under the plan are frontloaded (that is, 

where future interest credits to an 

employee’s hypothetical account 

balance are not conditioned upon future 

service and thus accrue at the same time 

that the benefits attributable to a 

hypothetical allocation to the account 

accrue). Under the analysis set forth in 

Notice 96–8, in order to comply with 

sections 411(a) and 417(e)(3) in 

calculating the amount of a single-sum 

distribution under a cash balance plan, 

the balance of an employee’s 

hypothetical account must be projected 

to normal retirement age and converted 

to an annuity under the terms of the 

plan, and then the employee must be 

paid at least the present value of the 

projected annuity, determined in 

accordance with section 417(e). Under 

that analysis, where a cash balance plan 

provides frontloaded interest credits 

using an interest rate that is higher than 

the section 417(e) applicable interest 

rate, payment of a single-sum 

distribution equal to the current 

hypothetical account balance as a 

complete distribution of the employee’s 

accrued benefit may result in a violation 

of the minimum present value 

requirements of section 417(e) or a 

forfeiture in violation of section 411(a). 

In addition, Notice 96–8 proposed a safe 

harbor which provided that, if 

frontloaded interest credits are provided 

under a plan at a rate no greater than the 

sum of identified standard indices and 

associated margins, no violation of 

section 411(a) or 417(e) would result if 

the employee’s entire accrued benefit 

were to be distributed in the form of a 

single-sum distribution equal to the 

employee’s hypothetical account 

balance, provided the plan uses 

appropriate annuity conversion factors. 

Since the issuance of Notice 96–8, four 

Federal appellate courts have followed 

the analysis set out in the Notice: Esden 

v. Bank of Boston, 229 F.3d 154 (2d Cir. 

2000), cert. dismissed, 531 U.S. 1061 

(2001); West v. AK Steel Corp. Ret. 

Accumulation Pension Plan, 484 F.3d 

395 (6th Cir. 2007), cert. denied, 129 S. 

Ct. 895 (2009); Berger v. Xerox Corp. 

Ret. Income Guarantee Plan, 338 F.3d 

755 (7th Cir. 2003), reh’g and reh’g en 

banc denied, No. 02–3674, 2003 U.S. 

App. LEXIS 19374 (7th Cir. Sept. 15, 

2003); Lyons v. Georgia-Pacific Salaried 

Employees Ret. Plan, 221 F.3d 1235 

(11th Cir. 2000), cert. denied, 532 U.S. 

967 (2001). 

Notice 2007–6 (2007–1 CB 272), see 

§ 601.601(d)(2)(ii)(b), provides 

transitional guidance with respect to 

certain requirements of sections 

411(a)(13) and 411(b)(5) and section 

701(b) of PPA ’06. Notice 2007–6 

includes certain special definitions, 

including: accumulated benefit, which 

is defined as a participant’s benefit 

accrued to date under a plan; lump sumbased plan, which is defined as a 

defined benefit plan under the terms of 

which the accumulated benefit of a 

participant is expressed as the balance 

of a hypothetical account maintained for 

the participant or as the current value of 

the accumulated percentage of the 

participant’s final average 

compensation; and statutory hybrid 

plan, which is defined as a lump sumbased plan or a plan which has an effect 

similar to a lump sum-based plan. 

Notice 2007–6 provides guidance on a 

number of issues, including a rule under 

which a plan that provides for indexed 

benefits described in section 

411(b)(5)(E) is a statutory hybrid plan 

(because it has an effect similar to a 

lump sum-based plan), unless the plan 

either solely provides for postretirement adjustment of the amounts 

payable to a participant or is a variable 

annuity plan under which the assumed 

interest rate used to determine 

adjustments is at least 5 percent. Notice 

2007–6 provides a safe harbor for 

applying the rules set forth in section 

701 of PPA ’06 where the conversion of 

a defined benefit pension plan into an 

applicable defined benefit plan is made 

with respect to a group of employees 

who become employees by reason of a 

merger, acquisition, or similar 

transaction. This transitional guidance, 

along with the other guidance provided 

in Part III of Notice 2007–6, applies 

pending the issuance of further 

guidance and, thus, does not apply for 

periods to which the 2010 final 

regulations (as described later in this 

preamble) apply. 

Proposed regulations (REG–104946– 

07) under sections 411(a)(13) and 

411(b)(5) (2007 proposed regulations) 

were published by the Treasury 

Department and the IRS in the Federal 

Register on December 28, 2007 (72 FR 

73680). The Treasury Department and 

the IRS received written comments on 

the 2007 proposed regulations and a 

public hearing was held on June 6, 

2008. 

Proposed regulations (REG–100464– 

08) under section 411(b)(1)(B) (2008 

proposed backloading regulations) were 

published by the Treasury Department 

and the IRS in the Federal Register on 

June 18, 2008 (73 FR 34665). The 2008 

proposed backloading regulations 

would provide guidance on the 

application of the accrual rule for 

defined benefit plans under section 

411(b)(1)(B) in cases where plan benefits 

are determined on the basis of the 

greatest of two or more separate 

formulas. The Treasury Department and 

the IRS received written comments on 

the 2008 proposed backloading 

regulations and a public hearing was 

held on October 15, 2008. 

Announcement 2009–82 (2009–48 

IRB 720) and Notice 2009–97 (2009–52 

IRB 972) announced certain expected 

relief with respect to the requirements 

of section 411(b)(5). In particular, 

Announcement 2009–82 stated that the 

rules in the regulations specifying 

permissible market rates of return are 

not expected to go into effect before the 

first plan year that begins on or after 

January 1, 2011. In addition, Notice 


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3However, see footnote 6 in Section IV.C of this 

preamble. 

2009–97 stated that, once final 

regulations under sections 411(a)(13) 

and 411(b)(5) are issued, it is expected 

that relief from the requirements of 

section 411(d)(6) will be granted for a 

plan amendment that eliminates or 

reduces a section 411(d)(6) protected 

benefit, provided that the amendment is 

adopted by the last day of the first plan 

year that begins on or after January 1, 

2010, and the elimination or reduction 

is made only to the extent necessary to 

enable the plan to meet the 

requirements of section 411(b)(5).3

Notice 2009–97 also extended the 

deadline for amending cash balance and 

other applicable defined benefit plans, 

within the meaning of section 

411(a)(13)(C), to meet the requirements 

of section 411(a)(13) (other than section 

411(a)(13)(A)) and section 411(b)(5), 

relating to vesting and other special 

rules applicable to these plans. Under 

Notice 2009–97, the deadline for these 

amendments is the last day of the first 

plan year that begins on or after January 

1, 2010. 

Final regulations (2010 final 

regulations) under sections 411(a)(13) 

and 411(b)(5) are being issued at the 

same time as these proposed 

regulations. The 2010 final regulations 

adopt most of the provisions of the 2007 

proposed regulations, with certain 

modifications, and also reserve a 

number of sections relating to issues 

that are not addressed in those final 

regulations. These reserved issues relate 

to the scope of relief provided under 

section 411(a)(13)(A), a potential 

alternative method of satisfying the 

conversion protection requirements, 

additional rules with respect to the 

market rate of return requirement, and 

the application of the special plan 

termination rules. These proposed 

regulations generally address these 

issues, as well as an issue under section 

411(b)(1). 

Explanation of Provisions 

Overview 

In general, these proposed regulations 

would provide guidance with respect to 

certain issues under sections 411(a)(13) 

and 411(b)(5) that are not addressed in 

the 2010 final regulations, as well as an 

issue under section 411(b)(1) for hybrid 

defined benefit plans that adjust 

benefits using a variable rate. 

I. Section 411(a)(13): Scope of Relief of 

Section 411(a)(13)(A) 

A. The 2010 Final Regulations 

The 2010 final regulations define a 

lump sum-based benefit formula as a 

benefit formula used to determine all or 

any part of a participant’s accumulated 

benefit under which the accumulated 

benefit provided under the formula is 

expressed as the current balance of a 

hypothetical account maintained for the 

participant or as the current value of an 

accumulated percentage of the 

participant’s final average 

compensation. The 2010 final 

regulations provide that the relief of 

section 411(a)(13)(A) applies to the 

benefits determined under a lump sumbased benefit formula. 

B. Limitations on the Relief of Section 

411(a)(13)(A) 

The proposed regulations would 

provide that the relief of section 

411(a)(13)(A) does not apply with 

respect to the benefits determined under 

a lump sum-based benefit formula 

unless certain requirements are 

satisfied. In particular, the proposed 

regulations would provide that the relief 

does not apply unless, at all times on or 

before normal retirement age, the thencurrent hypothetical account balance or 

the then-current accumulated 

percentage of the participant’s final 

average compensation is not less than 

the present value, determined using 

reasonable actuarial assumptions, of the 

portion of the participant’s accrued 

benefit that is determined under the 

lump sum-based benefit formula. 

However, the plan would be deemed to 

satisfy this requirement for periods 

before normal retirement age if, upon 

attainment of normal retirement age, the 

then-current balance of the hypothetical 

account or the then-current value of the 

accumulated percentage of the 

participant’s final average compensation 

is actuarially equivalent (using 

reasonable actuarial assumptions) to the 

portion of the participant’s accrued 

benefit that is determined under the 

lump sum-based benefit formula. Thus, 

for periods before normal retirement 

age, a statutory hybrid plan with a lump 

sum-based benefit formula that meets 

the requirements of the preceding 

sentence need not project interest 

credits to normal retirement age and 

discount the resulting accrued benefit 

back in order to apply the relief of 

section 411(a)(13)(A) with respect to the 

benefit determined under the lump 

sum-based benefit formula. 

In addition, the proposed regulations 

would provide that the relief of section 

411(a)(13)(A) does not apply unless, as 

of each annuity starting date after 

normal retirement age, the then-current 

balance of the hypothetical account or 

the then-current value of the 

accumulated percentage of the 

participant’s final average compensation 

satisfies the requirements of section 

411(a)(2) or would satisfy those 

requirements but for the fact that the 

plan suspends benefits in accordance 

with section 411(a)(3)(B). Thus, for 

example, a plan that expresses the 

accumulated benefit as the balance of a 

hypothetical account and that does not 

comply with the suspension of benefit 

rules may have difficulty obtaining the 

relief of section 411(a)(13)(A) if, after 

normal retirement age, the plan credits 

interest at such a low rate that the 

adjustments provided by the interest 

credits, together with any principal 

credits, are insufficient to provide any 

required actuarial increases. 

The proposed regulations would also 

provide that the relief of section 

411(a)(13)(A) does not apply unless the 

balance of the hypothetical account or 

the accumulated percentage of the 

participant’s final average compensation 

may not be reduced except as a result 

of one of the specified reasons set forth 

in the regulations. Under the proposed 

regulations, reductions would only be 

permissible as a result of: (1) Benefit 

payments, (2) qualified domestic 

relations orders under section 414(p), 

(3) forfeitures that are permitted under 

section 411(a) (such as charges for 

providing a qualified preretirement 

survivor annuity), (4) amendments that 

are permitted under section 411(d)(6), 

and (5) adjustments resulting from the 

application of interest credits (under the 

rules of § 1.411(b)(5)–1) that are negative 

for a period, for plans that express the 

accumulated benefit as the balance of a 

hypothetical account. 

C. Application of Section 411(A)(13)(A) 

to Distributions Other Than Single Sums 

The proposed regulations would 

provide that the relief under section 

411(a)(13)(A) (with respect to the 

requirements of sections 411(a)(2), 

411(c), and 417(e)) extends to certain 

other forms of benefit under a lump 

sum-based benefit formula, in addition 

to a single-sum payment of the entire 

benefit. In particular, the proposed 

regulations would clarify that the relief 

provided under section 411(a)(13)(A) 

extends to an optional form of benefit 

that is currently payable with respect to 

a lump sum-based benefit formula if, 

under the terms of the plan, the optional 

form of benefit is determined as of the 

annuity starting date as the actuarial 

equivalent, determined using reasonable 

actuarial assumptions, of the thenVerDate Mar<15>2010 16:35 Oct 18, 2010 Jkt 223001 PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 E:\FR\FM\19OCP1.SGM 19OCP1

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64202 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

current balance of the hypothetical 

account or the then-current value of an 

accumulated percentage of the 

participant’s final average 

compensation. 

In addition, the proposed regulations 

would create a special rule that provides 

that the relief under section 

411(a)(13)(A) also extends to an optional 

form of benefit that is not subject to the 

minimum present value requirements of 

section 417(e) and that is currently 

payable with respect to a lump sumbased benefit formula if, under the 

terms of the plan, this optional form of 

benefit is determined as of the annuity 

starting date as the actuarial equivalent 

(using reasonable actuarial assumptions) 

of the optional form of benefit that: (1) 

Commences as of the same annuity 

starting date; (2) is payable in the same 

generalized optional form (within the 

meaning of § 1.411(d)-3(g)(8)) as the 

accrued benefit; and (3) is the actuarial 

equivalent (using reasonable actuarial 

assumptions) of the then-current 

balance of the hypothetical account 

maintained for the participant or the 

then-current value of an accumulated 

percentage of the participant’s final 

average compensation. This special rule 

would facilitate the payment of an 

immediate annuity, such as a joint and 

survivor annuity or life annuity with 

period certain, that is calculated as the 

actuarial equivalent of the form of 

payment of the accrued benefit under 

the plan, such as an immediately 

payable straight life annuity. 

Finally, the proposed regulations 

would provide that the relief under 

section 411(a)(13)(A) applies on a 

proportionate basis to a payment of a 

portion of the benefit under a lump 

sum-based benefit formula that is not 

paid in the form of an annuity, such as 

a payment of a specified dollar amount 

or percentage of the then-current 

balance of a hypothetical account 

maintained for the participant or thencurrent value of an accumulated 

percentage of the participant’s final 

average compensation. Thus, for 

example, if a plan that expresses the 

participant’s entire accumulated benefit 

as the balance of a hypothetical account 

distributes 40 percent of the 

participant’s then-current hypothetical 

account balance, the plan is treated as 

satisfying the requirements of section 

411(a) and the minimum present value 

rules of section 417(e) with respect to 40 

percent of the participant’s then-current 

accrued benefit. 

