[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Proposed Rules]
[Pages 64197-64216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25942]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-132554-08]
RIN 1545-BI16


Additional Rules Regarding Hybrid Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
relating to certain provisions of the Internal Revenue Code (Code) that 
apply to hybrid defined benefit pension plans. These regulations would 
provide guidance on changes made by the Pension Protection Act of 2006, 
as amended by the Worker, Retiree, and Employer Recovery Act of 2008. 
These regulations would affect sponsors, administrators, participants, 
and beneficiaries of hybrid defined benefit pension plans. This 
document also provides a notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by Wednesday, 
January 12, 2011. Outlines of topics to be discussed at the public 
hearing scheduled for Wednesday, January 26, 2011, at 10 a.m. must be 
received by Friday, January 14, 2011.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-132554-08), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
132554-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-132554-08). 
The public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Neil S. 
Sandhu, Lauson C. Green, or Linda S.F. Marshall at (202) 622-6090; 
concerning submissions of comments, the hearing, and/or being placed on 
the building access list to attend the hearing, Regina Johnson, at 
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under sections 411(a)(13), 411(b)(1), and 
411(b)(5) of the Code. Generally, a defined benefit pension plan must 
satisfy the minimum vesting standards of section 411(a) and the accrual 
requirements of section 411(b) in order to be qualified under section 
401(a) of the Code. Sections 411(a)(13) and 411(b)(5), which modify the 
minimum vesting standards of section 411(a) and the accrual 
requirements of section 411(b), were added to the Code by section 
701(b) of the Pension Protection Act of 2006, Public Law 109-280 (120 
Stat. 780 (2006)) (PPA '06). Sections 411(a)(13) and 411(b)(5), as well 
as certain effective date provisions related to these sections, were 
subsequently amended by the Worker, Retiree, and Employer Recovery Act 
of 2008, Public Law 110-458 (122 Stat. 5092 (2008)) (WRERA '08).
    Section 411(a)(13)(A) provides that an applicable defined benefit 
plan (which is defined in section 411(a)(13)(C)) is not treated as 
failing to meet either (i) the requirements of section 411(a)(2) 
(subject to a special vesting rule in section 411(a)(13)(B) with 
respect to benefits derived from employer contributions) or (ii) the 
requirements of section 411(a)(11), 411(c), or 417(e), with respect to 
accrued benefits derived from employer contributions, merely because 
the present value of the accrued benefit (or any portion thereof) of 
any participant is, under the terms of the plan, equal to the amount 
expressed as the balance of a hypothetical account or as an accumulated 
percentage of the participant's final average compensation. Section 
411(a)(13)(B) requires an applicable defined benefit plan to provide 
that an employee who has completed at least 3 years of service has a 
nonforfeitable right to 100 percent of the employee's accrued benefit 
derived from employer contributions.
    Under section 411(a)(13)(C)(i), an applicable defined benefit plan 
is defined as a defined benefit plan under which the accrued benefit 
(or any portion thereof) of a participant is calculated as the balance 
of a hypothetical account maintained for the participant or as an 
accumulated percentage of the participant's final average compensation. 
Under section 411(a)(13)(C)(ii), the Secretary of the Treasury is to 
issue regulations which include in the definition of an applicable 
defined benefit plan any defined benefit plan (or portion of such a 
plan) which has an effect similar to a plan described in section 
411(a)(13)(C)(i).
    Section 411(a) requires that a defined benefit plan satisfy the 
requirements of section 411(b)(1). Section 411(b)(1) provides that a 
defined benefit plan must satisfy one of the three accrual rules of 
section 411(b)(1)(A), (B), and (C) with respect to benefits accruing 
under the plan. The three accrual rules are the 3 percent method of 
section 411(b)(1)(A), the 133\1/3\ percent rule of section 
411(b)(1)(B), and the fractional rule of section 411(b)(1)(C).
    Section 411(b)(1)(B) provides that a defined benefit plan satisfies 
the requirements of the 133\1/3\ percent rule for a particular plan 
year if, under the plan, the accrued benefit payable at the normal 
retirement age is equal to the normal retirement benefit, and the 
annual rate at which any individual who is or could be a participant 
can accrue the retirement benefits payable at normal retirement age 
under the plan

[[Page 64198]]

for any later plan year is not more than 133\1/3\ percent of the annual 
rate at which the individual can accrue benefits for any plan year 
beginning on or after such particular plan year and before such later 
plan year.
    For purposes of applying the 133\1/3\ percent rule, section 
411(b)(1)(B)(i) provides that any amendment to the plan which is in 
effect for the current year is treated as in effect for all other plan 
years. Section 411(b)(1)(B)(ii) provides that any change in an accrual 
rate which does not apply to any individual who is or could be a 
participant in the current plan year is disregarded. Section 
411(b)(1)(B)(iii) provides that the fact that benefits under the plan 
may be payable to certain participants before normal retirement age is 
disregarded. Section 411(b)(1)(B)(iv) provides that social security 
benefits and all other relevant factors used to compute benefits are 
treated as remaining constant as of the current plan year for all years 
after the current year.
    Section 411(b)(1)(H)(i) provides that a defined benefit plan fails 
to comply with section 411(b) if, under the plan, an employee's benefit 
accrual is ceased, or the rate of an employee's benefit accrual is 
reduced, because of the attainment of any age. Section 411(b)(5), which 
was added to the Code by section 701(b)(1) of PPA '06, provides 
additional rules related to section 411(b)(1)(H)(i). Section 
411(b)(5)(A) generally provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) if a participant's 
accrued benefit, as determined as of any date under the terms of the 
plan, would be equal to or greater than that of any similarly situated, 
younger individual who is or could be a participant. For this purpose, 
section 411(b)(5)(A)(iv) provides that the accrued benefit may, under 
the terms of the plan, be expressed as an annuity payable at normal 
retirement age, the balance of a hypothetical account, or the current 
value of the accumulated percentage of the employee's final average 
compensation. Section 411(b)(5)(G) provides that, for purposes of 
section 411(b)(5), any reference to the accrued benefit of a 
participant refers to the participant's benefit accrued to date.
    Section 411(b)(5)(B) imposes certain requirements on an applicable 
defined benefit plan in order for the plan to satisfy section 
411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is 
treated as failing to meet the requirements of section 411(b)(1)(H) if 
the terms of the plan provide for an interest credit (or an equivalent 
amount) for any plan year at a rate that is greater than a market rate 
of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as 
having an above-market rate merely because the plan provides for a 
reasonable minimum guaranteed rate of return or for a rate of return 
that is equal to the greater of a fixed or variable rate of return. 
Section 411(b)(5)(B)(i)(II) provides that an applicable defined benefit 
plan is treated as failing to meet the requirements of section 
411(b)(1)(H) unless the plan provides that an interest credit (or an 
equivalent amount) of less than zero can in no event result in the 
account balance or similar amount being less than the aggregate amount 
of contributions credited to the account. Section 411(b)(5)(B)(i)(III) 
authorizes the Secretary of the Treasury to provide by regulation for 
rules governing the calculation of a market rate of return for purposes 
of section 411(b)(5)(B)(i)(I) and for permissible methods of crediting 
interest to the account (including fixed or variable interest rates) 
resulting in effective rates of return meeting the requirements of 
section 411(b)(5)(B)(i)(I).
    Sections 411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) 
contain additional requirements that apply if, after June 29, 2005, an 
applicable plan amendment is adopted. Section 411(b)(5)(B)(v)(I) 
defines an applicable plan amendment as an amendment to a defined 
benefit plan which has the effect of converting the plan to an 
applicable defined benefit plan. Under section 411(b)(5)(B)(ii), if, 
after June 29, 2005, an applicable plan amendment is adopted, the plan 
is treated as failing to meet the requirements of section 411(b)(1)(H) 
unless the requirements of section 411(b)(5)(B)(iii) are met with 
respect to each individual who was a participant in the plan 
immediately before the adoption of the amendment. Section 
411(b)(5)(B)(iii) specifies that, subject to section 411(b)(5)(B)(iv), 
the requirements of section 411(b)(5)(B)(iii) are met with respect to 
any participant if the accrued benefit of the participant under the 
terms of the plan as in effect after the amendment is not less than the 
sum of: (I) the participant's accrued benefit for years of service 
before the effective date of the amendment, determined under the terms 
of the plan as in effect before the amendment; plus (II) the 
participant's accrued benefit for years of service after the effective 
date of the amendment, determined under the terms of the plan as in 
effect after the amendment. Section 411(b)(5)(B)(iv) provides that, for 
purposes of section 411(b)(5)(B)(iii)(I), the plan must credit the 
participant's account or similar amount with the amount of any early 
retirement benefit or retirement-type subsidy for the plan year in 
which the participant retires if, as of such time, the participant has 
met the age, years of service, and other requirements under the plan 
for entitlement to such benefit or subsidy.
    Section 411(b)(5)(B)(v) sets forth certain provisions related to an 
applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if 
the benefits under two or more defined benefit plans of an employer are 
coordinated in such a manner as to have the effect of adoption of an 
applicable plan amendment, the plan sponsor is treated as having 
adopted an applicable plan amendment as of the date the coordination 
begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the 
Treasury to issue regulations to prevent the avoidance of the purposes 
of section 411(b)(5)(B) through the use of two or more plan amendments 
rather than a single amendment.
    Section 411(b)(5)(B)(vi) provides special rules for determining 
benefits upon termination of an applicable defined benefit plan. Under 
section 411(b)(5)(B)(vi)(I), an applicable defined benefit plan is not 
treated as satisfying the requirements of section 411(b)(5)(B)(i) 
(regarding permissible interest crediting rates) unless the plan 
provides that, upon plan termination, if the interest crediting rate 
under the plan is a variable rate, the rate of interest used to 
determine accrued benefits under the plan is equal to the average of 
the rates of interest used under the plan during the 5-year period 
ending on the termination date. In addition, under section 
411(b)(5)(B)(vi)(II), the plan must provide that, upon plan 
termination, the interest rate and mortality table used to determine 
the amount of any benefit under the plan payable in the form of an 
annuity payable at normal retirement age is the rate and table 
specified under the plan for this purpose as of the termination date, 
except that if the interest rate is a variable rate, the rate used is 
the average of the rates used under the plan during the 5-year period 
ending on the termination date.
    Section 411(b)(5)(C) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) solely because the 
plan provides offsets against benefits under the plan to the extent the 
offsets are otherwise allowable in applying the requirements of section 
401(a). Section 411(b)(5)(D) provides that a plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H) solely because 
the

[[Page 64199]]

plan provides a disparity in contributions or benefits with respect to 
which the requirements of section 401(l) (relating to permitted 
disparity for Social Security benefits and related matters) are met.
    Section 411(b)(5)(E) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H) solely because the 
plan provides for indexing of accrued benefits under the plan. Under 
section 411(b)(5)(E)(iii), indexing means the periodic adjustment of 
the accrued benefit by means of the application of a recognized 
investment index or methodology. Section 411(b)(5)(E)(ii) requires 
that, except in the case of a variable annuity, the indexing not result 
in a smaller benefit than the accrued benefit determined without regard 
to the indexing.
    Section 701(a) of PPA '06 added provisions to the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 
(1974)) (ERISA), that are parallel to sections 411(a)(13) and 411(b)(5) 
of the Code. The guidance provided in these regulations with respect to 
sections 411(a)(13) and 411(b)(5) of the Code would also apply for 
purposes of the parallel amendments to ERISA made by section 701(a) of 
PPA '06, and the guidance provided in these regulations with respect to 
section 411(b)(1) of the Code would also apply for purposes of section 
204(b)(1) of ERISA.\1\
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    \1\ Under 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.
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    Section 701(c) of PPA '06 added provisions to the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602 (1967)), that are parallel to section 411(b)(5) of the Code. 
Executive Order 12067 requires all Federal departments and agencies to 
advise and offer to consult with the Equal Employment Opportunity 
Commission (EEOC) during the development of any proposed rules, 
regulations, policies, procedures, or orders concerning equal 
employment opportunity. The Treasury Department and the IRS have 
consulted with the EEOC prior to the issuance of these regulations.
    Section 701(d) of PPA '06 provides that nothing in the amendments 
made by section 701 should be construed to create an inference 
concerning the treatment of applicable defined benefit plans or 
conversions of plans into applicable defined benefit plans under 
section 411(b)(1)(H), or concerning the determination of whether an 
applicable defined benefit plan fails to meet the requirements of 
section 411(a)(2), 411(c), or 417(e), as in effect before such 
amendments, solely because the present value of the accrued benefit (or 
any portion thereof) of any participant is, under the terms of the 
plan, equal to the amount expressed as the balance of a hypothetical 
account or as an accumulated percentage of the participant's final 
average compensation.
    Section 701(e) of PPA '06 sets forth the effective date provisions 
with respect to amendments made by section 701 of PPA '06. Section 
701(e)(1) specifies that the amendments made by section 701 generally 
apply to periods beginning on or after June 29, 2005. Thus, the age 
discrimination safe harbors under section 411(b)(5)(A) and section 
411(b)(5)(E) are effective for periods beginning on or after June 29, 
2005. Section 701(e)(2) provides that the special present value rules 
of section 411(a)(13)(A) are effective for distributions made after 
August 17, 2006 (the date PPA '06 was enacted).
    Under section 701(e) of PPA `06, the 3-year vesting rule under 
section 411(a)(13)(B) is generally effective for years beginning after 
December 31, 2007, for a plan in existence on June 29, 2005, while, 
pursuant to the amendments made by section 107(c) of WRERA '08, the 
rule is generally effective for plan years ending on or after June 29, 
2005, for a plan not in existence on June 29, 2005. The market rate of 
return limitation under section 411(b)(5)(B)(i) is generally effective 
for years beginning after December 31, 2007, for a plan in existence on 
June 29, 2005, while the limitation is generally effective for periods 
beginning on or after June 29, 2005, for a plan not in existence on 
June 29, 2005. Section 701(e)(4) of PPA '06 contains special effective 
date provisions for collectively bargained plans that modify these 
effective dates.
    Under section 701(e)(5) of PPA '06, as amended by WRERA '08, 
sections 411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion 
amendment that is adopted on or after, and takes effect on or after, 
June 29, 2005.
    Under section 701(e)(6) of PPA '06, as added by WRERA '08, the 3-
year vesting rule under section 411(a)(13)(B) does not apply to a 
participant who does not have an hour of service after the date the 3-
year vesting rule would otherwise be effective.
    Section 702 of PPA '06 provides for regulations to be prescribed by 
August 16, 2007, addressing the application of rules set forth in 
section 701 of PPA '06 where the conversion of a defined benefit 
pension plan into an applicable defined benefit plan is made with 
respect to a group of employees who become employees by reason of a 
merger, acquisition, or similar transaction.
    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to statutory provisions under PPA 
'06 (or pursuant to any regulation issued under PPA '06) until the last 
day of the first plan year beginning on or after January 1, 2009 
(January 1, 2011, in the case of governmental plans). As described in 
Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to 
both interim and discretionary amendments that are made pursuant to PPA 
'06 statutory provisions or any regulation issued under PPA `06. See 
Sec.  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 Sec. Sec.  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 retirement-type 
subsidy, or eliminating an optional form of benefit, with respect to 
benefits attributable to service before the amendment. However, an 
amendment that eliminates or decreases benefits that have not yet 
accrued does not violate section 411(d)(6), provided that the amendment 
is adopted and effective before the benefits accrue. If section 1107 of 
PPA '06 applies to an amendment of a plan, section 1107 provides that 
the plan does not fail to meet the requirements of section 411(d)(6) by 
reason of such amendment, except as provided by the Secretary of the 
Treasury.
    Section 1.411(b)-1(a)(1) of the Treasury Regulations provides that 
a defined benefit plan is not a qualified plan unless the method 
provided by the plan for determining accrued benefits satisfies at 
least one of the alternative methods in Sec.  1.411(b)-1(b) for 
determining accrued benefits with respect to all active participants 
under the plan. Section 1.411(b)-1(b)(2)(i) provides that a defined 
benefit plan satisfies the 133\1/3\ percent rule of section 
411(b)(1)(B) for a particular plan year if (A) under the plan the 
accrued benefit payable at the normal retirement age (determined under 
the plan) is equal to the normal retirement benefit (determined under 
the plan), and (B) the annual rate at which any individual who is or 
could be a participant can

