This document contains amendments to 26 CFR parts 1 and 54 under sections 411(d)(6) and 4980F of the Internal Revenue Code (Code). This Treasury Decision amends §1.411(d)-3 of the Treasury regulations to reflect changes to section 411(d)(6) made by the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (155 Stat. 38) (EGTRRA). In addition, this Treasury Decision includes rules relating to changes to section 411(d)(6) made by the Retirement Equity Act of 1984, Public Law 98-397 (98 Stat. 1426) (REA) and makes conforming amendments to §1.411(d)-4. This Treasury Decision also amends §54.4980F-1(b), relating to the notice requirement for certain plan amendments that eliminate or significantly reduce early retirement benefits or retirement-type subsidies.

Section 401(a)(7) provides that a trust does not constitute a qualified trust unless its related plan satisfies the requirements of section 411 (relating to minimum vesting standards). Section 411(d)(6)(A) provides that a plan is treated as not satisfying the requirements of section 411 if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412(c)(8) of the Code or section 4281 of the Employee Retirement Income Security Act of 1974 (ERISA), as amended.

Section 411(a)(7)(A) defines the term accrued benefit. For a defined contribution plan, a participant’s accrued benefit is the balance of the participant’s account. For a defined benefit plan, a participant’s accrued benefit is the participant’s benefit under the terms of the plan expressed in the form of an annual benefit commencing at normal retirement age. Under section 411(c)(3), if a participant’s accrued benefit under a defined benefit plan is to be determined as an amount other than an annual benefit commencing at normal retirement age, the participant’s accrued benefit is the actuarial equivalent of such benefit.

Section 301(a) of REA amended Code section 411(d)(6) to add subparagraph (B), which provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment is treated as impermissibly reducing accrued benefits. For a retirement-type subsidy, this protection applies only with respect to an employee who satisfies the preamendment conditions for the subsidy (either before or after the amendment). Section 411(d)(6)(B) also authorizes the Secretary of the Treasury to provide, through regulations, that section 411(d)(6)(B) does not apply to any plan amendment that eliminates optional forms of benefit (other than a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy).

On July 11, 1988, final regulations (T.D. 8212, 1988-2 C.B. 83) under section 411(d)(6) were published in the Federal Register (53 FR 26050) (the 1988 regulations). Under those regulations, section 411(d)(6) protects certain benefits, to the extent they have accrued, so that such benefits cannot be reduced or eliminated by plan amendment, except to the extent permitted by regulations (see §1.411(d)-4, Q&A-1(a)). Section 1.411(d)-4 specifies circumstances under which a plan is permitted to be amended to reduce or eliminate an optional form of benefit.

Section 645(b)(1) of EGTRRA amended section 411(d)(6)(B) of the Code to direct the Secretary to issue regulations providing that the requirements of section 411(d)(6)(B) do not apply to any amendment that reduces or eliminates early retirement benefits or retirement-type subsidies that create significant burdens or complexities for the plan and plan participants unless such amendment adversely affects the rights of any participant in a more than de minimis manner. As amended by EGTRRA, section 4980F of the Code and section 204(h) of ERISA each require that a plan administrator give notice of a plan amendment to affected plan participants and beneficiaries when the plan amendment provides for a significant reduction in the rate of future benefit accrual or the elimination or significant reduction of an early retirement benefit or a retirement-type subsidy.

Section 204(g) of ERISA contains parallel rules to Code section 411(d)(6), including a similar directive to the Secretary of the Treasury to issue regulations providing that section 204(g) does not apply to any amendment that reduces or eliminates early retirement benefits or retirement-type subsidies that create significant burdens or complexities for the plan and plan participants unless such amendment adversely affects the rights of any participant in a more than de minimis manner. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713) and section 204(g) of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of ERISA, as well as the Code. Thus, these final regulations issued under sections 411(d)(6) of the Code apply as well for purposes of section 204(g) of ERISA.

On March 24, 2004, proposed regulations (REG-128309-03, 2004-1 C.B. 800) under sections 411(d)(6) and 4980F of the Code were published in the Federal Register (69 FR 13769). On June 24, 2004, the IRS held a public hearing on the proposed regulations. Written comments responding to the notice of proposed rulemaking were also received. After consideration of all the comments, the proposed regulations are adopted, as amended by this Treasury Decision. The revisions are discussed below.