D. Application of Section 411(A)(13)(A) 

to Plans With Multiple Formulas 

The proposed regulations would 

clarify that the relief provided under 

section 411(a)(13)(A) does not apply to 

any portion of the participant’s benefit 

that is determined under a formula that 

is not a lump sum-based benefit 

formula. Thus, for example, where the 

participant’s accrued benefit equals the 

greater of the benefit under a 

hypothetical account formula and the 

benefit under a traditional defined 

benefit formula, a single-sum payment 

of the participant’s entire benefit must 

equal the greater of the then-current 

balance of the hypothetical account and 

the present value, determined in 

accordance with section 417(e), of the 

benefit under the traditional defined 

benefit formula. On the other hand, 

where the plan provides an accrued 

benefit equal to the sum of the benefit 

under a hypothetical account formula 

plus the excess of the benefit under a 

traditional defined benefit formula over 

the benefit under the hypothetical 

account formula, a single-sum payment 

of the participant’s entire benefit must 

equal the then-current balance of the 

hypothetical account plus the excess of 

the present value, determined in 

accordance with section 417(e), of the 

benefit under the traditional defined 

benefit formula over the present value, 

determined in accordance with section 

417(e), of the benefit under the 

hypothetical account formula. See the 

request for comments under the heading 

‘‘Comments and Public Hearing’’ on the 

issue of determining the present value 

of a benefit determined, in part, based 

on the benefit under a lump sum-based 

benefit formula. 

E. Application of Section 411(A)(13)(A) 

to Pension Equity Plans 

The preamble to the 2007 proposed 

regulations asked for comments on plan 

formulas that calculate benefits as the 

current value of an accumulated 

percentage of the participant’s final 

average compensation (often referred to 

as ‘‘pension equity plans’’ or ‘‘PEPs’’). 

Commenters indicated that some of 

these plans never credit interest, 

directly or indirectly, some explicitly 

credit interest after cessation of PEP 

accruals, and some do not credit interest 

explicitly but provide for specific 

amounts to be payable after cessation of 

PEP accruals (both immediately and at 

future dates) based on actuarial 

equivalence using specified actuarial 

factors applied upon cessation of PEP 

accruals. 

The 2010 final regulations clarify that 

a formula is expressed as the balance of 

a hypothetical account maintained for 

the participant if it is expressed as a 

current single-sum dollar amount. Thus, 

a PEP formula that credits interest after 

cessation of PEP accruals is considered 

a formula that is expressed as the 

balance of a hypothetical account after 

cessation of PEP accruals. As a result, 

such a formula is a lump sum-based 

benefit formula that is subject to the 

rules of section 411(a)(13)(A) set forth 

earlier in this preamble, as those rules 

are applied to PEP formulas during the 

period of PEP accruals and as those 

rules are applied to hypothetical 

account balance formulas after cessation 

of PEP accruals. 

Under these proposed regulations, 

any other PEP formula (including those 

that do not credit interest, directly or 

indirectly, and those that offer 

actuarially equivalent forms of payment 

using specified actuarial factors applied 

after cessation of PEP accruals) would 

also be subject to the rules of section 

411(a)(13)(A), as explained earlier in 

this preamble. Thus, for example, a PEP 

that does not explicitly credit interest 

but, instead, calculates the annuity 

benefit commencing at future ages as the 

actuarial equivalent of the PEP value as 

of cessation of PEP accruals would be 

eligible for the relief of section 

411(a)(13)(A) with respect to the PEP 

value as of every period before cessation 

of PEP accruals. In addition, since the 

accrued benefit is calculated as an 

annuity commencing at normal 

retirement age that is actuarially 

equivalent to the PEP value as of 

cessation of PEP accruals, the relief 

described above that applies to 

annuities that are calculated as the 

actuarial equivalent of the then-current 

PEP value would not apply. 

II. Section 411(b)(1): Special Rule With 

Respect to Statutory Hybrid Plans 

Under the regulations with respect to 

the 1331⁄3 percent rule of section 

411(b)(1)(B), for any plan year, social 

security benefits and all relevant factors 

used to compute benefits, e.g., consumer 

price index, are treated as remaining 

constant as of the beginning of the 

current plan year for all subsequent plan 

years. A number of commenters on both 

the 2007 proposed regulations and the 

2008 proposed backloading regulations 

expressed concern that this rule might 

effectively preclude statutory hybrid 

plans from using an interest crediting 

rate that is a variable rate that could 

potentially be negative in a year, such 

as an equity-based rate. This is because, 

if a plan treated an interest crediting 

rate that was negative as remaining 

constant in all future years for purposes 

of the backloading test of section 

411(b)(1)(B), a principal credit (such as 

a pay credit) that accrues in a later year 

would result in a greater benefit accrual 

than an otherwise identical principal 

credit that accrues in an earlier year 


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because the principal credit that accrues 

later is credited with negative interest 

credits for fewer years. Thus, these 

commenters were concerned that a plan 

that uses a variable rate could fail the 

backloading rules of section 411(b)(1) 

even where both the pay crediting and 

interest crediting formulas do not vary 

over time. 

In response to these comments, the 

proposed regulations contain a special 

rule regarding the application of the 

1331⁄3; percent rule of section 

411(b)(1)(B) to a statutory hybrid plan 

that adjusts benefits using a variable 

interest crediting rate that can 

potentially be negative in any given 

year. Under this proposed rule, a plan 

that determines any portion of the 

participant’s accrued benefit pursuant to 

a statutory hybrid benefit formula (as 

defined in § 1.411(a)(13)–1(d)(4)) that 

utilizes an interest crediting rate 

described in § 1.411(b)(5)–1(d) that is a 

variable rate that was less than zero for 

the prior plan year would not be treated 

as failing to satisfy the requirements of 

the 1331⁄3 percent rule for the current 

plan year merely because the section 

411(b)(1)(B) backloading calculation is 

performed assuming that the variable 

rate is zero for the current plan year and 

all future plan years. 

III. Section 411(b)(5): Special 

Conversion Protection Rule and 

Additional Rules With Respect to the 

Market Rate of Return Limitation 

A. Comparison at Effective Date of 

Conversion Amendment 

In accordance with the requirements 

of section 411(b)(5)(B)(ii), the 2010 final 

regulations provide that a participant 

whose benefits are affected by a 

conversion amendment generally must 

be provided with a benefit after the 

conversion that is at least equal to the 

sum of benefits accrued through the 

date of conversion and benefits earned 

after the conversion, with no permitted 

interaction between the two portions. 

The 2010 final regulations provide for 

an alternative method of satisfying the 

conversion protection requirements 

where an opening hypothetical account 

balance or opening accumulated 

percentage of the participant’s final 

average compensation is established at 

the time of the conversion and the plan 

provides for separate calculation of (1) 

the benefit attributable to the opening 

hypothetical account balance (including 

interest credits attributable thereto) or 

attributable to the opening accumulated 

percentage of the participant’s final 

average compensation and (2) the 

benefit attributable to post-conversion 

service under the post-conversion 

benefit formula. Under this alternative, 

the plan must provide that, when a 

participant commences benefits, the 

participant’s benefit will be increased if 

the benefit attributable to the opening 

hypothetical account or opening 

accumulated percentage that is payable 

in the particular optional form of benefit 

selected is less than the benefit accrued 

under the plan prior to the date of 

conversion and that was payable in the 

same generalized optional form of 

benefit (within the meaning of 

§ 1.411(d)–3(g)(8)) at the same annuity 

starting date. 

The preamble to the 2007 proposed 

regulations requested comments on 

another alternative method of satisfying 

the conversion protection requirements 

that would not require this comparison 

at the annuity starting date. In response 

to favorable comments related to this 

alternative, these proposed regulations 

would provide that certain plans may 

satisfy the conversion protection 

requirements of sections 411(b)(5)(B)(ii), 

411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) by 

establishing an opening hypothetical 

account balance without a subsequent 

comparison of benefits at the annuity 

starting date. While testing at the 

annuity starting date would not be 

required under this method, a number 

of requirements like those described in 

the preamble to the 2007 proposed 

regulations would need to be satisfied in 

order to ensure that the hypothetical 

account balance used to replicate the 

pre-conversion benefit (the opening 

hypothetical account balance and 

interest credits on that account balance) 

is reasonably expected in most, but not 

necessarily all, cases to provide a 

benefit at least as large as the preconversion benefit for all periods after 

the conversion amendment. 

This alternative method would be 

limited to situations where an opening 

hypothetical account balance is 

established and would not be available 

where an opening accumulated 

percentage of the participant’s final 

average compensation is established 

because these plans would be unable to 

reliably replicate the pre-conversion 

benefit. This is because the value of the 

opening accumulated percentage would 

only increase as a result of 

unpredictable increases in 

compensation for periods after the 

conversion amendment until cessation 

of PEP accruals, rather than by 

application of an annual interest 

crediting rate. 

This alternative would only be 

available where the participant elects to 

receive payment in the form of a singlesum distribution equal to the sum of the 

then-current balance of the hypothetical 

account used to replicate the preconversion benefit and the benefit 

attributable to post-conversion service 

under the post-conversion benefit 

formula. Because of the limited 

availability of this alternative, plans will 

still need to separately keep track of the 

pre-conversion benefit in order to satisfy 

the conversion protection requirements 

for all forms of distribution other than 

a single-sum distribution. See the 

related request for comments in this 

preamble under the heading ‘‘Comments 

and Public Hearing.’’ 

Under this alternative, in order to 

satisfy the requirements of section 

411(d)(6), the participant’s benefit after 

the effective date of the conversion 

amendment must not be less than the 

participant’s section 411(d)(6) protected 

benefit (as defined in § 1.411(d)– 

3(g)(14)) with respect to service before 

the effective date of the conversion 

amendment (determined under the 

terms of the plan as in effect 

immediately before the effective date of 

the amendment). Also, the plan, as in 

effect immediately before the effective 

date of the conversion amendment, 

either must not have provided a singlesum payment option (for benefits that 

cannot be immediately distributed 

under section 411(a)(11)) or must have 

provided a single-sum payment option 

that was based solely on the present 

value of the benefit payable at normal 

retirement age (or at date of benefit 

commencement, if later) and which was 

not based on the present value of the 

benefit payable commencing at any date 

prior to normal retirement age. This 

condition ensures that the hypothetical 

account balance used to replicate the 

pre-conversion benefit does not result in 

a single-sum distribution that is less 

than would have been available under 

an early retirement subsidy under the 

pre-conversion formula. 

Under this alternative method of 

satisfying the conversion protection 

requirements, the opening hypothetical 

account balance must be established in 

accordance with the rules under which 

this opening balance is not less than the 

present value, determined in accordance 

with section 417(e), of the accrued 

benefit immediately prior to the 

effective date of the conversion 

amendment. In addition, under this 

alternative, the interest crediting rate 

under the plan as of the effective date 

of the conversion amendment must be 

either the rate of interest on long-term 

investment grade corporate bonds (the 

third segment rate) or one of several 

specified safe harbor rates. Also, as of 

that date, the value of the index used to 

determine the interest crediting rate 

under the plan must be at least as great 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64204 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

for every participant or beneficiary as 

the interest rate that was used to 

determine the opening hypothetical 

account balance. This requirement is 

satisfied, for example, if each 

participant’s opening hypothetical 

account balance is determined using the 

applicable interest rate and applicable 

mortality table under section 417(e)(3), 

the interest crediting rate under the plan 

is the third segment rate, and, at the 

effective date of the conversion 

amendment, the third segment rate is 

the highest of the three segment rates. If, 

subsequent to the effective date of the 

conversion amendment, the interest 

crediting rate changes (whether by plan 

amendment or otherwise) with respect 

to a participant who was a participant 

at the time of the effective date of the 

conversion amendment from an interest 

crediting rate that is either the rate of 

interest on long-term investment grade 

corporate bonds or one of the specified 

safe harbor rates to a different interest 

crediting rate that is not in all cases at 

least as great as the prior interest 

crediting rate under the plan, then the 

new interest crediting rate does not 

apply to the existing hypothetical 

account balance as of the effective date 

of the change in interest crediting rates 

(or, if the plan created a subaccount 

consisting of the opening hypothetical 

account balance and interest credits on 

that subaccount, then the new interest 

crediting rate does not apply to the 

subaccount). 

Finally, either the plan must provide 

a death benefit after the effective date of 

the conversion amendment which has a 

present value that is at all times at least 

equal to the then-current balance of the 

hypothetical account used to replicate 

the pre-conversion benefit or the plan 

must not have applied a pre-retirement 

mortality decrement in establishing the 

opening hypothetical account balance. 

B. Market Rate of Return 

The 2010 final regulations provide 

that a plan that credits interest must 

specify how the plan determines 

interest credits and must specify how 

and when interest credits are credited. 

In addition, the 2010 final regulations 

contain certain specific rules regarding 

the method and timing of interest 

credits, including a requirement that 

interest be credited at least annually. 

The proposed regulations include a 

rule that would provide that a plan is 

not treated as failing to meet the interest 

crediting requirements merely because 

the plan does not provide for interest 

credits on amounts distributed prior to 

the end of the interest crediting period. 

Thus, if a plan credits interest at 

periodic intervals, the plan would not 

be required to credit interest on 

amounts that were distributed between 

the dates on which interest under the 

plan is credited to the account balance. 

Furthermore, the proposed 

regulations include a rule that would 

allow plans to credit interest taking into 

account increases or decreases to the 

participant’s accumulated benefit that 

occur during the period. In particular, 

the rule would provide that a plan is not 

treated as failing to meet the market rate 

of return limitations merely because the 

plan calculates increases or decreases to 

the participant’s accumulated benefit by 

applying a rate of interest or rate of 

return (including a rate of increase or 

decrease under an index) to the 

participant’s adjusted accumulated 

benefit (or portion thereof) for the 

period. For this purpose, the 

participant’s adjusted accumulated 

benefit equals the participant’s 

accumulated benefit as of the beginning 

of the period, adjusted for debits and 

credits (other than interest credits) made 

to the accumulated benefit prior to the 

end of the interest crediting period, with 

appropriate weighting for those debits 

and credits based on their timing within 

the period. For plans that calculate 

increases or decreases to the 

participant’s accumulated benefit by 

applying a rate of interest or rate of 

return to the participant’s adjusted 

accumulated benefit (or portion thereof) 

for the period, interest credits include 

these increases and decreases, to the 

extent provided under the terms of the 

plan at the beginning of the period and 

to the extent not conditioned on current 

service and not made on account of 

imputed service, and the interest 

crediting rate with respect to a 

participant equals the total amount of 

interest credits for the period divided by 

the participant’s adjusted accumulated 

benefit for the period. 