[[Page 64200]]

accrue the retirement benefits payable at normal retirement age under 
the plan for any later plan year cannot be more than 133\1/3\ percent 
of the annual rate at which the participant can accrue benefits for any 
plan year beginning on or after such particular plan year and before 
such later plan year. Section 1.411(b)-1(b)(2)(ii)(A) through (D) sets 
forth a series of rules that correspond to the rules of section 
411(b)(1)(B)(i) through (iv). Section 1.411(b)-1(b)(2)(ii)(D) provides 
that, for purposes of the 133\1/3\ percent rule, for any plan year, 
social security benefits and all relevant factors used to compute 
benefits, e.g., consumer price index, are treated as remaining constant 
as of the beginning of the current plan year for all subsequent plan 
years.
    Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and 
411(b)(2) were published by the Treasury Department and the IRS in the 
Federal Register on April 11, 1988 (53 FR 11876), as part of a package 
of regulations that also included proposed regulations under sections 
410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age 
for participation, vesting, normal retirement age, and actuarial 
adjustments after normal retirement age, respectively).\2\
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    \2\ On 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 Sec.  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 Sec.  601.601(d)(2)(ii)(b), the Treasury 
Department and the IRS announced the withdrawal of the 2002 proposed 
regulations relating to age discrimination.
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    Notice 96-8 (1996-1 CB 359), see Sec.  601.601(d)(2)(ii)(b), 
described the application of sections 411 and 417(e)(3) to a single-sum 
distribution under a cash balance plan where interest credits under the 
plan are frontloaded (that is, where future interest credits to an 
employee's hypothetical account balance are not conditioned upon future 
service and thus accrue at the same time that the benefits attributable 
to a hypothetical allocation to the account accrue). Under the analysis 
set forth in Notice 96-8, in order to comply with sections 411(a) and 
417(e)(3) in calculating the amount of a single-sum distribution under 
a cash balance plan, the balance of an employee's hypothetical account 
must be projected to normal retirement age and converted to an annuity 
under the terms of the plan, and then the employee must be paid at 
least the present value of the projected annuity, determined in 
accordance with section 417(e). Under that analysis, where a cash 
balance plan provides frontloaded interest credits using an interest 
rate that is higher than the section 417(e) applicable interest rate, 
payment of a single-sum distribution equal to the current hypothetical 
account balance as a complete distribution of the employee's accrued 
benefit may result in a violation of the minimum present value 
requirements of section 417(e) or a forfeiture in violation of section 
411(a). In addition, Notice 96-8 proposed a safe harbor which provided 
that, if frontloaded interest credits are provided under a plan at a 
rate no greater than the sum of identified standard indices and 
associated margins, no violation of section 411(a) or 417(e) would 
result if the employee's entire accrued benefit were to be distributed 
in the form of a single-sum distribution equal to the employee's 
hypothetical account balance, provided the plan uses appropriate 
annuity conversion factors. Since the issuance of Notice 96-8, four 
Federal appellate courts have followed the analysis set out in the 
Notice: Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. 
dismissed, 531 U.S. 1061 (2001); West v. AK Steel Corp. Ret. 
Accumulation Pension Plan, 484 F.3d 395 (6th Cir. 2007), cert. denied, 
129 S. Ct. 895 (2009); Berger v. Xerox Corp. Ret. Income Guarantee 
Plan, 338 F.3d 755 (7th Cir. 2003), reh'g and reh'g en banc denied, No. 
02-3674, 2003 U.S. App. LEXIS 19374 (7th Cir. Sept. 15, 2003); Lyons v. 
Georgia-Pacific Salaried Employees Ret. Plan, 221 F.3d 1235 (11th Cir. 
2000), cert. denied, 532 U.S. 967 (2001).
    Notice 2007-6 (2007-1 CB 272), see Sec.  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 sum-based 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 sum-based 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 post-retirement adjustment of the amounts payable to a 
participant or is a variable annuity plan under which the assumed 
interest rate used to determine adjustments is at least 5 percent. 
Notice 2007-6 provides a safe harbor for applying the rules set forth 
in section 701 of PPA '06 where the conversion of a defined benefit 
pension plan into an applicable defined benefit plan is made with 
respect to a group of employees who become employees by reason of a 
merger, acquisition, or similar transaction. This transitional 
guidance, along with the other guidance provided in Part III of Notice 
2007-6, applies pending the issuance of further guidance and, thus, 
does not apply for periods to which the 2010 final regulations (as 
described later in this preamble) apply.
    Proposed regulations (REG-104946-07) under sections 411(a)(13) and 
411(b)(5) (2007 proposed regulations) were published by the Treasury 
Department and the IRS in the Federal Register on December 28, 2007 (72 
FR 73680). The Treasury Department and the IRS received written 
comments on the 2007 proposed regulations and a public hearing was held 
on June 6, 2008.
    Proposed regulations (REG-100464-08) under section 411(b)(1)(B) 
(2008 proposed backloading regulations) were published by the Treasury 
Department and the IRS in the Federal Register on June 18, 2008 (73 FR 
34665). The 2008 proposed backloading regulations would provide 
guidance on the application of the accrual rule for defined benefit 
plans under section 411(b)(1)(B) in cases where plan benefits are 
determined on the basis of the greatest of two or more separate 
formulas. The Treasury Department and the IRS received written comments 
on the 2008 proposed backloading regulations and a public hearing was 
held on October 15, 2008.
    Announcement 2009-82 (2009-48 IRB 720) and Notice 2009-97 (2009-52 
IRB 972) announced certain expected relief with respect to the 
requirements of section 411(b)(5). In particular, Announcement 2009-82 
stated that the rules in the regulations specifying permissible market 
rates of return are not expected to go into effect before the first 
plan year that begins on or after January 1, 2011. In addition, Notice

[[Page 64201]]

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.
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    \3\ However, see footnote 6 in Section IV.C of this preamble.
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    Final regulations (2010 final regulations) under sections 
411(a)(13) and 411(b)(5) are being issued at the same time as these 
proposed regulations. The 2010 final regulations adopt most of the 
provisions of the 2007 proposed regulations, with certain 
modifications, and also reserve a number of sections relating to issues 
that are not addressed in those final regulations. These reserved 
issues relate to the scope of relief provided under section 
411(a)(13)(A), a potential alternative method of satisfying the 
conversion protection requirements, additional rules with respect to 
the market rate of return requirement, and the application of the 
special plan termination rules. These proposed regulations generally 
address these issues, as well as an issue under section 411(b)(1).

Explanation of Provisions

Overview

    In general, these proposed regulations would provide guidance with 
respect to certain issues under sections 411(a)(13) and 411(b)(5) that 
are not addressed in the 2010 final regulations, as well as an issue 
under section 411(b)(1) for hybrid defined benefit plans that adjust 
benefits using a variable rate.

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

A. The 2010 Final Regulations

    The 2010 final regulations define a lump sum-based benefit formula 
as a benefit formula used to determine all or any part of a 
participant's accumulated benefit under which the accumulated benefit 
provided under the formula is expressed as the current balance of a 
hypothetical account maintained for the participant or as the current 
value of an accumulated percentage of the participant's final average 
compensation. The 2010 final regulations provide that the relief of 
section 411(a)(13)(A) applies to the benefits determined under a lump 
sum-based benefit formula.

B. Limitations on the Relief of Section 411(a)(13)(A)

    The proposed regulations would provide that the relief of section 
411(a)(13)(A) does not apply with respect to the benefits determined 
under a lump sum-based benefit formula unless certain requirements are 
satisfied. In particular, the proposed regulations would provide that 
the relief does not apply unless, at all times on or before normal 
retirement age, the then-current hypothetical account balance or the 
then-current accumulated percentage of the participant's final average 
compensation is not less than the present value, determined using 
reasonable actuarial assumptions, of the portion of the participant's 
accrued benefit that is determined under the lump sum-based benefit 
formula. However, the plan would be deemed to satisfy this requirement 
for periods before normal retirement age if, upon attainment of normal 
retirement age, the then-current balance of the hypothetical account or 
the then-current value of the accumulated percentage of the 
participant's final average compensation is actuarially equivalent 
(using reasonable actuarial assumptions) to the portion of the 
participant's accrued benefit that is determined under the lump sum-
based benefit formula. Thus, for periods before normal retirement age, 
a statutory hybrid plan with a lump sum-based benefit formula that 
meets the requirements of the preceding sentence need not project 
interest credits to normal retirement age and discount the resulting 
accrued benefit back in order to apply the relief of section 
411(a)(13)(A) with respect to the benefit determined under the lump 
sum-based benefit formula.
    In addition, the proposed regulations would provide that the relief 
of section 411(a)(13)(A) does not apply unless, as of each annuity 
starting date after normal retirement age, the then-current balance of 
the hypothetical account or the then-current value of the accumulated 
percentage of the participant's final average compensation satisfies 
the requirements of section 411(a)(2) or would satisfy those 
requirements but for the fact that the plan suspends benefits in 
accordance with section 411(a)(3)(B). Thus, for example, a plan that 
expresses the accumulated benefit as the balance of a hypothetical 
account and that does not comply with the suspension of benefit rules 
may have difficulty obtaining the relief of section 411(a)(13)(A) if, 
after normal retirement age, the plan credits interest at such a low 
rate that the adjustments provided by the interest credits, together 
with any principal credits, are insufficient to provide any required 
actuarial increases.
    The proposed regulations would also provide that the relief of 
section 411(a)(13)(A) does not apply unless the balance of the 
hypothetical account or the accumulated percentage of the participant's 
final average compensation may not be reduced except as a result of one 
of the specified reasons set forth in the regulations. Under the 
proposed regulations, reductions would only be permissible as a result 
of: (1) Benefit payments, (2) qualified domestic relations orders under 
section 414(p), (3) forfeitures that are permitted under section 411(a) 
(such as charges for providing a qualified preretirement survivor 
annuity), (4) amendments that are permitted under section 411(d)(6), 
and (5) adjustments resulting from the application of interest credits 
(under the rules of Sec.  1.411(b)(5)-1) that are negative for a 
period, for plans that express the accumulated benefit as the balance 
of a hypothetical account.

C. Application of Section 411(A)(13)(A) to Distributions Other Than 
Single Sums

    The proposed regulations would provide that the relief under 
section 411(a)(13)(A) (with respect to the requirements of sections 
411(a)(2), 411(c), and 417(e)) extends to certain other forms of 
benefit under a lump sum-based benefit formula, in addition to a 
single-sum payment of the entire benefit. In particular, the proposed 
regulations would clarify that the relief provided under section 
411(a)(13)(A) extends to an optional form of benefit that is currently 
payable with respect to a lump sum-based benefit formula if, under the 
terms of the plan, the optional form of benefit is determined as of the 
annuity starting date as the actuarial equivalent, determined using 
reasonable actuarial assumptions, of the then-

[[Page 64202]]

current balance of the hypothetical account or the then-current value 
of an accumulated percentage of the participant's final average 
compensation.
    In addition, the proposed regulations would create a special rule 
that provides that the relief under section 411(a)(13)(A) also extends 
to an optional form of benefit that is not subject to the minimum 
present value requirements of section 417(e) and that is currently 
payable with respect to a lump sum-based benefit formula if, under the 
terms of the plan, this optional form of benefit is determined as of 
the annuity starting date as the actuarial equivalent (using reasonable 
actuarial assumptions) of the optional form of benefit that: (1) 
Commences as of the same annuity starting date; (2) is payable in the 
same generalized optional form (within the meaning of Sec.  1.411(d)-
3(g)(8)) as the accrued benefit; and (3) is the actuarial equivalent 
(using reasonable actuarial assumptions) of the then-current balance of 
the hypothetical account maintained for the participant or the then-
current value of an accumulated percentage of the participant's final 
average compensation. This special rule would facilitate the payment of 
an immediate annuity, such as a joint and survivor annuity or life 
annuity with period certain, that is calculated as the actuarial 
equivalent of the form of payment of the accrued benefit under the 
plan, such as an immediately payable straight life annuity.
    Finally, the proposed regulations would provide that the relief 
under section 411(a)(13)(A) applies on a proportionate basis to a 
payment of a portion of the benefit under a lump sum-based benefit 
formula that is not paid in the form of an annuity, such as a payment 
of a specified dollar amount or percentage of the then-current balance 
of a hypothetical account maintained for the participant or then-
current value of an accumulated percentage of the participant's final 
average compensation. Thus, for example, if a plan that expresses the 
participant's entire accumulated benefit as the balance of a 
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance, the plan is treated as satisfying 
the requirements of section 411(a) and the minimum present value rules 
of section 417(e) with respect to 40 percent of the participant's then-
current accrued benefit.