These regulations respond to the EGTRRA directive for purposes of both section 411(d)(6) of the Code and section 204(g) of ERISA by specifying the circumstances under which a plan may be amended to reduce or eliminate early retirement benefits, retirement-type subsidies, and optional forms of benefit (section 411(d)(6)(B) protected benefits). The circumstances specified in the regulations are designed to implement the statutory directive to permit reduction or elimination of section 411(d)(6)(B) protected benefits that create significant burdens or complexities for the plan and its participants, but only if the elimination does not adversely affect the rights of any participant in a more than de minimis manner. These provisions relating to the permissible elimination of benefits protected by section 411(d)(6)(B) are in addition to the rules permitting a plan to be amended to eliminate optional forms of benefit under §1.411(d)-4.

These regulations provide 2 permitted methods for eliminating or reducing section 411(d)(6)(B) protected benefits under the EGTRRA directive: elimination of redundant optional forms of benefit and elimination of noncore optional forms of benefits where core options are offered. Either of these 2 alternative methods can be applied with respect to any optional form of benefit. A plan sponsor may determine that one method of elimination works for some plan participants or some optional forms of benefit, but not for the remaining plan participants or other optional forms of benefit. However, a plan must satisfy all of the requirements of the applicable method with respect to any optional form of benefit being eliminated.

These final regulations also include general guidance on section 411(d)(6), including the meaning of the terms used therein, the scope of the section 411(d)(6)(A) protection against plan amendments decreasing a participant’s accrued benefit, and the scope of section 411(d)(6)(B) protection for early retirement benefits, retirement-type subsidies, and optional forms of benefit. This Treasury Decision also makes conforming amendments to §1.411(d)-4, including amendments to the definition of optional form of benefit and the multiple amendment rule described in this preamble (under the heading Multiple amendment rule).

This Treasury Decision completely replaces the provisions in former §1.411(d)-3. However, the rules in former §1.411(d)-3 generally have been carried over to this Treasury Decision, except to the extent needed to reflect statutory changes (such as the elimination of class-year vesting and the enactment of section 411(d)(6)(B)).

These final regulations take into account and respond to judicial decisions interpreting section 411(d)(6) (or its parallel provision at section 204(g) of ERISA).^[1]For example, the regulations provide that section 411(d)(6) protection applies to a participant’s entire accrued benefit as of the applicable amendment date, without regard to whether the entire accrued benefit was accrued before a participant’s severance from employment, or whether some portion of the accrued benefit was the result of an increase pursuant to a plan amendment adopted after the participant’s severance from employment.^[2]

The regulations generally retain the rules from former §1.411(d)-3. Thus, for purposes of determining whether or not any participant’s accrued benefit is decreased, all plan amendments affecting, directly or indirectly, the computation of accrued benefits are taken into account and, in determining whether a reduction has occurred, all plan amendments with the same applicable amendment date (the later of the adoption date or the effective date of the amendment) are treated as one amendment. The regulations also provide that these rules apply to section 411(d)(6)(B) protected benefits. Thus, for example, if there are 2 amendments with the same applicable amendment date, one of which increases accrued benefits and the other of which decreases the early retirement factors that are used to determine the early retirement annuity, the 2 amendments are treated as one amendment and only violate section 411(d)(6) if, after the 2 amendments, the net dollar amount of any early retirement annuity, with respect to the accrued benefit of any participant as of the applicable amendment date, is lower on that applicable amendment date than it would have been without the 2 amendments.^[3]

The legislative history of REA provides that:

These final regulations reflect the rules in the 1988 regulations (see §1.411(d)-4, Q&A-1(d)) that ancillary benefits and other rights or features are not protected under section 411(d)(6). In addition, taking the REA legislative history into account, these regulations define the terms early retirement benefit, retirement-type benefit, and retirement-type subsidy. These definitions differ in several respects from the proposed regulations.

The definition of the term ancillary benefit in these regulations reflects changes from the proposed regulations regarding death benefits. Because the account balance is the accrued benefit in a defined contribution plan, the payment of the account balance upon the death of a participant is the payment of the accrued benefit rather than an ancillary benefit. Therefore, in contrast to the proposed regulations, the final regulations do not categorize a right to a death benefit under a defined contribution plan as an ancillary benefit, and this right is protected under section 411(d)(6). For a defined benefit plan, these regulations provide that a death benefit that is not part of an optional form of benefit is an ancillary benefit and, therefore, is not protected under section 411(d)(6), even if paid after retirement. The regulations also clarify when a death benefit under a defined benefit plan is part of an optional form of benefit. The definition of optional form of benefit is defined in §1.411(d)-3(g)(6)(ii) of these final regulations and in §1.411(d)-4, Q&A-1(b)(1), which has been revised by this Treasury Decision to coordinate with the definition of optional form of benefit in these final regulations.

