Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64123 

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The authority citation for part 249 

continues to read in part as follows: 

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

■ 2. The authority citation for part 274 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted. 

* * * * * 

■ 3. Form N–SAR (referenced in 

§§ 249.330 and 274.101) is amended by: 

■ a. In paragraph E. of Item 133, deleting 

the word ‘‘and’’; 

■ b. In paragraph F. of Item 133, revising 

‘‘filing.’’ to read ‘‘filing; and’’; 

■ c. Adding new paragraph G. to Item 

133; 

■ d. Revising the sentence immediately 

following new paragraph G. to Item 133; 

■ e. In the heading to the Instruction to 

Item 133, deleting the phrase ‘‘in 

Accordance with the Sudan 

Accountability and Divestment Act of 

2007’’; and 

■ f. In the first sentence of the 

Instruction to Item 133, deleting the 

phrase ‘‘, which was added by the Sudan 

Accountability and Divestment Act of 

2007’’. The addition and revision read as 

follows: 

Note: The text of Form N–SAR does not, 

and these amendments will not, appear in 

the Code of Federal Regulations. 

Form N–SAR 

* * * * * 

133. * * * 

G. Name of the statute that added the 

provision of Section 13(c) in accordance 

with which the securities were divested. 

This item 133 shall terminate one year 

after the first date on which all statutory 

provisions that underlie Section 13(c) of 

the Investment Company Act of 1940 

have terminated. 

* * * * * 

■ 4. Form N–CSR (referenced in 

§§ 249.331 and 274.128) is amended by: 

■ a. In paragraph (b)(5) of Item 6, 

deleting the word ‘‘and’’; 

■ b. In paragraph (b)(6) of Item 6, 

revising ‘‘filing.’’ to read ‘‘filing; and’’; 

■ c. Adding new paragraph (7) to Item 

6(b); 

■ d. Revising the sentence immediately 

following new paragraph (7) to Item 

6(b); and 

■ e. In Instruction 1 to paragraph (b) of 

Item 6, deleting the phrase ‘‘, which was 

added by the Sudan Accountability and 

Divestment Act of 2007’’. 

The addition and revision read as 

follows: 

Note: The text of Form N–CSR does not, 

and these amendments will not, appear in 

the Code of Federal Regulations. 

Form N–CSR 

* * * * * 

Item 6. Investments. 

(a) * * * 

(b) * * * 

(7) Name of the statute that added the 

provision of Section 13(c) in accordance 

with which the securities were divested. 

This Item 6(b) shall terminate one 

year after the first date on which all 

statutory provisions that underlie 

Section 13(c) of the Investment 

Company Act of 1940 have terminated. 

* * * * * 

By the Commission. 

October 13, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–26206 Filed 10–18–10; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9505] 

RIN 1545–BG36 

Hybrid Retirement Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final Regulations. 

SUMMARY: This document contains final 

regulations providing guidance relating 

to certain provisions of the Internal 

Revenue Code (Code) that apply to 

hybrid defined benefit pension plans. 

These regulations 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 affect sponsors, 

administrators, participants, and 

beneficiaries of hybrid defined benefit 

pension plans. 

DATES: Effective Date: These regulations 

are effective on October 19, 2010. 

Applicability Date: These regulations 

generally apply to plan years that begin 

on or after January 1, 2011. However, 

see the ‘‘Effective/Applicability Dates’’ 

section in this preamble for additional 

information regarding the applicability 

of these regulations. 

FOR FURTHER INFORMATION CONTACT: Neil 

S. Sandhu, Lauson C. Green, or Linda 

S. F. Marshall at (202) 622–6090 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

part 1) under sections 411(a)(13) 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 


emcdonald on DSK2BSOYB1PROD with RULES
64124 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

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(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). 

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

contains 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 

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 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64125 

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. 

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. 

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 the Code also 

applies for purposes of the parallel 

amendments to ERISA made by section 

701(a) of PPA ’06.1

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)) (ADEA), 

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, this vesting 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. 

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) to 

a single-sum distribution under a cash 

balance plan where interest credits 

under the plan are frontloaded (that is, 

where the right to future interest credits 

with respect to an employee’s 

hypothetical account balance is not 

conditioned upon future service and 

thus accrues 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) in calculating the amount of 


emcdonald on DSK2BSOYB1PROD with RULES
64126 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

3However, see footnote 6 in the preamble to the 

2010 proposed regulations described in the next 

paragraph. 

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 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 these final regulations 

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. 

Announcement 2009–82 (2009–48 

IRB 720) and Notice 2009–97 (2009–52 

IRB 972), see § 601.601(d)(2)(ii)(b), 

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 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. 

After consideration of the comments 

received in response to the 2007 

proposed regulations, these final 

regulations generally adopt the 

provisions of the 2007 proposed 

regulations with certain modifications 

as described under the heading 

‘‘Explanation of Provisions.’’ In addition, 

the Treasury Department and the IRS 

are issuing proposed regulations (2010 

proposed regulations) that address 

certain issues under sections 411(a)(13) 

and 411(b)(5) that have not been 

addressed in these final regulations (and 

that are generally indicated as 

‘‘RESERVED’’ in these final regulations), 

and that also address a related issue 

under section 411(b)(1). The 2010 

proposed regulations are being issued at 

the same time as these final regulations. 

Explanation of Provisions 

Overview 

In general, these final regulations 

incorporate the transitional guidance 

provided under Notice 2007–6 as well 

as the provisions of the 2007 proposed 

regulations. The regulations adopt the 

terminology used in the proposed 

regulations (such as ‘‘statutory hybrid 

benefit formula’’ and ‘‘lump sum-based 

benefit formula’’) to take into account 

situations where plans provide more 

than one benefit formula. These 

regulations also provide additional 

guidance with respect to sections 

411(a)(13) and 411(b)(5), taking into 

account comments received in response 

to the 2007 proposed regulations and 

also reflecting the enactment of WRERA 

’08. 

I. Section 411(a)(13): Applicable 

Definitions, Relief of Section 

411(a)(13)(A), and Special Vesting 

Rules for Applicable Defined Benefit 

Plans 

A. Definitions 

The regulations under section 

411(a)(13) contain certain definitions 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64127 

that apply both for purposes of the 

regulations under section 411(a)(13) and 

the regulations under section 411(b)(5). 

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

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

reference to the accrued benefit means 

the benefit accrued to date. The final 

regulations refer to this as the 

‘‘accumulated benefit’’, which is distinct 

from the participant’s accrued benefit 

under section 411(a)(7) (an annuity 

beginning at normal retirement age that 

is actuarially equivalent to the 

participant’s accumulated benefit). As 

in the 2007 proposed regulations, the 

regulations use the term ‘‘statutory 

hybrid plan’’ to refer to an applicable 

defined benefit plan described in 

section 411(a)(13)(C). Under the 

regulations, a statutory hybrid plan is a 

defined benefit plan that contains a 

statutory hybrid benefit formula, and a 

‘‘statutory hybrid benefit formula’’ is a 

benefit formula that is either a lump 

sum-based benefit formula or a formula 

that has an effect similar to a lump sumbased benefit formula. 

The regulations define a ‘‘lump sumbased 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 the 

accumulated percentage of the 

participant’s final average 

compensation. The final regulations 

adopt the rules of the 2007 proposed 

regulations whereby the determination 

as to whether a benefit formula is a 

lump sum-based benefit formula is 

made based on how the accumulated 

benefit of a participant is expressed 

under the terms of the plan, and does 

not depend on whether the plan 

provides an optional form of benefit in 

the form of a single-sum payment. 

Similarly, a formula does not fail to be 

a lump sum-based benefit formula 

merely because the plan’s terms state 

that the participant’s accrued benefit is 

an annuity at normal retirement age that 

is actuarially equivalent to the balance 

of a hypothetical account maintained for 

the participant. 

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 

accruals (both immediately and at future 

dates) based on actuarial equivalence 

using specified actuarial factors applied 

after cessation of accruals. 

In response to these comments, the 

final regulations clarify that a benefit 

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. A 

lump sum-based benefit formula that 

credits interest is subject to the market 

rate of return rules, so that in any case 

in which a PEP formula provides for 

interest credits after cessation of PEP 

accruals, the interest credits are subject 

to the market rate of return rules. 

The 2007 proposed regulations 

contained a rule whereby a benefit 

formula would not have been treated as 

a lump sum-based benefit formula with 

respect to a participant merely because 

the participant is entitled to a benefit 

that is not less than the benefit properly 

attributable to after-tax employee 

contributions. In response to comments 

received that this rule be broadened, the 

final regulations provide that the benefit 

properly attributable to after-tax 

employee contributions, rollover 

contributions, and other similar 

employee contributions is disregarded 

when determining whether a benefit 

formula is a lump sum-based benefit 

formula with respect to a participant. 

Thus, for example, a plan is not a 

statutory hybrid plan with a lump sumbased benefit formula with respect to a 

participant merely because the plan 

provides that the participant’s benefit is 

equal to the sum-of or greater-of the 

benefit properly attributable to 

employee contributions and the benefit 

under a traditional defined benefit 

formula. 

The regulations provide that a benefit 

is not properly attributable to employee 

contributions if such contributions are 

credited with interest at a rate that 

exceeds a reasonable rate of interest or 

if the conversion factors used to 

calculate the benefit based on such 

employee contributions are not 

actuarially reasonable. The regulations 

clarify that section 411(c) merely 

provides an example of an acceptable 

methodology for purposes of 

determining the benefit that is properly 

attributable to employee contributions. 

The 2007 proposed regulations 

provided that a benefit formula under a 

defined benefit plan has an effect 

similar to a lump sum-based benefit 

formula if the formula provides that a 

participant’s accumulated benefit 

payable at normal retirement age (or at 

benefit commencement, if later) is 

expressed as a benefit that includes 

periodic adjustments (including a 

formula that provides for indexed 

benefits described in section 

411(b)(5)(E)) that are reasonably 

expected to result in a smaller annual 

benefit at normal retirement age (or at 

benefit commencement, if later) for the 

participant, when compared to a 

similarly situated, younger individual 

who is or could be a participant in the 

plan. A number of commenters 

suggested that the rule in the 2007 

proposed regulations was too broad 

generally and also suggested that certain 

types of plans, such as plans described 

in section 411(b)(5)(E), be exempted 

entirely. However, the Treasury 

Department and the IRS believe that a 

key purpose of sections 411(a)(13) and 

411(b)(5) is to address defined benefit 

plan formulas where younger 

participants receive a larger annual 

benefit at normal retirement age when 

compared to similarly situated, older 

participants. Therefore, the final 

regulations do not significantly narrow 

the definition of a benefit formula that 

has an effect similar to a lump sumbased benefit formula. 

The regulations clarify that a benefit 

formula under a defined benefit plan 

has an effect similar to a lump sumbased benefit formula if the formula 

provides that a participant’s 

accumulated benefit is expressed as a 

benefit that includes adjustments 

(including a formula that provides for 

indexed benefits described in section 

411(b)(5)(E)) for a future period and the 

total dollar amount of the adjustments is 

reasonably expected to be smaller for 

the participant, when compared to a 

similarly situated, younger individual 

who is or could be a participant in the 

plan. Thus, a formula that provides that 

a participant’s accumulated benefit is 

expressed as a benefit that includes the 

right to periodic adjustments is treated 

as having an effect similar to a lump 

sum-based benefit formula based on a 

comparison of the expected total dollar 

amount of the adjustments through 

benefit commencement, rather than the 

expected total accumulated benefit after 

application of these adjustments. 

As in the 2007 proposed regulations, 

the regulations provide that a benefit 

formula under a plan has an effect 

similar to a lump sum-based benefit 

formula where the right to future 

adjustments accrues at the same time as 

the benefit that is subject to those 

adjustments. In addition, the regulations 

provide that a benefit formula that does 

not include adjustments is nevertheless 

treated as a formula with an effect 

similar to a lump sum-based benefit 

formula where benefits are adjusted 


emcdonald on DSK2BSOYB1PROD with RULES
64128 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

pursuant to a pattern of repeated plan 

amendments and the total dollar 

amount of those adjustments is 

reasonably expected to be smaller for 

the participant than for any similarly 

situated, younger individual who is or 

could be a participant. See § 1.411(d)–4, 

A–1(c)(1). 

Like the 2007 proposed regulations, 

the regulations provide that certain 

benefits are disregarded when 

determining whether a benefit formula 

has an effect similar to a lump sumbased benefit formula. For example, the 

regulations provide that, for purposes of 

determining whether a benefit formula 

has an effect similar to a lump sumbased benefit formula, indexing that 

applies to adjust benefits after the 

annuity starting date (for example, costof-living increases) is disregarded. In 

addition, benefits properly attributable 

to certain employee contributions that 

are disregarded for purposes of 

determining whether a participant is 

treated as having a lump-sum based 

benefit formula are also disregarded for 

purposes of determining whether a 

formula has an effect similar to a lump 

sum-based benefit formula. 

The regulations include an example 

that illustrates that a defined benefit 

formula is not treated as a statutory 

hybrid benefit formula merely because 

the formula provides for actuarial 

increases after normal retirement age. 

This is because actuarial increases after 

normal retirement age do not provide 

smaller adjustments for older 

participants when compared to 

similarly situated, younger participants. 

The 2007 proposed regulations 

provided that variable annuity benefit 

formulas with assumed interest rates 

(sometimes referred to as ‘‘hurdle rates’’) 

of at least 5 percent are not treated as 

having an effect similar to a lump sumbased benefit formula. A number of 

commenters requested that the 

regulations extend this rule to variable 

annuity plans with lower hurdle rates. 

However, plans with lower hurdle rates 

are more likely to provide positive 

adjustments for future periods than 

plans with higher hurdle rates and, as 

a result, younger participants are more 

likely to receive a meaningfully larger 

total dollar amount of adjustments than 

older participants under these plans. 

The Treasury Department and the IRS 

are concerned that exempting these 

plans would mean that participants 

would lose the protections afforded to 

participants in statutory hybrid plans 

(including 3-year vesting and 

conversion protection). Therefore, the 

final regulations retain the rule whereby 

adjustments under a variable annuity do 

not have an effect similar to a lump 

sum-based benefit formula if the 

assumed interest rate used to determine 

the adjustments is 5 percent or higher. 

Such an annuity does not have an effect 

similar to a lump sum-based benefit 

formula even if post-annuity starting 

date adjustments are made using a 

specified assumed interest rate that is 

less than 5 percent. 

B. Relief Under Section 411(a)(13)(A) 

The regulations reflect new section 

411(a)(13)(A) by providing that a 

statutory hybrid plan is not treated as 

failing to meet the requirements of 

section 411(a)(2), or, with respect to the 

participant’s accrued benefit derived 

from employer contributions, the 

requirements of sections 411(a)(11), 

411(c), or 417(e), merely because the 

plan provides that the present value of 

benefits as determined under a lump 

sum-based benefit formula is equal to 

the then-current balance of the 

hypothetical account maintained for the 

participant or the then-current value of 

the accumulated percentage of the 

participant’s final average compensation 

under that formula. However, section 

411(a)(13) does not alter the definition 

of the accrued benefit under section 

411(a)(7)(A) (which generally defines 

the participant’s accrued benefit as the 

annual benefit commencing at normal 

retirement age), nor does it alter the 

definition of the normal retirement 

benefit under section 411(a)(9) (which 

generally defines the participant’s 

normal retirement benefit as the benefit 

under the plan commencing at normal 

retirement age). 

Section 411(a)(13)(A) applies only 

with respect to a benefit provided under 

a lump sum-based benefit formula. A 

statutory hybrid plan that provides 

benefits under a benefit formula that is 

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)) must comply with the 

present value rules of section 417(e) 

with respect to an optional form of 

benefit that is subject to the 

requirements of section 417(e). 

The regulations do not provide 

guidance as to how section 

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

payments that are not made in the form 

of a single-sum distribution of the 

hypothetical account balance or 

accumulated percentage of final average 

compensation, such as payments made 

in the form of an annuity. That issue is 

being addressed in the 2010 proposed 

regulations. 

C. Special Vesting Rules for Applicable 

Defined Benefit Plans 

Pursuant to section 411(a)(13)(B), the 

regulations provide that, in the case of 

a participant whose accrued benefit (or 

any portion thereof) under a defined 

benefit plan is determined under a 

statutory hybrid benefit formula, the 

plan is treated as failing to satisfy the 

requirements of section 411(a)(2) unless 

the plan provides that the participant 

has a nonforfeitable right to 100 percent 

of the participant’s accrued benefit 

derived from employer contributions if 

the participant has 3 or more years of 

service. As in the 2007 proposed 

regulations, the final regulations 

provide that this requirement applies on 

a participant-by-participant basis and 

applies to the participant’s entire benefit 

derived from employer contributions 

under a statutory hybrid plan (not just 

the portion of the participant’s benefit 

that is determined under a statutory 

hybrid benefit formula). Furthermore, 

the regulations retain the rule under 

which, if a participant is entitled to the 

greater of two (or more) benefit amounts 

under a plan, where each amount is 

determined under a different benefit 

formula (including a benefit determined 

pursuant to an offset among formulas 

within the plan or a benefit determined 

as the greater of a protected benefit 

under section 411(d)(6) and another 

benefit amount), at least one of which is 

a benefit calculated under a statutory 

hybrid benefit formula, the 3-year 

vesting requirement applies to that 

participant’s entire accrued benefit 

under the plan even if the participant’s 

benefit under the statutory hybrid 

benefit formula is ultimately smaller 

than under the other formula. 

The 2007 proposed regulations 

requested comments regarding the 

application of the 3-year vesting 

requirement to a floor plan that is not 

a statutory hybrid plan but that is part 

of a floor-offset arrangement with an 

independent plan that is a statutory 

hybrid plan. A number of commenters 

suggested that the 3-year vesting 

requirement should apply on a plan-byplan basis, without regard to whether a 

plan is part of a floor-offset 

arrangement. In contrast, one 

commenter suggested that the 3-year 

vesting requirement should apply to 

both plans that are part of a floor-offset 

arrangement even if only one of the 

plans is a statutory hybrid plan, because 

the commenter felt that determining the 

amount of the offset in an arrangement 

involving plans with different vesting 

schedules would be inherently difficult. 

However, this concern is mitigated 

because, in the view of the Treasury 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64129 

4See Rev. Rul. 76–259 (1976–2 CB 111), see 

§ 601.601(d)(2)(ii)(b). 

Department and the IRS, a floor-offset 

arrangement where the benefit payable 

under a floor plan is reduced by the 

benefit payable under an independent 

plan is only permissible if the 

arrangement limits the offset to amounts 

that are vested under the independent 

plan.4 Therefore, the regulations retain 

the rule whereby the 3-year vesting 

requirement is limited to plans that 

contain a statutory hybrid benefit 

formula and provide an example 

illustrating this rule with respect to a 

floor-offset arrangement where the 

benefit payable under a floor plan that 

does not include a statutory hybrid 

benefit formula is reduced by the vested 

accrued benefit payable under an 

independent plan that includes a 

statutory hybrid benefit formula. 

II. Section 411(b)(5): Safe Harbor for 

Age Discrimination, Conversion 

Protection, and Market Rate of Return 

Limitation 

A. Safe Harbor for Age Discrimination 

The regulations reflect new section 

411(b)(5)(A), which provides that a plan 

is not treated as failing to meet the 

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

with respect to certain benefit formulas 

if, as determined as of any date, a 

participant’s accumulated benefit 

expressed under one of those formulas 

would not be less than any similarly 

situated, younger participant’s 

accumulated benefit expressed under 

the same formula. A plan that does not 

satisfy this test is required to satisfy the 

general age discrimination rule of 

section 411(b)(1)(H)(i). 

As in the 2007 proposed regulations, 

the regulations provide that the safe 

harbor standard under section 

411(b)(5)(A) is available only where a 

participant’s accumulated benefit under 

the terms of the plan is expressed as an 

annuity payable at normal retirement 

age (or current age, if later), the current 

balance of a hypothetical account, or the 

current value of the accumulated 

percentage of the employee’s final 

average compensation. For this purpose, 

if the accumulated benefit of a 

participant is expressed as an annuity 

payable at normal retirement age (or 

current age, if later) under the plan 

terms, then the comparison of benefits 

is made using such an annuity. 

Similarly, if the accumulated benefit of 

a participant is expressed under the 

plan terms as the current balance of a 

hypothetical account or the current 

value of an accumulated percentage of 

the participant’s final average 

compensation, then the comparison of 

benefits is made using the current 

balance of a hypothetical account or the 

current value of the accumulated 

percentage of the participant’s final 

average compensation, respectively. 

The regulations require a comparison 

of the accumulated benefit of each 

possible participant in the plan to the 

accumulated benefit of each other 

similarly situated, younger individual 

who is or could be a participant in the 

plan. For this purpose, as in the 2007 

proposed regulations, the regulations 

provide that an individual is similarly 

situated to another individual if the 

individual is identical to that other 

individual in every respect that is 

relevant in determining a participant’s 

benefit under the plan (including, but 

not limited to, period of service, 

compensation, position, date of hire, 

work history, and any other respect) 

except for age. In determining whether 

an individual is similarly situated to 

another individual, any characteristic 

that is relevant for determining benefits 

under the plan and that is based directly 

or indirectly on age is disregarded. For 

example, if a particular benefit formula 

applies to a participant on account of 

the participant’s age, an individual to 

whom the benefit formula does not 

apply and who is identical to a 

participant in all respects other than age 

is similarly situated to the participant. 

By contrast, an individual is not 

similarly situated to a participant if a 

different benefit formula applies to the 

individual and the application of the 

different formula is based neither 

directly nor indirectly on age. For 

example, if the benefit formula under a 

plan is changed from one type to 

another for employees hired after the 

effective date of the change, employees 

hired after the relevant date would not 

be similarly situated with employees 

hired before that date because the 

benefit formula for new hires is not 

based directly nor indirectly on age. 

The comparison of accumulated 

benefits is made without regard to any 

subsidized portion of any early 

retirement benefit that is included in a 

participant’s accumulated benefit. For 

this purpose, the subsidized portion of 

an early retirement benefit is the 

retirement-type subsidy within the 

meaning of § 1.411(d)–3(g)(6) that is 

contingent on a participant’s severance 

from employment and commencement 

of benefits before normal retirement age. 

In addition, like the 2007 proposed 

regulations, the regulations provide that 

the safe harbor is generally not available 

with respect to a participant if the 

benefit of any similarly situated, 

younger individual is expressed in a 

different form than the participant’s 

benefit. Thus, for example, the safe 

harbor is not available for comparing the 

accumulated benefit of a participant 

expressed as an annuity at normal 

retirement age with the accumulated 

benefit of a similarly situated, younger 

participant expressed as the current 

balance of a hypothetical account. 

Like the 2007 proposed regulations, 

the regulations generally permit a plan 

that provides the sum-of or the greaterof benefits that are expressed in two or 

more different forms of benefit to satisfy 

the safe harbor if the plan would 

separately satisfy the safe harbor for 

each separate form of benefit. For 

purposes of the safe harbor comparisons 

involving greater-of and sum-of benefit 

formulas, the 2007 proposed regulations 

contained a rule where a similarly 

situated, younger participant would be 

treated as having an accumulated 

benefit of zero under a benefit formula 

that does not apply to the participant. 

While the sum-of and greater-of 

provisions are organized differently in 

these regulations, the regulations 

effectively retain this rule because sumof and greater-of formulas are eligible 

for the safe harbor even where older 

participants receive benefits expressed 

in a different form than the benefits of 

similarly situated, younger participants, 

as long as younger participants are not 

entitled to benefits expressed in a 

different form than the benefits of 

similarly situated, older participants. 

Several commenters requested that 

the regulations clarify that the safe 

harbor is also available to plans that 

allow older participants to choose, at 

the time a new statutory hybrid benefit 

formula goes into effect, whether to 

receive a benefit under the statutory 

hybrid benefit formula or under the preexisting traditional defined benefit 

formula. In response to such comments, 

the regulations adopt similar rules as 

the sum-of and greater-of rules for plans 

that provide participants with the 

choice of benefits that are expressed in 

two or more different forms. 

As part of the sum-of, greater-of, and 

choice-of rules, the regulations reflect 

the fact that the sum of benefits 

expressed in two or more forms is never 

less than the greater of the same benefits 

and that the greater of benefits 

expressed in two or more forms is never 

less than the choice of the same 

benefits. As a result, the regulations 

provide that in order for the safe harbor 

to be available with respect to a 

participant who is provided with the 

greater of benefits expressed in two or 

more different forms, the plan must not 

provide any similarly situated, younger 

participant with the sum of the same 


emcdonald on DSK2BSOYB1PROD with RULES
64130 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

benefits. Similarly, the regulations 

provide that in order for the safe harbor 

to be available with respect to a 

participant who is provided with the 

choice of benefits expressed in two or 

more different forms, the plan must not 

provide any similarly situated, younger 

participant with either the sum of or the 

greater of the same benefits. In addition, 

in order for the safe harbor to be 

available, the plan cannot provide for 

any other relationship between benefits 

expressed in different forms other than 

sum-of, greater-of, or choice-of benefits. 

The regulations reflect new section 

411(b)(5)(C), which provides that a plan 

is not treated as failing to meet the 

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

solely because the plan provides offsets 

of benefits under the plan to the extent 

such offsets are allowable in applying 

the requirements under section 401 and 

the applicable requirements of ERISA 

and ADEA. The regulations incorporate 

the provisions of section 411(b)(5)(D) 

(relating to permitted disparity under 

section 401(l)) without providing 

additional guidance. These rules are 

unchanged from the 2007 proposed 

regulations. 

The regulations contain a number of 

new examples that illustrate the 

application of the safe harbor under 

various fact patterns. One of these 

examples illustrates that the safe harbor 

is not satisfied in the case of a plan that 

contains a suspension of benefits 

provision that reduces or eliminates 

interest credits for participants who 

continue in service after normal 

retirement age. 

The regulations also reflect new 

section 411(b)(5)(E), which provides for 

the disregard of certain indexing of 

benefits for purposes of the age 

discrimination rules of section 

411(b)(1)(H). As in the 2007 proposed 

regulations, the regulations limit the 

disregard of indexing to formulas under 

defined benefit plans other than lump 

sum-based formulas. In addition, the 

regulations clarify that the disregard of 

indexing is limited to situations in 

which the extent of the indexing for a 

participant would not be less than the 

indexing applicable to a similarly 

situated, younger participant. Thus, the 

disregard of indexing is only available if 

the indexing is neither terminated nor 

reduced on account of the attainment of 

any age. 

Section 411(b)(5)(E) requires that the 

indexing be accomplished by 

application of a recognized investment 

index or methodology. The 2007 

proposed regulations limited a 

recognized investment index or 

methodology to an eligible cost-of-living 

index as described in § 1.401(a)(9)–6, A– 

14(b), the rate of return on the aggregate 

assets of the plan, or the rate of return 

on the annuity contract for the 

employee issued by an insurance 

company licensed under the laws of a 

State. The final regulations expand the 

list of what constitutes a recognized 

index or methodology by treating any 

rate of return that satisfies the market 

rate of return rules under these 

regulations as a recognized index or 

methodology. 

As under the 2007 proposed 

regulations, the section 411(b)(5)(E)(ii) 

protection against loss (‘‘no-loss’’) 

requirement for an indexed plan (which 

requires that the indexing not result in 

a smaller accrued benefit than if no 

indexing had applied) is implemented 

under the final regulations by applying 

the ‘‘preservation of capital’’ rule of 

section 411(b)(5)(B)(i)(II) to indexed 

plans. (The preservation of capital rule 

is discussed in section II. C. of this 

preamble.) The final regulations clarify 

that variable annuity benefit formulas 

(as defined in the regulations) are 

exempt from the no-loss and 

preservation of capital rules. 

B. Conversion Protection 

The regulations provide guidance on 

the new conversion protections under 

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

which is similar to the 2007 proposed 

regulations. Under the regulations, a 

participant whose benefits are affected 

by a conversion amendment that was 

both adopted and effective on or after 

June 29, 2005, must generally be 

provided with a benefit after the 

conversion that is at least equal to the 

sum of the benefits accrued through the 

date of the conversion and benefits 

earned after the conversion, with no 

permitted interaction between these two 

portions. This assures participants that 

there will be no ‘‘wear-away’’ as a result 

of a conversion, both with respect to the 

participant’s accrued benefits and any 

early retirement subsidy to which the 

participant is entitled based on the preconversion benefits. 

The 2007 proposed regulations 

included an alternative mechanism 

under which a plan could provide for 

the establishment of an opening 

hypothetical account balance or opening 

accumulated percentage of the 

participant’s final average compensation 

as part of the conversion and keep 

separate track 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. Comments on this rule 

were favorable and it is retained under 

the final regulations. A variety of 

examples illustrating application of the 

alternative are included in the 

regulations. Under this alternative, 

when a participant commences benefits, 

it must be determined whether the 

benefit attributable to the opening 

hypothetical account or attributable to 

the opening accumulated percentage 

that is payable in the particular optional 

form of benefit selected is greater than 

or equal to 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. If the benefit attributable to the 

opening hypothetical account balance or 

opening accumulated percentage is 

greater, then the plan must provide that 

such benefit is paid in lieu of the preconversion benefit, in addition to the 

benefit attributable to post-conversion 

service under the post-conversion 

benefit formula. If the benefit 

attributable to the opening hypothetical 

account balance or opening 

accumulated percentage is less, then the 

plan must provide that such benefit will 

be increased sufficiently to provide the 

pre-conversion benefit, in addition to 

the benefit attributable to postconversion service under the postconversion benefit formula. 

As in the 2007 proposed regulations, 

the final regulations provide under this 

alternative that, if an optional form of 

benefit is available on the annuity 

starting date with respect to the benefit 

attributable to the opening hypothetical 

account balance or opening 

accumulated percentage, but no 

optional form (such as a single-sum 

distribution) within the same 

generalized optional form of benefit was 

available at that annuity starting date 

under the terms of a plan as in effect 

immediately prior to the effective date 

of the conversion amendment, then the 

comparison must still be made by 

assuming that the pre-conversion plan 

had such an optional form of benefit. 

The preamble to the 2007 proposed 

regulations asked for comments on 

another alternative means of satisfying 

the conversion requirements that would 

involve establishing an opening 

hypothetical account balance, but 

would not require a comparison of 

benefits at the annuity starting date if 

certain requirements are met. Comments 

on this alternative were favorable, but 

some commenters requested that the 

alternative only be available where there 

was sufficient protection to ensure that 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64131 

participants’ benefits would not be less 

than would apply under the rules in the 

2007 proposed regulations. While these 

final regulations do not permit this 

additional alternative, it is included in 

the 2010 proposed regulations. 

The regulations also provide guidance 

that is unchanged from the 2007 

proposed regulations on what 

constitutes a conversion amendment 

under section 411(b)(5)(B)(v). Under the 

final regulations, whether an 

amendment is a conversion amendment 

is determined on a participant-byparticipant basis. The regulations 

provide that an amendment (including 

multiple amendments) is a conversion 

amendment with respect to a participant 

if it meets two criteria: (1) The 

amendment reduces or eliminates the 

benefits that, but for the amendment, 

the participant would have accrued after 

the effective date of the amendment 

under a benefit formula that is not a 

statutory hybrid benefit formula and 

under which the participant was 

accruing benefits prior to the 

amendment; and (2) after the effective 

date of the amendment, all or a portion 

of the participant’s benefit accruals 

under the plan are determined under a 

statutory hybrid benefit formula. 

The regulations clarify that only 

amendments that reduce or eliminate 

accrued benefits described in section 

411(a)(7), or retirement-type subsidies 

described in section 411(d)(6)(B)(i), that 

would otherwise accrue as a result of 

future service are treated as 

amendments that reduce or eliminate 

the participant’s benefits that would 

have accrued after the effective date of 

the amendment under a benefit formula 

that is not a statutory hybrid benefit 

formula. As under the 2007 proposed 

regulations, a plan is treated as having 

been amended for this purpose if, under 

the terms of the plan, a change in the 

conditions of a participant’s 

employment results in a reduction or 

elimination of the benefits that the 

participant would have accrued in the 

future under a benefit formula that is 

not a statutory hybrid benefit formula 

(for example, a job transfer from an 

operating division covered by a nonstatutory hybrid defined benefit plan to 

an operating division that is covered by 

a formula expressed as the balance of a 

hypothetical account). However, in the 

absence of coordination between the 

formulas, the special requirements for 

conversion amendments typically will 

be satisfied automatically. 

A number of commenters 

recommended that the effective date of 

a conversion amendment generally be 

the date accruals begin under a statutory 

hybrid benefit formula, rather than the 

date that future accruals are reduced 

under the non-statutory hybrid benefit 

formula. Several commenters suggested 

that, if this recommendation was not 

implemented generally, it should 

nevertheless apply at the effective date 

of an amendment which provides 

participants with the greater of benefits 

under the prior formula and a statutory 

hybrid benefit formula for a period of 

time before benefit accruals cease under 

the prior formula, especially if the 

amendment applies to a subgroup of 

existing older, long service employees. 

However, some comments expressed 

concern that such a change in the 

proposed definition of the effective date 

of a conversion amendment would 

allow plans to delay the statutory antiwearaway protections by adding a less 

valuable cash balance benefit for the 

grandfathered group at a date, even 

though ‘‘the effect of converting’’ (within 

the meaning of section 411(b)(5)(B)(v)(I)) 

their traditional benefit into a cash 

balance benefit would occur for them at 

the later date when their benefit 

accruals cease under the prior formula. 

The Treasury Department and the IRS 

are concerned that the requested change 

in the proposed rule would circumvent 

a key purpose behind the conversion 

protection requirements by allowing for 

a delayed wear-away that would occur 

at the time accruals cease under the 

prior formula. For example, if a plan 

were generally converted to a cash 

balance plan, but the plan were to 

provide for some class of participants, 

such as participants who are age 55 or 

older, to receive the greater of accruals 

under the prior formula or the new cash 

balance formula for a period of 5 years, 

the change requested in the comments 

would define the effective date of the 

conversion amendment for all 

participants to be the date the cash 

balance formula went into effect (rather 

than applying a participant by 

participant rule). As a result, 5 years 

after the cash balance formula went into 

effect, the hypothetical account balance 

for these older participants could 

provide benefits that are less than the 

frozen amount under the prior formula, 

a circumstance that would produce no 

additional accruals for some period of 

time after the end of the 5-year period. 

Therefore, the approach suggested by 

these comments would allow the type of 

wear-away the statute was intended to 

prevent. Accordingly, like the 2007 

proposed regulations, the regulations 

adopt a rule whereby the effective date 

of a conversion amendment is, with 

respect to a participant, the date as of 

which the reduction occurs in the 

benefits that the participant would have 

accrued after the effective date of the 

amendment under a benefit formula that 

is not a statutory hybrid benefit formula. 

In accordance with section 411(d)(6), 

the regulations provide that the date 

future benefit accruals are reduced 

cannot be earlier than the date of 

adoption of the conversion amendment. 

The regulations provide rules, similar 

to those in the 2007 proposed 

regulations, prohibiting the avoidance of 

the conversion protections through the 

use of multiple plans or multiple 

employers. Under these rules, an 

employer is treated as having adopted a 

conversion amendment if the employer 

adopts an amendment under which a 

participant’s benefits under a plan that 

is not a statutory hybrid plan are 

coordinated with a separate plan that is 

a statutory hybrid plan, such as through 

a reduction (offset) of the benefit under 

the plan that is not a statutory hybrid 

plan. In addition, if an employee’s 

employer changes as a result of a 

merger, acquisition, or other transaction 

described in § 1.410(b)–2(f), then the 

employee’s old and new employers 

would be treated as a single employer 

for this purpose. Thus, for example, in 

an acquisition, if the buyer adopts an 

amendment to its statutory hybrid plan 

under which a participant’s benefits 

under the seller’s plan (that is not a 

statutory hybrid plan) are coordinated 

with benefits under the buyer’s plan, 

such as through a reduction (offset) of 

the buyer’s plan benefits, the seller and 

buyer would be treated as a single 

employer and as having adopted a 

conversion amendment. However, if 

there is no coordination between the 

plans, there is no conversion 

amendment. 