The proposed regulations would 

provide that the preservation of capital 

requirement is applied only at an 

annuity starting date on which a 

distribution of the participant’s entire 

benefit as of that date under the plan’s 

statutory hybrid benefit formula 

commences. The proposed regulations 

would also provide special rules to 

ensure that prior distributions are taken 

into account in determining the 

guarantee provided by the preservation 

of capital requirement with respect to a 

current distribution to which the rule 

applies. 

These proposed regulations would 

broaden the list of permitted interest 

crediting rates from those permitted 

under the 2010 final regulations. A 

number of commenters on the 2007 

proposed regulations requested that the 

rate of return on plan assets be treated 

as a market rate of return for all types 

of statutory hybrid plans, and not just 

indexed plans. In response to these 

comments, the proposed regulations 

would permit the use of the rate of 

return on plan assets as a market rate of 

return for statutory hybrid plans 

generally if the plan’s assets are 

diversified so as to minimize the 

volatility of returns. Like the 2010 final 

regulations, the proposed regulations 

would provide that this requirement 

that plan assets be diversified so as to 

minimize the volatility of returns does 

not require greater diversification than 

is required under section 404(a)(1)(C) of 

Title I of the Employee Retirement 

Income Security Act of 1974, Public 

Law 93–406 (88 Stat. 829 (1974)) with 

respect to defined benefit pension plans. 

The preamble to the 2007 proposed 

regulations asked for comments about 

the possibility of allowing an interest 

credit to be determined by reference to 

a rate of return on a regulated 

investment company (RIC) described in 

section 851. The preamble focused on 

whether such an investment has 

sufficiently constrained volatility that 

the existence of the capital preservation 

rule would not result in an above 

market rate of return. In response to 

comments received on the 2007 

proposed regulations, these proposed 

regulations would provide that an 

interest crediting rate is not in excess of 

a market rate of return if it is equal to 

the rate of return on a RIC, as defined 

in section 851, that is reasonably 

expected to be not significantly more 

volatile than the broad United States 

equities market or a similarly broad 

international equities market. For 

example, a RIC that has most of its 

assets invested in securities of issuers 

(including other RICs) concentrated in 

an industry sector or a country other 

than the United States, that uses 

leverage, or that has significant 

investment in derivative financial 

products, for the purpose of achieving 

returns that amplify the returns of an 

unleveraged investment, generally 

would not meet this requirement. Thus, 

a RIC that has most of its investments 

concentrated in the semiconductor 

industry or that uses leverage in order 

to provide a rate of return that is twice 

the rate of return on the Standard & 

Poor’s 500 index (S&P 500) would not 

meet this requirement. On the other 

hand, a RIC whose investments track the 

rate of return on the S&P 500, a broadbased ‘‘small-cap’’ index (such as the 

Russell 2000 index), or a broad-based 

international equities index would meet 

this requirement. The requirement that 


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the RIC’s investments not be 

concentrated in an industry sector or a 

specific international country is 

intended to limit the volatility of the 

returns, as well as the risk inherent in 

non-diversified investments. Similarly, 

the requirement that the RIC not provide 

leveraged returns is intended both to 

ensure that rates provided by the RIC do 

not exceed an unleveraged market rate 

as well as to limit the volatility of the 

returns provided. Subject to these 

requirements, the proposed rule is 

intended to provide plan sponsors with 

greater flexibility in choosing an equitybased rate than would be provided if the 

regulations were to list particular 

equity-based rates that satisfy the 

market rate of return requirement. 

The preamble to the 2007 proposed 

regulations requested comments as to 

how to implement a rule that provides 

that interest credits are determined 

under the greater of two or more interest 

crediting rates without violating the 

market rate of return limitation. In 

response to such comments, these 

proposed regulations would provide 

that in certain limited circumstances a 

plan can provide interest credits based 

on the greater of two or more interest 

crediting rates without exceeding a 

market rate of return. 

The Treasury Department and the IRS 

have modeled the historical distribution 

of rates of interest on long-term 

investment grade corporate bonds and 

have determined that those rates have 

only infrequently been lower than 4 

percent and, when lower, were 

generally lower by small amounts and 

for limited durations. Therefore, the 

increase in the effective rate of return 

resulting from adding an annual 4 

percent floor to one of these bond rates 

has historically been small enough that 

the effective rate of return is not in 

excess of a market rate of return. As a 

result, the proposed rules would 

provide that it is permissible for a plan 

to utilize an annual floor of 4 percent in 

conjunction with a permissible bond 

rate. Specifically, the proposed 

regulations would provide that a plan 

does not provide an interest crediting 

rate that is in excess of a market rate of 

return merely because the plan provides 

that the interest crediting rate for an 

interest crediting period equals the 

greater of the rate of interest on longterm investment grade corporate bonds 

(or one of the safe harbor rates that, 

under the regulations, are deemed not to 

be in excess of that rate) and an annual 

interest rate of 4 percent. 

This rule permitting a plan to utilize 

an annual floor of 4 percent in 

conjunction with a permissible bondbased rate would also permit plans that 

credit interest more frequently than 

annually using a permissible bondbased rate to also utilize a periodic floor 

that is a pro rata portion of an annual 

4 percent floor. Thus, plans that credit 

interest more frequently than annually 

could provide an effective annual floor 

that is greater than 4 percent, both due 

to the effect of compounding because 

the floor would be applied more 

frequently than annually and because 

the floor would be applied in any period 

that the bond-based rate was below the 

floor, even if the annual rate exceeded 

4 percent for the plan year. However, 

given the nature of bond-based rates, 

including the serial correlation of rates 

from one period to the next, as well as 

the fact that 4 percent is not expected 

to exceed a permissible bond-based rate 

except infrequently, by small amounts, 

and for limited durations, in most 

instances a periodic floor that is based 

on a 4 percent annual floor will not 

provide a floor that is significantly 

different than an annual floor of 4 

percent. 

In contrast, because of the volatility of 

equity-based rates, adding an annual 

floor to an equity-based rate often 

provides a cumulative rate of return that 

far exceeds the rate of return provided 

by the equity-based rate without such 

floor. It should also be noted that 

commenters on the 2007 proposed 

regulations generally did not request 

that such an annual floor be permitted 

(perhaps in recognition that a minimum 

guaranteed annual return when applied 

to equity-based rates could have a 

significant impact on funding). 

Accordingly, the proposed regulations 

would not allow the use of an annual 

floor in conjunction with the rate of 

return on plan assets or on a permissible 

RIC. 

On the other hand, if, instead of 

applying a floor on each year’s rate of 

return, a cumulative floor is applied to 

an equity-based rate, the effective rate of 

return is not necessarily substantially 

greater than the rate of return provided 

without the floor. Specifically, the 

Treasury Department and the IRS have 

determined that, based on the modeling 

of long-term historical returns, a 3 

percent floor that applies cumulatively 

(in the aggregate from the date of each 

principal credit until the annuity 

starting date, without a floor on the rate 

of return provided in any interim 

period) could be combined with any 

permissible rate (including a 

permissible equity-based rate), without 

increasing the effective rate of return to 

such an extent that the effective rate of 

return would be in excess of a market 

rate of return. As a result, the proposed 

rule would provide that a plan that 

determines interest credits using any 

particular interest crediting rate that 

satisfies the market rate of return 

limitation does not provide an effective 

interest crediting rate in excess of a 

market rate of return merely because the 

plan provides that the participant’s 

benefit, as of the participant’s annuity 

starting date, is equal to the greater of 

the benefit determined using the interest 

crediting rate and the benefit 

determined as if the plan had used a 

fixed annual interest crediting rate equal 

to 3 percent (or a rate not in excess of 

3 percent) for principal credits in all 

years. This rule in the proposed 

regulations that allows for plans to 

utilize a cumulative floor of up to 3 

percent would also allow plans some 

additional flexibility in design. Thus, 

for example, a plan that utilizes annual 

ceilings in conjunction with a 

permissible rate could also provide a 

cumulative floor of up to 3 percent. 

Similar to the rules with respect to 

application of the preservation of capital 

requirement, the proposed regulations 

would provide that the determination of 

the guarantee provided by any 

cumulative floor with respect to the 

participant’s benefit is made only at an 

annuity starting date on which a 

distribution of the participant’s entire 

benefit as of that date under the plan’s 

statutory hybrid benefit formula 

commences. The proposed regulations 

would also provide special rules to 

ensure that prior distributions are taken 

into account in determining whether the 

guarantee exceeds the benefit otherwise 

provided under the plan. 

In addition to permitting certain fixed 

floors to be applied to variable rates, the 

proposed regulations would also permit 

a standalone fixed rate of interest to be 

used for interest crediting purposes. 

While the statutory language at section 

411(b)(5)(B)(i)(I) does not explicitly 

reference a fixed interest crediting rate, 

the reference to ‘‘a reasonable minimum 

guaranteed rate of return’’ and the 

reference to ‘‘the greater of a fixed or 

variable rate of return’’ necessarily mean 

that some fixed rate must also be 

permissible. Further, the statutory 

language at section 411(b)(5)(B)(i)(III) 

specifically authorizes the Treasury 

Department to issue regulations 

permitting a fixed rate of interest under 

the rules relating to a market rate of 

return. However, reconciling a fixed 

interest crediting rate with the statutory 

requirement that an interest crediting 

rate ‘‘for any plan year shall be at a rate 

which is not greater than a market rate 

of return’’ [emphasis added] presents 

unique challenges because, by 

definition, fixed rates do not adjust with 

the market. As a result, the use of any 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64206 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

fixed rate will result in an interest 

crediting rate that is above a thencurrent market rate of interest during 

any period in which the current market 

rate falls below the fixed rate. 

In light of this fact, the Treasury 

Department and the IRS believe that, in 

order to satisfy the market rate of return 

requirement, any fixed interest crediting 

rate allowed under the rules must not be 

expected to exceed future market rates 

of interest, except infrequently, by small 

amounts, and for limited durations. 

Based on the historical modeling 

described above, the Treasury 

Department and the IRS have 

determined that a 5 percent fixed rate 

satisfies these criteria and that any 

higher fixed rate would result in an 

effective rate of return that is in excess 

of a market rate of return. 

Specifically, the proposed rules 

would provide that an annual interest 

crediting rate of a fixed 5 percent is a 

safe harbor rate deemed to be not in 

excess of the rate of interest on longterm investment grade corporate bonds. 

As a result, an interest crediting rate of 

a fixed 5 percent would satisfy the 

market rate of return limitation. In 

addition, the special section 411(d)(6) 

rule set forth in the 2010 final 

regulations with respect to certain 

changes in interest crediting rates would 

apply to an interest crediting rate of a 

fixed 5 percent and, as a result, a plan 

amendment that changes the interest 

crediting rate under the plan to the third 

segment rate from a fixed 5 percent is 

deemed to satisfy the requirements of 

section 411(d)(6), provided certain 

requirements are met. 

The 2010 final regulations provide 

that §§ 1.411(b)(5)–1(d)(1)(iii), 

1.411(b)(5)–1(d)(1)(vi), and 1.411(b)(5)– 

1(d)(6), which provide that the 

regulations set forth the exclusive list of 

interest crediting rates and 

combinations of interest crediting rates 

that satisfy the market rate of return 

requirement under section 411(b)(5), 

apply to plan years that begin on or after 

January 1, 2012. For plan years that 

begin before January 1, 2012, statutory 

hybrid plans may utilize a rate that is 

permissible under the 2010 final 

regulations or these proposed 

regulations for purposes of satisfying the 

statutory market rate of return 

requirement. 

C. Plan Termination 

The proposed regulations would 

provide guidance with respect to the 

application of the rules of section 

411(b)(5)(B)(vi), which require special 

plan provisions relating to interest 

crediting rates and annuity conversion 

rates that apply when the plan is 

terminated. Under the proposed 

regulations, a statutory hybrid plan is 

treated as meeting the market rate of 

return requirements only if the terms of 

the plan satisfy the rules in the 

regulations relating to section 

411(b)(5)(B)(vi). Title IV of ERISA also 

imposes special rules that apply when 

a single employer pension plan is 

terminated (including special rules 

relating to plan amendments). See 

regulations of the Pension Benefit 

Guaranty Corporation for additional 

rules that apply when a pension plan is 

terminated. 

These proposed regulations reflect the 

statutory requirement that a plan 

provide that, if the interest crediting rate 

used to determine a participant’s 

accumulated benefit (or a portion 

thereof) varied (that is, was not a 

constant fixed rate) during the 5-year 

period ending on the plan termination 

date, then the interest crediting rate 

used to determine the participant’s 

accumulated benefit under the plan 

after the date of plan termination is 

equal to the average of the rates used 

under the plan during the 5-year period 

ending on the plan termination date. If 

the interest crediting rate used to 

determine a participant’s accumulated 

benefit (or a portion thereof) was instead 

a single fixed rate for all periods during 

the 5-year period ending on the plan 

termination date, then the interest 

crediting rate used to determine the 

participant’s accumulated benefit after 

the date of plan termination would be 

equal to that fixed rate. 