The regulations also include changes to the definitions of ancillary benefit and retirement-type benefit, relating to benefits that are not permitted to be in a qualified plan. These changes are relevant for purposes of applying section 204(g) of ERISA (the parallel rule to section 411(d)(6)), which applies to both qualified and nonqualified plans. The final regulations provide that, in addition to social security supplements, disability benefits, life insurance benefits, medical benefits under section 401(h), and certain death benefits, the only other ancillary benefits are plant shutdown benefits and other similar benefits that do not continue past retirement age, do not affect the payment of the accrued benefit, and are permitted to be in a qualified pension plan. These regulations also provide that a retirement-type benefit is either the payment of a distribution alternative with respect to an accrued benefit or the payment of any other benefit under a defined benefit plan (including a QSUPP as defined in §1.401(a)(4)-12) that is permitted to be in a qualified pension plan, continues after retirement, and is not an ancillary benefit.

These regulations include a number of clarifications regarding section 411(d)(6)(B) protected benefits that were included in the proposed regulations with minor modifications. The regulations clarify that if, after a plan amendment, there is another optional form of benefit available to a participant under the plan that is of inherently equal or greater value, the plan amendment is not treated as eliminating an optional form of benefit, or eliminating or reducing an early retirement benefit or a retirement-type subsidy. For example, a change in the method of calculating a joint and survivor annuity from using a 90% adjustment factor on account of the survivorship payment at particular ages for a participant and a spouse to using a 91% adjustment factor at the same ages is treated as not eliminating an optional form of benefit.

Under the proposed regulations, a plan amendment would violate the requirements of section 411(d)(6) if it is one of a series of plan amendments made at different times that, when taken together, have the effect of reducing or eliminating a section 411(d)(6) protected benefit in a manner that would be prohibited under section 411(d)(6) if accomplished through a single amendment. The 1988 regulations contained a similar rule under which a plan amendment that modified an optional form of benefit with respect to benefits already accrued was evaluated in light of previous amendments (see §1.411(d)-4, Q&A-2(c), as in effect prior to amendment by these regulations).

Commentators raised concerns about the multiple amendment rule in the proposed regulations, including its complexity and the uncertainty as to when the rule would apply. In response to these comments, this multiple amendment rule has been revised to add an objective rule that generally only combines plan amendments adopted within a 3-year period. The final regulations also retain an application of the multiple amendment rule from the proposed regulations relating to restrictions against creating burdens or complexities. Under this rule, if a plan is amended to add a retirement-type subsidy in order to eliminate another retirement-type subsidy within 3 years, the plan amendment eliminating the retirement-type subsidy will not be treated as reducing or eliminating burdens and complexities for the plan and its participants, even if the elimination of the subsidy would not adversely affect the rights of any plan participant in a more than de minimis manner.

These final regulations also make a conforming change to §1.411(d)-4, Q&A-2(c), by replacing the serial amendment rule under those regulations with a revised version of the multiple amendment rule. These regulations do not modify the rule in §1.411(d)-4, Q&A-1(c)(1), which provides that if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, then those similar benefits will be treated as provided under the terms of the plan, without regard to the limited period of time, to the extent necessary to carry out the purposes of sections 411(d)(6) and, where applicable, the definitely determinable requirement of section 401(a), including section 401(a)(25).

Commentators suggested that the final regulations clarify that a plan is permitted under section 411(d)(6) to eliminate an optional form of benefit that is inconsistent with the plan qualification requirements of section 401(a) (e.g., the requirements of section 401(a)(9)). In general, section 411(d)(6) does not permit the elimination or reduction of a section 411(d)(6) protected benefit solely because that benefit violates the plan qualification requirements. However, in the past, the IRS has exercised its authority to issue guidance that, in certain situations, permit certain plan amendments that eliminate or reduce certain optional forms of benefit that violate the plan qualification requirements. For example, §1.401(a)(9)-8, Q&A-12, provides that a plan will not fail to satisfy section 411(d)(6) merely because the plan is amended to eliminate the availability of an optional form of benefit to the extent that the optional form does not satisfy section 401(a)(9).^[5]

These regulations generally retain the rule from the proposed regulations that a plan is permitted to be amended to eliminate an optional form of benefit for a participant with respect to benefits accrued before the applicable amendment date if the optional form of benefit is redundant with respect to a retained optional form of benefit and certain conditions are satisfied. An optional form of benefit is considered redundant with respect to a retained optional form of benefit if the retained optional form of benefit is in the same family of optional forms of benefit as the optional form of benefit being eliminated and the participant’s rights with respect to the retained optional form of benefit are not subject to materially greater restrictions than those that applied to the optional form of benefit being eliminated.