D. Application of Section 411(A)(13)(A) to Plans With Multiple Formulas

    The proposed regulations would clarify that the relief provided 
under section 411(a)(13)(A) does not apply to any portion of the 
participant's benefit that is determined under a formula that is not a 
lump sum-based benefit formula. Thus, for example, where the 
participant's accrued benefit equals the greater of the benefit under a 
hypothetical account formula and the benefit under a traditional 
defined benefit formula, a single-sum payment of the participant's 
entire benefit must equal the greater of the then-current balance of 
the hypothetical account and the present value, determined in 
accordance with section 417(e), of the benefit under the traditional 
defined benefit formula. On the other hand, where the plan provides an 
accrued benefit equal to the sum of the benefit under a hypothetical 
account formula plus the excess of the benefit under a traditional 
defined benefit formula over the benefit under the hypothetical account 
formula, a single-sum payment of the participant's entire benefit must 
equal the then-current balance of the hypothetical account plus the 
excess of the present value, determined in accordance with section 
417(e), of the benefit under the traditional defined benefit formula 
over the present value, determined in accordance with section 417(e), 
of the benefit under the hypothetical account formula. See the request 
for comments under the heading ``Comments and Public Hearing'' on the 
issue of determining the present value of a benefit determined, in 
part, based on the benefit under a lump sum-based benefit formula.

E. Application of Section 411(A)(13)(A) to Pension Equity Plans

    The preamble to the 2007 proposed regulations asked for comments on 
plan formulas that calculate benefits as the current value of an 
accumulated percentage of the participant's final average compensation 
(often referred to as ``pension equity plans'' or ``PEPs''). Commenters 
indicated that some of these plans never credit interest, directly or 
indirectly, some explicitly credit interest after cessation of PEP 
accruals, and some do not credit interest explicitly but provide for 
specific amounts to be payable after cessation of PEP accruals (both 
immediately and at future dates) based on actuarial equivalence using 
specified actuarial factors applied upon cessation of PEP accruals.
    The 2010 final regulations clarify that a formula is expressed as 
the balance of a hypothetical account maintained for the participant if 
it is expressed as a current single-sum dollar amount. Thus, a PEP 
formula that credits interest after cessation of PEP accruals is 
considered a formula that is expressed as the balance of a hypothetical 
account after cessation of PEP accruals. As a result, such a formula is 
a lump sum-based benefit formula that is subject to the rules of 
section 411(a)(13)(A) set forth earlier in this preamble, as those 
rules are applied to PEP formulas during the period of PEP accruals and 
as those rules are applied to hypothetical account balance formulas 
after cessation of PEP accruals.
    Under these proposed regulations, any other PEP formula (including 
those that do not credit interest, directly or indirectly, and those 
that offer actuarially equivalent forms of payment using specified 
actuarial factors applied after cessation of PEP accruals) would also 
be subject to the rules of section 411(a)(13)(A), as explained earlier 
in this preamble. Thus, for example, a PEP that does not explicitly 
credit interest but, instead, calculates the annuity benefit commencing 
at future ages as the actuarial equivalent of the PEP value as of 
cessation of PEP accruals would be eligible for the relief of section 
411(a)(13)(A) with respect to the PEP value as of every period before 
cessation of PEP accruals. In addition, since the accrued benefit is 
calculated as an annuity commencing at normal retirement age that is 
actuarially equivalent to the PEP value as of cessation of PEP 
accruals, the relief described above that applies to annuities that are 
calculated as the actuarial equivalent of the then-current PEP value 
would not apply.

II. Section 411(b)(1): Special Rule With Respect to Statutory Hybrid 
Plans

    Under the regulations with respect to the 133\1/3\ percent rule of 
section 411(b)(1)(B), for any plan year, social security benefits and 
all relevant factors used to compute benefits, e.g., consumer price 
index, are treated as remaining constant as of the beginning of the 
current plan year for all subsequent plan years. A number of commenters 
on both the 2007 proposed regulations and the 2008 proposed backloading 
regulations expressed concern that this rule might effectively preclude 
statutory hybrid plans from using an interest crediting rate that is a 
variable rate that could potentially be negative in a year, such as an 
equity-based rate. This is because, if a plan treated an interest 
crediting rate that was negative as remaining constant in all future 
years for purposes of the backloading test of section 411(b)(1)(B), a 
principal credit (such as a pay credit) that accrues in a later year 
would result in a greater benefit accrual than an otherwise identical 
principal credit that accrues in an earlier year

[[Page 64203]]

because the principal credit that accrues later is credited with 
negative interest credits for fewer years. Thus, these commenters were 
concerned that a plan that uses a variable rate could fail the 
backloading rules of section 411(b)(1) even where both the pay 
crediting and interest crediting formulas do not vary over time.
    In response to these comments, the proposed regulations contain a 
special rule regarding the application of the 133\1/3\; percent rule of 
section 411(b)(1)(B) to a statutory hybrid plan that adjusts benefits 
using a variable interest crediting rate that can potentially be 
negative in any given year. Under this proposed rule, a plan that 
determines any portion of the participant's accrued benefit pursuant to 
a statutory hybrid benefit formula (as defined in Sec.  1.411(a)(13)-
1(d)(4)) that utilizes an interest crediting rate described in Sec.  
1.411(b)(5)-1(d) that is a variable rate that was less than zero for 
the prior plan year would not be treated as failing to satisfy the 
requirements of the 133\1/3\ percent rule for the current plan year 
merely because the section 411(b)(1)(B) backloading calculation is 
performed assuming that the variable rate is zero for the current plan 
year and all future plan years.

III. Section 411(b)(5): Special Conversion Protection Rule and 
Additional Rules With Respect to the Market Rate of Return Limitation

A. Comparison at Effective Date of Conversion Amendment

    In accordance with the requirements of section 411(b)(5)(B)(ii), 
the 2010 final regulations provide that a participant whose benefits 
are affected by a conversion amendment generally must be provided with 
a benefit after the conversion that is at least equal to the sum of 
benefits accrued through the date of conversion and benefits earned 
after the conversion, with no permitted interaction between the two 
portions. The 2010 final regulations provide for an alternative method 
of satisfying the conversion protection requirements where an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation is established at the time of 
the conversion and the plan provides for separate calculation of (1) 
the benefit attributable to the opening hypothetical account balance 
(including interest credits attributable thereto) or attributable to 
the opening accumulated percentage of the participant's final average 
compensation and (2) the benefit attributable to post-conversion 
service under the post-conversion benefit formula. Under this 
alternative, the plan must provide that, when a participant commences 
benefits, the participant's benefit will be increased if the benefit 
attributable to the opening hypothetical account or opening accumulated 
percentage that is payable in the particular optional form of benefit 
selected is less than the benefit accrued under the plan prior to the 
date of conversion and that was payable in the same generalized 
optional form of benefit (within the meaning of Sec.  1.411(d)-3(g)(8)) 
at the same annuity starting date.
    The preamble to the 2007 proposed regulations requested comments on 
another alternative method of satisfying the conversion protection 
requirements that would not require this comparison at the annuity 
starting date. In response to favorable comments related to this 
alternative, these proposed regulations would provide that certain 
plans may satisfy the conversion protection requirements of sections 
411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) by 
establishing an opening hypothetical account balance without a 
subsequent comparison of benefits at the annuity starting date. While 
testing at the annuity starting date would not be required under this 
method, a number of requirements like those described in the preamble 
to the 2007 proposed regulations would need to be satisfied in order to 
ensure that the hypothetical account balance used to replicate the pre-
conversion benefit (the opening hypothetical account balance and 
interest credits on that account balance) is reasonably expected in 
most, but not necessarily all, cases to provide a benefit at least as 
large as the pre-conversion benefit for all periods after the 
conversion amendment.
    This alternative method would be limited to situations where an 
opening hypothetical account balance is established and would not be 
available where an opening accumulated percentage of the participant's 
final average compensation is established because these plans would be 
unable to reliably replicate the pre-conversion benefit. This is 
because the value of the opening accumulated percentage would only 
increase as a result of unpredictable increases in compensation for 
periods after the conversion amendment until cessation of PEP accruals, 
rather than by application of an annual interest crediting rate.
    This alternative would only be available where the participant 
elects to receive payment in the form of a single-sum distribution 
equal to the sum of the then-current balance of the hypothetical 
account used to replicate the pre-conversion benefit and the benefit 
attributable to post-conversion service under the post-conversion 
benefit formula. Because of the limited availability of this 
alternative, plans will still need to separately keep track of the pre-
conversion benefit in order to satisfy the conversion protection 
requirements for all forms of distribution other than a single-sum 
distribution. See the related request for comments in this preamble 
under the heading ``Comments and Public Hearing.''
    Under this alternative, in order to satisfy the requirements of 
section 411(d)(6), the participant's benefit after the effective date 
of the conversion amendment must not be less than the participant's 
section 411(d)(6) protected benefit (as defined in Sec.  1.411(d)-
3(g)(14)) with respect to service before the effective date of the 
conversion amendment (determined under the terms of the plan as in 
effect immediately before the effective date of the amendment). Also, 
the plan, as in effect immediately before the effective date of the 
conversion amendment, either must not have provided a single-sum 
payment option (for benefits that cannot be immediately distributed 
under section 411(a)(11)) or must have provided a single-sum payment 
option that was based solely on the present value of the benefit 
payable at normal retirement age (or at date of benefit commencement, 
if later) and which was not based on the present value of the benefit 
payable commencing at any date prior to normal retirement age. This 
condition ensures that the hypothetical account balance used to 
replicate the pre-conversion benefit does not result in a single-sum 
distribution that is less than would have been available under an early 
retirement subsidy under the pre-conversion formula.
    Under this alternative method of satisfying the conversion 
protection requirements, the opening hypothetical account balance must 
be established in accordance with the rules under which this opening 
balance is not less than the present value, determined in accordance 
with section 417(e), of the accrued benefit immediately prior to the 
effective date of the conversion amendment. In addition, under this 
alternative, the interest crediting rate under the plan as of the 
effective date of the conversion amendment must be either the rate of 
interest on long-term investment grade corporate bonds (the third 
segment rate) or one of several specified safe harbor rates. Also, as 
of that date, the value of the index used to determine the interest 
crediting rate under the plan must be at least as great

[[Page 64204]]

for every participant or beneficiary as the interest rate that was used 
to determine the opening hypothetical account balance. This requirement 
is satisfied, for example, if each participant's opening hypothetical 
account balance is determined using the applicable interest rate and 
applicable mortality table under section 417(e)(3), the interest 
crediting rate under the plan is the third segment rate, and, at the 
effective date of the conversion amendment, the third segment rate is 
the highest of the three segment rates. If, subsequent to the effective 
date of the conversion amendment, the interest crediting rate changes 
(whether by plan amendment or otherwise) with respect to a participant 
who was a participant at the time of the effective date of the 
conversion amendment from an interest crediting rate that is either the 
rate of interest on long-term investment grade corporate bonds or one 
of the specified safe harbor rates to a different interest crediting 
rate that is not in all cases at least as great as the prior interest 
crediting rate under the plan, then the new interest crediting rate 
does not apply to the existing hypothetical account balance as of the 
effective date of the change in interest crediting rates (or, if the 
plan created a subaccount consisting of the opening hypothetical 
account balance and interest credits on that subaccount, then the new 
interest crediting rate does not apply to the subaccount).
    Finally, either the plan must provide a death benefit after the 
effective date of the conversion amendment which has a present value 
that is at all times at least equal to the then-current balance of the 
hypothetical account used to replicate the pre-conversion benefit or 
the plan must not have applied a pre-retirement mortality decrement in 
establishing the opening hypothetical account balance.

B. Market Rate of Return

    The 2010 final regulations provide that a plan that credits 
interest must specify how the plan determines interest credits and must 
specify how and when interest credits are credited. In addition, the 
2010 final regulations contain certain specific rules regarding the 
method and timing of interest credits, including a requirement that 
interest be credited at least annually.
    The proposed regulations include a rule that would provide that a 
plan is not treated as failing to meet the interest crediting 
requirements merely because the plan does not provide for interest 
credits on amounts distributed prior to the end of the interest 
crediting period. Thus, if a plan credits interest at periodic 
intervals, the plan would not be required to credit interest on amounts 
that were distributed between the dates on which interest under the 
plan is credited to the account balance.
    Furthermore, the proposed regulations include a rule that would 
allow plans to credit interest taking into account increases or 
decreases to the participant's accumulated benefit that occur during 
the period. In particular, the rule would provide that a plan is not 
treated as failing to meet the market rate of return limitations merely 
because the plan calculates increases or decreases to the participant's 
accumulated benefit by applying a rate of interest or rate of return 
(including a rate of increase or decrease under an index) to the 
participant's adjusted accumulated benefit (or portion thereof) for the 
period. For this purpose, the participant's adjusted accumulated 
benefit equals the participant's accumulated benefit as of the 
beginning of the period, adjusted for debits and credits (other than 
interest credits) made to the accumulated benefit prior to the end of 
the interest crediting period, with appropriate weighting for those 
debits and credits based on their timing within the period. For plans 
that calculate increases or decreases to the participant's accumulated 
benefit by applying a rate of interest or rate of return to the 
participant's adjusted accumulated benefit (or portion thereof) for the 
period, interest credits include these increases and decreases, to the 
extent provided under the terms of the plan at the beginning of the 
period and to the extent not conditioned on current service and not 
made on account of imputed service, and the interest crediting rate 
with respect to a participant equals the total amount of interest 
credits for the period divided by the participant's adjusted 
accumulated benefit for the period.
    The proposed regulations would provide that the preservation of 
capital requirement is applied only at an annuity starting date on 
which a distribution of the participant's entire benefit as of that 
date under the plan's statutory hybrid benefit formula commences. The 
proposed regulations would also provide special rules to ensure that 
prior distributions are taken into account in determining the guarantee 
provided by the preservation of capital requirement with respect to a 
current distribution to which the rule applies.
    These proposed regulations would broaden the list of permitted 
interest crediting rates from those permitted under the 2010 final 
regulations. A number of commenters on the 2007 proposed regulations 
requested that the rate of return on plan assets be treated as a market 
rate of return for all types of statutory hybrid plans, and not just 
indexed plans. In response to these comments, the proposed regulations 
would permit the use of the rate of return on plan assets as a market 
rate of return for statutory hybrid plans generally if the plan's 
assets are diversified so as to minimize the volatility of returns. 
Like the 2010 final regulations, the proposed regulations would provide 
that this requirement that plan assets be diversified so as to minimize 
the volatility of returns does not require greater diversification than 
is required under section 404(a)(1)(C) of Title I of the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 
(1974)) with respect to defined benefit pension plans.
    The preamble to the 2007 proposed regulations asked for comments 
about the possibility of allowing an interest credit to be determined 
by reference to a rate of return on a regulated investment company 
(RIC) described in section 851. The preamble focused on whether such an 
investment has sufficiently constrained volatility that the existence 
of the capital preservation rule would not result in an above market 
rate of return. In response to comments received on the 2007 proposed 
regulations, these proposed regulations would provide that an interest 
crediting rate is not in excess of a market rate of return if it is 
equal to the rate of return on a RIC, as defined in section 851, that 
is reasonably expected to be not significantly more volatile than the 
broad United States equities market or a similarly broad international 
equities market. For example, a RIC that has most of its assets 
invested in securities of issuers (including other RICs) concentrated 
in an industry sector or a country other than the United States, that 
uses leverage, or that has significant investment in derivative 
financial products, for the purpose of achieving returns that amplify 
the returns of an unleveraged investment, generally would not meet this 
requirement. Thus, a RIC that has most of its investments concentrated 
in the semiconductor industry or that uses leverage in order to provide 
a rate of return that is twice the rate of return on the Standard & 
Poor's 500 index (S&P 500) would not meet this requirement. On the 
other hand, a RIC whose investments track the rate of return on the S&P 
500, a broad-based ``small-cap'' index (such as the Russell 2000 
index), or a broad-based international equities index would meet this 
requirement. The requirement that