Under this rule, the interest crediting 

rate used after plan termination would 

be based on the average of the rates that 

applied under the plan during the 5- 

year period preceding plan termination, 

without regard to whether this average 

rate exceeds then-current market rates of 

return (but, in determining the average 

rate, a rate would only be taken into 

account to the extent that the rate did 

not exceed a market rate of return when 

the rate actually applied). For purposes 

of this calculation, the proposed 

regulations would provide that, subject 

to certain other rules described in this 

preamble, the average of the rates used 

under the plan during the 5-year period 

ending on the termination date is 

determined with respect to a participant 

as the arithmetic average, expressed as 

an annual rate, of the applicable interest 

crediting rates that applied in the 5-year 

period. In determining this average, 

each interest crediting period for which 

the interest crediting date is within the 

5-year period ending on the plan 

termination date would be taken into 

account, with interest crediting rates for 

periods that are less than a year in 

length adjusted and weighted 

proportionately. However, under this 

rule, if a period begins on or before the 

date that is 5 years before the 

termination date and ends within the 5- 

year period ending on the plan 

termination date, the period would be 

weighted as though the entire period 

were within the 5-year period ending on 

the plan termination date. 

Section 411(b)(5)(B)(vi) does not 

explicitly provide rules with respect to 

plans that determine interest credits 

based on equity-based rates of return 

that may involve potential losses. Since 

the trailing 5-year average of an equitybased rate of return may have little, if 

any, correlation to the actual future 

equity-based rate of return, the Treasury 

Department and the IRS do not believe 

it is appropriate to provide that the 

trailing 5-year average of such rate of 

return be used to determine benefits 

after plan termination. In such cases, the 

Treasury Department and the IRS 

believe that it is appropriate to apply a 

bond-based rule instead. Thus, the 

proposed regulations would provide 

that, with respect to an interest crediting 

rate used to determine a participant’s 

accumulated benefit for an interest 

crediting period during the 5-year 

period ending on the termination date 

that is not a fixed interest rate or a bondbased rate of interest (or is based on a 

variable rate that is not permissible 

under the regulations), the terms of the 

plan must provide that, for purposes of 

determining the average upon plan 

termination, the interest crediting rate 

for the interest crediting period is 

deemed to be equal to the third segment 

rate for the last calendar month ending 

before the beginning of the interest 

crediting period, as adjusted for any 

actual applicable floors and ceilings that 

applied to the rate of return in the 

period, but without regard to any 

reductions that applied to the rate of 

return in the period. Thus, for example, 

if the actual interest crediting rate in an 

interest crediting period was equal to 

the rate of return on plan assets, but not 

greater than 5 percent, then for purposes 

of determining the plan’s average 

interest crediting rate, the interest 

crediting rate for that interest crediting 

period would be deemed to equal to the 

lesser of the applicable third segment 

rate for the period and 5 percent. 

However, if the actual interest crediting 

rate in an interest crediting period was 

equal to the rate of return on plan assets 

minus 200 basis points, then for 

purposes of determining the plan’s 

average interest crediting rate, the 

interest crediting rate for that interest 

crediting period would be deemed to 


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equal the third segment rate (not the 

third segment rate minus 200 basis 

points). See the request for comments in 

this preamble under the heading 

‘‘Comments and Public Hearing’’ 

regarding the application of floors, 

ceilings, and reductions for purposes of 

the plan termination provisions when 

the third segment rate is substituted for 

an equity-based rate. 

As provided in section 411(b)(5)(B)(i), 

the regulations require that the terms of 

the plan also provide that the interest 

rate and mortality table (including 

tabular adjustment factors) used on and 

after plan termination for purposes of 

determining the amount of any benefit 

under the plan payable in the form of an 

annuity (commencing at or after normal 

retirement age) be based on the interest 

rate and mortality table specified under 

the plan for that purpose as of the 

termination date, except that if the 

interest rate is a variable rate, the 

interest rate is instead based on the 

rules described in the preceding 

paragraphs of this preamble using a 5- 

year average. 

A number of special rules apply for 

purposes of determining the interest 

crediting rate that applies after plan 

termination. In particular, for purposes 

of determining the average rate during 

the five-year period ending on plan 

termination, the interest crediting rate 

that applied for each interest crediting 

period is generally the ongoing interest 

crediting rate that was specified under 

the plan in that period, without regard 

to any section 411(d)(6) protected 

benefit using an old interest crediting 

rate. However, if, at the end of the last 

interest crediting period prior to plan 

termination, the participant’s 

accumulated benefit is based on a 

section 411(d)(6) protected benefit that 

results from a prior amendment to 

change the rate of interest crediting 

applicable under the plan, then, for 

purposes of determining the average 

rate, the pre-amendment interest 

crediting rate is treated as having 

applied for each interest crediting 

period after the date of the interest 

crediting rate change. In addition, the 

proposed regulations would provide 

that if the plan determines a 

participant’s interest credits in any 

interest crediting period by applying 

different rates to different 

predetermined portions of the 

accumulated benefit as permissible 

under the regulations, then the 

participant’s interest crediting rate for 

the interest crediting period is assumed 

for purposes of the plan termination 

provisions to be the weighted average of 

the fixed interest rates, determined 

under the plan termination rules, that 

apply to each portion of the 

accumulated benefit. 

Furthermore, to reduce the 

administrative burden and to determine 

the average rate for each participant 

based on 5 years of interest crediting 

data, if the plan provided for interest 

credits for any interest crediting period 

in which, pursuant to the terms of the 

plan, the individual was not eligible to 

receive interest credits (because the 

individual was not a participant or 

beneficiary in the relevant interest 

crediting period or otherwise), then, for 

purposes of determining the interest 

crediting rate that applies after plan 

termination, the individual is treated as 

though the individual received interest 

credits in that period using the interest 

crediting rate that applied in that period 

under the terms of the plan to determine 

the benefit of a similarly situated 

participant or beneficiary who was 

eligible to receive interest credits. 

However, if, under the terms of the plan, 

the individual was not eligible to 

receive any interest credits during the 

entire 5-year period ending on the plan 

termination date, then the rules fixing 

the interest crediting rate do not apply 

to determine the individual’s benefit 

after plan termination. 

The proposed regulations include 

examples to illustrate the application of 

these plan termination rules, including 

how these rules would apply where a 

plan bases its interest crediting rate on 

a weighted average of more than one 

rate, how these rules would apply 

where the plan’s ongoing interest 

crediting rate is an equity-based rate of 

return, and how these rules would 

apply to a participant whose benefits are 

determined where the plan had 

switched interest crediting rates in the 

past and where the interest credit prior 

to termination was determined by 

applying the old rate to the benefit 

attributable to principal credits before 

the applicable amendment date. 

D. Special Rule With Respect to 

Changes in Interest Crediting Rates 

Where Plan Provides Section 411(d)(6) 

Protection 

An inherent tension exists between 

the requirement not to reduce a 

participant’s accrued benefit and the 

requirement that an interest crediting 

rate not be in excess of a market rate of 

return that makes changes in interest 

crediting rates difficult to implement for 

statutory hybrid plans in many 

circumstances. This is because, in order 

to satisfy section 411(d)(6), a 

participant’s benefit can never be less 

than the pre-amendment benefit 

increased for periods after the 

amendment using the pre-amendment 

interest crediting rate, thereby 

effectively requiring a minimum interest 

crediting rate. In light of this tension, 

the proposed regulations would create a 

special market rate of return rule that 

applies in the case of an amendment to 

change the plan’s interest crediting rate. 

In particular, the proposed rule would 

provide that, in the case of an 

amendment to change a plan’s interest 

crediting rate for periods after the 

applicable amendment date from one 

interest crediting rate (the old rate) that 

is not in excess of a market rate of return 

to another interest crediting rate (the 

new rate) that is not in excess of a 

market rate of return, the plan’s effective 

interest crediting rate is not in excess of 

a market rate of return merely because 

the plan provides for the benefit of any 

participant who is benefiting under the 

plan on the applicable amendment date 

to never be less than what it would be 

if the old rate had continued but 

without taking into account any 

principal credits after the applicable 

amendment date. A pattern of repeated 

plan amendments each of which 

provides for a prospective change in the 

plan’s interest crediting rate with 

respect to the benefit as of the 

applicable amendment date will be 

treated as resulting in the ongoing plan 

terms providing that the interest 

crediting rate equals the greater of each 

of the interest crediting rates, so that the 

special rule in the preceding sentence 

would not apply. See § 1.411(d)–4, A– 

1(c)(1). Thus, in such cases the plan will 

be treated as providing a rate of return 

that is in excess of a market rate of 

return, unless the resulting greater-of 

rate satisfies the market rate of return 

rules. 

E. Special Rule With Respect to Interest 

Crediting Rate After Normal Retirement 

Age 

In coordination with the rules under 

section 411(a)(13)(A) (as described in 

section I of this preamble) that apply 

with respect to the benefit determined 

as of each annuity starting date after 

normal retirement age, the proposed 

regulations would provide that a 

statutory hybrid plan is not treated as 

providing an effective interest crediting 

rate that is in excess of a market rate of 

return merely because the plan provides 

that the participant’s benefit, as of each 

annuity starting date after normal 

retirement age, is equal to the greater of 

the benefit determined using an interest 

crediting rate that is not otherwise in 

excess of a market rate of return and the 

benefit that satisfies the requirements of 

section 411(a)(2). Thus, for example, a 

cash balance plan would not be treated 

as providing an effective interest 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64208 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

4However, see section 204(h) of ERISA and 

section 4980F of the Code for notice requirements 

relating to amendments that provide for a 

significant reduction in the rate of future benefit 

accrual. 

5Except to the extent permitted under section 

411(d)(6) and §§ 1.411(d)–3 and 1.411(d)–4, another 

Code provision, or another statutory provision such 

as section 1107 of PPA ’06, section 411(d)(6) 

prohibits a plan amendment that decreases a 

participant’s accrued benefits or that has the effect 

of eliminating or reducing an early retirement 

benefit or retirement-type subsidy, or eliminating 

an optional form of benefit, with respect to benefits 

attributable to service before the amendment. 

6Announcement 2009–82 and Notice 2009–97 

stated that the IRS and the Treasury Department 

expected to provide such relief. While Notice 2009– 

97 indicated the relief would only apply if the 

amendment is adopted by the last day of the first 

plan year that begins on or after January 1, 2010, 

this preamble supersedes that applicability date to 

provide that it is expected that this relief would 

apply if the amendment is adopted before final 

regulations that finalize these proposed regulations 

apply to the plan. 

crediting rate in excess of a market rate 

of return merely because the plan 

credits interest after normal retirement 

age at a rate that is sufficient to provide 

any required actuarial increases. 

IV. Changes in Interest Crediting Rates 

and Code Section 411(d)(6) 

A. Background 

An amendment to change a plan’s 

interest crediting rate that only applies 

with respect to benefits that have not yet 

accrued (such as where the plan 

establishes a second hypothetical 

account balance for future principal 

credits to which a different interest 

crediting rate is applied) would not 

result in a reduction in accrued benefits 

attributable to service before the 

applicable amendment date and, 

therefore, such a change would not 

violate section 411(d)(6).4 However, 

except to the extent permitted under 

section 1107 of PPA ’06 or as otherwise 

described in section IV of this preamble, 

an amendment to change a plan’s future 

interest crediting rate with respect to 

benefits that have already accrued (in 

other words, with respect to an existing 

account balance) must satisfy section 

411(d)(6) if the change could result in 

interest credits that are smaller as of any 

date after the applicable amendment 

date than the interest credits that would 

be credited without regard to the 

amendment.5

B. Special Section 411(d)(6) Rule With 

Respect to Changes in Future Interest 

Crediting Rates 

Under the 2010 final regulations, a 

plan is not treated as providing smaller 

interest credits after the applicable 

amendment date merely because the 

amendment changes the plan’s future 

interest crediting rate with respect to 

benefits that have already accrued to the 

rate of interest on long-term investment 

grade corporate bonds (the third 

segment rate under section 

430(h)(2)(C)(iii)) from one of the other 

bond-based safe harbor rates permitted 

under the 2010 final regulations (for 

example, a rate based on Treasury bonds 

with any of the margins specified in the 

regulations or an eligible cost-of-living 

index). However, the change is 

permitted only if: (1) The effective date 

of the amendment is at least 30 days 

after adoption, (2) the new interest 

crediting rate only applies to interest to 

be credited after the effective date of the 

amendment, and (3) on the effective 

date of the amendment, the new interest 

crediting rate is not lower than the 

interest crediting rate that would have 

applied in the absence of the 

amendment. 

C. Changes That Would Otherwise 

Violate Section 411(d)(6) But That Are 

Made to the Extent Necessary To Satisfy 

Section 411(b)(5) 

After these proposed regulations 

under sections 411(a)(13) and 411(b)(5) 

are issued as final regulations, it is 

expected that relief from the 

requirements of section 411(d)(6) will be 

granted for a plan amendment that 

eliminates or reduces a section 411(d)(6) 

protected benefit, provided that the 

amendment is adopted before those 

final regulations apply to the plan, and 

the elimination or reduction is made 

only to the extent necessary to enable 

the plan to meet the requirements of 

section 411(b)(5).6 It is expected that 

this section 411(d)(6) relief will be 

available in the case of an amendment 

that reduces the future interest crediting 

rate with respect to benefits that have 

already accrued from a rate that is in 

excess of a market rate of return under 

the final market rate of return rules to 

the extent necessary to constitute a 

permissible rate under the final market 

rate of return rules. However, it is 

expected that this relief would not 

permit a plan with an interest crediting 

rate within the list of permitted rates 

under the final market rate of return 

rules to change to another permitted rate 

because the change would not be 

necessary to enable the plan to satisfy 

the requirements of section 411(b)(5). 

Similarly, it is expected that this relief 

would not permit a plan with an interest 

crediting rate that is impermissible 

under the final market rate of return 

rules to change to a permissible rate 

using less than the maximum permitted 

margin for that rate because the 

reduction would be more than necessary 

to enable the plan to satisfy the 

requirements of section 411(b)(5). For 

purposes of the preceding sentence, a 

rate without an associated margin is 

treated as having a maximum permitted 

margin of zero. See the request for 

comments, under the heading 

‘‘Comments and Public Hearing’’ in this 

preamble, regarding limitations on the 

scope of this anticipated relief under 

§ 1.411(d)–4, A–2(b)(2)(i) because the 

relief must be limited to amendments 

that change a plan’s interest crediting 

rate only to the extent necessary to 

enable the plan to satisfy the 

requirements of section 411(b)(5). 