These regulations also contain new terminology to facilitate the application of certain rules. Various rules in these final regulations use the term annuity commencement date instead of the term annuity starting date, thereby accommodating the elimination of an optional form of benefit that includes a retroactive annuity starting date. The final regulations also define the term generalized optional form, which means a group of optional forms of benefit that are identical except for differences due to the actuarial factors that are used to determine the amount of the distributions under those optional forms of benefit and the annuity starting dates. The concept of a generalized optional form is used in several places in these regulations, including the redundancy rule and the rules concerning burdensome and de minimis benefits.

Under the proposed regulations, among the conditions for eliminating a section 411(d)(6)(B) protected benefit under the redundancy rule is that the plan amendment not apply to an optional form of benefit with an annuity starting date that is earlier than 90 days after the date the amendment is adopted. This 90-day waiting period is based on a rule relating to the timing for the written explanation of a qualified joint and survivor annuity under section 417(a)(3). Under that rule, the explanation cannot be provided more than 90 days before the annuity starting date. See §1.417(e)-1(b)(3)(ii). A commentator suggested that the regulations be revised to increase the waiting period before the elimination of a redundant optional form of benefit from 90 days after the amendment is adopted to 180 days after the amendment is adopted. The commentator reasoned that this increase would give participants more time to adjust to the elimination of the optional form of benefit and, thus, participants would have more time to select from among the preamendment optional forms of benefit. The commentator also noted that proposed legislation had been introduced that would increase the number of days before the annuity starting date that a QJSA explanation can be provided (the maximum QJSA explanation period) from 90 days to 180 days.

In light of this comment, the final regulations explicitly link the waiting period before the elimination of a redundant optional form of benefit with the maximum QJSA explanation period, which is currently a 90-day period. Thus, these regulations provide that, for purposes of the redundancy rule, a plan amendment cannot be applicable with respect to an optional form of benefit with an annuity commencement date for which a written explanation relating to a QJSA would have satisfied the timing requirements of section 417(a)(3) had it been provided on or before the date that the amendment is adopted. This ensures that no participant will receive a QJSA explanation describing an optional form of benefit which could be eliminated before the election has been made. The waiting period before the elimination of a redundant optional form of benefit under these final regulations would change automatically if, at any future date, the maximum QJSA explanation period were to be altered.

The final regulations retain the rule from the proposed regulations under which a plan is permitted to be amended to eliminate an optional form of benefit for plan participants with respect to benefits accrued before the applicable amendment date if, after the amendment, the plan offers a designated set of core options to plan participants with respect to benefits accrued both before and after the amendment. The core options are defined as a straight life annuity, a 75% joint and contingent annuity, a 10-year term certain and life annuity, and the most valuable option for a participant with a short life expectancy. As under the proposed regulations, the final regulations do not permit a plan amendment to apply to optional forms of benefit with annuity commencement dates that are earlier than 4 years after the date the amendment is adopted. In addition, the final regulations retain the rule that a plan may not be amended to eliminate an optional form of benefit that includes a single-sum distribution that applies with respect to at least 25% of a participant’s accrued benefit as of the date the optional form of benefit is eliminated.

Several commentators suggested that the 75% joint and contingent annuity core option be replaced with a 50% joint and contingent annuity core option. One commentator argued that if the 50% joint and contingent annuity option is not available to participants, the higher actuarial charge associated with the 75% joint and contingent annuity option might discourage participants from electing any joint and contingent annuity option. Other commentators pointed out that §1.411(d)-4, Q&A-2(b)(2)(ii), allows a plan that provides a range of 3 or more actuarially equivalent joint and survivor annuity options to be amended to eliminate any of such options, other than the options with the largest and smallest optional survivor payment percentages (the bookends rule) and argued that the 75% joint and contingent annuity core option rule would require plans to add back the 75% joint and contingent annuity option that was eliminated under the bookends rule. In light of these comments and to accommodate the bookends rule, the final regulations retain the 75% joint and contingent annuity as a core option, but provide a special rule that a plan is permitted to treat both the 50% and 100% joint and contingent annuity options as core options for purposes of the core options rule (in lieu of offering a 75% joint and contingent annuity) if the plan otherwise satisfies the requirements of the core options rule.