[[Page 64205]]

the RIC's investments not be concentrated in an industry sector or a 
specific international country is intended to limit the volatility of 
the returns, as well as the risk inherent in non-diversified 
investments. Similarly, the requirement that the RIC not provide 
leveraged returns is intended both to ensure that rates provided by the 
RIC do not exceed an unleveraged market rate as well as to limit the 
volatility of the returns provided. Subject to these requirements, the 
proposed rule is intended to provide plan sponsors with greater 
flexibility in choosing an equity-based rate than would be provided if 
the regulations were to list particular equity-based rates that satisfy 
the market rate of return requirement.
    The preamble to the 2007 proposed regulations requested comments as 
to how to implement a rule that provides that interest credits are 
determined under the greater of two or more interest crediting rates 
without violating the market rate of return limitation. In response to 
such comments, these proposed regulations would provide that in certain 
limited circumstances a plan can provide interest credits based on the 
greater of two or more interest crediting rates without exceeding a 
market rate of return.
    The Treasury Department and the IRS have modeled the historical 
distribution of rates of interest on long-term investment grade 
corporate bonds and have determined that those rates have only 
infrequently been lower than 4 percent and, when lower, were generally 
lower by small amounts and for limited durations. Therefore, the 
increase in the effective rate of return resulting from adding an 
annual 4 percent floor to one of these bond rates has historically been 
small enough that the effective rate of return is not in excess of a 
market rate of return. As a result, the proposed rules would provide 
that it is permissible for a plan to utilize an annual floor of 4 
percent in conjunction with a permissible bond rate. Specifically, the 
proposed regulations would provide that a plan does not provide an 
interest crediting rate that is in excess of a market rate of return 
merely because the plan provides that the interest crediting rate for 
an interest crediting period equals the greater of the rate of interest 
on long-term investment grade corporate bonds (or one of the safe 
harbor rates that, under the regulations, are deemed not to be in 
excess of that rate) and an annual interest rate of 4 percent.
    This rule permitting a plan to utilize an annual floor of 4 percent 
in conjunction with a permissible bond-based rate would also permit 
plans that credit interest more frequently than annually using a 
permissible bond-based rate to also utilize a periodic floor that is a 
pro rata portion of an annual 4 percent floor. Thus, plans that credit 
interest more frequently than annually could provide an effective 
annual floor that is greater than 4 percent, both due to the effect of 
compounding because the floor would be applied more frequently than 
annually and because the floor would be applied in any period that the 
bond-based rate was below the floor, even if the annual rate exceeded 4 
percent for the plan year. However, given the nature of bond-based 
rates, including the serial correlation of rates from one period to the 
next, as well as the fact that 4 percent is not expected to exceed a 
permissible bond-based rate except infrequently, by small amounts, and 
for limited durations, in most instances a periodic floor that is based 
on a 4 percent annual floor will not provide a floor that is 
significantly different than an annual floor of 4 percent.
    In contrast, because of the volatility of equity-based rates, 
adding an annual floor to an equity-based rate often provides a 
cumulative rate of return that far exceeds the rate of return provided 
by the equity-based rate without such floor. It should also be noted 
that commenters on the 2007 proposed regulations generally did not 
request that such an annual floor be permitted (perhaps in recognition 
that a minimum guaranteed annual return when applied to equity-based 
rates could have a significant impact on funding). Accordingly, the 
proposed regulations would not allow the use of an annual floor in 
conjunction with the rate of return on plan assets or on a permissible 
RIC.
    On the other hand, if, instead of applying a floor on each year's 
rate of return, a cumulative floor is applied to an equity-based rate, 
the effective rate of return is not necessarily substantially greater 
than the rate of return provided without the floor. Specifically, the 
Treasury Department and the IRS have determined that, based on the 
modeling of long-term historical returns, a 3 percent floor that 
applies cumulatively (in the aggregate from the date of each principal 
credit until the annuity starting date, without a floor on the rate of 
return provided in any interim period) could be combined with any 
permissible rate (including a permissible equity-based rate), without 
increasing the effective rate of return to such an extent that the 
effective rate of return would be in excess of a market rate of return. 
As a result, the proposed rule would provide that a plan that 
determines interest credits using any particular interest crediting 
rate that satisfies the market rate of return limitation does not 
provide an effective interest crediting rate in excess of a market rate 
of return merely because the plan provides that the participant's 
benefit, as of the participant's annuity starting date, is equal to the 
greater of the benefit determined using the interest crediting rate and 
the benefit determined as if the plan had used a fixed annual interest 
crediting rate equal to 3 percent (or a rate not in excess of 3 
percent) for principal credits in all years. This rule in the proposed 
regulations that allows for plans to utilize a cumulative floor of up 
to 3 percent would also allow plans some additional flexibility in 
design. Thus, for example, a plan that utilizes annual ceilings in 
conjunction with a permissible rate could also provide a cumulative 
floor of up to 3 percent.
    Similar to the rules with respect to application of the 
preservation of capital requirement, the proposed regulations would 
provide that the determination of the guarantee provided by any 
cumulative floor with respect to the participant's benefit is made only 
at an annuity starting date on which a distribution of the 
participant's entire benefit as of that date under the plan's statutory 
hybrid benefit formula commences. The proposed regulations would also 
provide special rules to ensure that prior distributions are taken into 
account in determining whether the guarantee exceeds the benefit 
otherwise provided under the plan.
    In addition to permitting certain fixed floors to be applied to 
variable rates, the proposed regulations would also permit a standalone 
fixed rate of interest to be used for interest crediting purposes. 
While the statutory language at section 411(b)(5)(B)(i)(I) does not 
explicitly reference a fixed interest crediting rate, the reference to 
``a reasonable minimum guaranteed rate of return'' and the reference to 
``the greater of a fixed or variable rate of return'' necessarily mean 
that some fixed rate must also be permissible. Further, the statutory 
language at section 411(b)(5)(B)(i)(III) specifically authorizes the 
Treasury Department to issue regulations permitting a fixed rate of 
interest under the rules relating to a market rate of return. However, 
reconciling a fixed interest crediting rate with the statutory 
requirement that an interest crediting rate ``for any plan year shall 
be at a rate which is not greater than a market rate of return'' 
[emphasis added] presents unique challenges because, by definition, 
fixed rates do not adjust with the market. As a result, the use of any

[[Page 64206]]

fixed rate will result in an interest crediting rate that is above a 
then-current market rate of interest during any period in which the 
current market rate falls below the fixed rate.
    In light of this fact, the Treasury Department and the IRS believe 
that, in order to satisfy the market rate of return requirement, any 
fixed interest crediting rate allowed under the rules must not be 
expected to exceed future market rates of interest, except 
infrequently, by small amounts, and for limited durations. Based on the 
historical modeling described above, the Treasury Department and the 
IRS have determined that a 5 percent fixed rate satisfies these 
criteria and that any higher fixed rate would result in an effective 
rate of return that is in excess of a market rate of return.
    Specifically, the proposed rules would provide that an annual 
interest crediting rate of a fixed 5 percent is a safe harbor rate 
deemed to be not in excess of the rate of interest on long-term 
investment grade corporate bonds. As a result, an interest crediting 
rate of a fixed 5 percent would satisfy the market rate of return 
limitation. In addition, the special section 411(d)(6) rule set forth 
in the 2010 final regulations with respect to certain changes in 
interest crediting rates would apply to an interest crediting rate of a 
fixed 5 percent and, as a result, a plan amendment that changes the 
interest crediting rate under the plan to the third segment rate from a 
fixed 5 percent is deemed to satisfy the requirements of section 
411(d)(6), provided certain requirements are met.
    The 2010 final regulations provide that Sec. Sec.  1.411(b)(5)-
1(d)(1)(iii), 1.411(b)(5)-1(d)(1)(vi), and 1.411(b)(5)-1(d)(6), which 
provide that the regulations set forth the exclusive list of interest 
crediting rates and combinations of interest crediting rates that 
satisfy the market rate of return requirement under section 411(b)(5), 
apply to plan years that begin on or after January 1, 2012. For plan 
years that begin before January 1, 2012, statutory hybrid plans may 
utilize a rate that is permissible under the 2010 final regulations or 
these proposed regulations for purposes of satisfying the statutory 
market rate of return requirement.

C. Plan Termination

    The proposed regulations would provide guidance with respect to the 
application of the rules of section 411(b)(5)(B)(vi), which require 
special plan provisions relating to interest crediting rates and 
annuity conversion rates that apply when the plan is terminated. Under 
the proposed regulations, a statutory hybrid plan is treated as meeting 
the market rate of return requirements only if the terms of the plan 
satisfy the rules in the regulations relating to section 
411(b)(5)(B)(vi). Title IV of ERISA also imposes special rules that 
apply when a single employer pension plan is terminated (including 
special rules relating to plan amendments). See regulations of the 
Pension Benefit Guaranty Corporation for additional rules that apply 
when a pension plan is terminated.
    These proposed regulations reflect the statutory requirement that a 
plan provide that, if the interest crediting rate used to determine a 
participant's accumulated benefit (or a portion thereof) varied (that 
is, was not a constant fixed rate) during the 5-year period ending on 
the plan termination date, then the interest crediting rate used to 
determine the participant's accumulated benefit under the plan after 
the date of plan termination is equal to the average of the rates used 
under the plan during the 5-year period ending on the plan termination 
date. If the interest crediting rate used to determine a participant's 
accumulated benefit (or a portion thereof) was instead a single fixed 
rate for all periods during the 5-year period ending on the plan 
termination date, then the interest crediting rate used to determine 
the participant's accumulated benefit after the date of plan 
termination would be equal to that fixed rate.
    Under this rule, the interest crediting rate used after plan 
termination would be based on the average of the rates that applied 
under the plan during the 5-year period preceding plan termination, 
without regard to whether this average rate exceeds then-current market 
rates of return (but, in determining the average rate, a rate would 
only be taken into account to the extent that the rate did not exceed a 
market rate of return when the rate actually applied). For purposes of 
this calculation, the proposed regulations would provide that, subject 
to certain other rules described in this preamble, the average of the 
rates used under the plan during the 5-year period ending on the 
termination date is determined with respect to a participant as the 
arithmetic average, expressed as an annual rate, of the applicable 
interest crediting rates that applied in the 5-year period. In 
determining this average, each interest crediting period for which the 
interest crediting date is within the 5-year period ending on the plan 
termination date would be taken into account, with interest crediting 
rates for periods that are less than a year in length adjusted and 
weighted proportionately. However, under this rule, if a period begins 
on or before the date that is 5 years before the termination date and 
ends within the 5-year period ending on the plan termination date, the 
period would be weighted as though the entire period were within the 5-
year period ending on the plan termination date.
    Section 411(b)(5)(B)(vi) does not explicitly provide rules with 
respect to plans that determine interest credits based on equity-based 
rates of return that may involve potential losses. Since the trailing 
5-year average of an equity-based rate of return may have little, if 
any, correlation to the actual future equity-based rate of return, the 
Treasury Department and the IRS do not believe it is appropriate to 
provide that the trailing 5-year average of such rate of return be used 
to determine benefits after plan termination. In such cases, the 
Treasury Department and the IRS believe that it is appropriate to apply 
a bond-based rule instead. Thus, the proposed regulations would provide 
that, with respect to an interest crediting rate used to determine a 
participant's accumulated benefit for an interest crediting period 
during the 5-year period ending on the termination date that is not a 
fixed interest rate or a bond-based rate of interest (or is based on a 
variable rate that is not permissible under the regulations), the terms 
of the plan must provide that, for purposes of determining the average 
upon plan termination, the interest crediting rate for the interest 
crediting period is deemed to be equal to the third segment rate for 
the last calendar month ending before the beginning of the interest 
crediting period, as adjusted for any actual applicable floors and 
ceilings that applied to the rate of return in the period, but without 
regard to any reductions that applied to the rate of return in the 
period. Thus, for example, if the actual interest crediting rate in an 
interest crediting period was equal to the rate of return on plan 
assets, but not greater than 5 percent, then for purposes of 
determining the plan's average interest crediting rate, the interest 
crediting rate for that interest crediting period would be deemed to 
equal to the lesser of the applicable third segment rate for the period 
and 5 percent. However, if the actual interest crediting rate in an 
interest crediting period was equal to the rate of return on plan 
assets minus 200 basis points, then for purposes of determining the 
plan's average interest crediting rate, the interest crediting rate for 
that interest crediting period would be deemed to

[[Page 64207]]

equal the third segment rate (not the third segment rate minus 200 
basis points). See the request for comments in this preamble under the 
heading ``Comments and Public Hearing'' regarding the application of 
floors, ceilings, and reductions for purposes of the plan termination 
provisions when the third segment rate is substituted for an equity-
based rate.
    As provided in section 411(b)(5)(B)(i), the regulations require 
that the terms of the plan also provide that the interest rate and 
mortality table (including tabular adjustment factors) used on and 
after plan termination for purposes of determining the amount of any 
benefit under the plan payable in the form of an annuity (commencing at 
or after normal retirement age) be based on the interest rate and 
mortality table specified under the plan for that purpose as of the 
termination date, except that if the interest rate is a variable rate, 
the interest rate is instead based on the rules described in the 
preceding paragraphs of this preamble using a 5-year average.
    A number of special rules apply for purposes of determining the 
interest crediting rate that applies after plan termination. In 
particular, for purposes of determining the average rate during the 
five-year period ending on plan termination, the interest crediting 
rate that applied for each interest crediting period is generally the 
ongoing interest crediting rate that was specified under the plan in 
that period, without regard to any section 411(d)(6) protected benefit 
using an old interest crediting rate. However, if, at the end of the 
last interest crediting period prior to plan termination, the 
participant's accumulated benefit is based on a section 411(d)(6) 
protected benefit that results from a prior amendment to change the 
rate of interest crediting applicable under the plan, then, for 
purposes of determining the average rate, the pre-amendment interest 
crediting rate is treated as having applied for each interest crediting 
period after the date of the interest crediting rate change. In 
addition, the proposed regulations would provide that if the plan 
determines a participant's interest credits in any interest crediting 
period by applying different rates to different predetermined portions 
of the accumulated benefit as permissible under the regulations, then 
the participant's interest crediting rate for the interest crediting 
period is assumed for purposes of the plan termination provisions to be 
the weighted average of the fixed interest rates, determined under the 
plan termination rules, that apply to each portion of the accumulated 
benefit.
    Furthermore, to reduce the administrative burden and to determine 
the average rate for each participant based on 5 years of interest 
crediting data, if the plan provided for interest credits for any 
interest crediting period in which, pursuant to the terms of the plan, 
the individual was not eligible to receive interest credits (because 
the individual was not a participant or beneficiary in the relevant 
interest crediting period or otherwise), then, for purposes of 
determining the interest crediting rate that applies after plan 
termination, the individual is treated as though the individual 
received interest credits in that period using the interest crediting 
rate that applied in that period under the terms of the plan to 
determine the benefit of a similarly situated participant or 
beneficiary who was eligible to receive interest credits. However, if, 
under the terms of the plan, the individual was not eligible to receive 
any interest credits during the entire 5-year period ending on the plan 
termination date, then the rules fixing the interest crediting rate do 
not apply to determine the individual's benefit after plan termination.
    The proposed regulations include examples to illustrate the 
application of these plan termination rules, including how these rules 
would apply where a plan bases its interest crediting rate on a 
weighted average of more than one rate, how these rules would apply 
where the plan's ongoing interest crediting rate is an equity-based 
rate of return, and how these rules would apply to a participant whose 
benefits are determined where the plan had switched interest crediting 
rates in the past and where the interest credit prior to termination 
was determined by applying the old rate to the benefit attributable to 
principal credits before the applicable amendment date.

D. Special Rule With Respect to Changes in Interest Crediting Rates 
Where Plan Provides Section 411(d)(6) Protection

    An inherent tension exists between the requirement not to reduce a 
participant's accrued benefit and the requirement that an interest 
crediting rate not be in excess of a market rate of return that makes 
changes in interest crediting rates difficult to implement for 
statutory hybrid plans in many circumstances. This is because, in order 
to satisfy section 411(d)(6), a participant's benefit can never be less 
than the pre-amendment benefit increased for periods after the 
amendment using the pre-amendment interest crediting rate, thereby 
effectively requiring a minimum interest crediting rate. In light of 
this tension, the proposed regulations would create a special market 
rate of return rule that applies in the case of an amendment to change 
the plan's interest crediting rate.
    In particular, the proposed rule would provide that, in the case of 
an amendment to change a plan's interest crediting rate for periods 
after the applicable amendment date from one interest crediting rate 
(the old rate) that is not in excess of a market rate of return to 
another interest crediting rate (the new rate) that is not in excess of 
a market rate of return, the plan's effective interest crediting rate 
is not in excess of a market rate of return merely because the plan 
provides for the benefit of any participant who is benefiting under the 
plan on the applicable amendment date to never be less than what it 
would be if the old rate had continued but without taking into account 
any principal credits after the applicable amendment date. A pattern of 
repeated plan amendments each of which provides for a prospective 
change in the plan's interest crediting rate with respect to the 
benefit as of the applicable amendment date will be treated as 
resulting in the ongoing plan terms providing that the interest 
crediting rate equals the greater of each of the interest crediting 
rates, so that the special rule in the preceding sentence would not 
apply. See Sec.  1.411(d)-4, A-1(c)(1). Thus, in such cases the plan 
will be treated as providing a rate of return that is in excess of a 
market rate of return, unless the resulting greater-of rate satisfies 
the market rate of return rules.

E. Special Rule With Respect to Interest Crediting Rate After Normal 
Retirement Age

    In coordination with the rules under section 411(a)(13)(A) (as 
described in section I of this preamble) that apply with respect to the 
benefit determined as of each annuity starting date after normal 
retirement age, the proposed regulations would provide that a statutory 
hybrid plan is not treated as providing an effective interest crediting 
rate that is in excess of a market rate of return merely because the 
plan provides that the participant's benefit, as of each annuity 
starting date after normal retirement age, is equal to the greater of 
the benefit determined using an interest crediting rate that is not 
otherwise in excess of a market rate of return and the benefit that 
satisfies the requirements of section 411(a)(2). Thus, for example, a 
cash balance plan would not be treated as providing an effective 
interest

[[Page 64208]]

crediting rate in excess of a market rate of return merely because the 
plan credits interest after normal retirement age at a rate that is 
sufficient to provide any required actuarial increases.

IV. Changes in Interest Crediting Rates and Code Section 411(d)(6)

A. Background

    An amendment to change a plan's interest crediting rate that only 
applies with respect to benefits that have not yet accrued (such as 
where the plan establishes a second hypothetical account balance for 
future principal credits to which a different interest crediting rate 
is applied) would not result in a reduction in accrued benefits 
attributable to service before the applicable amendment date and, 
therefore, such a change would not violate section 411(d)(6).\4\ 
However, except to the extent permitted under section 1107 of PPA '06 
or as otherwise described in section IV of this preamble, an amendment 
to change a plan's future interest crediting rate with respect to 
benefits that have already accrued (in other words, with respect to an 
existing account balance) must satisfy section 411(d)(6) if the change 
could result in interest credits that are smaller as of any date after 
the applicable amendment date than the interest credits that would be 
credited without regard to the amendment.\5\
---------------------------------------------------------------------------

    \4\ However, see section 204(h) of ERISA and section 4980F of 
the Code for notice requirements relating to amendments that provide 
for a significant reduction in the rate of future benefit accrual.
    \5\ Except to the extent permitted under section 411(d)(6) and 
Sec. Sec.  1.411(d)-3 and 1.411(d)-4, another Code provision, or 
another statutory provision such as section 1107 of PPA '06, section 
411(d)(6) prohibits a plan amendment that decreases a participant's 
accrued benefits or that has the effect of eliminating or reducing 
an early retirement benefit or retirement-type subsidy, or 
eliminating an optional form of benefit, with respect to benefits 
attributable to service before the amendment.
---------------------------------------------------------------------------

B. Special Section 411(d)(6) Rule With Respect to Changes in Future 
Interest Crediting Rates

    Under the 2010 final regulations, a plan is not treated as 
providing smaller interest credits after the applicable amendment date 
merely because the amendment changes the plan's future interest 
crediting rate with respect to benefits that have already accrued to 
the rate of interest on long-term investment grade corporate bonds (the 
third segment rate under section 430(h)(2)(C)(iii)) from one of the 
other bond-based safe harbor rates permitted under the 2010 final 
regulations (for example, a rate based on Treasury bonds with any of 
the margins specified in the regulations or an eligible cost-of-living 
index). However, the change is permitted only if: (1) The effective 
date of the amendment is at least 30 days after adoption, (2) the new 
interest crediting rate only applies to interest to be credited after 
the effective date of the amendment, and (3) on the effective date of 
the amendment, the new interest crediting rate is not lower than the 
interest crediting rate that would have applied in the absence of the 
amendment.

C. Changes That Would Otherwise Violate Section 411(d)(6) But That Are 
Made to the Extent Necessary To Satisfy Section 411(b)(5)

    After these proposed regulations under sections 411(a)(13) and 
411(b)(5) are issued as final regulations, it is expected that relief 
from the requirements of section 411(d)(6) will be granted for a plan 
amendment that eliminates or reduces a section 411(d)(6) protected 
benefit, provided that the amendment is adopted before those final 
regulations apply to the plan, and the elimination or reduction is made 
only to the extent necessary to enable the plan to meet the 
requirements of section 411(b)(5).\6\ It is expected that this section 
411(d)(6) relief will be available in the case of an amendment that 
reduces the future interest crediting rate with respect to benefits 
that have already accrued from a rate that is in excess of a market 
rate of return under the final market rate of return rules to the 
extent necessary to constitute a permissible rate under the final 
market rate of return rules. However, it is expected that this relief 
would not permit a plan with an interest crediting rate within the list 
of permitted rates under the final market rate of return rules to 
change to another permitted rate because the change would not be 
necessary to enable the plan to satisfy the requirements of section 
411(b)(5). Similarly, it is expected that this relief would not permit 
a plan with an interest crediting rate that is impermissible under the 
final market rate of return rules to change to a permissible rate using 
less than the maximum permitted margin for that rate because the 
reduction would be more than necessary to enable the plan to satisfy 
the requirements of section 411(b)(5). For purposes of the preceding 
sentence, a rate without an associated margin is treated as having a 
maximum permitted margin of zero. See the request for comments, under 
the heading ``Comments and Public Hearing'' in this preamble, regarding 
limitations on the scope of this anticipated relief under Sec.  
1.411(d)-4, A-2(b)(2)(i) because the relief must be limited to 
amendments that change a plan's interest crediting rate only to the 
extent necessary to enable the plan to satisfy the requirements of 
section 411(b)(5).
---------------------------------------------------------------------------

    \6\ Announcement 2009-82 and Notice 2009-97 stated that the IRS 
and the Treasury Department expected to provide such relief. While 
Notice 2009-97 indicated the relief would only apply if the 
amendment is adopted by the last day of the first plan year that 
begins on or after January 1, 2010, this preamble supersedes that 
applicability date to provide that it is expected that this relief 
would apply if the amendment is adopted before final regulations 
that finalize these proposed regulations apply to the plan.
---------------------------------------------------------------------------

Proposed Effective/Applicability Dates

    The specific rules that would be implemented under the proposed 
regulations generally would apply to plan years that begin on or after 
January 1, 2012. However, as stated in the preamble to the 2010 final 
regulations, a plan is permitted to rely on the provisions of these 
proposed regulations, as well as the 2010 final regulations, the 2007 
proposed regulations, and Notice 2007-6, for purposes of satisfying the 
requirements of sections 411(a)(13) and 411(b)(5) for periods before 
the regulatory effective date.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, these regulations have 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS specifically request comments 
on the clarity of the proposed regulations and how they may be made 
easier to understand.
    In addition to comments on issues addressed in these proposed 
regulations, the Treasury Department

[[Page 64209]]

and the IRS specifically request comments on the following issues:
    <bullet> Should a defined benefit plan that expresses a 
participant's accumulated benefit as a current single-sum dollar amount 
and that does not provide for interest credits be excluded from the 
definition of a statutory hybrid plan?
    <bullet> In the case of a statutory hybrid plan that credits 
interest using an interest crediting rate equal to the rate of return 
on a RIC, how does section 411(d)(6) apply if the underlying RIC 
subsequently ceases to exist?
    <bullet> The proposed regulations permit certain fixed interest 
crediting rates (a fixed 5 percent rate for any year, the greater of 4 
percent or certain bond-based indices for any year, and a cumulative 
minimum 3 percent annual rate). Comments regarding these specific 
proposed rules should take into account how any general legal standard 
for a market rate of return would be applied in different economic 
circumstances with variable interest rate markets, as well as the 
related ability that would generally be available under these proposed 
regulations at Sec.  1.411(b)(5)-1(e)(3)(iii) for the plan sponsor to 
change the crediting rate on an existing hypothetical account balance 
for active participants from one interest crediting rate to another, 
including the risk that whatever fixed rate is permitted might allow a 
plan's interest credits to exceed market rates of interest either 
frequently, by an amount that might be large, or for an extended 
duration. Commenters recommending any additional types of rates of 
return than those in these proposed regulations should justify how 
those rates meet a market rate of return, taking into account the 
minimum guarantee rules.
    <bullet> Should a statutory hybrid plan be able to offer 
participants a menu of hypothetical investment options (including a 
life-cycle investment option, whereby participants are automatically 
transitioned incrementally at certain ages from a blended rate that is 
more heavily equity-weighted to a rate that is more heavily bond-
weighted) and, if so, what plan qualification issues (i.e., forfeiture, 
section 411(d)(6), market rate of return, and other section 411(b)(5) 
issues) arise under such a plan design? In particular, do the following 
events raise issues: (1) A participant elects to switch from one 
investment option to another; (2) a bond index or RIC underlying one of 
the investment options ceases to exist; (3) the plan is amended to 
eliminate an investment option; (4) a participant elects to switch from 
an investment option with a cumulative minimum to an investment option 
without a cumulative minimum (or vice versa); or (5) the plan is 
terminated and, pursuant to the special rules that apply upon plan 
termination, the interest crediting rate that applies to determine a 
participant's benefit after plan termination must be fixed?
    <bullet> How does a statutory hybrid plan that provides benefits 
under a statutory hybrid benefit formula other than a lump sum-based 
benefit formula (such as a plan that provides for indexing as described 
in section 411(b)(5)(E))--a plan to which section 411(a)(13)(A) does 
not apply--ensure compliance with the minimum present value rules of 
section 417(e)?
    <bullet> How does a statutory hybrid plan determine the section 
417(e) minimum present value of the participant's benefit where a 
portion of the benefit is determined based partly on the benefit under 
a lump sum-based benefit formula, although that portion is not 
determined under a lump sum-based benefit formula? For example, where a 
portion of the accrued benefit is equal to the excess of the benefit 
under a traditional defined benefit formula over the benefit under a 
hypothetical account formula, how is the present value of that portion 
of the accrued benefit determined?
    <bullet> Should the proposed alternative method of satisfying the 
conversion protection requirements that does not require a comparison 
of benefits at the annuity starting date be broadened to apply to forms 
of distribution other than a single-sum distribution? If this rule 
should be broadened, what rules would ensure that the benefit 
attributable to the opening hypothetical account balance is not less 
than the benefit available under the same generalized optional form 
under the pre-conversion formula (which may include subsidized early 
retirement benefits and other retirement-type subsidies) consistent 
with the goal of having a simplified alternative?
    <bullet> How does a statutory hybrid plan that uses a variable 
interest crediting rate that may potentially be negative satisfy the 
fractional rule of section 411(b)(1)(C) if the 133\1/3\ percent rule of 
section 411(b)(1)(B) is not satisfied?
    <bullet> For purposes of the plan termination rules, should a 
floor, ceiling, or reduction that applied to an equity-based rate in an 
interest crediting period be treated as applying in the same manner to 
the third segment rate or is it appropriate for such an adjustment to 
be disregarded or otherwise modified for purposes of such rules?
    <bullet> Under the relief to be provided pursuant to Sec.  
1.411(d)-4, A-2(b)(2)(i), which authorizes amendments that reduce a 
section 411(d)(6) protected benefit only to the extent necessary to 
satisfy the requirements of section 411(b)(5), should a statutory 
hybrid plan with an interest crediting rate that is impermissible under 
the final market rate of return rules be permitted to be amended to 
change the future interest crediting rate with respect to benefits that 
have already accrued to any permissible rate using the maximum 
permitted margin for that rate or should that be dependent upon the 
reasons that the pre-amendment rate exceeded a market rate of return? 
Thus, for example, should a plan with an impermissible bond-based rate 
(without a fixed component) be permitted to switch to any permissible 
rate, bond-based or otherwise, using the maximum permitted margin for 
that rate? Should a plan with an impermissibly high standalone fixed 
rate be permitted to switch to the maximum rate of any type, should it 
be permitted to switch to the maximum permitted bond-based rate with 
the maximum permitted floor for that rate (the third segment rate with 
a fixed 4 percent floor), or must it switch to the maximum permitted 
standalone fixed rate (a fixed rate of 5 percent)? Should a plan with a 
permissible bond-based rate but with an impermissibly high fixed floor 
be permitted to switch to the maximum rate of any type, should it be 
permitted to retain the pre-amendment bond-based rate while reducing 
the floor to the maximum permitted floor for that rate (a fixed 4 
percent floor), should it be permitted to switch to the maximum 
permitted standalone fixed rate (a fixed rate of 5 percent), or must it 
switch to the maximum permitted bond-based rate with the maximum 
permitted floor for that rate (the third segment rate with a fixed 4 
percent floor)?
    All comments will be available for public inspection and copying. A 
public hearing has been scheduled for Wednesday, January 26, 2011, 
beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.