Proposed Effective/Applicability Dates 

The specific rules that would be 

implemented under the proposed 

regulations generally would apply to 

plan years that begin on or after January 

1, 2012. However, as stated in the 

preamble to the 2010 final regulations, 

a plan is permitted to rely on the 

provisions of these proposed 

regulations, as well as the 2010 final 

regulations, the 2007 proposed 

regulations, and Notice 2007–6, for 

purposes of satisfying the requirements 

of sections 411(a)(13) and 411(b)(5) for 

periods before the regulatory effective 

date. 

Special Analyses 

It has been determined that these 

proposed regulations are not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

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

to these regulations, and because the 

regulation does not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, these 

regulations have been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Public Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (a signed original and eight (8) 

copies) or electronic comments that are 

submitted timely to the IRS. The 

Treasury Department and the IRS 

specifically request comments on the 

clarity of the proposed regulations and 

how they may be made easier to 

understand. 

In addition to comments on issues 

addressed in these proposed 

regulations, the Treasury Department 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 64209 

and the IRS specifically request 

comments on the following issues: 

• Should a defined benefit plan that 

expresses a participant’s accumulated 

benefit as a current single-sum dollar 

amount and that does not provide for 

interest credits be excluded from the 

definition of a statutory hybrid plan? 

• In the case of a statutory hybrid 

plan that credits interest using an 

interest crediting rate equal to the rate 

of return on a RIC, how does section 

411(d)(6) apply if the underlying RIC 

subsequently ceases to exist? 

• The proposed regulations permit 

certain fixed interest crediting rates (a 

fixed 5 percent rate for any year, the 

greater of 4 percent or certain bondbased indices for any year, and a 

cumulative minimum 3 percent annual 

rate). Comments regarding these specific 

proposed rules should take into account 

how any general legal standard for a 

market rate of return would be applied 

in different economic circumstances 

with variable interest rate markets, as 

well as the related ability that would 

generally be available under these 

proposed regulations at § 1.411(b)(5)– 

1(e)(3)(iii) for the plan sponsor to 

change the crediting rate on an existing 

hypothetical account balance for active 

participants from one interest crediting 

rate to another, including the risk that 

whatever fixed rate is permitted might 

allow a plan’s interest credits to exceed 

market rates of interest either 

frequently, by an amount that might be 

large, or for an extended duration. 

Commenters recommending any 

additional types of rates of return than 

those in these proposed regulations 

should justify how those rates meet a 

market rate of return, taking into 

account the minimum guarantee rules. 

• Should a statutory hybrid plan be 

able to offer participants a menu of 

hypothetical investment options 

(including a life-cycle investment 

option, whereby participants are 

automatically transitioned 

incrementally at certain ages from a 

blended rate that is more heavily equityweighted to a rate that is more heavily 

bond-weighted) and, if so, what plan 

qualification issues (i.e., forfeiture, 

section 411(d)(6), market rate of return, 

and other section 411(b)(5) issues) arise 

under such a plan design? In particular, 

do the following events raise issues: (1) 

A participant elects to switch from one 

investment option to another; (2) a bond 

index or RIC underlying one of the 

investment options ceases to exist; (3) 

the plan is amended to eliminate an 

investment option; (4) a participant 

elects to switch from an investment 

option with a cumulative minimum to 

an investment option without a 

cumulative minimum (or vice versa); or 

(5) the plan is terminated and, pursuant 

to the special rules that apply upon plan 

termination, the interest crediting rate 

that applies to determine a participant’s 

benefit after plan termination must be 

fixed? 

• How does a statutory hybrid plan 

that provides benefits under a statutory 

hybrid benefit formula other than a 

lump sum-based benefit formula (such 

as a plan that provides for indexing as 

described in section 411(b)(5)(E))—a 

plan to which section 411(a)(13)(A) does 

not apply—ensure compliance with the 

minimum present value rules of section 

417(e)? 

• How does a statutory hybrid plan 

determine the section 417(e) minimum 

present value of the participant’s benefit 

where a portion of the benefit is 

determined based partly on the benefit 

under a lump sum-based benefit 

formula, although that portion is not 

determined under a lump sum-based 

benefit formula? For example, where a 

portion of the accrued benefit is equal 

to the excess of the benefit under a 

traditional defined benefit formula over 

the benefit under a hypothetical account 

formula, how is the present value of that 

portion of the accrued benefit 

determined? 

• Should the proposed alternative 

method of satisfying the conversion 

protection requirements that does not 

require a comparison of benefits at the 

annuity starting date be broadened to 

apply to forms of distribution other than 

a single-sum distribution? If this rule 

should be broadened, what rules would 

ensure that the benefit attributable to 

the opening hypothetical account 

balance is not less than the benefit 

available under the same generalized 

optional form under the pre-conversion 

formula (which may include subsidized 

early retirement benefits and other 

retirement-type subsidies) consistent 

with the goal of having a simplified 

alternative? 

• How does a statutory hybrid plan 

that uses a variable interest crediting 

rate that may potentially be negative 

satisfy the fractional rule of section 

411(b)(1)(C) if the 1331⁄3 percent rule of 

section 411(b)(1)(B) is not satisfied? 

• For purposes of the plan 

termination rules, should a floor, 

ceiling, or reduction that applied to an 

equity-based rate in an interest crediting 

period be treated as applying in the 

same manner to the third segment rate 

or is it appropriate for such an 

adjustment to be disregarded or 

otherwise modified for purposes of such 

rules? 

• Under the relief to be provided 

pursuant to § 1.411(d)–4, A–2(b)(2)(i), 

which authorizes amendments that 

reduce a section 411(d)(6) protected 

benefit only to the extent necessary to 

satisfy the requirements of section 

411(b)(5), should a statutory hybrid plan 

with an interest crediting rate that is 

impermissible under the final market 

rate of return rules be permitted to be 

amended to change the future interest 

crediting rate with respect to benefits 

that have already accrued to any 

permissible rate using the maximum 

permitted margin for that rate or should 

that be dependent upon the reasons that 

the pre-amendment rate exceeded a 

market rate of return? Thus, for 

example, should a plan with an 

impermissible bond-based rate (without 

a fixed component) be permitted to 

switch to any permissible rate, bondbased or otherwise, using the maximum 

permitted margin for that rate? Should 

a plan with an impermissibly high 

standalone fixed rate be permitted to 

switch to the maximum rate of any type, 

should it be permitted to switch to the 

maximum permitted bond-based rate 

with the maximum permitted floor for 

that rate (the third segment rate with a 

fixed 4 percent floor), or must it switch 

to the maximum permitted standalone 

fixed rate (a fixed rate of 5 percent)? 

Should a plan with a permissible bondbased rate but with an impermissibly 

high fixed floor be permitted to switch 

to the maximum rate of any type, should 

it be permitted to retain the preamendment bond-based rate while 

reducing the floor to the maximum 

permitted floor for that rate (a fixed 4 

percent floor), should it be permitted to 

switch to the maximum permitted 

standalone fixed rate (a fixed rate of 5 

percent), or must it switch to the 

maximum permitted bond-based rate 

with the maximum permitted floor for 

that rate (the third segment rate with a 

fixed 4 percent floor)? 

All comments will be available for 

public inspection and copying. A public 

hearing has been scheduled for 

Wednesday, January 26, 2011, beginning 

at 10 a.m. in the Auditorium, Internal 

Revenue Service, 1111 Constitution 

Avenue, NW., Washington, DC. Due to 

building security procedures, visitors 

must enter at the Constitution Avenue 

entrance. In addition, all visitors must 

present photo identification to enter the 

building. Because of access restrictions, 

visitors will not be admitted beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

information about having your name 

placed on the building access list to 

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this 

preamble. 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64210 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

The rules of 26 CFR 601.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments at the hearing 

must submit written or electronic 

comments by Wednesday, January 12, 

2011, and an outline of topics to be 

discussed and the amount of time to be 

devoted to each topic (a signed original 

and eight (8) copies) by Friday, January 

14, 2011. A period of 10 minutes will 

be allotted to each person for making 

comments. An agenda showing the 

scheduling of the speakers will be 

prepared after the deadline for receiving 

outlines has passed. Copies of the 

agenda will be available free of charge 

at the hearing. 

Drafting Information 

The principal authors of these 

regulations are Neil S. Sandhu, Lauson 

C. Green, and Linda S. F. Marshall, 

Office of Division Counsel/Associate 

Chief Counsel (Tax Exempt and 

Government Entities). However, other 

personnel from the IRS and the Treasury 

Department participated in the 

development of these regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

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 continues to read in part as 

follows: 

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

Par. 2. Section 1.411(a)(13)–1 is 

amended by revising paragraphs (b)(2), 

(b)(3), (b)(4), and (e)(2)(ii) to read as 

follows: 

§ 1.411(a)(13)–1 Statutory hybrid plans. 

* * * * * 

(b) * * * 

(2) Requirements that lump sumbased benefit formula must satisfy to 

obtain relief—(i) In general. The relief of 

paragraph (b)(1) of this section does not 

apply with respect to benefits 

determined under a lump sum-based 

benefit formula unless the requirements 

of paragraphs (b)(2)(ii) through (iv) of 

this section are satisfied. 

(ii) Benefit on or before normal 

retirement age. A plan satisfies this 

paragraph (b)(2)(ii) only if, at all times 

on or before normal retirement age, the 

then-current balance of the hypothetical 

account or the then-current value of the 

accumulated percentage of the 

participant’s final average compensation 

is not less than the present value, 

determined using reasonable actuarial 

assumptions, of the portion of the 

participant’s accrued benefit that is 

determined under the lump sum-based 

benefit formula. However, a plan is 

deemed to satisfy the requirement in the 

preceding sentence for periods before 

normal retirement age if, upon 

attainment of normal retirement age, the 

then-current balance of the hypothetical 

account or the then-current value of the 

accumulated percentage of the 

participant’s final average compensation 

is actuarially equivalent (using 

reasonable actuarial assumptions) to the 

portion of the participant’s accrued 

benefit that is determined under the 

lump sum-based benefit formula. 

(iii) Benefit after normal retirement 

age. A plan satisfies this paragraph 

(b)(2)(iii) only if, as of each annuity 

starting date after normal retirement age, 

the then-current balance of the 

hypothetical account or the then-current 

value of the accumulated percentage of 

the participant’s final average 

compensation— 

(A) Satisfies the requirements of 

section 411(a)(2); or 

(B) Would satisfy the requirements of 

section 411(a)(2) but for the fact that the 

plan suspends benefits in accordance 

with section 411(a)(3)(B). 

(iv) Reductions limited. A plan 

satisfies this paragraph (b)(2)(iv) only if 

the balance of the hypothetical account 

or accumulated percentage of the 

participant’s final average compensation 

may not be reduced except as a result 

of— 

(A) Benefit payments under paragraph 

(b)(3) of this section; 

(B) Qualified domestic relations 

orders under section 414(p); 

(C) Forfeitures that are permitted 

under section 411(a) (such as charges for 

providing a qualified preretirement 

survivor annuity); 

(D) Amendments that are permitted 

under section 411(d)(6); or 

(E) Adjustments resulting from the 

application of interest credits (under the 

rules of § 1.411(b)(5)–1) that are negative 

for a period, for plans that express the 

accumulated benefit as the balance of a 

hypothetical account. 

(3) Alternative forms of distribution 

under a lump sum-based benefit 

formula—(i) Payment of current account 

balance or current value. The relief of 

paragraph (b)(1) of this section applies 

with respect to a single-sum payment 

equal to the then-current balance of a 

hypothetical account maintained for the 

participant or the then-current value of 

an accumulated percentage of the 

participant’s final average 

compensation. 

(ii) Payment of benefits that are 

actuarially equivalent to current 

account balance or current value. With 

respect to the benefits under a lump 

sum-based benefit formula, the relief of 

paragraph (b)(1) of this section applies 

to an optional form of benefit that is 

determined as of the annuity starting 

date as the actuarial equivalent, using 

reasonable actuarial assumptions, of the 

then-current balance of a hypothetical 

account maintained for the participant 

or the then-current value of an 

accumulated percentage of the 

participant’s final average 

compensation. 

(iii) Payment of benefits based on 

immediate annuity. With respect to the 

benefits under a lump sum-based 

benefit formula, the relief of paragraph 

(b)(1) of this section applies to an 

optional form of benefit that is not 

subject to the minimum present value 

requirements of section 417(e) and that 

is determined under the plan as of the 

annuity starting date as the actuarial 

equivalent (using reasonable actuarial 

assumptions) of the optional form of 

benefit that— 

(A) Commences as of the same 

annuity starting date; 

(B) Is payable in the same generalized 

optional form (within the meaning of 

§ 1.411(d)–3(g)(8)) as the accrued 

benefit; and 

(C) Is the actuarial equivalent (using 

reasonable actuarial assumptions) of the 

then-current balance of a hypothetical 

account maintained for the participant 

or the then-current value of an 

accumulated percentage of the 

participant’s final average 

compensation. 

(iv) Payment of portion of current 

account balance or current value. The 

relief of paragraph (b)(1) of this section 

applies on a proportionate basis to a 

payment of a portion of the benefit 

under a lump sum-based benefit 

formula that is not paid in a form 

otherwise described in this paragraph 

(b)(3), such as a payment of a specified 

dollar amount or percentage of the thencurrent balance of a hypothetical 

account maintained for the participant 

or then-current value of an accumulated 

percentage of the participant’s final 

average compensation. Thus, for 

example, if a plan that expresses the 

participant’s entire accumulated benefit 

as the balance of a hypothetical account 

distributes 40 percent of the 

participant’s then-current hypothetical 

account balance in a single payment, the 

plan is treated as satisfying the 

requirements of section 411(a) and the 

minimum present value rules of section 

417(e) with respect to 40 percent of the 

participant’s then-current accrued 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 64211 

benefit. See paragraph (b)(3)(ii) or (iii) of 

this section for relief applicable with 

respect to a distribution with respect to 

the remainder (60 percent) of the 

participant’s accumulated benefit. 

(v) Conditions for applicability. This 

paragraph (b)(3) applies to a payment of 

benefits under a lump sum-based 

benefit formula only if the requirements 

of paragraph (b)(2) of this section are 

also satisfied. 

(4) Rules of application. The relief of 

paragraph (b)(1) of this section applies 

only to the portion of the participant’s 

benefit that is determined under a lump 

sum-based benefit formula and does not 

apply to any portion of the participant’s 

benefit that is determined under a 

formula that is not a lump sum-based 

benefit formula. Thus, the following 

rules apply: 

(i) Greater-of formulas. Where the 

participant’s accrued benefit equals the 

greater of the benefit under a lump sumbased benefit formula and the benefit 

under another formula, a single-sum 

payment of the participant’s entire 

benefit must equal the greater of the 

then-current accumulated benefit under 

the lump sum-based benefit formula and 

the present value, determined in 

accordance with section 417(e), of the 

benefit under the other formula. 

Applying this rule where the non-lump 

sum-based benefit formula provides a 

benefit equal to a pro rata portion of the 

benefit determined by projecting a 

future hypothetical account balance 

(including future principal credits), a 

single-sum payment of the participant’s 

entire benefit must equal the greater of 

the then-current balance of the 

hypothetical account and the present 

value, determined in accordance with 

section 417(e), of the pro-rata benefit 

determined by projecting the future 

hypothetical account balance. 

(ii) ‘‘Sum-of’’ formulas. Where the 

accrued benefit equals the sum of the 

benefit under a lump sum-based benefit 

formula plus the excess of the benefit 

under another formula over the benefit 

under the lump sum-based benefit 

formula, a single-sum payment of the 

participant’s entire benefit must equal 

the then-current accumulated benefit 

under the lump sum-based benefit 

formula plus the excess of the present 

value, determined in accordance with 

section 417(e), of the benefit under the 

other formula over the present value, 

determined in accordance with section 

417(e), of the benefit under the lump 

sum-based benefit formula. 

* * * * * 

(e) * * * 

(2) * * * 

(ii) Special effective date. Paragraphs 

(b)(2), (b)(3), and (b)(4) of this section 

apply to plan years that begin on or after 

January 1, 2012. 

* * * * * 

Par. 3. Section 1.411(b)–1 is amended 

by adding paragraph (b)(2)(ii)(G) and 

(b)(2)(ii)(H) to read as follows: 

§ 1.411(b)–1 Accrued benefit 

requirements. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) * * * 

(G) Special rule for multiple formulas. 

[Reserved] 

(H) Variable interest crediting rate 

under a statutory hybrid benefit 

formula. For plan years that begin on or 

after January 1, 2012, a plan that 

determines any portion of the 

participant’s accrued benefit pursuant to 

a statutory hybrid benefit formula (as 

defined in § 1.411(a)(13)–1(d)(4)) that 

utilizes an interest crediting rate 

described in § 1.411(b)(5)–1(d) that is a 

variable rate that was less than zero for 

the prior plan year is not treated as 

failing to satisfy the requirements of 

paragraph (b)(2) of this section for the 

current plan year merely because the 

plan assumes for purposes of paragraph 

(b)(2) of this section that the variable 

rate is zero for the current plan year and 

all future plan years. 

* * * * * 

Par. 4. Section 1.411(b)(5)–1 is 

amended by: 

1. Revising paragraph (c)(3)(iii). 

2. Adding Example 8 to paragraph 

(c)(5). 

3. Revising paragraphs (d)(1)(iv)(D), 

(d)(2)(ii), (d)(4)(iv), (d)(5)(ii), (d)(5)(iv), 

(d)(6)(ii), (d)(6)(iii), (e)(2), (e)(3)(iii), 

(e)(4), and (f)(2)(i)(B). 

The revisions and addition read as 

follows: 

§ 1.411(b)(5)–1 Reduction in rate of benefit 

accrual under a defined benefit plan. 

* * * * * 

(c) * * * 

(3) * * * 

(iii) Comparison of benefits at 

effective date of conversion 

amendment—(A) In general. A plan 

satisfies the requirements of this 

paragraph (c)(3)(iii) with respect to a 

participant only if an opening 

hypothetical account balance is 

established to replicate the preconversion benefit and the requirements 

of paragraphs (c)(3)(iii)(B) through 

(c)(3)(iii)(G) of this section are each 

satisfied. 

(B) Single-sum payment. At the 

annuity starting date, the participant 

elects to receive payment in the form of 

a single-sum distribution equal to the 

sum of the then-current balance of the 

hypothetical account used to replicate 

the pre-conversion benefit and the 

benefit attributable to post-conversion 

service under the post-conversion 

benefit formula. 

(C) Not less than pre-conversion 

benefit. In accordance with section 

411(d)(6), the aggregate benefit payable 

at the annuity starting date after the 

effective date of the conversion 

amendment is not less than the benefit 

described in paragraph (c)(2)(i)(A) of 

this section. 

(D) Form of pre-conversion benefit. 

The plan, as in effect immediately prior 

to the effective date of the conversion 

amendment, either did not provide a 

single-sum payment option (for benefits 

that cannot be immediately distributed 

under section 411(a)(11)) or provided a 

single-sum payment option that was 

based solely on the present value of the 

benefit payable at normal retirement age 

(or at date of benefit commencement, if 

later), and which was not based on the 

present value of the benefit payable 

commencing at any date prior to normal 

retirement age. 

(E) Minimum opening account 

balance. The plan provides for the 

opening hypothetical account balance 

under paragraph (c)(3)(i) of this section 

to be established in accordance with 

rules under which the amount of this 

opening balance will not be less than 

the present value, determined in 

accordance with section 417(e), of the 

participant’s accrued benefit under the 

plan immediately prior to the effective 

date of the conversion amendment. 

(F) Interest credits—(1) Requirement 

as of effective date of conversion 

amendment. As of the effective date of 

the conversion amendment, the interest 

crediting rate under the plan is an 

interest crediting rate described in 

paragraph (d)(3) or (d)(4) of this section. 

In addition, as of that date, the value of 

the index used to determine the interest 

crediting rate under the plan is at least 

as great for every participant or 

beneficiary as the interest rate that was 

used pursuant to paragraph (c)(3)(iii)(E) 

of this section to determine the opening 

hypothetical account balance. This 

requirement is satisfied, for example, if 

each participant’s opening hypothetical 

account balance is determined using the 

applicable interest rate and applicable 

mortality table under section 417(e)(3), 

the interest crediting rate under the plan 

is the third segment rate, and, at the 

effective date of the conversion 

amendment, the third segment rate is 

the highest of the three segment rates. 

(2) Requirement for later interest 

crediting rate changes. If, subsequent to 

the effective date of the conversion 

amendment, the interest crediting rate 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64212 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

changes (whether by plan amendment 

or otherwise) with respect to a 

participant who was a participant at the 

time of the effective date of the 

conversion amendment from a 

particular interest crediting rate 

described in paragraph (d)(3) or (d)(4) of 

this section to a different interest 

crediting rate that is not in all cases at 

least as great as the prior interest 

crediting rate under the plan, then the 

new interest crediting rate does not 

apply to the existing hypothetical 

account balance as of the effective date 

of the change in interest crediting rates 

(or, if the plan created a subaccount 

consisting of the opening hypothetical 

account balance and interest credits on 

that subaccount, then the new interest 

crediting rate does not apply to the 

subaccount). 

(G) Death benefits. The plan either— 

(1) Provides a death benefit after the 

effective date of the conversion 

amendment which has a present value 

that is at all times at least equal to the 

then-current balance of the hypothetical 

account used to replicate the preconversion benefit; or 

(2) Applied no pre-retirement 

mortality decrement in establishing the 

opening hypothetical account balance 

under paragraph (c)(3)(iii)(E) of this 

section. 

* * * * * 

(c) * * * 

(5) * * * 

Example 8. (i) Facts where plan 

establishes opening hypothetical account 

balance under paragraph (c)(3)(iii) of this 

section. Employer O sponsors Plan F, a 

defined benefit plan that provides an 

accumulated benefit, payable as a straight life 

annuity commencing at age 65 (which is Plan 

F’s normal retirement age), based on a 

percentage of highest average compensation 

times the participant’s years of service. Plan 

F permits any participant who has had a 

severance from employment to elect payment 

in the following optional forms of benefit 

(with spousal consent if applicable), with any 

payment not made in a straight life annuity 

converted to an equivalent form based on 

reasonable actuarial assumptions: A straight 

life annuity; and a 50 percent, 75 percent, or 

100 percent joint and survivor annuity. The 

payment of benefits may commence at any 

time after attainment of age 55, with an 

actuarial reduction if the commencement is 

before normal retirement age. In addition, the 

plan offers a single-sum payment after 

attainment of age 55 equal to the present 

value of the normal retirement benefit using 

the applicable interest rate and mortality 

table under section 417(e)(3) in effect under 

the terms of the plan on the annuity starting 

date. (These facts are the same as those in 

paragraph (i) of Example 1.) 

(ii) Facts relating to the conversion 

amendment and establishment of opening 

balance. On January 1, 2012, Plan F is 

amended to eliminate future accruals under 

the highest average compensation benefit 

formula and to base future benefit accruals 

on a hypothetical account balance. As of 

January 1, 2012, the plan establishes an 

opening hypothetical account balance for 

each individual who was a participant in the 

plan on December 31, 2011, equal to the 

present value of the participant’s 

accumulated benefits, payable as a straight 

life annuity commencing at age 65, based on 

the actuarial assumptions then applicable 

under section 417(e)(3). New participants 

begin with a hypothetical account balance of 

zero on their date of participation. For 

service on or after January 1, 2012, each 

participant’s hypothetical account balance is 

credited monthly with a pay credit equal to 

a specified percentage of the participant’s 

compensation during the month and also 

with interest based on the third segment rate 

described in section 430(h)(2)(C)(iii). With 

respect to benefits under the hypothetical 

account balance, a participant is permitted to 

elect (with spousal consent) payment in the 

same generalized optional forms of benefit 

(even though different actuarial factors 

apply) as under the terms of the plan in effect 

before January 1, 2012, and also as a singlesum distribution. The plan provides that in 

no event will the benefit payable be less than 

the benefits attributable to service before 

January 1, 2012, to be determined under the 

terms of the plan as in effect immediately 

before the effective date of the amendment. 

In the event of death prior to the annuity 

starting date, the plan provides a death 

benefit equal to the hypothetical account 

balance (and allows a surviving spouse to 

elect payment in the form of an actuarially 

equivalent life annuity). 

(iii) Conclusion. Plan F satisfies the 

requirements of paragraph (c)(3)(iii) of this 

section for participants who elect to receive 

payment in the form of a single-sum 

distribution equal to the hypothetical 

account balance in accordance with the 

requirements of paragraph (c)(3)(iii)(B) of this 

section for the following reasons. First, Plan 

F satisfies the requirements of paragraph 

(c)(3)(iii)(C) of this section because the 

benefit payable can never be less than the 

pre-conversion benefit, in accordance with 

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

Second, Plan F satisfies the requirements of 

paragraph (c)(3)(iii)(D) of this section because 

prior to conversion it provided for a singlesum payment option that was based solely on 

the present value of the benefit payable at 

normal retirement age. Third, Plan F satisfies 

the requirements of paragraph (c)(3)(iii)(E) of 

this section because the amount of the 

opening balance is not less than the present 

value of the participant’s accrued benefit 

under the plan immediately prior to the 

effective date of the conversion amendment, 

as determined in accordance with section 

417(e). Fourth, Plan F satisfies the 

requirements of paragraph (c)(3)(iii)(F) of this 

section because it provides for interest 

credits that are described in paragraph (d)(3) 

of this section on the opening balance and 

the interest credits are reasonably expected to 

be no lower than the interest rate used to 

determine the opening balance. This is the 

case because interest is credited at least 

annually after the effective date of the 

conversion amendment and the interest rate 

used to establish the opening balance (which 

is based on the first, second, and third 

segment rates described in section 

430(h)(2)(C) referenced under section 

417(e)(3)) is not greater than the interest rate 

applicable under the third segment rate 

described in section 430(h)(2)(C)(iii) which 

the plan uses to determine interest for all 

future periods after the effective date of the 

conversion amendment. Fifth, Plan F satisfies 

the requirements of paragraph (c)(3)(iii)(G) of 

this section because it provides a death 

benefit after the effective date of the 

conversion amendment which has a present 

value that is at all times at least equal to the 

hypothetical account balance at the date of 

death. 

* * * * * 

(d) * * * 

(1) * * * 

(iv) * * * 

(D) Debits and credits during the 

interest crediting period. A plan is not 

treated as failing to meet the 

requirements of this paragraph (d) 

merely because the plan does not 

provide for interest credits on amounts 

distributed prior to the end of the 

interest crediting period. Furthermore, a 

plan is not treated as failing to meet the 

requirements of this paragraph (d) 

merely because the plan calculates 

increases or decreases to the 

participant’s accumulated benefit by 

applying a rate of interest or rate of 

return (including a rate of increase or 

decrease under an index) to the 

participant’s adjusted accumulated 

benefit (or portion thereof) for the 

period. For this purpose, the 

participant’s adjusted accumulated 

benefit equals the participant’s 

accumulated benefit as of the beginning 

of the period, adjusted for debits and 

credits (other than interest credits) made 

to the accumulated benefit prior to the 

end of the interest crediting period, with 

appropriate weighting for those debits 

and credits based on their timing within 

the period. For plans that calculate 

increases or decreases to the 

participant’s accumulated benefit by 

applying a rate of interest or rate of 

return to the participant’s adjusted 

accumulated benefit (or portion thereof) 

for the period, interest credits include 

these increases and decreases, to the 

extent provided under the terms of the 

plan at the beginning of the period and 

to the extent not conditioned on current 

service and not made on account of 

imputed service (as defined in 

§ 1.401(a)(4)–11(d)(3)(ii)(B)), and the 

interest crediting rate with respect to a 

participant equals the total amount of 

interest credits for the period divided by 


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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 64213 

the participant’s adjusted accumulated 

benefit for the period. 