As stated above, these regulations retain in the list of core options the most valuable option for a participant with a short life expectancy. This core option is defined as the optional form of benefit that is reasonably expected to result in payments that have the largest actuarial present value in the case of a participant who dies shortly after the annuity starting date. Like the proposed regulations, these regulations provide a safe harbor method for determining which optional form of benefit under the plan is the most valuable option for a participant with a short life expectancy. Under this safe harbor method, a plan is permitted to treat a single-sum distribution option with an actuarial present value that is not less than the actuarial present value of any optional form of benefit being eliminated as the most valuable option for a participant with a short life expectancy. If a plan does not offer such a single-sum distribution option, the plan is permitted to treat a joint and contingent annuity as the most valuable option for a participant with a short life expectancy if the continuation percentage under the amendment is at least 75% and is at least as great as the highest continuation percentage available before the amendment. In the event a plan has neither a single-sum distribution option nor a joint and contingent annuity with a continuation percentage of at least 75%, the plan is permitted to treat a term certain and life annuity with a term certain period of at least 15 years as the most valuable option for a participant with a short life expectancy.

Similar rules were in the proposed regulations, and a commentator argued that the rules would overprotect single-sum distribution options by providing 2 levels of protection: first, by not treating an amendment as satisfying the core options rule if it eliminates an optional form of benefit that includes a single-sum distribution that applies with respect to at least 25% of the participant’s accrued benefit as of the date the optional form of benefit is eliminated; and, second, by providing that a plan is permitted to treat a single-sum distribution option with an actuarial present value that is not less than the actuarial present value of any optional form of benefit eliminated by the plan amendment as the most valuable option for a participant with a short life expectancy. This comment is based on the assumption that a single-sum distribution option will always be the most valuable option for a participant with a short life expectancy. However, as illustrated in an example in these regulations, a single-sum option is not always the most valuable option for a participant with a short life expectancy, e.g., where the single-sum distribution does not take into account an early retirement subsidy available in another optional form of benefit (see §1.411(d)-3(h), Example 4). Accordingly, the final regulations retain the separate protection for single sum-distributions and the most valuable option for a participant with a short life expectancy. However, the final regulations clarify that the safe harbor hierarchy method for determining the most valuable option for a participant with a short life expectancy is available only if the single-sum distribution, joint and contingent annuity, or term certain and life annuity optional forms satisfy the conditions set forth in that rule at all relevant ages. Thus, when the safe harbor hierarchy rule applies, the most valuable option for a participant with a short life expectancy will be the generalized optional form for all participants.

These regulations also retain the requirement in the proposed regulations under which an amendment to eliminate an optional form of benefit under the core options rule cannot apply to an optional form of benefit with an annuity commencement date that is earlier than 4 years after the date the amendment is adopted. Several commentators argued that the waiting period before elimination of a noncore optional form of benefit be shortened, with one commentator suggesting 90 days, similar to the waiting period before the elimination of a redundant optional form of benefit. Other commentators argued that the waiting period before the elimination of a noncore optional form of benefit be increased to 5 years, similar to the 5-year cliff vesting rule. However, no commentator provided evidence that participants evaluate benefit choices over a shorter or longer period. Treasury and the IRS believe that the 4-year waiting period before elimination of a noncore optional form of benefit strikes the right balance between protecting participants’ expectations about the various benefit choices in their plans in coordination with decisions relating to retirement planning, while reducing burdens on plans. Thus, the 4-year waiting period before the elimination of a noncore optional form of benefit has been retained in these regulations.

As stated earlier under the heading Multiple amendment rule, the final regulations provide that a plan amendment violates section 411(d)(6) if it is one of a series of plan amendments that, when taken together, have the effect of reducing or eliminating section 411(d)(6) protected benefits in a manner that would violate section 411(d)(6) if accomplished through a single amendment. These final regulations add a rule that, for purposes of the multiple amendment rule, only plan amendments made within a 3-year period are generally taken into account. Notwithstanding this 3-year rule, the final regulations also add a rule that if a plan is amended to eliminate an optional form of benefit using the core option rule, the employer must wait 3 years after the first annuity commencement date for which the optional form of benefit is no longer available before reducing or eliminating any core options offered under the plan.