The regulations retain the rule from 

the 2007 proposed regulations under 

which a conversion amendment also 

includes multiple amendments that 

result in a conversion amendment, even 

if the amendments would not be 

conversion amendments individually. If 

an amendment to provide a benefit 

under a statutory hybrid benefit formula 

is adopted within 3 years after adoption 

of an amendment to reduce benefits 

under a non-statutory hybrid benefit 

formula, then those amendments would 

be consolidated in determining whether 

a conversion amendment has been 

adopted. In the case of an amendment 

to provide a benefit under a statutory 

hybrid benefit formula that is adopted 

more than 3 years after adoption of an 

amendment to reduce non-statutory 

hybrid benefit formula benefits, there is 

a presumption that the amendments are 

not consolidated unless the facts and 

circumstances indicate that adoption of 

an amendment to provide a benefit 


emcdonald on DSK2BSOYB1PROD with RULES
64132 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

under a statutory hybrid benefit formula 

was intended at the time of the 

reduction in the non-statutory hybrid 

benefit formula benefits. 

A number of commenters expressed 

concern that the interaction between 

employee transfers and the conversion 

protection effective date provisions was 

unclear under the 2007 proposed 

regulations. In response to such 

comments, the regulations clarify that a 

conversion amendment must be both 

adopted on or after June 29, 2005, and 

be effective on or after June 29, 2005, in 

order for the conversion protection 

provisions to apply to such amendment. 

Therefore, if a transfer provision was 

adopted before June 29, 2005, an 

employee transfer is not treated as part 

of a conversion amendment to which 

the conversion protection provisions 

apply, even if the transfer occurs on or 

after June 29, 2005. 

C. Market Rate of Return Limitation 

The regulations reflect the rule in 

section 411(b)(5)(B)(i)(I) under which a 

statutory hybrid plan is treated as failing 

to satisfy section 411(b)(1)(H) if it 

provides an interest crediting rate with 

respect to benefits determined under a 

statutory hybrid benefit formula that is 

in excess of a market rate of return. 

Several commenters suggested that the 

definition of interest crediting rate in 

the 2007 proposed regulations be 

revised to exclude not only adjustments 

conditioned on current service but also 

adjustments made as a result of past and 

imputed service as well as ad hoc 

adjustments. In response to the 

comments, the regulations expand the 

exclusions from the definition of 

interest credit to also exclude 

adjustments made as a result of imputed 

service, as well as certain one-time 

adjustments. 

The final regulations provide that an 

interest credit generally means any 

increase or decrease for a period to a 

participant’s accumulated benefit under 

a statutory hybrid benefit formula, 

under the terms of the plan at the 

beginning of the period, that is 

calculated by applying a rate of interest 

or rate of return (including a rate of 

increase or decrease under an index) to 

the participant’s accumulated benefit (or 

a portion thereof) as of the beginning of 

the period, to the extent the increase or 

decrease is not conditioned on current 

service and is not made on account of 

imputed service; as well as any other 

increase for a period to a participant’s 

accumulated benefit under a statutory 

hybrid benefit formula, under the terms 

of the plan at the beginning of the 

period, to the extent the increase is not 

conditioned on current service and is 

not made on account of imputed 

service. 

Under the regulations, 

notwithstanding the general rule 

described in the previous paragraph, an 

increase to a participant’s accumulated 

benefit is not treated as an interest 

credit to the extent the increase is made 

as a result of a plan amendment 

providing for a one-time adjustment to 

the participant’s accumulated benefit. 

However, a pattern of repeated plan 

amendments each of which provides for 

a one-time adjustment to a participant’s 

accumulated benefit will cause such 

adjustments to be treated as provided on 

a permanent basis under the terms of 

the plan. 

The interest crediting rate for a period 

with respect to a participant generally 

equals the total amount of interest 

credits for the period divided by the 

participant’s accumulated benefit at the 

beginning of the period. 

Under the regulations, a principal 

credit means any increase to a 

participant’s accumulated benefit under 

a statutory hybrid benefit formula that is 

not an interest credit. As a result, a 

principal credit includes an increase to 

a participant’s accumulated benefit to 

the extent the increase is conditioned on 

current service or made on account of 

imputed service. Thus, for example, 

even if the plan denominates an 

increase to a hypothetical account 

balance as an interest credit, the 

increase is treated as a principal credit 

to the extent the increase is conditioned 

on current service. Similarly, a principal 

credit includes an increase to the 

current value of an accumulated 

percentage of the participant’s final 

average compensation. For indexed 

benefits, a principal credit includes an 

increase to the participant’s accrued 

benefit other than an increase provided 

by indexing. In addition, pursuant to the 

rule set forth earlier, a principal credit 

generally includes an increase to a 

participant’s accumulated benefit to the 

extent the increase is made as a result 

of a plan amendment providing for a 

one-time adjustment to the participant’s 

accumulated benefit. Thus, for example, 

a principal credit includes an opening 

hypothetical account balance or opening 

accumulated percentage of the 

participant’s final average 

compensation. 

Consistent with the requirement 

under § 1.401–1(b)(1)(i) that a pension 

plan provide definitely determinable 

benefits, a plan that credits interest 

must specify how the plan determines 

interest credits and must specify how 

and when interest credits are credited. 

Under the regulations, a plan must 

determine the plan’s interest crediting 

rate that will apply for each plan year 

(or portion of a plan year) using one of 

two permitted methods—either using 

the applicable periodic interest 

crediting rate that applies over the 

current period or, for certain rates, using 

the rate that applied in a specified 

lookback month with respect to a 

stability period. For this purpose, the 

plan’s lookback month and stability 

period must satisfy the rules for 

selecting the lookback month and 

stability period under § 1.417(e)–1(d)(4). 

However, the stability period and 

lookback month need not be the same as 

those used under the plan for purposes 

of section 417(e)(3). 

In addition, the regulations require 

interest credits under a plan to be 

provided on an annual or more frequent 

periodic basis and also require interest 

credits for each period to be credited as 

of the end of the period. If, under a plan, 

interest is credited more frequently than 

annually (for example, daily, monthly or 

quarterly) based on one of the 

permissible annual interest rates, then 

the plan does not provide an above 

market rate of return if the periodic 

interest credits are provided under an 

interest crediting rate that is no greater 

than a pro rata portion of the applicable 

annual interest crediting rate. However, 

the regulations provide a special rule 

whereby a plan that credits interest 

daily based on one of these annual rates 

may credit interest at a rate which is 

1/360th of the applicable annual rate 

(instead of 1/365th) without violating 

the general rule of the preceding 

sentence. In addition, the regulations 

provide that interest credits based on 

one of these annual rates are not treated 

as creating an effective rate of return in 

excess of a market rate of return merely 

because an otherwise permissible 

interest crediting rate for a plan year is 

compounded more frequently than 

annually. Thus, for example, if a plan’s 

terms provide for interest to be credited 

monthly and for the interest crediting 

rate to be equal to the interest rate on 

long-term investment grade corporate 

bonds and the applicable annual rate on 

these bonds for the plan year is 6 

percent, then the accumulated benefit at 

the beginning of each month could be 

increased as a result of interest credits 

by as much as 0.5 percent per month 

during the plan year without resulting 

in an interest crediting rate that is in 

excess of a market rate of return. These 

rules are similar to those in the 2007 

proposed regulations. 

The 2007 proposed regulations 

provided that an interest crediting rate 

is not in excess of a market rate of return 

if it is always less than a particular 

interest crediting rate that meets the 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64133 

5A governmental plan in the first sentence of 

section 414(d) means a plan that is established and 

maintained for its employees by the Government of 

the United States, by the government of any State 

or political subdivision thereof, or by an agency or 

instrumentality of any of the foregoing. 

market rate of return limitation. A 

number of commenters suggested that 

this rule be revised to clarify that rates 

that may sometimes equal but are never 

greater than another permissible rate are 

also permissible. In response to these 

comments, the final regulations provide 

that an interest crediting rate is not in 

excess of a market rate of return if it can 

never be in excess of a particular rate 

that meets the market rate of return 

limitation. Thus, a rate that is a 

percentage (no greater than 100 percent) 

of a particular rate that meets the market 

rate of return limitation is not in excess 

of a market rate of return and a rate that 

is a fixed amount less than a particular 

rate that meets the market rate of return 

limitation is also not in excess of a 

market rate of return. Similarly, an 

interest crediting rate is not in excess of 

a market rate of return if it always 

equals the lesser of two or more rates 

where at least one of the rates meets the 

market rate of return limitation. 

In addition, the regulations clarify 

that a statutory hybrid plan does not 

provide an effective interest crediting 

rate that is in excess of a market rate of 

return merely because the plan 

determines an interest credit by 

applying different rates to different 

predetermined portions of the 

accumulated benefit, provided each rate 

would separately satisfy the market rate 

of return limitations if the rate applied 

to the entire accumulated benefit. Thus, 

under this rule, statutory hybrid plans 

may, in effect, provide participants with 

rates that are a blend of two or more 

rates and may also apply different rates 

to portions of the benefit attributable to 

different principal credits. However, as 

in the 2007 proposed regulations, the 

final regulations provide that interest 

credits that are determined by applying 

the greater of two or more rates 

generally exceed a market rate of return 

except under certain limited 

circumstances. 

The regulations provide that an 

interest crediting rate for a plan year is 

not in excess of a market rate of return 

if it is based on the rate of interest 

provided under one of several specified 

indices. Like the 2007 proposed 

regulations, these rates include the rate 

of interest on long-term investment 

grade corporate bonds (as described in 

section 412(b)(5)(B)(ii)(II) prior to 

amendment by PPA ’06 for plan years 

beginning before January 1, 2008, and 

the third segment rate used under 

section 430(h) for subsequent plan 

years), the interest rate on 30-year 

Treasury securities, the interest rates on 

shorter term Treasuries with the 

associated margins that were safe harbor 

rates described in Notice 96–8, as well 

as certain cost-of-living indices. Several 

commenters on the 2007 proposed 

regulations suggested that this list be 

expanded to also include all of the 

interest rates permissible under section 

417(e). The Treasury Department and 

the IRS agree with this suggestion and, 

as a result, the regulations expand the 

list of safe-harbor rates to include the 

first and second segment rates, as 

defined in either section 417(e) or 

430(h) and whether calculated with or 

without regard to the transition rules of 

section 417(e)(3) or 430(h)(2)(G). 

The regulations provide that an 

interest crediting rate based on a 

specified index must be adjusted on at 

least an annual basis. These rates are 

market yields to maturity on 

outstanding bonds and, as a result, these 

rates do not reflect defaults nor do these 

rates reflect the change in the market 

value of an outstanding bond as a result 

of future changes in the interest rate 

environment or in a bond issuer’s risk 

profile. Because the interest rate does 

not reflect the change in the market 

value of an outstanding bond when an 

issuer becomes higher risk or the bond 

goes into default, the bonds have been 

limited to investment grade bonds in the 

top three quality levels where the risk 

of default is relatively small. 

The regulations also set forth certain 

interest crediting rates that satisfy the 

statutory market rate of return 

requirement but that are not safe harbor 

rates. The regulations provide that, in 

the case of indexed benefits as described 

in section 411(b)(5)(E), 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. The regulations 

further 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. 

Furthermore, the regulations provide 

that the rate of return on the annuity 

contract for the employee issued by an 

insurance company licensed under the 

laws of a State is not in excess of a 

market rate of return, subject to an antiabuse rule. The 2010 proposed 

regulations provide that certain 

additional interest crediting rates satisfy 

the market rate of return limitation. 

The regulations reflect the 

preservation of capital rule in section 

411(b)(5)(B)(i)(II) that requires a 

statutory hybrid plan to provide that 

interest credits will not result in a 

hypothetical account balance (or similar 

amount) being less than the aggregate 

amount of the hypothetical allocations. 

Under the 2007 proposed regulations, 

this requirement applied at the 

participant’s annuity starting date. In 

addition, the 2007 proposed regulations 

provided that the combination of this 

preservation of capital protection with a 

rate of return that otherwise satisfies the 

market rate of return limitation will not 

result in an effective interest crediting 

rate that is in excess of a market rate of 

return. Responses to these rules were 

favorable and they are retained in these 

regulations. Hypothetical allocations are 

referred to as principal credits in the 

regulations, as described earlier in this 

preamble. The regulations clarify that 

the preservation of capital requirement 

applies to all principal credits that were 

credited under the plan as of the 

annuity starting date, including 

principal credits that were credited 

before the statutory effective date of the 

preservation of capital requirement 

under section 411(b)(5)(b)(i)(II). 

These regulations do not address 

section 411(b)(5)(B)(vi), which requires 

that a plan’s provisions reflect special 

rules applicable upon plan termination. 

These plan termination rules are 

addressed in the 2010 proposed 

regulations. 

Section 123 of WRERA ’08 amended 

ADEA to provide that, in the case of a 

governmental plan that is described in 

the first sentence of section 414(d) of the 

Code,5 a rate of return or a method of 

crediting interest established pursuant 

to any provision of Federal, State, or 

local law is treated as a market rate of 

return for certain purposes under ADEA 

as long as such rate or method does not 

violate any other requirement of ADEA. 

No changes have been made to these 

regulations as a result of section 123 of 

WRERA ’08 because that provision does 

not amend the Internal Revenue Code. 

III. Section 411(d)(6): Changes in a 

Plan’s Interest Crediting Rate 

The 2007 proposed regulations 

provided that, to the extent that benefits 

have accrued under the terms of a 

statutory hybrid plan that entitle the 

participant to future interest credits, an 

amendment to the plan to change the 

interest crediting rate for such interest 

credits violates section 411(d)(6) if the 

revised rate under any circumstances 


emcdonald on DSK2BSOYB1PROD with RULES
64134 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

could result in a lower interest crediting 

rate as of any date after the applicable 

amendment date of the amendment 

changing the interest crediting rate. 

Several commenters on the 2007 

proposed regulations requested 

clarification of this rule. In particular, 

one commenter noted that there are 

several circumstances in which an 

amendment that results in a lower 

interest credit for a particular period 

after amendment than would have been 

provided for the same period under the 

old rate may not result in a reduction 

under section 411(d)(6), such as where 

the plan’s aggregate interest credits after 

the applicable amendment date but 

before the period at issue exceeded the 

interest credits that would have been 

provided under the old rate or where 

the plan was also amended to increase 

benefits under other provisions, such as 

providing for larger principal credits 

than were provided before the change in 

interest crediting rates. 

In response to these comments, the 

regulations clarify that the right to 

interest credits in the future that are not 

conditioned on future service 

constitutes a section 411(d)(6) protected 

benefit. Thus, to the extent that benefits 

have accrued under the terms of a 

statutory hybrid plan that entitle the 

participant to future interest credits, an 

amendment to the plan to change the 

interest crediting rate must comply with 

section 411(d)(6) if the revised rate 

under any circumstances could result in 

interest credits that are smaller as of any 

date after the applicable amendment 

date of the plan amendment than the 

interest credits that would have been 

provided without regard to the 

amendment. 

The regulations retain the rule in the 

2007 proposed regulations under which 

a plan is not treated as providing 

smaller interest credits in the future for 

purposes of section 411(d)(6) merely 

because of an amendment that changes 

the plan’s interest crediting rate with 

respect to future interest credits from 

one of the safe harbor market rates of 

interest (for example, a rate based on an 

eligible cost-of-living index or a rate 

based on Treasury bonds with the 

margins specified in the regulations) to 

the rate of interest on long-term 

investment grade corporate bonds (the 

third segment rate under section 417(e) 

or 430(h)), if certain requirements are 

satisfied. Under this rule, the change in 

the interest crediting rates would not 

result in a reduction in accrued benefits 

in violation of section 411(d)(6) because 

it is expected that an interest crediting 

rate that equals the third segment rate 

would not provide smaller interest 

credits as of any date after the 

applicable amendment date than the 

prior safe harbor interest crediting rate, 

except in rare and unusual 

circumstances. This special rule is only 

available if the change applies to 

interest credits to be credited after the 

effective date of the amendment, the 

effective date of the amendment is at 

least 30 days after adoption and, 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. 

The 2010 proposed regulations 

provide additional guidance with 

respect to the market rate of return 

requirements where a plan is amended 

to change its interest crediting rate in 

the absence of the application of a 

special rule under section 411(d)(6). In 

such a case, 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. 

Effective/Applicability Dates 

The regulations reflect the statutory 

effective dates set forth in section 701(e) 

of PPA ’06. Pursuant to section 701(e)(1) 

of PPA ’06, the amendments made by 

section 701 of PPA ’06 are generally 

effective for periods beginning on or 

after June 29, 2005. However, sections 

701(e)(2) through 701(e)(6) of PPA ’06, 

as amended by WRERA ’08, set forth a 

number of special effective/applicability 

date rules that are described earlier in 

the Background section of the preamble 

of these regulations. 

In addition, these regulations reflect 

the delayed effective date for 

collectively bargained plans as set forth 

in section 701(e)(4) of PPA ’06. This rule 

delays the effective date for section 

411(b)(5)(B)(i) with respect to a 

collectively bargained plan maintained 

pursuant to one or more collective 

bargaining agreements between 

employee representatives and one or 

more employers ratified on or before 

August 17, 2006. 

The 2007 proposed regulations 

included a rule for determining whether 

a plan was collectively bargained if a 

collective bargaining agreement applies 

to some, but not all, of the plan 

participants. Under that rule, a plan 

would be considered a collectively 

bargained plan if at least 25 percent of 

the participants in the plan are members 

of collective bargaining units for which 

the benefit levels under the plan are 

specified under the collective 

bargaining agreement. The same 

proposed rule was included in proposed 

regulations under section 436 (REG– 

113891–07, 72 FR 50544) and, in 

response to comments, this rule was 

modified in final regulations under 

section 436 (TD 9467, 74 FR 53004). 

Rather than repeat the rule, these 

regulations incorporate by reference the 

rule under the final section 436 

regulations. 

These regulations generally apply to 

plan years that begin on or after January 

1, 2011. However, § 1.411(b)(5)– 

1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i), 

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 

these final regulations or the 2010 

proposed regulations for purposes of 

satisfying the statutory market rate of 

return requirement. In addition, certain 

paragraphs which are reserved in these 

regulations (at § 1.411(a)(13)–1(b)(2), 

(b)(3), and (b)(4) and § 1.411(b)(5)– 

1(c)(3)(iii), (d)(1)(iv)(D), (d)(2)(ii), 

(d)(4)(iv), (d)(5)(iv), (d)(6)(ii), (d)(6)(iii), 

(e)(2), (e)(3)(iii), and (e)(4)) are 

addressed in proposed regulations that 

are being published at the same time as 

these regulations and those paragraphs 

are proposed to apply to plan years that 

begin on or after January 1, 2012. 

The regulations provide that a benefit 

formula is not treated as having an effect 

similar to a lump sum-based benefit 

formula with respect to a participant 

who does not have an hour of service 

after the regulatory effective date. In 

addition, the regulations provide that, 

with respect to a conversion 

amendment, where the effective date of 

the conversion amendment (as defined 

in the regulations) is on or after the 

statutory effective date, the conversion 

protection requirements in the 

regulations apply only to a participant 

who has an hour of service on or after 

the regulatory effective date. As a result, 

participants who have an hour of 

service on or after the regulatory 

effective date must be provided with the 

minimum benefit required under the 

regulations beginning as of the effective 

date of a conversion amendment (as 

defined in the regulations), even if the 

effective date of the conversion 

amendment is before the regulatory 

effective date. 

For periods after the statutory 

effective date and before the regulatory 

effective date, the relief of sections 

411(a)(13) and 411(b)(5) applies and the 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64135 

requirements of sections 411(a)(13) and 

411(b)(5) must be satisfied. During the 

periods set forth in the preceding 

sentence, a plan is permitted to rely on 

the provisions of these regulations for 

purposes of applying the relief and 

satisfying the requirements of sections 

411(a)(13) and 411(b)(5). Further, for 

periods after the statutory effective date 

and before the regulatory effective date, 

a plan is permitted to rely on the 

provisions of the 2010 proposed 

regulations, the 2007 proposed 

regulations, and Notice 2007–6 for 

purposes of applying the relief and 

satisfying the requirements of sections 

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

These regulations should not be 

construed to create any inference 

concerning the applicable law prior to 

the effective dates of sections 411(a)(13) 

and 411(b)(5). See also section 701(d) of 

PPA ’06. In addition, these regulations 

should not be construed to create any 

inference concerning sections 411(a)(13) 

and 411(b)(5) prior to the effective date 

of the regulations. 

Special Analyses 

It has been determined that these 

regulations are not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

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

to these final regulations and, because 

the regulation does not impose a 

collection of information on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Pursuant to section 7805(f) of the Code, 

the proposed regulations preceding 

these final regulations were submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on its impact on small 

business. 

Drafting Information 

The principal authors of these 

regulations are Neil S. Sandhu, 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. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding the 

following entries: 

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

Section 1.411(a)(13)–1 also issued under 26 

U.S.C. 411(a)(13). 

Section 1.411(b)(5)–1 also issued under 26 

U.S.C. 411(b)(5). 

* * * * * 

■ Par. 2. Section 1.411(a)(13)–1 is added 

to read as follows: 

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

(a) In general. This section sets forth 

certain rules that apply to statutory 

hybrid plans under section 411(a)(13). 

Paragraph (b) of this section describes 

special rules for certain statutory hybrid 

plans that determine benefits under a 

lump sum-based benefit formula. 

Paragraph (c) of this section describes 

the vesting requirement for statutory 

hybrid plans. Paragraphs (d) and (e) of 

this section contain definitions and 

effective/applicability dates, 

respectively. 

(b) Calculation of benefit by reference 

to hypothetical account balance or 

accumulated percentage—(1) Payment 

of a current balance or current value 

under a lump sum-based benefit 

formula. Pursuant to section 

411(a)(13)(A), a statutory hybrid plan 

that determines any portion of a 

participant’s benefits under a lump 

sum-based benefit formula is not treated 

as failing to meet the following 

requirements solely because, with 

respect to benefits determined under 

that formula, the present value of those 

benefits is, under the terms of the plan, 

equal to the then-current balance of the 

hypothetical account maintained for the 

participant or to the then-current value 

of the accumulated percentage of the 

participant’s final average compensation 

under that formula— 

(i) Section 411(a)(2); or 

(ii) With respect to the participant’s 

accrued benefit derived from employer 

contributions, section 411(a)(11), 411(c), 

or 417(e). 

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

obtain relief. [Reserved]. 

(3) Alternative forms of distribution 

under a lump sum-based benefit 

formula. [Reserved]. 

(4) Rules of application. [Reserved]. 

(c) Three-year vesting requirement— 

(1) In general. Pursuant to section 

411(a)(13)(B), if any portion of the 

participant’s accrued benefit under a 

defined benefit plan is determined 

under a statutory hybrid benefit 

formula, the plan is treated as failing to 

satisfy the requirements of section 

411(a)(2) unless the plan provides that 

the participant has a nonforfeitable right 

to 100 percent of the participant’s 

accrued benefit if the participant has 

three or more years of service. Thus, this 

3-year vesting requirement applies with 

respect to the entire accrued benefit of 

a participant under a defined benefit 

plan even if only a portion of the 

participant’s accrued benefit under the 

plan is determined under a statutory 

hybrid benefit formula. Similarly, if the 

participant’s accrued benefit under a 

defined benefit plan is, under the plan’s 

terms, the larger of two (or more) benefit 

amounts, where each amount is 

determined under a different benefit 

formula (including a benefit determined 

pursuant to an offset among formulas 

within the plan or a benefit determined 

as the greater of a protected benefit 

under section 411(d)(6) and another 

benefit amount) and at least one of those 

formulas is a statutory hybrid benefit 

formula, the participant’s entire accrued 

benefit under the defined benefit plan is 

subject to the 3-year vesting rule of 

section 411(a)(13)(B) and this paragraph 

(c). The rule described in the preceding 

sentence applies even if the larger 

benefit is ultimately the benefit 

determined under a formula that is not 

a statutory hybrid benefit formula. 

(2) Examples. The provisions of this 

paragraph (c) are illustrated by the 

following examples: 

Example 1. Employer M sponsors Plan X, 

a defined benefit plan under which each 

participant’s accrued benefit is equal to the 

sum of the benefit provided under two 

benefit formulas. The first benefit formula is 

a statutory hybrid benefit formula, and the 

second formula is not. Because a portion of 

each participant’s accrued benefit provided 

under Plan X is determined under a statutory 

hybrid benefit formula, the 3-year vesting 

requirement described in paragraph (c)(1) of 

this section applies to each participant’s 

entire accrued benefit provided under Plan 

X. 

Example 2. The facts are the same as in 

Example 1, except that the benefit formulas 

described in Example 1 only apply to 

participants for service performed in Division 

A of Employer M and a different benefit 

formula applies to participants for service 

performed in Division B of Employer M. 

Pursuant to the terms of Plan X, the accrued 

benefit of a participant attributable to service 

performed in Division B is based on a benefit 

formula that is not a statutory hybrid benefit 

formula. Therefore, the 3-year vesting 

requirement described in paragraph (c)(1) of 

this section does not apply to a participant 

with an accrued benefit under Plan X if the 

participant’s benefit is solely attributable to 

service performed in Division B. 

Example 3. Employer N sponsors defined 

benefit Plan Y, an independent plan that 

provides benefits based solely on a lump 

sum-based benefit formula, and defined 


emcdonald on DSK2BSOYB1PROD with RULES
64136 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

benefit Plan Z, which provides benefits based 

on a formula which is not a statutory hybrid 

benefit formula, but which is a floor plan that 

provides for the benefits payable to a 

participant under Plan Z to be reduced by the 

amount of the vested accrued benefit payable 

under Plan Y. The formula under Plan Y is 

a statutory hybrid benefit formula. 

Accordingly, Plan Y is subject to the 3-year 

vesting requirement described in paragraph 

(c)(1) of this section. The formula provided 

under Plan Z, even taking into account the 

offset for vested accrued benefits under Plan 

Y, is not a statutory hybrid benefit formula. 

Therefore, Plan Z is not subject to the 3-year 

vesting requirement in paragraph (c)(1) of 

this section. 

(d) Definitions—(1) In general. The 

definitions in this paragraph (d) apply 

for purposes of this section. 

(2) Accumulated benefit. A 

participant’s accumulated benefit at any 

date means the participant’s benefit, as 

expressed under the terms of the plan, 

accrued to that date. For this purpose, 

if a participant’s benefit is expressed 

under the terms of the plan as the 

current balance of a hypothetical 

account or the current value of an 

accumulated percentage of the 

participant’s final average 

compensation, the participant’s 

accumulated benefit is expressed in that 

manner regardless of how the plan 

defines the participant’s accrued 

benefit. Thus, for example, the 

accumulated benefit of a participant 

may be expressed under the terms of the 

plan as either the current balance of a 

hypothetical account or the current 

value of an accumulated percentage of 

the participant’s final average 

compensation, even if the plan defines 

the participant’s accrued benefit as an 

annuity beginning at normal retirement 

age that is actuarially equivalent to that 

balance or value. 

(3) Lump sum-based benefit 

formula—(i) In general. A lump sumbased benefit formula means a benefit 

formula used to determine all or any 

part of a participant’s accumulated 

benefit under a defined benefit plan 

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. A benefit formula is 

expressed as the current balance of a 

hypothetical account maintained for the 

participant if it is expressed as a current 

single-sum dollar amount. Whether a 

benefit formula is a lump sum-based 

benefit formula is determined based on 

how the accumulated benefit of a 

participant is expressed under the terms 

of the plan, and does not depend on 

whether the plan provides an optional 

form of benefit in the form of a singlesum payment. 

(ii) Exception for employee 

contributions. For purposes of the 

definition of a lump sum-based benefit 

formula in paragraph (d)(3)(i) of this 

section, the benefit properly attributable 

to after-tax employee contributions, 

rollover contributions from eligible 

retirement plans under section 

402(c)(8), and other similar employee 

contributions (such as repayments of 

distributions pursuant to section 

411(a)(7)(C) and employee contributions 

that are pickup contributions pursuant 

to section 414(h)(2)) is disregarded. 

However, a benefit is not properly 

attributable to contributions described 

in this paragraph (d)(3)(ii) if the 

contributions are credited with interest 

at a rate that exceeds a reasonable rate 

of interest or if the conversion factors 

used to calculate such benefit are not 

actuarially reasonable. See section 

411(c) for an example of a calculation of 

a benefit that is properly attributable to 

employee contributions. 

(4) Statutory hybrid benefit formula— 

(i) In general. A statutory hybrid benefit 

formula means a benefit formula that is 

either a lump sum-based benefit formula 

or a formula that is not a lump sumbased benefit formula but that has an 

effect similar to a lump sum-based 

benefit formula. 

(ii) Effect similar to a lump sum-based 

benefit formula—(A) In general. Except 

as provided in paragraphs (d)(4)(ii)(B) 

through (D) of this section, a benefit 

formula under a defined benefit plan 

that is not a lump sum-based benefit 

formula has an effect similar to a lump 

sum-based benefit formula if the 

formula provides that a participant’s 

accumulated benefit is expressed as a 

benefit that includes the right to 

adjustments (including a formula that 

provides for indexed benefits under 

§ 1.411(b)(5)–1(b)(2)) for a future period 

and the total dollar amount of those 

adjustments is reasonably expected to 

be smaller for the participant than for a 

similarly situated, younger individual 

(within the meaning of § 1.411(b)(5)– 

1(b)(5)) who is or could be a participant 

in the plan. A benefit formula that does 

not include adjustments for any future 

period is treated as a formula with an 

effect similar to a lump sum-based 

benefit formula if the formula would be 

described in the preceding sentence 

except for the fact that the adjustments 

are provided pursuant to a pattern of 

repeated plan amendments. See 

§ 1.411(d)–4, A–1(c)(1). 

(B) Exception for post-retirement 

benefit adjustments. Post-annuity 

starting date adjustments in the amount 

payable to a participant (such as cost-ofliving increases) are disregarded in 

determining whether a benefit formula 

under a defined benefit plan has an 

effect similar to a lump sum-based 

benefit formula. 

(C) Exception for certain variable 

annuity benefit formulas. If the assumed 

interest rate used for purposes of the 

adjustment of amounts payable to a 

participant under a variable annuity 

benefit formula is 5 percent or higher, 

then the variable annuity benefit 

formula is not treated as being 

reasonably expected to provide a 

smaller total dollar amount of future 

adjustments for the participant than for 

a similarly situated, younger individual 

who is or could be a participant in the 

plan, and thus such a variable annuity 

benefit formula does not have an effect 

similar to a lump sum-based benefit 

formula. 

(D) Exception for employee 

contributions. Benefits that are 

disregarded under paragraph (d)(3)(ii) of 

this section (benefits properly 

attributable to certain employee 

contributions) are also disregarded for 

purposes of determining whether a 

benefit formula has an effect similar to 

a lump sum-based benefit formula. 

(5) Statutory hybrid plan. A statutory 

hybrid plan means a defined benefit 

plan that contains a statutory hybrid 

benefit formula. 

(6) Variable annuity benefit formula. 

A variable annuity benefit formula 

means any benefit formula under a 

defined benefit plan which provides 

that the amount payable is periodically 

adjusted by reference to the difference 

between the rate of return on plan assets 

(or specified market indices) and a 

specified assumed interest rate. 

(e) Effective/applicability date—(1) 

Statutory effective/applicability date— 

(i) In general. Except as provided in 

paragraphs (e)(1)(ii) and (e)(1)(iii) of this 

section, section 411(a)(13) applies for 

periods beginning on or after June 29, 

2005. 

(ii) Calculation of benefits. Section 

411(a)(13)(A) applies to distributions 

made after August 17, 2006. 

(iii) Vesting—(A) Plans in existence 

on June 29, 2005—(1) General rule. In 

the case of a plan that is in existence on 

June 29, 2005 (regardless of whether the 

plan is a statutory hybrid plan on that 

date), section 411(a)(13)(B) applies to 

plan years that begin on or after January 

1, 2008. 

(2) Exception for plan sponsor 

election. See § 1.411(b)(5)– 

1(f)(1)(iii)(A)(2) for a special election for 

early application of section 

411(a)(13)(B). 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64137 

(B) Plans not in existence on June 29, 

2005. In the case of a plan not in 

existence on June 29, 2005, section 

411(a)(13)(B) applies to plan years that 

end on or after June 29, 2005. 

(C) Collectively bargained plans. 

Notwithstanding paragraphs 

(e)(1)(iii)(A) and (B) of this section, in 

the case of a collectively bargained plan 

maintained pursuant to one or more 

collective bargaining agreements 

between employee representatives and 

one or more employers ratified on or 

before August 17, 2006, the 

requirements of section 411(a)(13)(B) do 

not apply to plan years that begin before 

the earlier of— 

(1) The later of— 

(i) The date on which the last of those 

collective bargaining agreements 

terminates (determined without regard 

to any extension thereof on or after 

August 17, 2006); or 

(ii) January 1, 2008; or 

(2) January 1, 2010. 

(D) Treatment of plans with both 

collectively bargained and noncollectively bargained employees. In the 

case of a plan with respect to which a 

collective bargaining agreement applies 

to some, but not all, of the plan 

participants, the plan is considered a 

collectively bargained plan for purposes 

of paragraph (e)(1)(iii)(C) of this section 

if it is considered a collectively 

bargained plan under the rules of 

§ 1.436–1(a)(5)(ii)(B). 

(E) Hour of service required. Section 

411(a)(13)(B) does not apply to a 

participant who does not have an hour 

of service after section 411(a)(13)(B) but 

would otherwise apply to the 

participant under the rules of paragraph 

(e)(1)(iii)(A), (B), or (C) of this section. 

(2) Effective/applicability date of 

regulations—(i) In general. Except as 

provided in paragraph (e)(2)(ii) of this 

section, this section applies to plan 

years that begin on or after January 1, 

2011. For the periods after the statutory 

effective date set forth in paragraph 

(e)(1) of this section and before the 

regulatory effective date set forth in the 

preceding sentence, the relief of section 

411(a)(13)(A) applies and the 3-year 

vesting requirement of section 

411(a)(13)(B) must be satisfied. During 

these periods, a plan is permitted to rely 

on the provisions of this section for 

purposes of applying the relief of 

section 411(a)(13)(A) and satisfying the 

requirements of section 411(a)(13)(B). 

(ii) Special effective date. [Reserved]. 

(iii) Hour of service required. A 

benefit formula is not treated as having 

an effect similar to a lump sum-based 

benefit formula under paragraph 

(d)(4)(ii) of this section with respect to 

a participant who does not have an hour 

of service after the regulatory effective 

date set forth in paragraph (e)(2)(i) of 

this section. 

■ Par. 3. Section 1.411(b)(5)–1 is added 

to read as follows: 

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

accrual under a defined benefit plan. 

(a) In general—(1) Organization of 

regulation. This section sets forth 

certain rules for determining whether a 

reduction occurs in the rate of benefit 

accrual under a defined benefit plan 

because of the attainment of any age for 

purposes of section 411(b)(1)(H)(i). 

Paragraph (b) of this section describes 

safe harbors for certain plan designs 

(including statutory hybrid plans) that 

are deemed to satisfy the age 

discrimination rules under section 

411(b)(1)(H). Paragraph (c) of this 

section describes rules relating to 

statutory hybrid plan conversion 

amendments. Paragraph (d) of this 

section describes rules restricting 

interest credits (or equivalent amounts) 

under a statutory hybrid plan to a 

market rate of return. Paragraph (e) of 

this section contains additional rules 

related to market rates of return. 

Paragraph (f) of this section contains 

effective/applicability dates. 

(2) Definitions. The definitions of 

accumulated benefit, lump sum-based 

benefit formula, statutory hybrid benefit 

formula, statutory hybrid plan, and 

variable annuity benefit formula in 

§ 1.411(a)(13)–1(d) apply for purposes of 

this section. 

(b) Safe harbors for certain plan 

designs—(1) Accumulated benefit 

testing—(i) In general. Pursuant to 

section 411(b)(5)(A), and subject to 

paragraph (b)(1)(ii) of this section, a 

plan is not treated as failing to meet the 

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

with respect to an individual who is or 

could be a participant if, as of any date, 

the accumulated benefit of the 

individual would not be less than the 

accumulated benefit of any similarly 

situated, younger individual who is or 

could be a participant. Thus, this test 

involves a comparison of the 

accumulated benefit of an individual 

who is or could be a participant in the 

plan with the accumulated benefit of 

each similarly situated, younger 

individual who is or could be a 

participant in the plan. See paragraph 

(b)(5) of this section for rules regarding 

whether a younger individual who is or 

could be a participant is similarly 

situated to a participant. The 

comparison described in this paragraph 

(b)(1)(i) is based on any one of the 

following benefit measures, each of 

which is referred to as a safe-harbor 

formula measure: 

(A) The annuity payable at normal 

retirement age (or current age, if later) 

if the accumulated benefit of the 

participant under the terms of the plan 

is an annuity payable at normal 

retirement age (or current age, if later). 

(B) The current balance of a 

hypothetical account maintained for the 

participant if the accumulated benefit of 

the participant under the terms of the 

plan is a balance of a hypothetical 

account. 

(C) The current value of an 

accumulated percentage of the 

participant’s final average compensation 

if the accumulated benefit of the 

participant under the terms of the plan 

is an accumulated percentage of final 

average compensation. 

(ii) Benefit formulas for comparison— 

(A) In general. Except as provided in 

paragraphs (b)(1)(ii)(B), (C), and (D) of 

this section, the safe harbor provided by 

section 411(b)(5)(A) and paragraph 

(b)(1)(i) of this section is available only 

with respect to an individual if the 

individual’s accumulated benefit under 

the plan is expressed in terms of only 

one safe-harbor formula measure and no 

similarly situated, younger individual 

who is or could be a participant has an 

accumulated benefit that is expressed in 

terms of any measure other than that 

same safe-harbor formula measure. 

Thus, for example, if a plan provides 

that the accumulated benefit of 

participants who are age 55 or over is 

expressed under the terms of the plan as 

a life annuity payable at normal 

retirement age (or current age if later) as 

described in paragraph (b)(1)(i)(A) of 

this section and the plan provides that 

the accumulated benefit of participants 

who are younger than age 55 is 

expressed as the current balance of a 

hypothetical account as described in 

paragraph (b)(1)(i)(B) of this section, 

then the safe harbor described in section 

411(b)(5)(A) and paragraph (b)(1)(i) of 

this section does not apply to 

individuals who are or could be 

participants who are age 55 or over. 

(B) Sum-of benefit formulas. If a plan 

provides that a participant’s 

accumulated benefit is expressed as the 

sum of benefits determined in terms of 

two or more benefit formulas, each of 

which is expressed in terms of a 

different safe-harbor formula measure, 

then the plan is deemed to satisfy 

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

respect to an individual who is or could 

be a participant, provided that the plan 

satisfies the comparison described in 

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

separately for benefits determined in 

terms of each safe-harbor formula 

measure and no accumulated benefit of 

a similarly situated, younger individual 


emcdonald on DSK2BSOYB1PROD with RULES
64138 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

who is or could be a participant is 

expressed other than as— 

(1) The sum of benefits under two or 

more benefit formulas, each of which is 

expressed in terms of one of those same 

safe-harbor formula measures as is used 

for the participant’s ‘‘sum-of’’ benefit; 

(2) The greater of benefits under two 

or more benefit formulas, each of which 

is expressed in terms of any one of those 

same safe-harbor formula measures; 

(3) The choice of benefits under two 

or more benefit formulas, each of which 

is expressed in terms of any one of those 

same safe-harbor formula measures; or 

(4) A benefit that is determined in 

terms of only one of those same safeharbor formula measures. 

(C) Greater-of benefit formulas. If a 

plan provides that a participant’s 

accumulated benefit is expressed as the 

greater of benefits under two or more 

benefit formulas, each of which is 

determined in terms of a different safeharbor formula measure, then the plan 

is deemed to satisfy paragraph (b)(1)(i) 

of this section with respect to an 

individual who is or could be a 

participant, provided that the plan 

satisfies the comparison described in 

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

separately for benefits determined in 

terms of each safe-harbor formula 

measure and no accumulated benefit of 

a similarly situated, younger individual 

who is or could be a participant is 

expressed other than as— 

(1) The greater of benefits determined 

under two or more benefit formulas, 

each of which is expressed in terms of 

one of those same safe-harbor formula 

measures as is used for the participant’s 

‘‘greater-of’’ benefit; 

(2) The choice of benefits determined 

under two or more benefit formulas, 

each of which is expressed in terms of 

one of those same safe-harbor formula 

measures; or 

(3) A benefit that is determined in 

terms of only one of those same safeharbor formula measures. 

(D) Choice-of benefit formulas. If a 

plan provides that a participant’s 

accumulated benefit is determined 

pursuant to a choice by the participant 

between benefits determined in terms of 

two or more different safe-harbor 

formula measures, then the plan is 

deemed to satisfy paragraph (b)(1)(i) of 

this section with respect to an 

individual who is or could be a 

participant, provided that the plan 

satisfies the comparison described in 

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

separately for benefits determined in 

terms of each safe-harbor formula 

measure and no accumulated benefit of 

a similarly situated, younger individual 

who is or could be a participant is 

expressed other than as— 

(1) The choice of benefits determined 

under two or more benefit formulas, 

each of which is expressed in terms of 

one of those same safe-harbor formula 

measures as is used for the participant’s 

‘‘choice-of’’ benefit; or 

(2) A benefit that is determined in 

terms of only one of those same safeharbor formula measures. 

(iii) Disregard of certain subsidized 

benefits. For purposes of paragraph 

(b)(1)(i) of this section, any subsidized 

portion of any early retirement benefit 

that is included in a participant’s 

accumulated benefit is disregarded. For 

this purpose, the subsidized portion of 

an early retirement benefit is the 

retirement-type subsidy within the 

meaning of § 1.411(d)–3(g)(6) that is 

contingent on a participant’s severance 

from employment and commencement 

of benefits before normal retirement age. 

(iv) Examples. The provisions of this 

paragraph (b)(1) are illustrated by the 

following examples: 

Example 1. (i) Facts relating to formulas 

described in paragraph (b)(1)(i)(A) of this 

section. Employer X maintains a defined 

benefit plan that provides a straight life 

annuity payable commencing at normal 

retirement age (which is age 65) equal to 1 

percent of the participant’s highest 3 

consecutive years’ compensation times years 

of service and provides for suspension of 

benefits as permitted under section 

411(a)(3)(B). In the case of a participant 

whose service continues after normal 

retirement age, the amount payable is the 

greater of (i) the benefit payable at normal 

retirement age, and for each year thereafter, 

actuarially increased to account for delayed 

commencement, and (ii) the retirement 

benefit determined under the formula at the 

date the employee’s service ceases 

(calculated by including years of service and 

increases in compensation after normal 

retirement age). 

(ii) Conclusion. Under these facts, the plan 

formula is a formula described in paragraph 

(b)(1)(i)(A) of this section. The formula is not 

a statutory hybrid benefit formula merely 

because the plan formula includes a benefit 

that is based on the participant’s benefit at 

normal retirement age (and each year 

thereafter) that is actuarially increased for 

commencement after attainment of normal 

retirement age. In addition, the plan formula 

would satisfy the comparison under 

paragraph (b)(1)(i) of this section for each 

individual who is or could be a participant 

because, as of any date (including any date 

after normal retirement age), the accumulated 

benefit of the individual would not be less 

than the accumulated benefit of any similarly 

situated, younger individual who is or could 

be a participant. 

Example 2. (i) Facts relating to formulas 

described in paragraph (b)(1)(i)(B) of this 

section. Employer Y maintains a defined 

benefit plan that expresses each participant’s 

accumulated benefit as the balance of a 

hypothetical account. Under the formula, the 

hypothetical account balance of each 

participant is credited monthly with interest 

at a specified rate and the hypothetical 

account balance of each employee who is a 

participant is also credited with a pay credit 

under the plan equal to 7 percent of the 

participant’s compensation for the month. 

(ii) Conclusion. The plan formula is a lump 

sum-based benefit formula described in 

paragraph (b)(1)(i)(B) of this section and the 

formula would satisfy the comparison under 

paragraph (b)(1)(i) of this section for each 

individual who is or could be a participant 

because, as of any date, the hypothetical 

account balance of the individual would not 

be less than the hypothetical account balance 

of any similarly situated, younger individual 

who is or could be a participant. 

Example 3. (i) Facts where plan suspends 

interest credits after normal retirement age. 

The facts are the same as in Example 2 

except that the plan provides for suspension 

of benefits as permitted under section 

411(a)(3)(B). Pursuant to the plan’s 

suspension of benefits provision, the plan 

provides for interest credits to cease during 

service after normal retirement age or for the 

amount of the interest credits during this 

service to be reduced to reflect principal 

credits credited. 

(ii) Conclusion. The plan does not satisfy 

the safe harbor in paragraph (b)(1)(i) of this 

section. Applying the rule of paragraph 

(b)(1)(i) of this section, the plan formula 

would fail to satisfy the safe harbor 

comparison under paragraph (b)(1)(i) of this 

section with respect to an individual whose 

benefits have been suspended because, as of 

any date after attainment of normal 

retirement age, the hypothetical account 

balance of this individual would be less than 

the hypothetical account balance of one or 

more similarly situated individuals who have 

not attained normal retirement age. 

Example 4. (i) Facts providing greater-of 

benefits as described in paragraph 

(b)(1)(ii)(C) of this section. Employer Z 

sponsors a defined benefit plan that provides 

an accumulated benefit expressed as a 

straight life annuity commencing at the 

plan’s normal retirement age (age 65), based 

on a percentage of average annual 

compensation times the participant’s years of 

service. On November 2, 2011, the plan is 

amended effective as of January 1, 2012, to 

provide participants who have attained age 

55 by January 1, 2012, with a benefit that is 

the greater of the benefit under the average 

annual compensation formula and a benefit 

that is based on the balance of a hypothetical 

account, which provides for annual pay 

credits of a specified percentage of the 

participant’s compensation and annual 

interest credits based on the third segment 

rate. 

(ii) Conclusion where plan provides 

greater-of benefits to older participants. The 

plan satisfies the safe harbor of paragraph 

(b)(1)(i) of this section with respect to all 

individuals who are or could be participants. 

Pursuant to the rules of paragraph (b)(1)(ii)(C) 

of this section, the plan satisfies the safe 

harbor with respect to individuals who have 

attained age 55 by January 1, 2012, because 

(A) with respect to the benefit described in 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64139 

paragraph (b)(1)(i)(A) of this section (the 

benefit based on average annual 

compensation, disregarding the benefit based 

on the balance of a hypothetical account), the 

accumulated benefit for any individual who 

is or could be a participant and who is at 

least age 55 on January 1, 2012, would in no 

event be less than the accumulated benefit 

for a similarly situated, younger individual 

who is or could be participant and who has 

not yet attained age 55 by January 1, 2012, 

(B) with respect to the benefit described in 

paragraph (b)(1)(i)(B) of this section (the 

benefit based on the balance of a hypothetical 

account, disregarding the benefit based on 

average annual compensation), the 

accumulated benefit for any individual who 

is or could be a participant and who is at 

least age 55 on January 1, 2012, would in no 

event be less than the accumulated benefit 

for a similarly situated, younger individual 

who is or could be a participant and who has 

not yet attained age 55 by January 1, 2012, 

and (C) the benefit of any individual who is 

or could be a participant who has not yet 

attained age 55 by January 1, 2012, is only 

expressed as an annuity payable at normal 

retirement age as described in paragraph 

(b)(1)(i)(A) of this section, and this safeharbor formula measure applies also to 

participants who have attained age 55 by 

January 1, 2012. Furthermore, the plan 

satisfies the safe harbor with respect to 

individuals who have not yet attained age 55 

by January 1, 2012, because the benefit of 

these individuals satisfies the general rule of 

paragraph (b)(1)(ii)(A) of this section. 

(iii) Conclusion where plan provides 

greater-of benefits only to younger 

participants. If, instead of the facts in 

paragraph (i) of this Example 4, the plan had 

been amended to provide only participants 

who have not yet attained age 55 by January 

1, 2012, with a benefit that is the greater of 

the benefit under the average annual 

compensation formula and a benefit that is 

based on the balance of a hypothetical 

account then, the safe harbor would not be 

satisfied with respect to individuals who 

have attained age 55 by January 1, 2012. 

Under paragraph (b)(1)(ii)(A) of this section, 

except as provided in paragraphs (b)(1)(ii)(B), 

(C), and (D) of this section, the safe harbor 

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

available only with respect to individuals 

over age 55, whose benefit is expressed in 

terms of only one safe-harbor formula 

measure, if no similarly situated, younger 

individual has an accumulated benefit that is 

expressed in terms of any measure other than 

that same safe-harbor formula measure. This 

is not the case under these facts. The greaterof rule of paragraph (b)(1)(ii)(C) of this 

section would not apply to individuals who 

have attained age 55 because the 

accumulated benefits of these individuals is 

not equal to the greater of benefits under two 

or more benefit formulas. 

Example 5. (i) Facts where plan provides 

choice-of benefits to older participants. The 

facts are the same as in paragraph (i) of 

Example 4, except that for service after 

December 31, 2011, the amendment permits 

participants who have attained age 55 by 

January 1, 2012, to choose between benefits 

under the average annual compensation 

benefit formula or benefits under the 

hypothetical account balance formula (but, if 

a participant chooses the hypothetical 

account balance formula, his or her benefit 

under the plan is in no event to be less than 

the benefit determined under the average 

annual compensation benefit formula for 

service before January 1, 2012), while other 

participants receive benefits solely under the 

hypothetical account balance formula (but 

individuals who are participants on 

December 31, 2011, are in no event to receive 

less than the benefit determined under the 

average annual compensation benefit formula 

for service before January 1, 2012). 

(ii) Conclusion where plan provides choice 

to older participants. The plan satisfies the 

safe harbor with respect to all individuals 

who are or could be participants. Pursuant to 

the rule of paragraph (b)(1)(ii)(D) of this 

section, the plan satisfies the safe harbor of 

paragraph (b)(1)(i) of this section with respect 

to individuals who have attained age 55 by 

January 1, 2012, and, pursuant to the rule of 

paragraph (b)(1)(ii)(A), the plan satisfies the 

safe harbor with respect to individuals who 

have not yet attained 55 by January 1, 2012. 

(iii) Conclusion where plan provides 

choice-of benefits to older workers and 

greater-of benefits to younger participants. If, 

in addition to the facts in paragraph (i) of this 

Example 5, the plan were also to provide 

participants who had not yet attained age 55 

by January 1, 2012, the greater of the benefits 

under the average annual compensation 

benefit formula or the benefits under the 

hypothetical account balance formula, then 

pursuant to the rules of paragraph 

(b)(1)(ii)(A) and (D) of this section, the safe 

harbor would not be satisfied with respect to 

participants who have attained age 55 by 

January 1, 2012. 

(2) Indexed benefits—(i) In general. 

Except as provided in paragraph 

(b)(2)(iii) of this section, pursuant to 

section 411(b)(5)(E) and this paragraph 

(b)(2)(i), a defined benefit plan is not 

treated as failing to meet the 

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

with respect to a participant solely 

because a benefit formula (other than a 

lump sum-based benefit formula) under 

the plan provides for the periodic 

adjustment of the participant’s accrued 

benefit under the plan by means of the 

application of a recognized index or 

methodology. For purpose of the 

preceding sentence, a rate that does not 

exceed a market rate of return, as 

defined in paragraph (d) of this section, 

is deemed to be a recognized index or 

methodology. However, such a plan 

must satisfy the qualification 

requirements otherwise applicable to 

statutory hybrid plans, including the 

requirements of § 1.411(a)(13)–1(c) 

(relating to minimum vesting standards) 

and paragraph (c) of this section 

(relating to plan conversion 

amendments). 

(ii) Similarly situated participant test. 

Paragraph (b)(2)(i) of this section does 

not apply unless the aggregate 

adjustments made to a participant’s 

accrued benefit under the plan 

(determined as a percentage of the 

unadjusted accrued benefit) in a period 

would not be less than the aggregate 

adjustments for any similarly situated, 

younger participant. This test requires a 

comparison, for each period, of the 

aggregate adjustments for each 

individual who is or could be a 

participant in the plan for the period 

with the aggregate adjustments of each 

other similarly situated, younger 

individual who is or could be a 

participant in the plan for that period. 

See paragraph (b)(5) of this section for 

rules regarding whether each younger 

individual who is or could be a 

participant is similarly situated to a 

participant. 

(iii) Protection against loss—(A) In 

general. Paragraph (b)(2)(i) of this 

section does not apply unless the plan 

satisfies section 411(b)(5)(E)(ii) and 

paragraph (d)(2) of this section (relating 

to preservation of capital). 

(B) Exception for variable annuity 

benefit formulas. The requirement to 

satisfy section 411(b)(5)(B)(i)(II), as set 

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

as well as section 411(b)(5)(E)(ii), as set 

forth in this paragraph (b)(2)(iii), does 

not apply in the case of a benefit 

provided under a variable annuity 

benefit formula as defined in 

§ 1.411(a)(13)–1(d)(6). 

(3) Certain offsets permitted. A plan is 

not treated as failing to meet the 

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

solely because the plan provides offsets 

against benefits under the plan to the 

extent the offsets are allowable in 

applying the requirements of section 

401(a) and the applicable requirements 

of the Employee Retirement Income 

Security Act of 1974, Public Law 93– 

406 (88 Stat. 829 (1974)), and the Age 

Discrimination in Employment Act of 

1967, Public Law 90–202 (81 Stat. 602 

(1967)). 

(4) Permitted disparities in plan 

contributions or benefits. A plan is not 

treated as failing to meet the 

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

solely because the plan provides a 

disparity in contributions or benefits 

with respect to which the requirements 

of section 401(l) are met. 

(5) Definition of similarly situated. 

For purposes of paragraphs (b)(1) and 

(b)(2) of this section, an individual is 

similarly situated to another individual 

if the individual is identical to that 

other individual in every respect that is 

relevant in determining a participant’s 

benefit under the plan (including period 

of service, compensation, position, date 

of hire, work history, and any other 


emcdonald on DSK2BSOYB1PROD with RULES
64140 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

respect) except for age. In determining 

whether an individual is similarly 

situated to another individual, any 

characteristic that is relevant for 

determining benefits under the plan and 

that is based directly or indirectly on 

age is disregarded. For example, if a 

particular benefit formula applies to a 

participant on account of the 

participant’s age, an individual to whom 

the benefit formula does not apply and 

who is identical to the participant in all 

other respects is similarly situated to the 

participant. By contrast, an individual is 

not similarly situated to a participant if 

a different benefit formula applies to the 

individual and the application of the 

different formula is not based directly or 

indirectly on age. 

(c) Special rules for plan conversion 

amendments—(1) In general. Pursuant 

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

if there is a conversion amendment 

within the meaning of paragraph (c)(4) 

of this section with respect to a defined 

benefit plan, then the plan is treated as 

failing to meet the requirements of 

section 411(b)(1)(H) unless the plan, 

after the amendment, satisfies the 

requirements of paragraph (c)(2) of this 

section. 

(2) Separate calculation of postconversion benefit—(i) In general. A 

statutory hybrid plan satisfies the 

requirements of this paragraph (c)(2) if 

the plan provides that, in the case of an 

individual who was a participant in the 

plan immediately before the date of 

adoption of the conversion amendment, 

the participant’s benefit at any 

subsequent annuity starting date is not 

less than the sum of— 

(A) 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 conversion amendment; and 

(B) The participant’s section 411(d)(6) 

protected benefit with respect to service 

on and after the effective date of the 

conversion amendment, determined 

under the terms of the plan as in effect 

after the effective date of the conversion 

amendment. 

(ii) Rules of application. For purposes 

of this paragraph (c)(2), except as 

provided in paragraph (c)(3) of this 

section, the benefits under paragraphs 

(c)(2)(i)(A) and (c)(2)(i)(B) of this section 

must each be determined in the same 

manner as if they were provided under 

separate plans that are independent of 

each other (for example, without any 

benefit offsets), and, except to the extent 

permitted under § 1.411(d)–3 or 

§ 1.411(d)–4 (or other applicable law), 

each optional form of payment provided 

under the terms of the plan with respect 

to a participant’s section 411(d)(6) 

protected benefit as in effect before the 

conversion amendment must be 

available thereafter to the extent of the 

plan’s benefits for service prior to the 

effective date of the conversion 

amendment. 

(3) Establishment of opening 

hypothetical account balance or 

opening accumulated percentage—(i) In 

general. Provided that the requirements 

of paragraph (c)(3)(ii) or (c)(3)(iii) of this 

section are satisfied, a statutory hybrid 

plan under which an opening 

hypothetical account balance or opening 

accumulated percentage of the 

participant’s final average compensation 

is established as of the effective date of 

the conversion amendment does not fail 

to satisfy the requirements of paragraph 

(c)(2) of this section merely because 

benefits attributable to that opening 

hypothetical account balance or opening 

accumulated percentage (that is, 

benefits that are not described in 

paragraph (c)(2)(i)(B) of this section) are 

substituted for benefits described in 

paragraph (c)(2)(i)(A) of this section. 

(ii) Comparison of benefits at annuity 

starting date—(A) Testing requirement. 

The requirements of this paragraph 

(c)(3)(ii) are satisfied with respect to an 

optional form of benefit payable at an 

annuity starting date only if the plan 

provides that the amount of the benefit 

payable in that optional form under the 

lump sum-based benefit formula that is 

attributable to the opening hypothetical 

account balance or opening 

accumulated percentage as described in 

paragraph (c)(3)(i) of this section is not 

less than the benefit under the 

comparable optional form of benefit 

under paragraph (c)(2)(i)(A) of this 

section. To satisfy this requirement, if 

the benefit under the optional form 

attributable to the opening hypothetical 

account balance or opening 

accumulated percentage is less than the 

benefit under the comparable optional 

form of benefit described in paragraph 

(c)(2)(i)(A) of this section, then the 

benefit attributable to the opening 

hypothetical account balance or opening 

accumulated percentage must be 

increased to the extent necessary to 

provide the minimum benefit described 

in this paragraph (c)(3)(ii). Thus, if a 

plan is using the option under this 

paragraph (c)(3)(ii) to satisfy paragraph 

(c)(2) of this section with respect to a 

participant, the participant must receive 

a benefit equal to not less than the sum 

of— 

(1) The benefit described in paragraph 

(c)(2)(i)(B) of this section; and 

(2) The greater of— 

(i) The benefit attributable to the 

opening hypothetical account balance or 

attributable to the opening accumulated 

percentage of the participant’s final 

average compensation as described in 

this paragraph (c)(3)(ii); or 

(ii) The benefit described in paragraph 

(c)(2)(i)(A) of this section. 

(B) Comparable optional form of 

benefit. If there was an optional form of 

benefit within the same generalized 

optional form of benefit (within the 

meaning of § 1.411(d)–3(g)(8)) that 

would have been available to the 

participant at that annuity starting date 

under the terms of the plan as in effect 

immediately before the effective date of 

the conversion amendment, then that 

optional form of benefit is the 

comparable optional form of benefit. 

(C) Special rule for new postconversion optional forms of benefit. If 

an optional form of benefit is available 

on the annuity starting date with respect 

to the benefit attributable to the opening 

hypothetical account balance or opening 

accumulated percentage, but no 

optional form within the same 

generalized optional form of benefit 

(within the meaning of § 1.411(d)– 

3(g)(8)) was available at that annuity 

starting date under the terms of the plan 

as in effect immediately prior to the 

effective date of the conversion 

amendment, then, for purposes of this 

paragraph (c)(3)(ii), the plan is treated as 

if such an optional form of benefit were 

available immediately prior to the 

effective date of the conversion 

amendment for purposes of this 

paragraph (c)(3)(ii). Thus, for example, 

if a single-sum optional form of 

payment is not available under the plan 

terms applicable to the accrued benefit 

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

this section, but a single-sum optional 

form of payment is available with 

respect to the benefit attributable to the 

opening hypothetical account balance or 

opening accumulated percentage as of 

the annuity starting date, then, for 

purposes of this paragraph (c)(3)(ii), the 

plan is treated as if a single sum (which 

satisfies the requirements of section 

417(e)(3)) were available under the 

terms of the plan as in effect 

immediately prior to the effective date 

of the conversion amendment. 

(iii) Comparison of benefits at 

effective date of conversion amendment. 

[Reserved]. 

(4) Conversion amendment—(i) In 

general. An amendment is a conversion 

amendment that is subject to the 

requirements of this paragraph (c) with 

respect to a participant if— 

(A) The amendment reduces or 

eliminates the benefits that, but for the 

amendment, the participant would have 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64141 

accrued after the effective date of the 

amendment under a benefit formula that 

is not a statutory hybrid benefit formula 

(and under which the participant was 

accruing benefits prior to the 

amendment); and 

(B) After the effective date of the 

amendment, all or a portion of the 

participant’s benefit accruals under the 

plan are determined under a statutory 

hybrid benefit formula. 

(ii) Rules of application—(A) In 

general. Paragraphs (c)(4)(iii), (iv), and 

(v) of this section describe special rules 

that treat certain arrangements as 

conversion amendments. The rules 

described in those paragraphs apply 

both separately and in combination. 

Thus, for example, in an acquisition 

described in § 1.410(b)–2(f), if the buyer 

adopts an amendment under which a 

participant’s benefits under the seller’s 

plan that is not a statutory hybrid plan 

are coordinated with a separate plan of 

the buyer that is a statutory hybrid plan, 

such as through an offset of the 

participant’s benefit under the buyer’s 

plan by the participant’s benefit under 

the seller’s plan, the seller and buyer are 

treated as a single employer under 

paragraph (c)(4)(iv) of this section and 

they are treated as having adopted a 

conversion amendment under paragraph 

(c)(4)(iii) of this section. However, 

pursuant to paragraph (c)(4)(iii) of this 

section, if there is no coordination 

between the two plans, there is no 

conversion amendment. 

(B) Covered amendments. Only 

amendments that eliminate or reduce 

accrued benefits described in section 

411(a)(7), or a retirement-type subsidy 

described in section 411(d)(6)(B)(i), that 

would otherwise accrue as a result of 

future service are treated as 

amendments described in paragraph 

(c)(4)(i)(A) of this section. 

(C) Operation of plan terms treated as 

covered amendment. If, under the terms 

of a plan, a change in the conditions of 

a participant’s employment results in a 

reduction of the participant’s benefits 

that would have accrued in the future 

under a benefit formula that is not a 

statutory hybrid benefit formula, the 

plan is treated for purposes of this 

paragraph (c)(4) as if such plan terms 

constitute an amendment that reduces 

the participant’s benefits that would 

have accrued after the effective date of 

the change under a benefit formula that 

is not a statutory hybrid benefit formula. 

Thus, for example, if a participant 

transfers from an operating division that 

is covered by a non-statutory hybrid 

benefit formula to an operating division 

that is covered by a statutory hybrid 

benefit formula, there has been a 

conversion amendment and the effective 

date of the conversion amendment is the 

date of the transfer. For purposes of 

applying the effective date rule of 

paragraph (f)(1)(ii) of this section, the 

date that the relevant plan terms were 

adopted is treated as the adoption date 

of the amendment. 

(iii) Multiple plans. An employer is 

treated as having adopted a conversion 

amendment if the employer adopts an 

amendment under which a participant’s 

benefits under a plan that is not a 

statutory hybrid plan are coordinated 

with a separate plan that is a statutory 

hybrid plan, such as through a 

reduction (offset) of the benefit under 

the plan that is not a statutory hybrid 

plan. 

(iv) Multiple employers. If the 

employer of an employee changes as a 

result of a transaction described in 

§ 1.410(b)–2(f), then the two employers 

are treated as a single employer for 

purposes of this paragraph (c)(4). 

(v) Multiple amendments—(A) In 

general—(1) General rule. For purposes 

of this paragraph (c)(4), a conversion 

amendment includes multiple 

amendments that result in a conversion 

amendment even if the amendments are 

not conversion amendments 

individually. For example, an employer 

is treated as having adopted a 

conversion amendment if the employer 

first adopts an amendment described in 

paragraph (c)(4)(i)(A) of this section 

and, at a later date, adopts an 

amendment that adds a benefit under a 

statutory hybrid benefit formula as 

described in paragraph (c)(4)(i)(B) of 

this section, if they are consolidated 

under paragraph (c)(4)(v)(A)(2) of this 

section. 

(2) Delay between plan amendments. 

In determining whether a conversion 

amendment has been adopted, an 

amendment to provide a benefit under 

a statutory hybrid benefit formula is 

consolidated with a prior amendment to 

reduce non-statutory hybrid benefit 

formula benefits if the amendment 

providing benefits under a statutory 

hybrid benefit formula is adopted 

within three years after adoption of the 

amendment reducing non-statutory 

hybrid benefit formula benefits. Thus, 

the later adoption of the statutory 

hybrid benefit formula will cause the 

earlier amendment to be treated as part 

of a conversion amendment. In the case 

of an amendment to provide a benefit 

under a statutory hybrid benefit formula 

that is adopted more than three years 

after adoption of an amendment to 

reduce benefits under a non-statutory 

hybrid benefit formula, there is a 

presumption that the amendments are 

not consolidated unless the facts and 

circumstances indicate that adoption of 

the amendment to provide a benefit 

under a statutory hybrid benefit formula 

was intended at the time of reduction in 

the non-statutory hybrid benefit 

formula. 

(B) Multiple conversion amendments. 

If an employer adopts multiple 

amendments reducing benefits 

described in paragraph (c)(4)(i)(A) of 

this section, each amendment is treated 

as a separate conversion amendment, 

provided that paragraph (c)(4)(i)(B) of 

this section is applicable at the time of 

the amendment (taking into account the 

rules of this paragraph (c)(4)). 

(vi) Effective date of a conversion 

amendment. The effective date of a 

conversion amendment is, with respect 

to a participant, the date as of which the 

reduction of the participant’s benefits 

described in paragraph (c)(4)(i)(A) of 

this section occurs. In accordance with 

section 411(d)(6), the date of a reduction 

of those benefits cannot be earlier than 

the date of adoption of the conversion 

amendment. 

(5) Examples. The following examples 

illustrate the application of this 

paragraph (c): 

Example 1. (i) Facts where plan does not 

establish opening hypothetical account 

balance for participants and participant 

elects life annuity at normal retirement age. 

Employer N sponsors Plan E, a defined 

benefit plan that provides an accumulated 

benefit, payable as a straight life annuity 

commencing at age 65 (which is Plan E’s 

normal retirement age), based on a 

percentage of highest average compensation 

times the participant’s years of service. Plan 

E 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. 

(ii) Facts relating to the conversion 

amendment. On January 1, 2012, Plan E is 

amended to eliminate future accruals under 

the highest average compensation benefit 

formula and to base future benefit accruals 

under a hypothetical account balance 

formula. 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 


emcdonald on DSK2BSOYB1PROD with RULES
64142 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

430(h)(2)(C)(iii). With respect to benefits 

under the hypothetical account balance 

attributable to service on and after January 1, 

2012, a participant is permitted to elect (with 

spousal consent if applicable) 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 for the 

benefit 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, and the 

benefit attributable to service on and after 

January 1, 2012, to be determined separately, 

under the terms of the plan as in effect after 

the effective date of the amendment, with 

neither benefit offsetting the other in any 

manner. Thus, each participant’s benefit is 

equal to the sum of the benefit 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), plus the benefit attributable 

to the participant’s hypothetical account 

balance. 

(iii) Facts relating to an affected 

participant. Participant A is age 62 on 

January 1, 2012. On December 31, 2011, A’s 

benefit for years of service before January 1, 

2012, payable as a straight life annuity 

commencing at A’s normal retirement age 

(age 65), which is January 1, 2015, is $1,000 

per month. On January 1, 2015, when 

Participant A has a severance from 

employment, the then-current hypothetical 

account balance, with pay credits and 

interest from January 1, 2012, to January 1, 

2015, is $11,000. Using the conversion 

factors applicable under the plan on January 

1, 2015, that balance is equivalent to a 

straight life annuity of $100 per month 

commencing on January 1, 2015. This benefit 

is in addition to the benefit attributable to 

service before January 1, 2012. Participant A 

elects (with spousal consent) a straight life 

annuity of $1,100 per month commencing 

January 1, 2015. 

(iv) Conclusion. Participant A’s benefit 

satisfies the requirements of paragraph (c) of 

this section because Participant A’s benefit is 

not less than the sum of Participant A’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, 

and Participant A’s section 411(d)(6) 

protected benefit with respect to service on 

and after the effective date of the conversion 

amendment, determined under the terms of 

the plan as in effect after the effective date 

of the amendment. 

Example 2. (i) Facts involving plan’s 

establishment of opening hypothetical 

account balance and payment of preconversion accumulated benefit in life 

annuity at normal retirement age. Except as 

indicated in this Example 2, the facts are the 

same as the facts under paragraph (i) of 

Example 1. 

(ii) Facts relating to the conversion 

amendment. On January 1, 2012, Plan E is 

amended to eliminate future accruals under 

the highest average compensation benefit 

formula and to provide future benefit 

accruals under a hypothetical account 

balance formula. An opening hypothetical 

account balance is established for each 

participant, and, under the plan’s terms, that 

balance is equal to the present value of the 

participant’s accumulated benefit on 

December 31, 2011 (payable as a straight life 

annuity at normal retirement age or 

immediately, if later), using the applicable 

interest rate and applicable mortality table 

under section 417(e)(3) on January 1, 2012. 

Under Plan E, the account based on this 

opening hypothetical account balance is 

maintained as a separate account from the 

account for accruals on or after January 1, 

2012. The hypothetical account balance 

maintained for each participant for accruals 

on or after January 1, 2012, is credited 

monthly with a pay credit equal to a 

specified percentage of the participant’s 

compensation during the month. A 

participant’s hypothetical account balance 

(including both of the separate accounts) is 

credited monthly with interest based on the 

third segment rate described in section 

430(h)(2)(C)(iii). 

(iii) Facts relating to optional forms of 

benefit. Following severance from 

employment and attainment of age 55, a 

participant is permitted to elect (with spousal 

consent, if applicable) payment in the same 

generalized optional forms of benefit as 

under the plan in effect prior to January 1, 

2012, with the amount payable calculated 

based on the hypothetical account balance on 

the annuity starting date and the applicable 

interest rate and applicable mortality table on 

the annuity starting date. The single-sum 

distribution is equal to the hypothetical 

account balance. 

(iv) Facts relating to conversion protection. 

The plan provides that, as of a participant’s 

annuity starting date, the plan will determine 

whether the benefit attributable to the 

opening hypothetical account payable in the 

particular optional form of benefit selected is 

equal to or greater than the benefit accrued 

under the plan through the date of 

conversion and payable in the same 

generalized optional form of benefit with the 

same annuity starting date. If the benefit 

attributable to the opening hypothetical 

account balance is equal to or greater than 

the pre-conversion benefit, the plan provides 

that such benefit is paid in lieu of the preconversion benefit, together with the benefit 

attributable to post-conversion pay-based 

principal credits. If the benefit attributable to 

the opening hypothetical account balance is 

less than the pre-conversion benefit, the plan 

provides that such benefit is increased 

sufficiently to provide the pre-conversion 

benefit, together with the benefit attributable 

to post-conversion pay-based principal 

credits. 

(v) Facts relating to an affected participant. 

On January 1, 2012, the opening hypothetical 

account balance established for Participant A 

is $80,000, which is the present value of 

Participant A’s straight life annuity of $1,000 

per month commencing at January 1, 2015, 

using the applicable interest rate and 

applicable mortality table under section 

417(e)(3) in effect on January 1, 2012. On 

January 1, 2012, the applicable interest rate 

for Participant A is equivalent to a level rate 

of 5.5 percent. Thereafter, Participant A’s 

hypothetical account balance for subsequent 

accruals is credited monthly with a pay 

credit equal to a specified percentage of the 

participant’s compensation during the 

month. In addition, Participant A’s 

hypothetical account balance (including both 

of the separate accounts) is credited monthly 

with interest based on the third segment rate 

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

(vi) Facts relating to calculation of the 

participant’s benefit. Participant A has a 

severance from employment on January 1, 

2015 at age 65, and elects (with spousal 

consent) a straight life annuity commencing 

January 1, 2015. On January 1, 2015, the 

opening hypothetical account balance, with 

interest credits from January 1, 2012, to 

January 1, 2015, has become $95,000, which, 

using the conversion factors under the plan 

on January 1, 2015, is equivalent to a straight 

life annuity of $1,005 per month 

commencing on January 1, 2015 (which is 

greater than the $1,000 a month payable at 

age 65 under the terms of the plan in effect 

before January 1, 2012). This benefit is in 

addition to the benefit determined using the 

hypothetical account balance for service after 

January 1, 2012. 