* * * * * 

(2) * * * 

(ii) Application to multiple annuity 

starting dates—(A) In general. Paragraph 

(d)(2)(i) of this section applies only at an 

annuity starting date, within the 

meaning of § 1.401(a)–20, A–10(b), on 

which a distribution of the participant’s 

entire benefit under the plan’s statutory 

hybrid benefit formula as of that date 

commences. For a participant who has 

more than one annuity starting date, 

paragraph (d)(2)(ii)(B) of this section 

provides rules for the application of 

paragraph (d)(2)(i) of this section, taking 

into account prior distributions. If the 

comparison under paragraph 

(d)(2)(ii)(B) of this section results in the 

sum of principal credits exceeding the 

sum of the amounts described in 

paragraphs (d)(2)(ii)(B)(1) through 

(d)(2)(ii)(B)(3) of this section, then the 

participant’s benefit to be distributed at 

the current annuity starting date is 

increased by an amount equal to the 

excess. 

(B) Comparison to reflect prior 

distributions. For a participant who has 

more than one annuity starting date, the 

sum of all principal credits credited to 

the participant under the plan, as of the 

current annuity starting date, is 

compared to the sum of— 

(1) The participant’s benefit as of the 

current annuity starting date; 

(2) The amount of the offset to the 

participant’s benefit under the statutory 

hybrid benefit formula that is 

attributable to any prior distribution of 

the participant’s benefit under that 

formula; and 

(3) The amount of any increase to the 

participant’s benefit as a result of the 

application of paragraph (d)(2)(i) of this 

section to a prior distribution. 

* * * * * 

(4) * * * 

(iv) Fixed rate of interest. An annual 

interest crediting rate equal to a fixed 5 

percent is deemed to be not in excess of 

the interest rate described in paragraph 

(d)(3) of this section. 

* * * * * 

(5) * * * 

(ii) Actual rate of return on plan 

assets. An interest crediting rate equal 

to the actual rate of return on the 

aggregate assets of the plan, including 

both positive returns and negative 

returns, is not in excess of a market rate 

of return if the plan’s assets are 

diversified so as to minimize the 

volatility of returns. This requirement 

that plan assets be diversified so as to 

minimize the volatility of returns does 

not require greater diversification than 

is required under section 404(a)(1)(C) of 

Title I of the Employee Retirement 

Income Security Act of 1974, Public 

Law 93–406 (88 Stat. 829 (1974)) with 

respect to defined benefit pension plans. 

* * * * * 

(iv) Rate of return on certain RICs. An 

interest crediting rate is not in excess of 

a market rate of return if it is equal to 

the rate of return on a regulated 

investment company (RIC), as defined 

in section 851, that is reasonably 

expected to be not significantly more 

volatile than the broad United States 

equities market or a similarly broad 

international equities market. For 

example, a RIC that has most of its 

assets invested in securities of issuers 

(including other RICs) concentrated in 

an industry sector or a country other 

than the United States, that uses 

leverage, or that has significant 

investment in derivative financial 

products, for the purpose of achieving 

returns that amplify the returns of an 

unleveraged investment, generally 

would not meet this requirement. Thus, 

a RIC that has most of its investments 

concentrated in the semiconductor 

industry or that uses leverage in order 

to provide a rate of return that is twice 

the rate of return on the Standard & 

Poor’s 500 index (S&P 500) would not 

meet this requirement. On the other 

hand, a RIC whose investments track the 

rate of return on the S&P 500, a broadbased ‘‘small-cap’’ index (such as the 

Russell 2000 index), or a broad-based 

international equities index would meet 

this requirement. 

* * * * * 

(6) * * * 

(ii) Annual or more frequent floor 

applied to bond-based rates. An interest 

crediting rate under a plan does not fail 

to be described in paragraph (d)(3) or 

(d)(4) of this section for an interest 

crediting period merely because the 

plan provides that the interest crediting 

rate for that interest crediting period 

equals the greater of— 

(A) An interest crediting rate 

described in paragraph (d)(3) or (d)(4) of 

this section; and 

(B) An annual interest rate of 4 

percent (or a pro rata portion of an 

annual interest rate of 4 percent for 

plans that provide interest credits more 

frequently than annually). 

(iii) Cumulative floor applied to 

equity-based or bond-based rates—(A) 

In general. A plan that determines 

interest credits under a statutory hybrid 

benefit formula using a particular 

interest crediting rate described in 

paragraph (d)(3), (d)(4), or (d)(5) of this 

section (or an interest crediting rate that 

can never be in excess of a particular 

interest crediting rate described in 

paragraph (d)(3), (d)(4), or (d)(5) of this 

section) does not provide an effective 

interest crediting rate in excess of a 

market rate of return merely because the 

plan provides that the participant’s 

benefit under the statutory hybrid 

benefit formula determined as of the 

participant’s annuity starting date is 

equal to the greater of— 

(1) The benefit determined using the 

interest crediting rate; and 

(2) The benefit determined as if the 

plan had used a fixed annual interest 

crediting rate equal to 3 percent (or a 

lower rate) for all principal credits that 

are made during the guarantee period 

(minimum guarantee amount). 

(B) Guarantee period defined. The 

guarantee period is the prospective 

period which begins on the date on 

which the cumulative floor described in 

this paragraph (d)(6)(iii) begins to apply 

to the participant’s benefit and which 

ends on the date on which that 

cumulative floor ceases to apply to the 

participant’s benefit. 

(C) Application to multiple annuity 

starting dates. The determination under 

paragraph (d)(6)(iii)(A) of this section is 

made only at an annuity starting date, 

within the meaning of § 1.401(a)–20, A– 

10(b), on which a distribution of the 

participant’s entire benefit under the 

plan’s statutory hybrid benefit formula 

as of that date commences. For a 

participant who has more than one 

annuity starting date, paragraph 

(d)(6)(iii)(D) of this section provides 

rules for the application of paragraph 

(d)(6)(iii)(A) of this section, taking into 

account any prior distributions. If the 

comparison under paragraph 

(d)(6)(iii)(D) of this section results in the 

minimum guarantee amount exceeding 

the sum of the amounts described in 

paragraphs (d)(6)(iii)(D)(1) through 

(d)(6)(iii)(D)(3) of this section, then the 

participant’s benefit to be distributed at 

the current annuity starting date is 

increased by an amount equal to the 

excess. 

(D) Comparison to reflect prior 

distributions. For a participant who has 

more than one annuity starting date, the 

minimum guarantee amount (described 

in paragraph (d)(6)(iii)(A)(2) of this 

section), as of the current annuity 

starting date, is compared to the sum 

of— 

(1) The participant’s benefit, as of the 

current annuity starting date, to which 

a minimum guaranteed rate described in 

paragraph (d)(6)(iii)(A)(2) of this section 

applies; 

(2) The amount of the offset to the 

participant’s benefit under the statutory 

hybrid benefit formula that is 

attributable to any prior distribution of 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
64214 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

the participant’s benefit under that 

formula and to which a minimum 

guaranteed rate described in paragraph 

(d)(6)(iii)(A)(2) of this section applied, 

together with interest at that minimum 

guaranteed rate annually from the prior 

annuity starting date to the current 

annuity starting date; and 

(3) The amount of any increase to the 

participant’s benefit as a result of the 

application of paragraph (d)(6)(iii)(A) of 

this section to any prior distribution, 

together with interest annually at the 

minimum guaranteed rate that applied 

to the prior distribution from the prior 

annuity starting date to the current 

annuity starting date. 

(E) Application to portion of 

participant’s benefit. A cumulative floor 

described in this paragraph (d)(6)(iii) 

may be applied to a portion of a 

participant’s benefit, provided the 

requirements of this paragraph (d)(6)(iii) 

are satisfied with respect to that portion 

of the benefit. If a cumulative floor 

described in this paragraph (d)(6)(iii) 

applies to a portion of a participant’s 

benefit, only the principal credits that 

are attributable to that portion of the 

participant’s benefit are taken into 

account in determining the amount of 

the guarantee described in paragraph 

(d)(6)(iii)(A)(2) of this section. 

* * * * * 

(e) * * * 

(2) Plan termination—(i) In general— 

(A) Interest crediting rates. If the interest 

crediting rate used to determine a 

participant’s accumulated benefit (or a 

portion thereof) has been a variable rate 

during the interest crediting periods in 

the 5-year period ending on the plan 

termination date (including any case in 

which the rate was not the same fixed 

rate during all such periods), then a 

statutory hybrid plan is treated as 

meeting the requirements of section 

411(b)(5)(B)(i) and paragraph (d)(1) of 

this section only if the terms of the plan 

satisfy the requirements of paragraph 

(e)(2)(ii) of this section. See regulations 

of the Pension Benefit Guaranty 

Corporation for additional rules that 

apply when a pension plan is 

terminated. 

(B) Annuity conversion factors. A 

statutory hybrid plan is treated as 

meeting the requirements of section 

411(b)(5)(B)(i) and paragraph (d)(1) of 

this section only if the terms of the plan 

provide that the interest rate and 

mortality table (including tabular 

adjustment factors) used on and after 

plan termination for purposes of 

determining the amount of any benefit 

under the plan payable in the form of an 

annuity commencing at or after normal 

retirement age are the interest rate and 

mortality table specified under the plan 

for that purpose as of the termination 

date, except that if the interest rate is a 

variable rate (as described in paragraph 

(e)(2)(i) of this section), then the interest 

rate for that purpose is determined 

pursuant to the rules of paragraph 

(e)(2)(ii) of this section. 

(ii) Interest crediting rates that are 

variable—(A) General rule. Subject to 

the other rules in this paragraph (e)(2), 

a plan satisfies this paragraph (e)(2)(ii) 

only if the terms of the plan provide 

that, on the plan termination date, if the 

interest crediting rate used to determine 

a participant’s accumulated benefit has 

been a variable rate as described in 

paragraph (e)(2)(i) of this section, then 

the interest crediting rate used to 

determine the participant’s accumulated 

benefit under the plan after the date of 

plan termination is equal to the average 

of the interest crediting rates used under 

the plan during the 5-year period ending 

on the plan termination date. For this 

purpose, an interest crediting rate is 

used under the plan if the rate applied 

under the terms of the plan during an 

interest crediting period for which the 

interest crediting date is within the 5- 

year period ending on the plan 

termination date and the average is 

determined as the arithmetic average of 

the rates used, with each rate adjusted 

to reflect the length of the interest 

crediting period and the average rate 

expressed as an annual rate. 

(B) Variable interest crediting rates 

that are based on interest rates. With 

respect to an interest crediting rate that 

was a variable interest rate described in 

paragraph (d)(3) or (d)(4) of this section 

(taking into account the rules of 

paragraph (d)(6)(ii) of this section), a 

variable interest rate that can never be 

in excess of a rate described in 

paragraph (d)(3) or (d)(4) of this section, 

or a fixed interest rate that has not been 

the same rate during the entire 5-year 

period ending on the plan termination 

date, the actual interest rate that applied 

under the plan for the interest crediting 

period is used for purposes of 

determining the average interest 

crediting rate. For this purpose, the rate 

that applied for the interest crediting 

period takes into account minimums, 

maximums, and other reductions that 

applied in the period, other than 

cumulative floors under paragraph 

(d)(6)(iii) of this section. 

(C) Variable interest crediting rates 

that are other rates of return. With 

respect to any interest crediting rate not 

described in paragraph (e)(2)(ii)(B) of 

this section (that is, a variable rate 

described in paragraph (d)(5) of this 

section), the interest crediting rate that 

applied for the interest crediting period 

for purposes of determining the average 

interest crediting rate is deemed to be 

equal to the third segment rate under 

section 430(h)(2)(C)(iii) for the last 

calendar month ending before the 

beginning of the interest crediting 

period, as adjusted to account for any 

minimums or maximums that applied in 

the period (other than cumulative floors 

under paragraph (d)(6)(iii) of this 

section), but without regard to other 

reductions that applied in the period. 

Thus, for example, if the actual interest 

crediting rate in an interest crediting 

period was equal to the rate of return on 

plan assets, but not greater than 5 

percent, then for purposes of 

determining the plan’s average interest 

crediting rate, the interest crediting rate 

for that interest crediting period would 

be deemed to equal the lesser of the 

applicable third segment rate for the 

period and 5 percent. However, if the 

actual interest crediting rate in an 

interest crediting period was equal to 

the rate of return on plan assets minus 

200 basis points, then for purposes of 

determining the plan’s average interest 

crediting rate, the interest crediting rate 

for that interest crediting period would 

be deemed to equal the third segment 

rate. 

(iii) Rules of application—(A) Section 

411(d)(6) protected benefits. In general, 

for purposes of determining the average 

interest crediting rate under paragraph 

(e)(2)(ii) of this section, the interest 

crediting rate that applied for each 

interest crediting period is the ongoing 

interest crediting rate that was specified 

under the plan in that period, without 

regard to any section 411(d)(6) protected 

benefit using an interest crediting rate 

that applied under the plan prior to 

amendment. However, if, at the end of 

the last interest crediting period prior to 

plan termination, the participant’s 

accumulated benefit is based on a 

section 411(d)(6) protected benefit that 

results from a prior amendment to 

change the rate of interest crediting 

applicable under the plan, then, for 

purposes of determining the average 

interest crediting rate under paragraph 

(e)(2)(ii) of this section, the preamendment interest crediting rate is 

treated as having applied for each 

interest crediting period after the date of 

the interest crediting rate change. 

(B) Weighted averages. If the plan 

determines the interest credit in any 

interest crediting period by applying 

different rates to different 

predetermined portions of the 

accumulated benefit under paragraph 

(d)(1)(vii) of this section, then, for 

purposes of determining the average 

interest crediting rate under paragraph 

(e)(2)(ii) of this section, the interest 


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crediting rate that applied for the 

interest crediting period is the weighted 

average of the relevant interest rates that 

apply, under the rules of paragraph 

(e)(2)(ii) of this section, to each portion 

of the accumulated benefit. 

(C) Participants with less than five 

years of interest credits upon plan 

termination. If the plan provided for 

interest credits for any interest crediting 

period in which, pursuant to the terms 

of the plan, the individual was not 

eligible to receive interest credits 

(because the individual was not a 

participant or beneficiary in the relevant 

interest crediting period or otherwise), 

then, for purposes of determining the 

individual’s average interest crediting 

rate under paragraph (e)(2)(ii) of this 

section, the individual is treated as 

though the individual received interest 

credits in that period using the interest 

crediting rate that applied in that period 

under the terms of the plan to a 

similarly situated participant or 

beneficiary who was eligible to receive 

interest credits. However, if, under the 

terms of the plan, the individual was 

not eligible to receive any interest 

credits during the entire 5-year period 

ending on the plan termination date, 

then the rules under paragraph (e)(2)(ii) 

do not apply to determine the 

individual’s benefit after plan 

termination. 

(iv) Examples. The following 

examples illustrate the rules of this 

paragraph (e)(2). In each case, it is 

assumed that the plan is terminated in 

a standard termination. 

Example 1. (i) Facts. Plan A is a defined 

benefit plan with a calendar plan year that 

expresses each participant’s accumulated 

benefit in the form of a hypothetical account 

balance to which principal credits are made 

at the end of each calendar quarter and to 

which interest is credited at the end of each 

calendar quarter based on the balance at the 

beginning of the quarter. Interest credits 

under Plan A are based on a rate of interest 

fixed at the beginning of each plan year equal 

to the third segment rate for the preceding 

December, except that the plan used the rate 

of interest on 30-year Treasury bonds 

(instead of the third segment rate) for plan 

years before 2012. The plan is terminated on 

March 3, 2016. The third segment rate 

credited under Plan A from January 1, 2012, 

through December 31, 2015, is assumed to be: 

6 percent annually for each of the four 

quarters in 2015 (1.5 percent quarterly); 6.5 

percent annually for each of the four quarters 

in 2014 (1.625 percent quarterly); 6 percent 

annually for each of the four quarters in 2013 

(1.5 percent quarterly); and 5.5 percent 

annually for each of the four quarters in 2012 

(1.375 percent quarterly). The rate of interest 

on 30-year Treasury bonds credited under 

Plan A for each of the four quarters in 2011 

is assumed to be 4.4 percent annually (1.1 

percent quarterly). 

(ii) Conclusion. Pursuant to paragraph 

(e)(2)(ii)(B) of this section, the interest 

crediting rate used to determine accrued 

benefits under the plan on and after the date 

of plan termination is 5.68 percent. This is 

determined by calculating the average 

quarterly rate of 1.42 percent (the sum of 1.5 

percent times 4, 1.625 times 4, 1.5 times 4, 

1.375 times 4, and 1.1 percent times 4, 

divided by the 20 quarters that end in the 5- 

year period from March 4, 2011 to March 3, 

2016) and multiplying such rate by 4 to 

determine the average annual rate. 

Example 2. (i) Facts. The facts are the same 

as Example 1, except that Participant B 

commenced participation in Plan A on April 

17, 2013. 

(ii) Conclusion. Pursuant to paragraph 

(e)(2)(iii)(C) of this section, the interest 

crediting rate used to determine 

Participant B’s accrued benefits under 

Plan A on and after the date of plan 

termination is 5.68 percent, which is the 

same rate that would have applied to 

Participant B if Participant B had 

participated in the plan during the 5- 

year period preceding the date of plan 

termination, as described in Example 1. 

Example 3. (i) Facts. Plan C is a defined 

benefit plan with a calendar plan year that 

expresses each participant’s accumulated 

benefit in the form of a hypothetical account 

balance to which principal credits are made 

at the end of each calendar year and to which 

interest is credited at the end of each 

calendar year based on the balance at the end 

of the preceding year. The plan is terminated 

on January 27, 2014. The plan’s interest 

crediting rate for each calendar year during 

the entire 5-year period ending on the plan 

termination date is equal to (A) 50 percent of 

the greater of the rate of interest on 3-month 

Treasury Bills for the preceding December 

and an annual rate of 4 percent, plus (B) 50 

percent of the rate of return on plan assets. 

The rate of interest on 3-month Treasury Bills 

credited under Plan C is assumed to be: 3.4 

percent for 2013; 4 percent for 2012; 4.5 

percent for 2011; 3.5 percent for 2010; and 

4.2 percent for 2009. Each of these rates 

applied under Plan C for interest credited 

during this period for purposes of the interest 

credits described in clause (A) of this 

paragraph (i), except that the 4 percent 

minimum rate applied for 2013 and 2010. For 

purposes of the interest credits described in 

clause (B) of this paragraph (i), the rate of 

interest on the third segment rate in the prior 

years (based on the rate for the preceding 

December) is assumed to be: 6 percent for 

2013; 6.5 percent for 2012; 6 percent for 

2011; 5.5 percent for 2010; and 6 percent for 

2009. 

(ii) Conclusion. Pursuant to paragraph 

(e)(2)(ii) of this section, the interest crediting 

rate used to determine accrued benefits 

under the plan on and after the date of plan 

termination is 5.07 percent. This number is 

equal to the sum of 50 percent of 4.14 percent 

(which is the sum of 4 percent, 4 percent, 4.5 

percent, 4 percent, and 4.2 percent, divided 

by 5), and 50 percent of 6 percent (which is 

the average third segment rate for the 5 

interest crediting periods ending within the 

5-year period). 

Example 4. (i) Facts. The facts are the same 

as in Example 3, except that the plan had 

credited interest before January 1, 2012, 

using the rate of return on a RIC and was 

amended effective January 1, 2012, to base 

interest credits for all plan years after 2011 

on the interest rate formula described in 

Example 3(i). In order to comply with section 

411(d)(6), the plan provides that, for each 

participant or beneficiary who was a 

participant on December 31, 2011, the 

benefits at any date are based on either the 

ongoing hypothetical account balance on that 

date (which is based on the December 31, 

2011 balance, with interest credited 

thereafter at the rate described in the first 

sentence of Example 3(i) and taking principal 

credits after 2011 into account) or a special 

hypothetical account balance (the pre-2012 

balance) on that date, whichever balance is 

greater. For each participant, the pre-2012 

balance is a hypothetical account balance 

equal to the participant’s December 31, 2011, 

balance, with interest credited thereafter at 

the RIC rate of return, but with no principal 

credits after 2011. There are 10 participants 

for whom his or her pre-2012 balance 

exceeded his or her ongoing hypothetical 

account balance at the end of 2013. 

(ii) Conclusion. Since Plan C credited 

interest prior to 2012 using the rate of return 

on a RIC (a rate not described in paragraph 

(d)(3) or (d)(4) of this section), for purposes 

of determining the average interest crediting 

rate upon plan termination, the interest 

crediting rate used to determine accrued 

benefits under Plan C for all participants 

during those periods (for the calendar years 

2009, 2010, and 2011) is deemed to be equal 

to the third segment rate for the preceding 

December. In addition, since the pre-2012 

balances exceeded the ongoing hypothetical 

account balance for 10 participants in the last 

interest crediting period prior to plan 

termination, for purposes of determining the 

average interest crediting rate upon plan 

termination, the interest crediting rate used 

to determine accrued benefits under Plan C 

for 2012 and 2013 for those participants is 

deemed to be equal to the third segment rate 

for the month of December preceding 2012 

and the month of December preceding 2013, 

respectively. For all other participants, for 

purposes of determining the average interest 

crediting rate upon plan termination, the 

interest crediting rate used to determine 

accrued benefits under Plan C for 2012 and 

2013 is based on the ongoing interest 

crediting rate (the formula described in 

Example 3). 

(3) * * * 

(iii) Coordination of section 411(d)(6) 

and market rate of return limitation— 

(A) In general. An amendment to a 

statutory hybrid plan that preserves a 

section 411(d)(6) protected benefit is 

subject to the rules under paragraph (d) 

of this section relating to market rate of 

return. However, in the case of an 

amendment to change a plan’s interest 

crediting rate for periods after the 

applicable amendment date from one 

interest crediting rate (the old rate) that 

satisfies the requirements of paragraph 


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64216 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules 

(d) of this section to another interest 

crediting rate (the new rate) that 

satisfies the requirements of paragraph 

(d) of this section, the plan’s effective 

interest crediting rate is not in excess of 

a market rate of return for purposes of 

paragraph (d) of this section merely 

because the plan provides for the benefit 

of any participant who is benefiting 

under the plan (within the meaning of 

§ 1.410(b)–3(a)) on the applicable 

amendment date to never be less than 

what it would be if the old rate had 

continued but without taking into 

account any principal credits (as 

defined in paragraph (d)(1)(ii)(D) of this 

section) after the applicable amendment 

date. 

(B) Multiple amendments. A pattern 

of repeated plan amendments each of 

which provides for a prospective change 

in the plan’s interest crediting rate with 

respect to the benefit as of the 

applicable amendment date will be 

treated as resulting in the ongoing plan 

terms providing that the interest 

crediting rate equals the greater of each 

of the interest crediting rates, so that the 

rule in paragraph (e)(3)(iii)(A) of this 

section would not apply. See § 1.411(d)– 

4, A–1(c)(1). 

(4) Actuarial increases after normal 

retirement age. A statutory hybrid plan 

is not treated as providing an effective 

interest crediting rate that is in excess 

of a market rate of return for purposes 

of paragraph (d) of this section merely 

because the plan provides that the 

participant’s benefit, as of each annuity 

starting date after normal retirement age, 

is equal to the greater of— 

(i) The benefit determined using an 

interest crediting rate that is not in 

excess of a market rate of return under 

paragraph (d) of this section; and 

(ii) The benefit that satisfies the 

requirements of section 411(a)(2). 

* * * * * 

(f) * * * 

(2) * * * 

(i) * * * 

(B) Special effective date. Paragraphs 

(c)(3)(iii), (d)(1)(iii), (d)(1)(iv)(D), 

(d)(1)(vi), (d)(2)(ii), (d)(4)(iv), (d)(5)(iv), 

(d)(6), (e)(2), (e)(3)(iii), and (e)(4) of this 

section apply to plan years that begin on 

or after January 1, 2012. 

* * * * * 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2010–25942 Filed 10–18–10; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF LABOR 

Occupational Safety and Health 

Administration 

[Docket No. OSHA–2010–0032] 

29 CFR Parts 1910 and 1926 

Interpretation of OSHA’s Provisions for 

Feasible Administrative or Engineering 

Controls of Occupational Noise 

AGENCY: Occupational Safety and Health 

Administration (OSHA) 

ACTION: Proposed interpretation. 

SUMMARY: This document constitutes 

OSHA’s official interpretation of the 

term feasible administrative or 

engineering controls as used in the 

applicable sections of OSHA’s General 

Industry and Construction Occupational 

Noise Exposure standards. Under the 

standard, employers must use 

administrative or engineering controls 

rather than personal protective 

equipment (PPE) to reduce noise 

exposures that are above acceptable 

levels when such controls are feasible. 

OSHA proposes to clarify that feasible 

as used in the standard has its ordinary 

meaning of capable of being done. The 

Agency intends to revise its current 

enforcement policy to reflect this 

interpretation. The Agency solicits 

comments from interested parties on 

this interpretation. 

DATES: Submit comments on or before 

December 20, 2010. 

ADDRESSES: You may submit comments 

by any of the following methods: 

Electronically: You may submit 

comments and attachments 

electronically at http:// 

www.regulations.gov, the Federal 

eRulemaking Portal. Follow the 

instructions online for making 

electronic submissions; 

Fax: You may fax submissions not 

longer than 10 pages, including 

attachments, to the OSHA Docket Office 

at 202–693–1648. 

Mail, hand delivery, express mail, 

messenger and courier service: If you 

use this option, you must submit three 

copies of your comments and 

attachments to the OSHA Docket Office, 

Docket No. OSHA–2010–0032, U.S. 

Department of Labor, Room N–2625, 

200 Constitution Avenue, NW., 

Washington, DC 20210. Deliveries 

(hand, express mail, messenger and 

courier service) are accepted from 8:15 

a.m.–4:45 p.m., e.t. 

Instructions: All submissions must 

include the agency name and the OSHA 

docket number for this interpretation 

(OSHA–2010–0032). Submissions are 

placed in the public docket without 

change and may be accessed online 

http://www.regulations.gov. Be careful 

about submitting personal information 

such as social security numbers and 

birth dates. 

Docket: To read or download 

submissions or other material in the 

docket, go to http://www.regulations.gov 

or the OSHA Docket Office at the 

address above. All documents in the 

docket are listed in the http:// 

www.regulations.gov index; some 

information (e.g., copyrighted material), 

however, can not be read or 

downloaded at the website. All 

submissions, including copyrighted 

material, can be examined or copied at 

the OSHA Docket Office. 

FOR FURTHER INFORMATION CONTACT:

General information or press inquiries: 

MaryAnn Garrahan, Acting Director, 

Office of Communications, Room N– 

3647, OSHA, U.S. Department of Labor, 

200 Constitution Avenue, NW., 

Washington, DC 20210; telephone 202– 

693–1999. 

For Technical Inquiries: Audrey 

Profitt, Senior Industrial Hygienist, 

Directorate of Enforcement Programs, 

Room N–3119, OSHA, U.S. Department 

of Labor, 200 Constitution Avenue, 

NW., Washington, DC 20210; telephone: 

202–693–2190, or fax: 202–693–1681. 

SUPPLEMENTARY INFORMATION: This 

Federal Register document sets out 

OSHA’s proposed interpretation of 

feasible administrative or engineering 

controls in 29 CFR 1910.95(b)(1) and 

1926.52(b) for the purpose of enforcing 

compliance with these standards. This 

document does not address feasibility in 

any other context. Sections 

1910.95(b)(1) and 1926.52(b), which are 

substantively identical, require that 

when employees are exposed to sound 

exceeding the permissible level, feasible 

administrative or engineering controls 

must be utilized to reduce the sound to 

within that level, and if such controls 

are ineffective, personal protective 

equipment must be provided and used. 

Feasibility encompasses both economic 

and technological considerations, but 

this document addresses only economic 

feasibility. Under OSHA’s current 

enforcement policy, the agency issues 

citations for failure to use engineering 

and administrative controls only when 

hearing protectors are ineffective or the 

costs of such controls are less than the 

cost of an effective hearing conservation 

program. 

As discussed below, this policy is 

contrary to the plain meaning of the 

standard and thwarts the safety and 

health purposes of the OSH Act by 

rarely requiring administrative and 

engineering controls even though these 


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