The final regulations retain from the proposed regulations the additional requirements that a plan amendment must satisfy if the retained optional form of benefit or each core option offered under the plan does not have the same annuity starting date or has a lower actuarial present value than the optional form of benefit being eliminated. In such a case, the plan amendment is only permitted to reduce or eliminate a section 411(d)(6)(B) protected benefit that creates significant burdens or complexities for the plan and its participants, but only if elimination does not adversely affect the rights of any participant in more than a de minimis manner.

The regulations generally retain the rule in the proposed regulations which provides that a reduction in actuarial present value is of no more than a de minimis amount if the reduction does not exceed the greater of 2% of the present value of the retirement-type subsidy under the eliminated optional form of benefit (if any) prior to the amendment or 1% of the participant’s compensation for the prior plan year (as defined in section 415(c)(3)). Several commentators offered suggestions to change this de minimis value test. Some commentators suggested that the 2% threshold be increased in order to make the ability to eliminate the subsidy more meaningful. The commentators suggested an increase up to 5% of the retirement-type subsidy. In addition, other commentators argued that 2% threshold should be changed from a percentage of the retirement-type subsidy to a percentage of the eliminated optional form of benefit. Under this suggestion, the margin of difference would be permitted to be significantly greater. Other commentators argued that the 2% threshold should be lowered in order to reflect Congressional intent in the examples illustrating de minimis reductions in the EGTRRA conference report.^[6] These suggestions ranged from 1.5% to 1% of the retirement-type subsidy. These commentators also recommended that the 1% of compensation de minimis threshold be reduced. In addition, some commentators suggested that a plan amendment eliminating a retirement-type subsidy should be required to satisfy both tests, instead of the 2 tests being alternatives.

These final regulations do not adopt these suggestions. The examples in the EGTRRA conference report are explicitly expressed as examples, not rules. The percentage thresholds in the de minimis value test are rounded percentages based on the dollar amounts in the EGTRRA conference report, and, thus, they accurately reflect the intent of EGTRRA and the legislative history. Accordingly, the final regulations retain the percentage thresholds from the proposed regulations.

Several commentators also noted that the 1% of compensation test would have no application to terminated vested participants because terminated participants frequently have no current or prior year compensation from the employer. Other commentators argued that the 1% of compensation test does not accurately reflect all employment situations, such as those participants who may take a leave of absence or begin a reduced work schedule. In light of these comments, the regulations provide that the 1% of compensation test is applied using the greater of the participant’s compensation (within the meaning of section 415(c)(3)) for the prior plan year or the participant’s average compensation for his or her high 3 years (within the meaning of section 415(b)(1)(B) and (b)(3)).

These regulations retain the rule in the proposed regulations under which a facts and circumstances analysis applies to determine whether a plan amendment eliminates section 411(d)(6)(B) protected benefits that create significant burdens and complexities for a plan and its participants. Under this rule, for a plan amendment eliminating a retirement-type subsidy or changing actuarial factors, the facts and circumstances to consider include the number of different retirement-type subsidies and other actuarial factors available under the plan, whether the terms and conditions applicable to the plan’s retirement-type subsidies are difficult to summarize in a manner that is concise and readily understandable to the average plan participant, whether those different retirement-type subsidies and other actuarial factors were added to the plan as a result of mergers, acquisitions, or other business transactions, and whether the effect of the plan amendment is to reduce the number of categories of retirement-type subsidies or other actuarial factors.

Several commentators stated that this facts and circumstances standard is vague and subjective. The commentators suggested that the standard should be revised to provide for more objective criteria to determine the circumstances under which a plan amendment is permitted to eliminate a section 411(d)(6)(B) protected benefit that creates significant burdens or complexities for a plan and its participants. The commentators also suggested that the final regulations include examples of the standard.

In light of these comments, the final regulations add 2 new factors to the facts and circumstances analysis for retirement-type subsidies and actuarial factors. These new factors are whether the plan amendment eliminates one or more generalized optional forms and whether the plan amendment replaces a complex optional form of benefit with a simpler form. An example has been added to the final regulations to illustrate this facts and circumstances analysis.