(vii) Conclusion. The benefit satisfies the 

requirements of paragraph (c)(3)(ii)(A) of this 

section with respect to Participant A because 

A’s benefit is not less than the sum of (A) the 

greater of Participant A’s benefits attributable 

to the opening hypothetical account balance 

and A’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, and (B) Participant A’s section 

411(d)(6) protected benefit with respect to 

service on and after the effective date of the 

conversion amendment, determined under 

the terms of the plan as in effect after the 

effective date of the amendment. 

Example 3. (i) Facts involving a subsequent 

decrease in interest rates. The facts are the 

same as in Example 2, except that, because 

of a decrease in bond rates after January 1, 

2012, and before January 1, 2015, the rate of 

interest credited in that period averages less 

than 5.5 percent, and, on January 1, 2015, the 

effective applicable interest rate under 

section 417(e)(3) under the plan’s terms is 4.7 

percent. As a result, Participant A’s opening 

hypothetical account balance plus 

attributable interest credits has increased to 

only $87,000 on January 1, 2015, and, using 

the conversion factors under the plan on 

January 1, 2015, is equivalent to a straight life 

annuity commencing on January 1, 2015, of 

$775 per month. Under the terms of Plan E, 

the benefit attributable to A’s opening 

account balance is increased so that A’s 

straight life annuity commencing on January 

1, 2015, is $1,000 per month. This benefit is 

in addition to the benefit attributable to the 

hypothetical account balance for service after 

January 1, 2012. 

(ii) Conclusion. The benefit satisfies the 

requirements of paragraph (c)(3)(ii)(A) of this 

section with respect to Participant A because 

A’s benefit is not less than the sum of— 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64143 

(A) The greater of A’s benefits attributable 

to the opening hypothetical account balance 

and A’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; and 

(B) A’s section 411(d)(6) protected benefit 

with respect to service on and after the 

effective date of the conversion amendment, 

determined under the terms of the plan as in 

effect after the effective date of the 

amendment. 

Example 4. (i) Facts involving payment of 

a subsidized early retirement benefit. The 

facts are the same as in Example 2, except 

that under the terms of Plan E on December 

31, 2011, a participant who retires before age 

65 and after age 55 with 30 years of service 

has only a 3 percent per year actuarial 

reduction. Participant A has a severance from 

employment on January 1, 2013, when A is 

age 63 and has 30 years of service. On 

January 1, 2013, A’s opening hypothetical 

account balance, with interest from January 

1, 2012, to January 1, 2013, has become 

$86,000, which, using the conversion factors 

under the plan (as amended) on January 1, 

2013, is equivalent to a straight life annuity 

commencing on January 1, 2013, of $850 per 

month. 

(ii) Facts relating to calculation of the 

participant’s benefit. Under the terms of Plan 

E on December 31, 2011, Participant A is 

entitled to a straight life annuity commencing 

on January 1, 2013, equal to at least $940 per 

month ($1,000 reduced by 3 percent for each 

of the 2 years that A’s benefits commence 

before normal retirement age). Under the 

terms of Plan E, the benefit attributable to A’s 

opening account balance is increased so that 

A is entitled to a straight life annuity of $940 

per month commencing on January 1, 2015. 

This benefit is in addition to the benefit 

determined using the hypothetical account 

balance for service after January 1, 2012. 

(iii) Conclusion. The benefit satisfies the 

requirements of paragraph (c)(3)(ii)(A) of this 

section with respect to Participant A because 

A’s benefit is not less than the sum of— 

(A) The greater of Participant A’s benefits 

attributable to the opening hypothetical 

account balance (increased by attributable 

interest credits) and A’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; and 

(B) Participant A’s section 411(d)(6) 

protected benefit with respect to service on 

and after the effective date of the conversion 

amendment, determined under the terms of 

the plan as in effect after the effective date 

of the amendment. 

Example 5. (i) Facts involving addition of 

a single-sum payment option. The facts are 

the same as in Example 2, except that, before 

January 1, 2012, Plan E did not offer payment 

in a single-sum distribution for amounts in 

excess of $5,000. Plan E, as amended on 

January 1, 2012, offers payment in any of the 

available annuity distribution forms 

commencing at any time following severance 

from employment as were provided under 

Plan E before January 1, 2012. In addition, 

Plan E, as amended on January 1, 2012, offers 

payment in the form of a single sum 

attributable to service before January 1, 2012, 

which is the greater of the opening 

hypothetical account balance (increased by 

attributable interest credits) or a single-sum 

distribution of the straight life annuity 

payable at age 65 using the same actuarial 

factors as are used for mandatory cashouts for 

amounts equal to $5,000 or less under the 

terms of the plan on December 31, 2011. 

Participant B is age 40 on January 1, 2012, 

and B’s opening hypothetical account 

balance (increased by attributable interest 

credits) is $33,000 (which is the present 

value, using the conversion factors under the 

plan (as amended) on January 1, 2012, of 

Participant B’s straight life annuity of $1,000 

per month commencing at January 1, 2037, 

which is when B will be age 65). Participant 

B has a severance from employment on 

January 1, 2015, and elects (with spousal 

consent) an immediate single-sum 

distribution. Participant B’s opening 

hypothetical account balance (increased by 

attributable interest) on January 1, 2015, is 

$45,000. The present value, on January 1, 

2015, of Participant B’s benefit of $1,000 per 

month, commencing immediately using the 

actuarial factors for mandatory cashouts 

under the terms of the plan on December 31, 

2011, would result in a single-sum payment 

of $44,750. Participant B is paid a single-sum 

distribution equal to the sum of $45,000 plus 

an amount equal to B’s January 1, 2015, 

hypothetical account balance for benefit 

accruals for service after January 1, 2012. 

(ii) Conclusion. Because, under Plan E, 

Participant B is entitled to the sum of— 

(A) The greater of the $45,000 opening 

hypothetical account balance (increased by 

attributable interest credits) and $44,750 

(present value of the benefit with respect to 

service prior to January 1, 2012, using the 

actuarial factors for mandatory cashout 

distributions under the terms of the plan on 

December 31, 2011); and 

(B) An amount equal to B’s hypothetical 

account balance for benefit accruals for 

service after January 1, 2012, the benefit 

satisfies the requirements of paragraph 

(c)(3)(ii)(A) of this section with respect to 

Participant B. If Participant B’s hypothetical 

account balance under Plan E was instead 

less than $44,750 on January 1, 2015, 

Participant B would be entitled to a singlesum payment equal to the sum of $44,750 

and an amount equal to B’s hypothetical 

account balance for benefit accruals for 

service after January 1, 2012. 

Example 6. (i) Facts involving addition of 

new annuity optional form of benefit. The 

facts are the same as in Example 2, except 

that, after December 31, 2011, and before 

January 1, 2015, Plan E is amended to offer 

payment in a 5-, 10-, or 15-year term certain 

and life annuity, using the same actuarial 

assumptions that apply for other optional 

forms of distribution. When Participant A has 

a severance from employment on January 1, 

2015, A elects (with spousal consent) a 5-year 

term certain and life annuity commencing 

immediately equal to $935 per month. 

Application of the same actuarial 

assumptions to Participant A’s benefit of 

$1,000 per month (under Plan E as in effect 

on December 31, 2011), commencing 

immediately on January 1, 2015, would result 

in a 5-year term certain and life annuity 

commencing immediately equal to $955 per 

month. Under the terms of Plan E, the benefit 

attributable to A’s opening account balance is 

increased so that, using the conversion 

factors under the plan (as amended) on 

January 1, 2015, A’s opening hypothetical 

account balance (increased by attributable 

interest credits) produces a 5-year term 

certain and life annuity commencing 

immediately equal to $955 per month 

commencing on January 1, 2015. This benefit 

is in addition to the benefit determined using 

the January 1, 2015, hypothetical account 

balance for service after January 1, 2012. 

(ii) Conclusion. This benefit satisfies the 

requirements of paragraph (c)(3)(ii)(A) of this 

section with respect to Participant A. 

Example 7. (i) Facts involving addition of 

distribution option before age 55. The facts 

are the same as in Example 5, except that 

Participant B (age 43) elects (with spousal 

consent) a straight life annuity commencing 

immediately on January 1, 2015. Under Plan 

E, the straight life annuity attributable to 

Participant B’s opening hypothetical account 

balance at age 43 is $221 per month. 

Application of the same actuarial 

assumptions to Participant B’s benefit of 

$1,000 per month commencing at age 65 

(under Plan E as in effect on December 31, 

2011) would result in a straight life annuity 

commencing immediately on January 1, 

2015, equal to $219 per month. 

(ii) Conclusion. Because, under its terms, 

Plan E provides that Participant B is entitled 

to an amount not less than the present value 

(using the same actuarial assumptions as 

apply on January 1, 2015, in converting the 

$45,000 hypothetical account balance 

attributable to the opening hypothetical 

account balance to the $221 straight life 

annuity) of Participant B’s straight life 

annuity of $1,000 per month commencing at 

age 65, and the $221 straight life annuity is 

in addition to the benefit accruals for service 

after January 1, 2012, payment of the $221 

monthly annuity would satisfy the 

requirements of paragraph (c)(3)(ii)(A) of this 

section with respect to Participant B. 

(d) Market rate of return—(1) In 

general—(i) Basic test. Subject to the 

rules of paragraph (e) of this section, a 

statutory hybrid plan satisfies the 

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

this paragraph (d) only if, for any plan 

year, the interest crediting rate with 

respect to benefits determined under a 

statutory hybrid benefit formula is not 

greater than a market rate of return. 

(ii) Definitions relating to market rate 

of return—(A) Interest credit. Subject to 

other rules in this paragraph (d), an 

interest credit for purposes of this 

paragraph (d) and section 411(b)(5)(B) 

means the following adjustments to a 

participant’s accumulated benefit under 

a statutory hybrid benefit formula, to the 

extent not conditioned on current 


emcdonald on DSK2BSOYB1PROD with RULES
64144 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

service and not made on account of 

imputed service (as defined in 

§ 1.401(a)(4)–11(d)(3)(ii)(B))— 

(1) Any increase or decrease for a 

period, under the terms of the plan at 

the beginning of the period, that is 

calculated by applying a rate of interest 

or rate of return (including a rate of 

increase or decrease under an index) to 

the participant’s accumulated benefit (or 

a portion thereof) as of the beginning of 

the period; and 

(2) Any other increase for a period, 

under the terms of the plan at the 

beginning of the period. 

(B) Treatment of plan amendments. 

An increase to a participant’s 

accumulated benefit is not treated as an 

interest credit to the extent the increase 

is made as a result of a plan amendment 

providing for a one-time adjustment to 

the participant’s accumulated benefit. 

However, a pattern of repeated plan 

amendments each of which provides for 

a one-time adjustment to a participant’s 

accumulated benefit will cause such 

adjustments to be treated as provided on 

a permanent basis under the terms of 

the plan. See § 1.411(d)–4, A–1(c)(1). 

(C) Interest crediting rate. Except as 

otherwise provided in this paragraph 

(d), the interest crediting rate, or 

effective rate of return, for a period with 

respect to a participant equals the total 

amount of interest credits for the period 

divided by the participant’s 

accumulated benefit at the beginning of 

the period. 

(D) Principal credit. For purposes of 

this paragraph (d), a principal credit 

means any increase to a participant’s 

accumulated benefit under a statutory 

hybrid benefit formula that is not an 

interest credit. Thus, for example, a 

principal credit includes an increase to 

a participant’s accumulated benefit to 

the extent the increase is conditioned on 

current service or made on account of 

imputed service. As a result, a principal 

credit includes an increase to the value 

of an accumulated percentage of the 

participant’s final average 

compensation. For indexed benefits 

described in paragraph (b)(2) of this 

section, a principal credit includes an 

increase to the participant’s accrued 

benefit other than an increase provided 

by indexing. In addition, pursuant to the 

rule in paragraph (d)(1)(ii)(B) of this 

section, a principal credit generally 

includes an increase to a participant’s 

accumulated benefit to the extent the 

increase is made as a result of a plan 

amendment providing for a one-time 

adjustment to the participant’s 

accumulated benefit. As a result, a 

principal credit includes an opening 

hypothetical account balance or opening 

accumulated percentage of the 

participant’s final average 

compensation, as described in 

paragraph (c)(3) of this section. 

(iii) Market rate of return for single 

rates. Except as is otherwise provided in 

this paragraph (d)(1), an interest 

crediting rate is not in excess of a 

market rate of return only if the plan 

terms provide that the interest credit for 

each plan year is determined using one 

of the following specified interest 

crediting rates: 

(A) The interest rate on long-term 

investment grade corporate bonds (as 

described in paragraph (d)(3) of this 

section). 

(B) An interest rate that, under 

paragraph (d)(4) of this section, is 

deemed to be not in excess of the 

interest rate described in paragraph 

(d)(3) of this section. 

(C) A rate of return that, under 

paragraph (d)(5) of this section, is not in 

excess of a market rate of return. 

(iv) Timing and other rules related to 

interest crediting rate—(A) In general. A 

plan that provides interest credits must 

specify how the plan determines 

interest credits and must specify how 

and when interest credits are credited. 

The plan must specify the method for 

determining interest credits in 

accordance with the requirements of 

paragraph (d)(1)(iv)(B) of this section, 

the frequency of interest crediting in 

accordance with the requirements of 

paragraph (d)(1)(iv)(C) of this section, 

and the treatment of interest credits on 

distributed amounts, as well as other 

debits and credits during the period, in 

accordance with the rules of paragraph 

(d)(1)(iv)(D) of this section. See 

paragraph (e) of this section for 

additional rules that apply to changes in 

the interest crediting rate. 

(B) Methods to determine interest 

credits. A plan that is using any 

specified interest crediting rate can 

determine interest credits for each 

current interest crediting period based 

on the effective periodic interest 

crediting rate that applies over the 

period. Alternatively, a plan that is 

using one of the interest crediting rates 

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

this section can determine interest 

credits for a stability period based on 

the interest crediting rate for a specified 

lookback month with respect to that 

stability period. For purposes of the 

preceding sentence, the stability period 

and lookback month must satisfy the 

rules for selecting the stability period 

and lookback month under § 1.417(e)– 

1(d)(4), although the interest crediting 

rate can be any one of the rates in 

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

and the stability period and lookback 

month need not be the same as those 

used under the plan for purposes of 

section 417(e)(3). 

(C) Frequency of interest crediting. 

Interest credits under a plan must be 

provided on an annual or more frequent 

periodic basis and interest credits for 

each interest crediting period must be 

credited as of the end of the period. If 

a plan provides for the crediting of 

interest more frequently than annually 

(for example, daily, monthly or 

quarterly) based on one of the annual 

interest rates described in paragraph 

(d)(3) or (d)(4) of this section, then the 

plan generally provides an above market 

rate of return unless each periodic 

interest credit is determined using an 

interest crediting rate that is no greater 

than a pro rata portion of the applicable 

annual interest crediting rate. However, 

a plan that credits interest daily based 

on one of the annual interest rates 

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

this section is not treated as providing 

an above market rate of return merely 

because the plan determines each daily 

interest credit using a daily interest 

crediting rate that is 1/360 of the 

applicable annual interest crediting rate. 

In addition, interest credits determined, 

under the terms of a plan, based on one 

of the annual interest rates described in 

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

are not treated as creating an effective 

rate of return that is in excess of a 

market rate of return merely because an 

otherwise permissible interest crediting 

rate for a plan year is compounded more 

frequently than annually. Thus, for 

example, if a plan’s terms provide for 

interest to be credited monthly and for 

the interest crediting rate to be equal to 

the interest rate on long-term 

investment grade corporate bonds (as 

described in paragraph (d)(3) of this 

section) and the applicable annual rate 

on these bonds for the plan year is 6 

percent, then the accumulated benefit at 

the beginning of each month could be 

increased as a result of interest credits 

by as much as 0.5 percent per month 

during the plan year without resulting 

in an interest crediting rate that is in 

excess of a market rate of return. 

(D) Debits and credits during the 

interest crediting period. [Reserved]. 

(v) Lesser rates. An interest crediting 

rate is not in excess of a market rate of 

return if the rate can never be in excess 

of a particular rate that is described in 

paragraph (d)(1)(iii) of this section. 

Thus, for example, an interest crediting 

rate that always equals the rate 

described in paragraph (d)(3) of this 

section minus 200 basis points is not in 

excess of a market rate of return because 

it can never be in excess of the rate 

described in paragraph (d)(3) of this 

section. Similarly, an interest crediting 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64145 

rate that always equals the lesser of the 

yield on 30-year Treasury bonds and a 

fixed 6 percent interest rate is not in 

excess of a market rate of return because 

it can never be in excess of the yield on 

30-year Treasury bonds. 

(vi) Greater-of rates. If a statutory 

hybrid plan determines an interest 

credit by applying the greater of 2 or 

more different rates to the accumulated 

benefit, the effective interest crediting 

rate is not in excess of a market rate of 

return only if each of the different rates 

would separately satisfy the 

requirements of this paragraph (d) and 

the requirements of paragraph (d)(6) of 

this section are also satisfied. 

(vii) Blended rates. A statutory hybrid 

plan does not provide an effective 

interest crediting rate that is in excess 

of a market rate of return merely 

because the plan determines an interest 

credit by applying different rates to 

different predetermined portions of the 

accumulated benefit, provided each rate 

would separately satisfy the 

requirements of this paragraph (d) if the 

rate applied to the entire accumulated 

benefit. 

(2) Preservation of capital 

requirement—(i) General rule. A 

statutory hybrid plan satisfies the 

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

only if the plan provides that the 

participant’s benefit under the statutory 

hybrid benefit formula determined as of 

the participant’s annuity starting date is 

no less than the benefit based on the 

sum of all principal credits (as 

described in paragraph (d)(1)(ii)(D) of 

this section) credited under the plan to 

the participant as of that date (including 

principal credits that were credited 

before the applicable statutory effective 

date of paragraph (f)(1) of this section). 

(ii) Application to multiple annuity 

starting dates. [Reserved]. 

(iii) Exception for variable annuity 

benefit formulas. See paragraph 

(b)(2)(iii)(B) of this section for an 

exception to this paragraph (d)(2). 

(3) Long-term investment grade 

corporate bonds. For purposes of this 

paragraph (d), the rate of interest on 

long-term investment grade corporate 

bonds means the third segment rate 

described in section 417(e)(3)(D) or 

430(h)(2)(C)(iii) (determined with or 

without regard to the transition rules of 

section 417(e)(3)(D)(ii) or 430(h)(2)(G)). 

However, for plan years beginning prior 

to January 1, 2008, the rate of interest 

on long-term investment grade corporate 

bonds means the rate described in 

section 412(b)(5)(B)(ii)(II) prior to 

amendment by the Pension Protection 

Act of 2006, Public Law 109–280 (120 

Stat. 780) (PPA ’06). 

(4) Safe harbor rates of interest—(i) In 

general. This paragraph (d)(4) identifies 

interest rates that are deemed to be not 

in excess of the interest rate described 

in paragraph (d)(3) of this section. The 

Commissioner may, in guidance of 

general applicability, specify additional 

interest crediting rates that are deemed 

to be not in excess of the rate described 

in paragraph (d)(3) of this section. See 

§ 601.601(d)(2)(ii)(b). 

(ii) Rates based on bonds with 

margins—(A) In general. An interest 

crediting rate is deemed to be not in 

excess of the interest rate described in 

paragraph (d)(3) of this section if the 

rate is equal to the sum of any of the 

following rates of interest for bonds and 

the associated margin for that interest 

rate: 

Interest rate bond index Associated margin 

The discount rate on 3-month Treasury Bills .............................................................................................................................. 175 basis points. 

The discount rate on 12-month or shorter Treasury Bills ............................................................................................................ 150 basis points. 

The yield on 1-year Treasury Constant Maturities ...................................................................................................................... 100 basis points. 

The yield on 3-year or shorter Treasury bonds ........................................................................................................................... 50 basis points. 

The yield on 7-year or shorter Treasury bonds ........................................................................................................................... 25 basis points. 

The yield on 30-year or shorter Treasury bonds ......................................................................................................................... 0 basis points. 

The first segment rate .................................................................................................................................................................. 0 basis points. 

The second segment rate ............................................................................................................................................................ 0 basis points. 

(B) Rule of application. For purposes 

of this paragraph (d)(4), the first and 

second segment rates mean the first and 

second segment rates described in 

section 417(e)(3)(D) or 430(h)(2)(C), 

determined with or without regard to 

the transition rules of section 

417(e)(3)(D)(ii) or 430(h)(2)(G). 

(iii) Eligible cost-of-living indices. An 

interest crediting rate is deemed to be 

not in excess of the interest rate 

described in paragraph (d)(3) of this 

section if the rate is adjusted no less 

frequently than annually and is equal to 

the rate of increase with respect to an 

eligible cost-of-living index described in 

§ 1.401(a)(9)–6, A–14(b), except that, for 

purposes of this paragraph (d)(4)(iii), the 

eligible cost-of-living index described in 

§ 1.401(a)(9)–6, A–14(b)(2) is increased 

by 300 basis points. 

(iv) Fixed rate of interest. [Reserved]. 

(5) Other rates of return—(i) General 

rule. This paragraph (d)(5) sets forth 

additional methods for determining an 

interest crediting rate that is not in 

excess of a market rate of return. 

(ii) Actual rate of return on plan 

assets. In the case of indexed benefits 

described in paragraph (b)(2) of this 

section, 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. 

(iii) Annuity contract rates. The rate 

of return on the annuity contract for the 

employee issued by an insurance 

company licensed under the laws of a 

State is not in excess of a market rate of 

return. However, this paragraph 

(d)(5)(iii) does not apply if the 

Commissioner determines that the 

annuity contract has been structured to 

provide an interest crediting rate that is 

in excess of a market rate of return. 

(iv) Rate of return on certain RICs. 

[Reserved]. 

(6) Combinations of rates of return— 

(i) In general. A plan that determines 

interest credits based, in whole or in 

part, on the greater of two or more 

different interest crediting rates 

provides an effective interest crediting 

rate in excess of a market rate of return 

unless the combination of rates is 

described in paragraph (d)(6)(ii), 

(d)(6)(iii), (e)(3)(iii), or (e)(4) of this 

section. However, a plan is not treated 

as providing the greater of two or more 

interest crediting rates merely because 

the plan satisfies the requirements of 

paragraph (d)(2) of this section. In 

addition, a plan is not treated as 

providing the greater of two or more 

interest crediting rates merely because a 


emcdonald on DSK2BSOYB1PROD with RULES
64146 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 

rate of return described in paragraph 

(d)(5)(iii) of this section is itself based 

on the greater of two or more rates. 

(ii) Annual or more frequent floor 

applied to bond-based rates. [Reserved]. 

(iii) Cumulative floor applied to 

equity-based or bond-based rates. 

[Reserved]. 

(e) Other rules regarding market rates 

of return—(1) In general. This paragraph 

(e) sets forth additional rules regarding 

the application of the market rate of 

return requirement with respect to 

benefits determined under a statutory 

hybrid benefit formula. 

(2) Plan termination. [Reserved]. 

(3) Rules relating to section 

411(d)(6)—(i) General rule. The right to 

interest credits in the future that are not 

conditioned on future service 

constitutes a section 411(d)(6) protected 

benefit (as defined in § 1.411(d)– 

3(g)(14)). Thus, to the extent that 

benefits have accrued under the terms of 

a statutory hybrid plan that entitle the 

participant to future interest credits, an 

amendment to the plan to change the 

interest crediting rate must satisfy 

section 411(d)(6) if the revised rate 

under any circumstances could result in 

interest credits that are smaller as of any 

date after the applicable amendment 

date (within the meaning of § 1.411(d)– 

3(g)(4)) than the interest credits that 

would be provided without regard to the 

amendment. For additional rules, see 

§ 1.411(d)–3(b). Paragraphs (e)(3)(ii) and 

(e)(3)(iii) of this section set forth special 

rules that apply regarding the 

interaction of section 411(d)(6) and 

changes to a plan’s interest crediting 

rate. The Commissioner may, in 

guidance of general applicability, 

prescribe additional rules regarding the 

interaction of section 411(d)(6) and 

section 411(b)(5), including changes to a 

plan’s interest crediting rate. See 

§ 601.601(d)(2)(ii)(b). 

(ii) Adoption of long-term investment 

grade corporate bond rate. For purposes 

of applying section 411(d)(6) and this 

paragraph (e) to an amendment to 

change to the interest crediting rate 

described in paragraph (d)(3) of this 

section, a plan is not treated as 

providing interest credits that are 

smaller as of any date after the 

applicable amendment date than the 

interest credits that would be provided 

using an interest crediting rate 

described in paragraph (d)(4) of this 

section merely because the plan credits 

interest after the applicable amendment 

date using the interest crediting rate 

described in paragraph (d)(3) of this 

section, provided— 

(A) The amendment only applies to 

interest credits to be credited after the 

effective date of the amendment; 

(B) The effective date of the 

amendment is at least 30 days after 

adoption of the amendment; and 

(C) 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. 

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

and market rate of return limitation. 

[Reserved]. 

(4) Actuarial increases after normal 

retirement age. [Reserved]. 

(f) Effective/applicability date—(1) 

Statutory effective/applicability dates— 

(i) In general. Except as provided in 

paragraph (f)(1)(iii) of this section, 

section 411(b)(5) applies for periods 

beginning on or after June 29, 2005. 

(ii) Conversion amendments. The 

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

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

apply to a conversion amendment (as 

defined in paragraph (c)(4) of this 

section) that both is adopted on or after 

June 29, 2005, and takes effect on or 

after June 29, 2005. 

(iii) Market rate of return—(A) Plans 

in existence on June 29, 2005—(1) In 

general. In the case of a plan that was 

in existence on June 29, 2005 (regardless 

of whether the plan was a statutory 

hybrid plan on that date), section 

411(b)(5)(B)(i) applies to plan years that 

begin on or after January 1, 2008. 

(2) Exception for plan sponsor 

election. Notwithstanding paragraph 

(f)(1)(iii)(A)(1) of this section, a plan 

sponsor of a plan that was in existence 

on June 29, 2005 (regardless of whether 

the plan was a statutory hybrid plan on 

that date) may elect to have the 

requirements of section 411(a)(13)(B) 

and section 411(b)(5)(B)(i) apply for any 

period on or after June 29, 2005, and 

before the first plan year beginning after 

December 31, 2007. In accordance with 

section 1107 of the PPA ’06, an 

employer is permitted to adopt an 

amendment to make this election as late 

as the last day of the first plan year that 

begins on or after January 1, 2009 

(January 1, 2011, in the case of a 

governmental plan as defined in section 

414(d)) if the plan operates in 

accordance with the election. 

(B) Plans not in existence on June 29, 

2005. In the case of a plan not in 

existence on June 29, 2005, section 

411(b)(5)(B)(i) applies to the plan on 

and after the later of June 29, 2005, and 

the date the plan becomes a statutory 

hybrid plan. 

(iv) Collectively bargained plans—(A) 

In general. Notwithstanding paragraph 

(f)(1)(iii) of this section, in the case of 

a collectively bargained plan 

maintained pursuant to one or more 

collective bargaining agreements 

between employee representatives and 

one or more employers ratified on or 

before August 17, 2006, the 

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

do not apply to plan years that begin 

before the earlier of— 

(1) The later of— 

(i) The date on which the last of those 

collective bargaining agreements 

terminates (determined without regard 

to any extension thereof on or after 

August 17, 2006); or 

(ii) January 1, 2008; or 

(2) January 1, 2010. 

(B) Treatment of plans with both 

collectively bargained and noncollectively bargained employees. In the 

case of a plan with respect to which a 

collective bargaining agreement applies 

to some, but not all, of the plan 

participants, the plan is considered a 

collectively bargained plan for purposes 

of this paragraph (f)(1)(iv) if it is 

considered a collectively bargained plan 

under the rules of § 1.436–1(a)(5)(ii)(B). 

(2) Effective/applicability date of 

regulations—(i) In general—(A) General 

effective date. Except as provided in 

paragraph (f)(2)(i)(B) of this section, this 

section applies to plan years that begin 

on or after January 1, 2011. 

(B) Special effective date. Paragraphs 

(d)(1)(iii), (d)(1)(vi), and (d)(6)(i) of this 

section apply to plan years that begin on 

or after January 1, 2012. 

(ii) Conversion amendments. With 

respect to a conversion amendment 

(within the meaning of paragraph (c)(4) 

of this section), where the effective date 

of the conversion amendment (as 

defined in paragraph (c)(4)(vi) of this 

section) is on or after the statutory 

effective date set forth in paragraph 

(f)(1)(ii) of this section, the requirements 

of paragraph (c)(2) of this section apply 

only to a participant who has an hour 

of service on or after the regulatory 

effective date set forth in paragraph 

(f)(2)(i) of this section. 

(iii) Reliance before regulatory 

effective date. For the periods after the 

statutory effective date set forth in 

paragraph (f)(1) of this section and 

before the regulatory effective date set 

forth in paragraph (f)(2)(i) of this 

section, the safe harbor and other relief 

of section 411(b)(5) applies and the 

market rate of return and other 

requirements of section 411(b)(5) must 

be satisfied. During these periods, a plan 

is permitted to rely on the provisions of 

this section for purposes of applying the 


emcdonald on DSK2BSOYB1PROD with RULES
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Rules and Regulations 64147 

relief and satisfying the requirements of 

section 411(b)(5). 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: September 17, 2010. 

Michael F. Mundaca, 

Assistant Secretary of the Treasury for Tax 

Policy. 

[FR Doc. 2010–25941 Filed 10–18–10; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Office of the Secretary 

31 CFR Part 1 

Privacy Act; Implementation 

AGENCY: Office of the Secretary, 

Treasury. 

ACTION: Final rule. 

SUMMARY: The Department of the 

Treasury is adopting, without change, 

an interim rule that amended its 

regulations on the Privacy Act of 1974, 

as Amended, by removing three Privacy 

Act systems of records from this part, 

revising the title of the one remaining 

Privacy Act system of records relating to 

the functions of the Alcohol and 

Tobacco Tax and Trade Bureau, and 

retaining the Privacy Act exemptions for 

TTB’s one remaining system of records. 

DATES: Effective Date: October 19, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Karen Welch, Regulations and Rulings 

Division, Alcohol and Tobacco Tax and 

Trade Bureau (202–453–2046) or 

Karen.Welch@ttb.gov. 

SUPPLEMENTARY INFORMATION: Effective 

January 24, 2003, the Homeland 

Security Act of 2002 divided the Bureau 

of Alcohol, Tobacco and Firearms (ATF) 

into two new Agencies, the Alcohol and 

Tobacco Tax and Trade Bureau (TTB) 

and the Bureau of Alcohol, Tobacco, 

Firearms and Explosives (ATFE) in the 

Department of Justice. ATFE oversees 

Federal firearms, explosives, and arson 

laws and programs, and administers 

laws pertaining to alcohol and tobacco 

smuggling and diversion. TTB is 

responsible for administering chapters 

51 (relating to distilled spirits, wine, 

and beer) and 52 (relating to tobacco 

products and cigarette papers and tubes) 

of title 26 U.S.C., the Internal Revenue 

Code of 1986, as amended (IRC). TTB 

also administers sections 4181 and 4182 

(relating to the excise tax on firearms 

and ammunition) of the IRC and title 27 

of the U.S.C. (relating to alcohol). 

After the organizational change, TTB 

conducted a review of its records to 

determine which records are Privacy 

Act systems of records. The review 

determined that one of the six ATF 

systems of records still existed within 

TTB, and five of ATF’s six systems of 

records could be removed from the 

Department of the Treasury’s Privacy 

Act systems of records inventory. As a 

result of this review, on September 2, 

2008, the Department of the Treasury 

published in the Federal Register at 73 

FR 51344 a notice of systems of records 

for the one system currently in TTB’s 

inventory, ‘‘Treasury/TTB .001– 

Regulatory Enforcement Record 

System.’’ 

The changes in organization and in 

TTB’s inventory of systems of records 

also required changes to the Department 

of the Treasury’s regulations in 31 CFR 

part 1. On September 2, 2008, the 

Department of the Treasury published 

in the Federal Register (73 FR 51218) an 

interim rule amending 31 CFR 1.20 and 

1.36 by revising the title of the Bureau 

from ‘‘Bureau of Alcohol, Tobacco and 

Firearms’’ to ‘‘Alcohol and Tobacco Tax 

and Trade Bureau,’’ by removing three 

Privacy Act systems of records from the 

31 CFR 1.36, by renaming the one 

remaining system of records, and by 

retaining the prior exemption from 

certain provisions of the Privacy Act 

pursuant to 5 U.S.C. 552a(k)(2) for the 

one remaining, renamed system of 

records. 

The interim rule also invited the 

submission of public comments on the 

regulatory amendments, prior to the 

comment period closing on October 2, 

2008. The Department did not receive 

any comments on the interim rule. 

Accordingly, we have determined that it 

is appropriate to adopt that interim rule 

as a final rule without change. 

In accordance with Executive Order 

12866, it has been determined that this 

final rule is not a ‘‘significant regulatory 

action’’ and, therefore, does not require 

a Regulatory Impact Analysis. The 

regulation will not have a substantial 

direct effect on the States, on the 

relationship between the national 

Government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Therefore, it has 

been determined that this final rule does 

not have federalism implications under 

Executive Order 13132. 

Because no notice of proposed 

rulemaking is required, the provisions 

of the Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) do not apply. 

List of Subjects in 31 CFR Part 1 

Freedom of Information; Privacy. 

The Regulatory Amendment 

■ For the reasons discussed in the 

preamble, the interim rule amending 31 

CFR part 1, published in the Federal 

Register at 73 FR 51218 on September 

2, 2008, is adopted as a final rule 

without change. 

Dated: September 28, 2010. 

Melissa Hartman, 

Deputy Assistant Secretary for Privacy, 

Transparency, and Records. 

[FR Doc. 2010–26326 Filed 10–18–10; 8:45 am] 

BILLING CODE 4810–31–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 165 

[Docket No. USCG–2010–0950] 

Safety Zone, Brandon Road Lock and 

Dam to Lake Michigan Including Des 

Plaines River, Chicago Sanitary and 

Ship Canal, Chicago River, and 

Calumet-Saganashkee Channel, 

Chicago, IL 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of enforcement of 

regulation. 

SUMMARY: The Coast Guard will enforce 

a segment of the Safety Zone; Brandon 

Road Lock and Dam to Lake Michigan 

including Des Plaines River, Chicago 

Ship and Sanitary Canal, Chicago River, 

Calumet-Saganashkee Channel on all 

waters of the Chicago Sanitary and Ship 

Canal between Mile Marker 291.0 and 

Mile Marker 296.1 from 4 p.m. on 

October 19, 2010 to 12 p.m. on October 

20, 2010 and from 4 p.m. on October 20, 

2010 to 10 a.m. on October 21, 2010. 

This action is necessary to protect the 

waterways, waterway users, and vessels 

from hazards associated with intensive 

fish sampling efforts in the Lockport 

pool to be conducted by the Illinois 

Department of Natural Resources 

(IDNR). These sampling efforts will 

include the setting of nets throughout 

this portion of the Chicago Sanitary and 

Ship Canal. The purpose of this 

sampling is to provide essential 

information in connection with efforts 

to control the spread of aquatic nuisance 

species that might devastate the waters 

of the Chicago Sanitary and Ship Canal. 

During the enforcement period, entry 

into, transiting, mooring, laying-up or 

anchoring within the enforced area of 

this safety zone by any person or vessel 

is prohibited unless authorized by the 

Captain of the Port, Sector Lake 


emcdonald on DSK2BSOYB1PROD with RULES