[[Page 64210]]

    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by Wednesday, January 12, 2011, and an outline of 
topics to be discussed and the amount of time to be devoted to each 
topic (a signed original and eight (8) copies) by Friday, January 14, 
2011. A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Neil S. Sandhu, 
Lauson C. Green, and Linda S. F. Marshall, Office of Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However, 
other personnel from the IRS and the Treasury Department participated 
in the development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. Section 1.411(a)(13)-1 is amended by revising paragraphs 
(b)(2), (b)(3), (b)(4), and (e)(2)(ii) to read as follows:


Sec.  1.411(a)(13)-1  Statutory hybrid plans.

* * * * *
    (b) * * *
    (2) Requirements that lump sum-based benefit formula must satisfy 
to obtain relief--(i) In general. The relief of paragraph (b)(1) of 
this section does not apply with respect to benefits determined under a 
lump sum-based benefit formula unless the requirements of paragraphs 
(b)(2)(ii) through (iv) of this section are satisfied.
    (ii) Benefit on or before normal retirement age. A plan satisfies 
this paragraph (b)(2)(ii) only if, at all times on or before normal 
retirement age, the then-current balance of the hypothetical account or 
the then-current value of the accumulated percentage of the 
participant's final average compensation is not less than the present 
value, determined using reasonable actuarial assumptions, of the 
portion of the participant's accrued benefit that is determined under 
the lump sum-based benefit formula. However, a plan is deemed to 
satisfy the requirement in the preceding sentence for periods before 
normal retirement age if, upon attainment of normal retirement age, the 
then-current balance of the hypothetical account or the then-current 
value of the accumulated percentage of the participant's final average 
compensation is actuarially equivalent (using reasonable actuarial 
assumptions) to the portion of the participant's accrued benefit that 
is determined under the lump sum-based benefit formula.
    (iii) Benefit after normal retirement age. A plan satisfies this 
paragraph (b)(2)(iii) only if, as of each annuity starting date after 
normal retirement age, the then-current balance of the hypothetical 
account or the then-current value of the accumulated percentage of the 
participant's final average compensation--
    (A) Satisfies the requirements of section 411(a)(2); or
    (B) Would satisfy the requirements of section 411(a)(2) but for the 
fact that the plan suspends benefits in accordance with section 
411(a)(3)(B).
    (iv) Reductions limited. A plan satisfies this paragraph (b)(2)(iv) 
only if the balance of the hypothetical account or accumulated 
percentage of the participant's final average compensation may not be 
reduced except as a result of--
    (A) Benefit payments under paragraph (b)(3) of this section;
    (B) Qualified domestic relations orders under section 414(p);
    (C) Forfeitures that are permitted under section 411(a) (such as 
charges for providing a qualified preretirement survivor annuity);
    (D) Amendments that are permitted under section 411(d)(6); or
    (E) Adjustments resulting from the application of interest credits 
(under the rules of Sec.  1.411(b)(5)-1) that are negative for a 
period, for plans that express the accumulated benefit as the balance 
of a hypothetical account.
    (3) Alternative forms of distribution under a lump sum-based 
benefit formula--(i) Payment of current account balance or current 
value. The relief of paragraph (b)(1) of this section applies with 
respect to a single-sum payment equal to the then-current balance of a 
hypothetical account maintained for the participant or the then-current 
value of an accumulated percentage of the participant's final average 
compensation.
    (ii) Payment of benefits that are actuarially equivalent to current 
account balance or current value. With respect to the benefits under a 
lump sum-based benefit formula, the relief of paragraph (b)(1) of this 
section applies to an optional form of benefit that is determined as of 
the annuity starting date as the actuarial equivalent, using reasonable 
actuarial assumptions, of the then-current balance of a hypothetical 
account maintained for the participant or the then-current value of an 
accumulated percentage of the participant's final average compensation.
    (iii) Payment of benefits based on immediate annuity. With respect 
to the benefits under a lump sum-based benefit formula, the relief of 
paragraph (b)(1) of this section applies to an optional form of benefit 
that is not subject to the minimum present value requirements of 
section 417(e) and that is determined under the plan as of the annuity 
starting date as the actuarial equivalent (using reasonable actuarial 
assumptions) of the optional form of benefit that--
    (A) Commences as of the same annuity starting date;
    (B) Is payable in the same generalized optional form (within the 
meaning of Sec.  1.411(d)-3(g)(8)) as the accrued benefit; and
    (C) Is the actuarial equivalent (using reasonable actuarial 
assumptions) of the then-current balance of a hypothetical account 
maintained for the participant or the then-current value of an 
accumulated percentage of the participant's final average compensation.
    (iv) Payment of portion of current account balance or current 
value. The relief of paragraph (b)(1) of this section applies on a 
proportionate basis to a payment of a portion of the benefit under a 
lump sum-based benefit formula that is not paid in a form otherwise 
described in this paragraph (b)(3), such as a payment of a specified 
dollar amount or percentage of the then-current balance of a 
hypothetical account maintained for the participant or then-current 
value of an accumulated percentage of the participant's final average 
compensation. Thus, for example, if a plan that expresses the 
participant's entire accumulated benefit as the balance of a 
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance in a single payment, the plan is 
treated as satisfying the requirements of section 411(a) and the 
minimum present value rules of section 417(e) with respect to 40 
percent of the participant's then-current accrued

[[Page 64211]]

benefit. See paragraph (b)(3)(ii) or (iii) of this section for relief 
applicable with respect to a distribution with respect to the remainder 
(60 percent) of the participant's accumulated benefit.
    (v) Conditions for applicability. This paragraph (b)(3) applies to 
a payment of benefits under a lump sum-based benefit formula only if 
the requirements of paragraph (b)(2) of this section are also 
satisfied.
    (4) Rules of application. The relief of paragraph (b)(1) of this 
section applies only to the portion of the participant's benefit that 
is determined under a lump sum-based benefit formula and does not apply 
to any portion of the participant's benefit that is determined under a 
formula that is not a lump sum-based benefit formula. Thus, the 
following rules apply:
    (i) Greater-of formulas. Where the participant's accrued benefit 
equals the greater of the benefit under a lump sum-based benefit 
formula and the benefit under another formula, a single-sum payment of 
the participant's entire benefit must equal the greater of the then-
current accumulated benefit under the lump sum-based benefit formula 
and the present value, determined in accordance with section 417(e), of 
the benefit under the other formula. Applying this rule where the non-
lump sum-based benefit formula provides a benefit equal to a pro rata 
portion of the benefit determined by projecting a future hypothetical 
account balance (including future principal credits), a single-sum 
payment of the participant's entire benefit must equal the greater of 
the then-current balance of the hypothetical account and the present 
value, determined in accordance with section 417(e), of the pro-rata 
benefit determined by projecting the future hypothetical account 
balance.
    (ii) ``Sum-of'' formulas. Where the accrued benefit equals the sum 
of the benefit under a lump sum-based benefit formula plus the excess 
of the benefit under another formula over the benefit under the lump 
sum-based benefit formula, a single-sum payment of the participant's 
entire benefit must equal the then-current accumulated benefit under 
the lump sum-based benefit formula plus the excess of the present 
value, determined in accordance with section 417(e), of the benefit 
under the other formula over the present value, determined in 
accordance with section 417(e), of the benefit under the lump sum-based 
benefit formula.
* * * * *
    (e) * * *
    (2) * * *
    (ii) Special effective date. Paragraphs (b)(2), (b)(3), and (b)(4) 
of this section apply to plan years that begin on or after January 1, 
2012.
* * * * *
    Par. 3. Section 1.411(b)-1 is amended by adding paragraph 
(b)(2)(ii)(G) and (b)(2)(ii)(H) to read as follows:


Sec.  1.411(b)-1  Accrued benefit requirements.

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (G) Special rule for multiple formulas. [Reserved]
    (H) Variable interest crediting rate under a statutory hybrid 
benefit formula. For plan years that begin on or after January 1, 2012, 
a plan that determines any portion of the participant's accrued benefit 
pursuant to a statutory hybrid benefit formula (as defined in Sec.  
1.411(a)(13)-1(d)(4)) that utilizes an interest crediting rate 
described in Sec.  1.411(b)(5)-1(d) that is a variable rate that was 
less than zero for the prior plan year is not treated as failing to 
satisfy the requirements of paragraph (b)(2) of this section for the 
current plan year merely because the plan assumes for purposes of 
paragraph (b)(2) of this section that the variable rate is zero for the 
current plan year and all future plan years.
* * * * *
    Par. 4. Section 1.411(b)(5)-1 is amended by:
    1. Revising paragraph (c)(3)(iii).
    2. Adding Example 8 to paragraph (c)(5).
    3. Revising paragraphs (d)(1)(iv)(D), (d)(2)(ii), (d)(4)(iv), 
(d)(5)(ii), (d)(5)(iv), (d)(6)(ii), (d)(6)(iii), (e)(2), (e)(3)(iii), 
(e)(4), and (f)(2)(i)(B).
    The revisions and addition read as follows:


Sec.  1.411(b)(5)-1  Reduction in rate of benefit accrual under a 
defined benefit plan.

* * * * *
    (c) * * *
    (3) * * *
    (iii) Comparison of benefits at effective date of conversion 
amendment--(A) In general. A plan satisfies the requirements of this 
paragraph (c)(3)(iii) with respect to a participant only if an opening 
hypothetical account balance is established to replicate the pre-
conversion benefit and the requirements of paragraphs (c)(3)(iii)(B) 
through (c)(3)(iii)(G) of this section are each satisfied.
    (B) Single-sum payment. At the annuity starting date, the 
participant elects to receive payment in the form of a single-sum 
distribution equal to the sum of the then-current balance of the 
hypothetical account used to replicate the pre-conversion benefit and 
the benefit attributable to post-conversion service under the post-
conversion benefit formula.
    (C) Not less than pre-conversion benefit. In accordance with 
section 411(d)(6), the aggregate benefit payable at the annuity 
starting date after the effective date of the conversion amendment is 
not less than the benefit described in paragraph (c)(2)(i)(A) of this 
section.
    (D) Form of pre-conversion benefit. The plan, as in effect 
immediately prior to the effective date of the conversion amendment, 
either did not provide a single-sum payment option (for benefits that 
cannot be immediately distributed under section 411(a)(11)) or provided 
a single-sum payment option that was based solely on the present value 
of the benefit payable at normal retirement age (or at date of benefit 
commencement, if later), and which was not based on the present value 
of the benefit payable commencing at any date prior to normal 
retirement age.
    (E) Minimum opening account balance. The plan provides for the 
opening hypothetical account balance under paragraph (c)(3)(i) of this 
section to be established in accordance with rules under which the 
amount of this opening balance will not be less than the present value, 
determined in accordance with section 417(e), of the participant's 
accrued benefit under the plan immediately prior to the effective date 
of the conversion amendment.
    (F) Interest credits--(1) Requirement as of effective date of 
conversion amendment. As of the effective date of the conversion 
amendment, the interest crediting rate under the plan is an interest 
crediting rate described in paragraph (d)(3) or (d)(4) of this section. 
In addition, as of that date, the value of the index used to determine 
the interest crediting rate under the plan is at least as great for 
every participant or beneficiary as the interest rate that was used 
pursuant to paragraph (c)(3)(iii)(E) of this section to determine the 
opening hypothetical account balance. This requirement is satisfied, 
for example, if each participant's opening hypothetical account balance 
is determined using the applicable interest rate and applicable 
mortality table under section 417(e)(3), the interest crediting rate 
under the plan is the third segment rate, and, at the effective date of 
the conversion amendment, the third segment rate is the highest of the 
three segment rates.
    (2) Requirement for later interest crediting rate changes. If, 
subsequent to the effective date of the conversion amendment, the 
interest crediting rate

[[Page 64212]]

changes (whether by plan amendment or otherwise) with respect to a 
participant who was a participant at the time of the effective date of 
the conversion amendment from a particular interest crediting rate 
described in paragraph (d)(3) or (d)(4) of this section to a different 
interest crediting rate that is not in all cases at least as great as 
the prior interest crediting rate under the plan, then the new interest 
crediting rate does not apply to the existing hypothetical account 
balance as of the effective date of the change in interest crediting 
rates (or, if the plan created a subaccount consisting of the opening 
hypothetical account balance and interest credits on that subaccount, 
then the new interest crediting rate does not apply to the subaccount).
    (G) Death benefits. The plan either--
    (1) Provides a death benefit after the effective date of the 
conversion amendment which has a present value that is at all times at 
least equal to the then-current balance of the hypothetical account 
used to replicate the pre-conversion benefit; or
    (2) Applied no pre-retirement mortality decrement in establishing 
the opening hypothetical account balance under paragraph (c)(3)(iii)(E) 
of this section.
* * * * *
    (c) * * *
    (5) * * *

    Example 8.  (i) Facts where plan establishes opening 
hypothetical account balance under paragraph (c)(3)(iii) of this 
section. Employer O sponsors Plan F, a defined benefit plan that 
provides an accumulated benefit, payable as a straight life annuity 
commencing at age 65 (which is Plan F's normal retirement age), 
based on a percentage of highest average compensation times the 
participant's years of service. Plan F permits any participant who 
has had a severance from employment to elect payment in the 
following optional forms of benefit (with spousal consent if 
applicable), with any payment not made in a straight life annuity 
converted to an equivalent form based on reasonable actuarial 
assumptions: A straight life annuity; and a 50 percent, 75 percent, 
or 100 percent joint and survivor annuity. The payment of benefits 
may commence at any time after attainment of age 55, with an 
actuarial reduction if the commencement is before normal retirement 
age. In addition, the plan offers a single-sum payment after 
attainment of age 55 equal to the present value of the normal 
retirement benefit using the applicable interest rate and mortality 
table under section 417(e)(3) in effect under the terms of the plan 
on the annuity starting date. (These facts are the same as those in 
paragraph (i) of Example 1.)
    (ii) Facts relating to the conversion amendment and 
establishment of opening balance. On January 1, 2012, Plan F is 
amended to eliminate future accruals under the highest average 
compensation benefit formula and to base future benefit accruals on 
a hypothetical account balance. As of January 1, 2012, the plan 
establishes an opening hypothetical account balance for each 
individual who was a participant in the plan on December 31, 2011, 
equal to the present value of the participant's accumulated 
benefits, payable as a straight life annuity commencing at age 65, 
based on the actuarial assumptions then applicable under section 
417(e)(3). New participants begin with a hypothetical account 
balance of zero on their date of participation. For service on or 
after January 1, 2012, each participant's hypothetical account 
balance is credited monthly with a pay credit equal to a specified 
percentage of the participant's compensation during the month and 
also with interest based on the third segment rate described in 
section 430(h)(2)(C)(iii). With respect to benefits under the 
hypothetical account balance, a participant is permitted to elect 
(with spousal consent) payment in the same generalized optional 
forms of benefit (even though different actuarial factors apply) as 
under the terms of the plan in effect before January 1, 2012, and 
also as a single-sum distribution. The plan provides that in no 
event will the benefit payable be less than the benefits 
attributable to service before January 1, 2012, to be determined 
under the terms of the plan as in effect immediately before the 
effective date of the amendment. In the event of death prior to the 
annuity starting date, the plan provides a death benefit equal to 
the hypothetical account balance (and allows a surviving spouse to 
elect payment in the form of an actuarially equivalent life 
annuity).
    (iii) Conclusion. Plan F satisfies the requirements of paragraph 
(c)(3)(iii) of this section for participants who elect to receive 
payment in the form of a single-sum distribution equal to the 
hypothetical account balance in accordance with the requirements of 
paragraph (c)(3)(iii)(B) of this section for the following reasons. 
First, Plan F satisfies the requirements of paragraph (c)(3)(iii)(C) 
of this section because the benefit payable can never be less than 
the pre-conversion benefit, in accordance with the requirements of 
section 411(d)(6). Second, Plan F satisfies the requirements of 
paragraph (c)(3)(iii)(D) of this section because prior to conversion 
it provided for a single-sum payment option that was based solely on 
the present value of the benefit payable at normal retirement age. 
Third, Plan F satisfies the requirements of paragraph (c)(3)(iii)(E) 
of this section because the amount of the opening balance is not 
less than the present value of the participant's accrued benefit 
under the plan immediately prior to the effective date of the 
conversion amendment, as determined in accordance with section 
417(e). Fourth, Plan F satisfies the requirements of paragraph 
(c)(3)(iii)(F) of this section because it provides for interest 
credits that are described in paragraph (d)(3) of this section on 
the opening balance and the interest credits are reasonably expected 
to be no lower than the interest rate used to determine the opening 
balance. This is the case because interest is credited at least 
annually after the effective date of the conversion amendment and 
the interest rate used to establish the opening balance (which is 
based on the first, second, and third segment rates described in 
section 430(h)(2)(C) referenced under section 417(e)(3)) is not 
greater than the interest rate applicable under the third segment 
rate described in section 430(h)(2)(C)(iii) which the plan uses to 
determine interest for all future periods after the effective date 
of the conversion amendment. Fifth, Plan F satisfies the 
requirements of paragraph (c)(3)(iii)(G) of this section because it 
provides a death benefit after the effective date of the conversion 
amendment which has a present value that is at all times at least 
equal to the hypothetical account balance at the date of death.
* * * * *
    (d) * * *
    (1) * * *
    (iv) * * *
    (D) Debits and credits during the interest crediting period. A plan 
is not treated as failing to meet the requirements of this paragraph 
(d) merely because the plan does not provide for interest credits on 
amounts distributed prior to the end of the interest crediting period. 
Furthermore, a plan is not treated as failing to meet the requirements 
of this paragraph (d) merely because the plan calculates increases or 
decreases to the participant's accumulated benefit by applying a rate 
of interest or rate of return (including a rate of increase or decrease 
under an index) to the participant's adjusted accumulated benefit (or 
portion thereof) for the period. For this purpose, the participant's 
adjusted accumulated benefit equals the participant's accumulated 
benefit as of the beginning of the period, adjusted for debits and 
credits (other than interest credits) made to the accumulated benefit 
prior to the end of the interest crediting period, with appropriate 
weighting for those debits and credits based on their timing within the 
period. For plans that calculate increases or decreases to the 
participant's accumulated benefit by applying a rate of interest or 
rate of return to the participant's adjusted accumulated benefit (or 
portion thereof) for the period, interest credits include these 
increases and decreases, to the extent provided under the terms of the 
plan at the beginning of the period and to the extent not conditioned 
on current service and not made on account of imputed service (as 
defined in Sec.  1.401(a)(4)-11(d)(3)(ii)(B)), and the interest 
crediting rate with respect to a participant equals the total amount of 
interest credits for the period divided by

[[Page 64213]]

the participant's adjusted accumulated benefit for the period.
* * * * *
    (2) * * *
    (ii) Application to multiple annuity starting dates--(A) In 
general. Paragraph (d)(2)(i) of this section applies only at an annuity 
starting date, within the meaning of Sec.  1.401(a)-20, A-10(b), on 
which a distribution of the participant's entire benefit under the 
plan's statutory hybrid benefit formula as of that date commences. For 
a participant who has more than one annuity starting date, paragraph 
(d)(2)(ii)(B) of this section provides rules for the application of 
paragraph (d)(2)(i) of this section, taking into account prior 
distributions. If the comparison under paragraph (d)(2)(ii)(B) of this 
section results in the sum of principal credits exceeding the sum of 
the amounts described in paragraphs (d)(2)(ii)(B)(1) through 
(d)(2)(ii)(B)(3) of this section, then the participant's benefit to be 
distributed at the current annuity starting date is increased by an 
amount equal to the excess.
    (B) Comparison to reflect prior distributions. For a participant 
who has more than one annuity starting date, the sum of all principal 
credits credited to the participant under the plan, as of the current 
annuity starting date, is compared to the sum of--
    (1) The participant's benefit as of the current annuity starting 
date;
    (2) The amount of the offset to the participant's benefit under the 
statutory hybrid benefit formula that is attributable to any prior 
distribution of the participant's benefit under that formula; and
    (3) The amount of any increase to the participant's benefit as a 
result of the application of paragraph (d)(2)(i) of this section to a 
prior distribution.
* * * * *
    (4) * * *
    (iv) Fixed rate of interest. An annual interest crediting rate 
equal to a fixed 5 percent is deemed to be not in excess of the 
interest rate described in paragraph (d)(3) of this section.
* * * * *
    (5) * * *
    (ii) Actual rate of return on plan assets. An interest crediting 
rate equal to the actual rate of return on the aggregate assets of the 
plan, including both positive returns and negative returns, is not in 
excess of a market rate of return if the plan's assets are diversified 
so as to minimize the volatility of returns. This requirement that plan 
assets be diversified so as to minimize the volatility of returns does 
not require greater diversification than is required under section 
404(a)(1)(C) of Title I of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406 (88 Stat. 829 (1974)) with respect to 
defined benefit pension plans.
* * * * *
    (iv) Rate of return on certain RICs. An interest crediting rate is 
not in excess of a market rate of return if it is equal to the rate of 
return on a regulated investment company (RIC), as defined in section 
851, that is reasonably expected to be not significantly more volatile 
than the broad United States equities market or a similarly broad 
international equities market. For example, a RIC that has most of its 
assets invested in securities of issuers (including other RICs) 
concentrated in an industry sector or a country other than the United 
States, that uses leverage, or that has significant investment in 
derivative financial products, for the purpose of achieving returns 
that amplify the returns of an unleveraged investment, generally would 
not meet this requirement. Thus, a RIC that has most of its investments 
concentrated in the semiconductor industry or that uses leverage in 
order to provide a rate of return that is twice the rate of return on 
the Standard & Poor's 500 index (S&P 500) would not meet this 
requirement. On the other hand, a RIC whose investments track the rate 
of return on the S&P 500, a broad-based ``small-cap'' index (such as 
the Russell 2000 index), or a broad-based international equities index 
would meet this requirement.
* * * * *
    (6) * * *
    (ii) Annual or more frequent floor applied to bond-based rates. An 
interest crediting rate under a plan does not fail to be described in 
paragraph (d)(3) or (d)(4) of this section for an interest crediting 
period merely because the plan provides that the interest crediting 
rate for that interest crediting period equals the greater of--
    (A) An interest crediting rate described in paragraph (d)(3) or 
(d)(4) of this section; and
    (B) An annual interest rate of 4 percent (or a pro rata portion of 
an annual interest rate of 4 percent for plans that provide interest 
credits more frequently than annually).
    (iii) Cumulative floor applied to equity-based or bond-based 
rates--(A) In general. A plan that determines interest credits under a 
statutory hybrid benefit formula using a particular interest crediting 
rate described in paragraph (d)(3), (d)(4), or (d)(5) of this section 
(or an interest crediting rate that can never be in excess of a 
particular interest crediting rate described in paragraph (d)(3), 
(d)(4), or (d)(5) of this section) does not provide an effective 
interest crediting rate in excess of a market rate of return merely 
because the plan provides that the participant's benefit under the 
statutory hybrid benefit formula determined as of the participant's 
annuity starting date is equal to the greater of--
    (1) The benefit determined using the interest crediting rate; and
    (2) The benefit determined as if the plan had used a fixed annual 
interest crediting rate equal to 3 percent (or a lower rate) for all 
principal credits that are made during the guarantee period (minimum 
guarantee amount).
    (B) Guarantee period defined. The guarantee period is the 
prospective period which begins on the date on which the cumulative 
floor described in this paragraph (d)(6)(iii) begins to apply to the 
participant's benefit and which ends on the date on which that 
cumulative floor ceases to apply to the participant's benefit.
    (C) Application to multiple annuity starting dates. The 
determination under paragraph (d)(6)(iii)(A) of this section is made 
only at an annuity starting date, within the meaning of Sec.  1.401(a)-
20, A-10(b), on which a distribution of the participant's entire 
benefit under the plan's statutory hybrid benefit formula as of that 
date commences. For a participant who has more than one annuity 
starting date, paragraph (d)(6)(iii)(D) of this section provides rules 
for the application of paragraph (d)(6)(iii)(A) of this section, taking 
into account any prior distributions. If the comparison under paragraph 
(d)(6)(iii)(D) of this section results in the minimum guarantee amount 
exceeding the sum of the amounts described in paragraphs 
(d)(6)(iii)(D)(1) through (d)(6)(iii)(D)(3) of this section, then the 
participant's benefit to be distributed at the current annuity starting 
date is increased by an amount equal to the excess.
    (D) Comparison to reflect prior distributions. For a participant 
who has more than one annuity starting date, the minimum guarantee 
amount (described in paragraph (d)(6)(iii)(A)(2) of this section), as 
of the current annuity starting date, is compared to the sum of--
    (1) The participant's benefit, as of the current annuity starting 
date, to which a minimum guaranteed rate described in paragraph 
(d)(6)(iii)(A)(2) of this section applies;
    (2) The amount of the offset to the participant's benefit under the 
statutory hybrid benefit formula that is attributable to any prior 
distribution of

[[Page 64214]]

the participant's benefit under that formula and to which a minimum 
guaranteed rate described in paragraph (d)(6)(iii)(A)(2) of this 
section applied, together with interest at that minimum guaranteed rate 
annually from the prior annuity starting date to the current annuity 
starting date; and
    (3) The amount of any increase to the participant's benefit as a 
result of the application of paragraph (d)(6)(iii)(A) of this section 
to any prior distribution, together with interest annually at the 
minimum guaranteed rate that applied to the prior distribution from the 
prior annuity starting date to the current annuity starting date.
    (E) Application to portion of participant's benefit. A cumulative 
floor described in this paragraph (d)(6)(iii) may be applied to a 
portion of a participant's benefit, provided the requirements of this 
paragraph (d)(6)(iii) are satisfied with respect to that portion of the 
benefit. If a cumulative floor described in this paragraph (d)(6)(iii) 
applies to a portion of a participant's benefit, only the principal 
credits that are attributable to that portion of the participant's 
benefit are taken into account in determining the amount of the 
guarantee described in paragraph (d)(6)(iii)(A)(2) of this section.
* * * * *
    (e) * * *
    (2) Plan termination--(i) In general--(A) Interest crediting rates. 
If the interest crediting rate used to determine a participant's 
accumulated benefit (or a portion thereof) has been a variable rate 
during the interest crediting periods in the 5-year period ending on 
the plan termination date (including any case in which the rate was not 
the same fixed rate during all such periods), then a statutory hybrid 
plan is treated as meeting the requirements of section 411(b)(5)(B)(i) 
and paragraph (d)(1) of this section only if the terms of the plan 
satisfy the requirements of paragraph (e)(2)(ii) of this section. See 
regulations of the Pension Benefit Guaranty Corporation for additional 
rules that apply when a pension plan is terminated.
    (B) Annuity conversion factors. A statutory hybrid plan is treated 
as meeting the requirements of section 411(b)(5)(B)(i) and paragraph 
(d)(1) of this section only if the terms of the plan provide that the 
interest rate and mortality table (including tabular adjustment 
factors) used on and after plan termination for purposes of determining 
the amount of any benefit under the plan payable in the form of an 
annuity commencing at or after normal retirement age are the interest 
rate and mortality table specified under the plan for that purpose as 
of the termination date, except that if the interest rate is a variable 
rate (as described in paragraph (e)(2)(i) of this section), then the 
interest rate for that purpose is determined pursuant to the rules of 
paragraph (e)(2)(ii) of this section.
    (ii) Interest crediting rates that are variable--(A) General rule. 
Subject to the other rules in this paragraph (e)(2), a plan satisfies 
this paragraph (e)(2)(ii) only if the terms of the plan provide that, 
on the plan termination date, if the interest crediting rate used to 
determine a participant's accumulated benefit has been a variable rate 
as described in paragraph (e)(2)(i) of this section, then the interest 
crediting rate used to determine the participant's accumulated benefit 
under the plan after the date of plan termination is equal to the 
average of the interest crediting rates used under the plan during the 
5-year period ending on the plan termination date. For this purpose, an 
interest crediting rate is used under the plan if the rate applied 
under the terms of the plan during an interest crediting period for 
which the interest crediting date is within the 5-year period ending on 
the plan termination date and the average is determined as the 
arithmetic average of the rates used, with each rate adjusted to 
reflect the length of the interest crediting period and the average 
rate expressed as an annual rate.
    (B) Variable interest crediting rates that are based on interest 
rates. With respect to an interest crediting rate that was a variable 
interest rate described in paragraph (d)(3) or (d)(4) of this section 
(taking into account the rules of paragraph (d)(6)(ii) of this 
section), a variable interest rate that can never be in excess of a 
rate described in paragraph (d)(3) or (d)(4) of this section, or a 
fixed interest rate that has not been the same rate during the entire 
5-year period ending on the plan termination date, the actual interest 
rate that applied under the plan for the interest crediting period is 
used for purposes of determining the average interest crediting rate. 
For this purpose, the rate that applied for the interest crediting 
period takes into account minimums, maximums, and other reductions that 
applied in the period, other than cumulative floors under paragraph 
(d)(6)(iii) of this section.
    (C) Variable interest crediting rates that are other rates of 
return. With respect to any interest crediting rate not described in 
paragraph (e)(2)(ii)(B) of this section (that is, a variable rate 
described in paragraph (d)(5) of this section), the interest crediting 
rate that applied for the interest crediting period for purposes of 
determining the average interest crediting rate is deemed to be equal 
to the third segment rate under section 430(h)(2)(C)(iii) for the last 
calendar month ending before the beginning of the interest crediting 
period, as adjusted to account for any minimums or maximums that 
applied in the period (other than cumulative floors under paragraph 
(d)(6)(iii) of this section), but without regard to other reductions 
that applied in the period. Thus, for example, if the actual interest 
crediting rate in an interest crediting period was equal to the rate of 
return on plan assets, but not greater than 5 percent, then for 
purposes of determining the plan's average interest crediting rate, the 
interest crediting rate for that interest crediting period would be 
deemed to equal the lesser of the applicable third segment rate for the 
period and 5 percent. However, if the actual interest crediting rate in 
an interest crediting period was equal to the rate of return on plan 
assets minus 200 basis points, then for purposes of determining the 
plan's average interest crediting rate, the interest crediting rate for 
that interest crediting period would be deemed to equal the third 
segment rate.
    (iii) Rules of application--(A) Section 411(d)(6) protected 
benefits. In general, for purposes of determining the average interest 
crediting rate under paragraph (e)(2)(ii) of this section, the interest 
crediting rate that applied for each interest crediting period is the 
ongoing interest crediting rate that was specified under the plan in 
that period, without regard to any section 411(d)(6) protected benefit 
using an interest crediting rate that applied under the plan prior to 
amendment. However, if, at the end of the last interest crediting 
period prior to plan termination, the participant's accumulated benefit 
is based on a section 411(d)(6) protected benefit that results from a 
prior amendment to change the rate of interest crediting applicable 
under the plan, then, for purposes of determining the average interest 
crediting rate under paragraph (e)(2)(ii) of this section, the pre-
amendment interest crediting rate is treated as having applied for each 
interest crediting period after the date of the interest crediting rate 
change.
    (B) Weighted averages. If the plan determines the interest credit 
in any interest crediting period by applying different rates to 
different predetermined portions of the accumulated benefit under 
paragraph (d)(1)(vii) of this section, then, for purposes of 
determining the average interest crediting rate under paragraph 
(e)(2)(ii) of this section, the interest

[[Page 64215]]

crediting rate that applied for the interest crediting period is the 
weighted average of the relevant interest rates that apply, under the 
rules of paragraph (e)(2)(ii) of this section, to each portion of the 
accumulated benefit.
    (C) Participants with less than five years of interest credits upon 
plan termination. If the plan provided for interest credits for any 
interest crediting period in which, pursuant to the terms of the plan, 
the individual was not eligible to receive interest credits (because 
the individual was not a participant or beneficiary in the relevant 
interest crediting period or otherwise), then, for purposes of 
determining the individual's average interest crediting rate under 
paragraph (e)(2)(ii) of this section, the individual is treated as 
though the individual received interest credits in that period using 
the interest crediting rate that applied in that period under the terms 
of the plan to a similarly situated participant or beneficiary who was 
eligible to receive interest credits. However, if, under the terms of 
the plan, the individual was not eligible to receive any interest 
credits during the entire 5-year period ending on the plan termination 
date, then the rules under paragraph (e)(2)(ii) do not apply to 
determine the individual's benefit after plan termination.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (e)(2). In each case, it is assumed that the plan is 
terminated in a standard termination.

    Example 1. (i) Facts. Plan A is a defined benefit plan with a 
calendar plan year that expresses each participant's accumulated 
benefit in the form of a hypothetical account balance to which 
principal credits are made at the end of each calendar quarter and 
to which interest is credited at the end of each calendar quarter 
based on the balance at the beginning of the quarter. Interest 
credits under Plan A are based on a rate of interest fixed at the 
beginning of each plan year equal to the third segment rate for the 
preceding December, except that the plan used the rate of interest 
on 30-year Treasury bonds (instead of the third segment rate) for 
plan years before 2012. The plan is terminated on March 3, 2016. The 
third segment rate credited under Plan A from January 1, 2012, 
through December 31, 2015, is assumed to be: 6 percent annually for 
each of the four quarters in 2015 (1.5 percent quarterly); 6.5 
percent annually for each of the four quarters in 2014 (1.625 
percent quarterly); 6 percent annually for each of the four quarters 
in 2013 (1.5 percent quarterly); and 5.5 percent annually for each 
of the four quarters in 2012 (1.375 percent quarterly). The rate of 
interest on 30-year Treasury bonds credited under Plan A for each of 
the four quarters in 2011 is assumed to be 4.4 percent annually (1.1 
percent quarterly).
    (ii) Conclusion. Pursuant to paragraph (e)(2)(ii)(B) of this 
section, the interest crediting rate used to determine accrued 
benefits under the plan on and after the date of plan termination is 
5.68 percent. This is determined by calculating the average 
quarterly rate of 1.42 percent (the sum of 1.5 percent times 4, 
1.625 times 4, 1.5 times 4, 1.375 times 4, and 1.1 percent times 4, 
divided by the 20 quarters that end in the 5-year period from March 
4, 2011 to March 3, 2016) and multiplying such rate by 4 to 
determine the average annual rate.

    Example 2. (i) Facts. The facts are the same as Example 1, 
except that Participant B commenced participation in Plan A on April 
17, 2013.
    (ii) Conclusion. Pursuant to paragraph (e)(2)(iii)(C) of this 
section, the interest crediting rate used to determine Participant B's 
accrued benefits under Plan A on and after the date of plan termination 
is 5.68 percent, which is the same rate that would have applied to 
Participant B if Participant B had participated in the plan during the 
5-year period preceding the date of plan termination, as described in 
Example 1.

    Example 3. (i) Facts. Plan C is a defined benefit plan with a 
calendar plan year that expresses each participant's accumulated 
benefit in the form of a hypothetical account balance to which 
principal credits are made at the end of each calendar year and to 
which interest is credited at the end of each calendar year based on 
the balance at the end of the preceding year. The plan is terminated 
on January 27, 2014. The plan's interest crediting rate for each 
calendar year during the entire 5-year period ending on the plan 
termination date is equal to (A) 50 percent of the greater of the 
rate of interest on 3-month Treasury Bills for the preceding 
December and an annual rate of 4 percent, plus (B) 50 percent of the 
rate of return on plan assets. The rate of interest on 3-month 
Treasury Bills credited under Plan C is assumed to be: 3.4 percent 
for 2013; 4 percent for 2012; 4.5 percent for 2011; 3.5 percent for 
2010; and 4.2 percent for 2009. Each of these rates applied under 
Plan C for interest credited during this period for purposes of the 
interest credits described in clause (A) of this paragraph (i), 
except that the 4 percent minimum rate applied for 2013 and 2010. 
For purposes of the interest credits described in clause (B) of this 
paragraph (i), the rate of interest on the third segment rate in the 
prior years (based on the rate for the preceding December) is 
assumed to be: 6 percent for 2013; 6.5 percent for 2012; 6 percent 
for 2011; 5.5 percent for 2010; and 6 percent for 2009.
    (ii) Conclusion. Pursuant to paragraph (e)(2)(ii) of this 
section, the interest crediting rate used to determine accrued 
benefits under the plan on and after the date of plan termination is 
5.07 percent. This number is equal to the sum of 50 percent of 4.14 
percent (which is the sum of 4 percent, 4 percent, 4.5 percent, 4 
percent, and 4.2 percent, divided by 5), and 50 percent of 6 percent 
(which is the average third segment rate for the 5 interest 
crediting periods ending within the 5-year period).
    Example 4. (i) Facts. The facts are the same as in Example 3, 
except that the plan had credited interest before January 1, 2012, 
using the rate of return on a RIC and was amended effective January 
1, 2012, to base interest credits for all plan years after 2011 on 
the interest rate formula described in Example 3(i). In order to 
comply with section 411(d)(6), the plan provides that, for each 
participant or beneficiary who was a participant on December 31, 
2011, the benefits at any date are based on either the ongoing 
hypothetical account balance on that date (which is based on the 
December 31, 2011 balance, with interest credited thereafter at the 
rate described in the first sentence of Example 3(i) and taking 
principal credits after 2011 into account) or a special hypothetical 
account balance (the pre-2012 balance) on that date, whichever 
balance is greater. For each participant, the pre-2012 balance is a 
hypothetical account balance equal to the participant's December 31, 
2011, balance, with interest credited thereafter at the RIC rate of 
return, but with no principal credits after 2011. There are 10 
participants for whom his or her pre-2012 balance exceeded his or 
her ongoing hypothetical account balance at the end of 2013.
    (ii) Conclusion. Since Plan C credited interest prior to 2012 
using the rate of return on a RIC (a rate not described in paragraph 
(d)(3) or (d)(4) of this section), for purposes of determining the 
average interest crediting rate upon plan termination, the interest 
crediting rate used to determine accrued benefits under Plan C for 
all participants during those periods (for the calendar years 2009, 
2010, and 2011) is deemed to be equal to the third segment rate for 
the preceding December. In addition, since the pre-2012 balances 
exceeded the ongoing hypothetical account balance for 10 
participants in the last interest crediting period prior to plan 
termination, for purposes of determining the average interest 
crediting rate upon plan termination, the interest crediting rate 
used to determine accrued benefits under Plan C for 2012 and 2013 
for those participants is deemed to be equal to the third segment 
rate for the month of December preceding 2012 and the month of 
December preceding 2013, respectively. For all other participants, 
for purposes of determining the average interest crediting rate upon 
plan termination, the interest crediting rate used to determine 
accrued benefits under Plan C for 2012 and 2013 is based on the 
ongoing interest crediting rate (the formula described in Example 
3).

    (3) * * *
    (iii) Coordination of section 411(d)(6) and market rate of return 
limitation--(A) In general. An amendment to a statutory hybrid plan 
that preserves a section 411(d)(6) protected benefit is subject to the 
rules under paragraph (d) of this section relating to market rate of 
return. However, in the case of an amendment to change a plan's 
interest crediting rate for periods after the applicable amendment date 
from one interest crediting rate (the old rate) that satisfies the 
requirements of paragraph

[[Page 64216]]

(d) of this section to another interest crediting rate (the new rate) 
that satisfies the requirements of paragraph (d) of this section, the 
plan's effective interest crediting rate is not in excess of a market 
rate of return for purposes of paragraph (d) of this section merely 
because the plan provides for the benefit of any participant who is 
benefiting under the plan (within the meaning of Sec.  1.410(b)-3(a)) 
on the applicable amendment date to never be less than what it would be 
if the old rate had continued but without taking into account any 
principal credits (as defined in paragraph (d)(1)(ii)(D) of this 
section) after the applicable amendment date.
    (B) Multiple amendments. A pattern of repeated plan amendments each 
of which provides for a prospective change in the plan's interest 
crediting rate with respect to the benefit as of the applicable 
amendment date will be treated as resulting in the ongoing plan terms 
providing that the interest crediting rate equals the greater of each 
of the interest crediting rates, so that the rule in paragraph 
(e)(3)(iii)(A) of this section would not apply. See Sec.  1.411(d)-4, 
A-1(c)(1).
    (4) Actuarial increases after normal retirement age. A statutory 
hybrid plan is not treated as providing an effective interest crediting 
rate that is in excess of a market rate of return for purposes of 
paragraph (d) of this section merely because the plan provides that the 
participant's benefit, as of each annuity starting date after normal 
retirement age, is equal to the greater of--
    (i) The benefit determined using an interest crediting rate that is 
not in excess of a market rate of return under paragraph (d) of this 
section; and
    (ii) The benefit that satisfies the requirements of section 
411(a)(2).
* * * * *
    (f) * * *
    (2) * * *
    (i) * * *
    (B) Special effective date. Paragraphs (c)(3)(iii), (d)(1)(iii), 
(d)(1)(iv)(D), (d)(1)(vi), (d)(2)(ii), (d)(4)(iv), (d)(5)(iv), (d)(6), 
(e)(2), (e)(3)(iii), and (e)(4) of this section apply to plan years 
that begin on or after January 1, 2012.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2010-25942 Filed 10-18-10; 8:45 am]
BILLING CODE 4830-01-P