Like the proposed regulations, the final regulations provide a rebuttable presumption for plan amendments that eliminate a set of actuarial factors under the plan that, considered in the aggregate, are burdensome or complex. If this is the case, then the elimination of any set of actuarial factors is presumed to eliminate section 411(d)(6)(B) protected benefits that create significant burdens or complexities for the plan and its participants. However, the regulations also provide that if the effect of a plan amendment with respect to an optional form of benefit is merely to substitute one set of actuarial factors for another set of actuarial factors, without any reduction in the number of different actuarial factors, the plan amendment would not be permitted. Commentators stated that this “no substitution” rule in the proposed regulations would offer no relief to plans that wish merely to update their plans with actuarial assumptions that reflect more recent experience. Another commentator similarly suggested that the regulations should permit a plan to update its mortality tables. In response to these comments, the final regulations provide an exception to the “no substitution” rule for situations in which a plan is changing actuarial factors for determining optional forms of benefit with new actuarial factors that are based on more accurate mortality experience or more appropriate interest rates (e.g., interest rates that reflect more recent rates of returns).

In Notice 2003-10, 2003-1 C.B. 369, Treasury and the IRS announced that regulations would be proposed that would provide guidance on benefits that are treated as early retirement benefits and retirement-type subsidies for purposes of section 411(d)(6)(B). Notice 2003-10 also provided that the regulations will be prospective and the IRS will not treat a plan as failing to satisfy the requirements of section 401 merely because of a plan amendment that eliminates or reduces an early retirement benefit or a retirement-type subsidy that is conditioned on the occurrence of an unpredictable contingent event (within the meaning of section 412(l)) if the amendment is adopted and effective prior to the occurrence of the contingent event and prior to the publication of the final regulations in the Federal Register.

These final regulations generally retain the rule in the proposed regulations which provided that benefits that are contingent on the occurrence of certain events, such as a plant shutdown or involuntary separation, and that continue after retirement are retirement-type subsidies that are protected under section 411(d)(6)(B), both before and after the occurrence of the contingency.^[7] However, as noted above under the heading Definitions of section 411(d)(6) protected benefits, this rule is limited to benefits under a defined benefit plan that are permitted to be in a qualified plan. This rule applies to amendments adopted after December 31, 2005. For an amendment adopted before January 1, 2006, the IRS will not treat a plan as failing to be tax qualified under section 401(a) merely because the plan amendment eliminates or reduces an early retirement benefit or a retirement-type subsidy that is conditioned on the occurrence of an unpredictable contingent event (within the meaning of section 412(l)) if the amendment is adopted and effective prior to the occurrence of the contingent event.

Since the issuance of the proposed regulations on March 24, 2004, the Supreme Court issued its opinion in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 749 (June 7, 2004). This case addressed an issue that was reserved in the proposed regulations, pending the final decision in Central Laborers’, namely the interaction of the vesting rules in section 411(a) with the anti-cutback rules in section 411(d)(6). This topic is reserved in these final regulations and addressed in proposed regulations (REG-156518-04) that are being published elsewhere in this issue of the Bulletin.

Comments were made prior to the issuance of the proposed regulations requesting relief from section 411(d)(6) to enable plans to eliminate optional forms of benefit that participants rarely use. The preamble to the proposed regulations noted the difficulty in applying a utilization standard for plans where there are few retirements. However, comments on the proposed regulations asked Treasury and the IRS to consider adding a utilization test to the regulations as an acceptable method of eliminating optional forms of benefit, early retirement benefits, and retirement-type subsidies that are rarely used. The commentators argued that rarely used optional forms create a burden both for plans and their participants and that utilization of an optional form of benefit is a good measure of a benefit’s value to participants in a plan. In light of these comments, Treasury and IRS are proposing a utilization standard, which is included in proposed regulations (REG-156518-04) being published elsewhere in this issue of the Bulletin. Accordingly, these final regulations provide a reserved paragraph for such a utilization test.

These final regulations apply to amendments adopted and effective after August 12, 2005. However, there is a special effective date for certain plan amendments as described above (under the heading Contingent Event Benefits). Plan amendments adopted before August 12, 2005, are to be evaluated in light of the applicable authorities without regard to these regulations. No implication is intended concerning whether or not a rule adopted prospectively in these regulations is applicable law before the effective date in these regulations.

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. In addition, because no collection of information is imposed on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply, and therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

Paragraph 1. The authority citation for part 1 is amended by adding an entry to read, in part, as follows:

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

§1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and section 645(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38).* * *

Par. 2. Section 1.411(d)-3 is revised to read as follows: