Section 411(d)(6) Protected Benefits, 47109-47127 [05-15958]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 155 (Friday, August 12, 2005)]
[Rules and Regulations]
[Pages 47109-47127]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-15958]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 54

[TD 9219]
RIN 1545-BC26


Section 411(d)(6) Protected Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations providing guidance 
regarding the anti-cutback rules of section 411(d)(6) of the Internal 
Revenue Code, which generally protect accrued benefits, early 
retirement benefits, retirement-type subsidies, and optional forms of 
benefit under qualified retirement plans. The regulations address the 
limited circumstances under which a qualified retirement plan is 
permitted to be amended to eliminate or reduce early retirement 
benefits, retirement-type subsidies, or optional forms of benefit. The 
final regulations also provide related guidance concerning the notice 
requirements of section 4980F. These final regulations generally affect 
sponsors of, and participants in, qualified retirement plans.

DATES: Effective date: These regulations are effective on August 12, 
2005.
    Applicability date: For dates of applicability of these 
regulations, see Sec.  1.411(d)-3(j) of these regulations.

FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard at (202) 622-6060 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    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 Sec.  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

[[Page 47110]]

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 Sec.  1.411(d)-4. This Treasury 
Decision also amends Sec.  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 (TD 8212) 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 Sec.  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) 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.

Explanation of Provisions

I. Overview

    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 Sec.  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 Sec.  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 
Sec.  1.411(d)-3. However, the rules in

[[Page 47111]]

former Sec.  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)).

II. Scope of Section 411(d)(6) Protections

A. General Rules Under Section 411(d)(6)

    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\
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    \1\ See Bellas v. CBS, Inc., 221 F. 3d 517 (3rd Cir. 2000), 
cert. denied, 531 U.S. 1104 (2001) (holding early retirement benefit 
that is more valuable than actuarially reduced normal retirement 
benefit and that is payable on occurrence of unpredictable 
contingent event is retirement-type subsidy, and therefore is 
protected under section 204(g)), Board of Trustees of the Sheet 
Metal Workers' National Pension Fund v. C.I.R., 318 F.3d 599 (4th 
Cir. 2003) (stating provision for automatic cost-of-living 
adjustments granted by plan amendment is not accrued benefit for 
participants who retired before effective date of amendment and, 
thus, holding subsequent plan amendment eliminating future 
adjustments did not violate anti-cutback rule of section 411(d)(6)), 
and Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001) 
(holding plan amendment providing for actuarial offset of early 
retirement benefits previously received by rehire upon subsequent 
retirement violates ERISA section 204(g), even though net effect of 
amendment is increase in retirement benefit of participant).
    \2\ This is contrary to the analysis in Board of Trustees of the 
Sheet Metal Workers' National Pension Fund v. C.I.R..
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    The regulations generally retain the rules from former Sec.  
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\
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    \3\ 3 This is contrary to the analysis in Michael v. Riverside 
Cement.
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B. Definitions of Section 411(d)(6) Protected Benefits

    The legislative history of REA provides that:

    [T]he term ``retirement-type subsidy'' is to be defined by 
Treasury regulations. The committee intends that under these 
regulations, a subsidy that continues after retirement is generally 
to be considered a retirement-type subsidy. The committee expects, 
however, that a qualified disability benefit, a medical benefit, a 
social security supplement, a death benefit (including life 
insurance), or a plant shutdown benefit (that does not continue 
after retirement age) will not be considered a retirement-type 
subsidy. The committee expects that Treasury regulations will 
prevent the recharacterization of retirement-type benefits as 
benefits that are not protected [under section 411(d)(6)].\4\
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    \4\ S. Rep. 98-575, at 30 (1984).

    These final regulations reflect the rules in the 1988 regulations 
(see Sec.  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 Sec.  1.411(d)-
3(g)(6)(ii) of these final regulations and in Sec.  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 Sec.  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

[[Page 47112]]

ages is treated as not eliminating an optional form of benefit.

C. Multiple Amendment Rule

    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 Sec.  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 Sec.  
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 Sec.  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).

D. Application of Section 411(d)(6) to Certain Amendments Eliminating 
Impermissible Benefits

    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, Sec.  
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\
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    \5\ See also Sec.  1.401(a)(9)-1, Q&A-3, providing that, 
notwithstanding any other plan provision, a plan is not permitted to 
distribute benefits under any optional form of benefit that does not 
satisfy section 401(a)(9).
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III. Elimination of Benefits of De Minimis Value Under EGTRRA

A. Elimination of Redundant Optional Forms of Benefit

    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 Sec.  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

[[Page 47113]]

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.

B. Permissible Elimination of Noncore Optional Forms of Benefit Where 
Core Options Are Offered

    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 Sec.  
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 accomodate 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 Sec.  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. The Treasury 
Department and the IRS

[[Page 47114]]

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.

C. Elimination of Early Retirement Benefits and Retirement-Type 
Subsidies That Are of de minimis Value

    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.
---------------------------------------------------------------------------

    \6\ H.R. Conf. Rep. 107-84, at 254 (2001).
---------------------------------------------------------------------------

    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

[[Page 47115]]

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).

IV. Other Issues

A. Contingent Event Benefits

    In Notice 2003-10 (2003-1 C.B. 369), the Treasury Department 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.
---------------------------------------------------------------------------

    \7\ This rule follows the analysis in Bellas v. CBS, Inc.
---------------------------------------------------------------------------

B. Effect of Central Laborers' Decision

    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 Federal Register.

C. Utilization Test

    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 the Treasury 
Department 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, 
the Treasury Department and IRS are proposing a utilization standard, 
which is included in proposed regulations (REG-156518-04) being 
published elsewhere in this issue of the Federal Register. Accordingly, 
these final regulations provide a reserved paragraph for such a 
utilization test.

Effective Dates

    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.

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. 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.

Drafting Information

    The principal author of these regulations is Pamela R. Kinard of 
the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt 
and Government Entities), Internal Revenue Service. However, personnel 
from other offices of the Internal Revenue Service and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 54 are amended as follows:

[[Page 47116]]

PART 1--INCOME TAXES

0
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 * * *.
    Sec.  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).* * *

0
Par. 2. Section 1.411(d)-3 is revised to read as follows:


Sec.  1.411(d)-3  Section 411(d)(6) protected benefits.

    (a) Protection of accrued benefits--(1) General rule. Under section 
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a 
part of such plan is not a qualified trust) if a plan amendment 
decreases the accrued benefit of any plan participant, except as 
provided in section 412(c)(8), section 4281 of the Employee Retirement 
Income Security Act of 1974 as amended (ERISA), or other applicable law 
(e.g., section 1541(a)(2) of the Taxpayer Relief Act of 1997, Public 
Law 105-34 (111 Stat. 788, 1085)). For purposes of this section, a plan 
amendment includes any changes to the terms of a plan, including 
changes resulting from a merger, consolidation, or transfer (as defined 
in section 414(l)) or a plan termination. The protection of section 
411(d)(6) applies to a participant's entire accrued benefit under the 
plan 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 any portion was the result of an increase in 
the accrued benefit of the participant pursuant to a plan amendment 
adopted after the participant's severance from employment.
    (2) Plan provisions taken into account--(i) Direct or indirect 
reduction in accrued benefit. For purposes of determining whether a 
participant's accrued benefit is decreased, all of the amendments to 
the provisions of a plan affecting, directly or indirectly, the 
computation of accrued benefits are taken into account. Plan provisions 
indirectly affecting the computation of accrued benefits include, for 
example, provisions relating to years of service and compensation.
    (ii) Amendments effective with the same applicable amendment date. 
In determining whether a reduction in a participant's accrued benefit 
has occurred, all plan amendments with the same applicable amendment 
date are treated as one amendment. Thus, if two amendments have the 
same applicable amendment date and one amendment, standing alone, 
increases participants' accrued benefits and the other amendment, 
standing alone, decreases participants' accrued benefits, the 
amendments are treated as one amendment and will only violate section 
411(d)(6) if, for any participant, the net effect is to decrease 
participants' accrued benefit as of that applicable amendment date.
    (iii) Multiple amendments--(A) General rule. A plan amendment 
violates the requirements of 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 a section 411(d)(6) protected benefit in a 
manner that would be prohibited by section 411(d)(6) if accomplished 
through a single amendment.
    (B) Determination of the time period for combining plan amendments. 
For purposes of applying the rule in paragraph (a)(2)(iii)(A) of this 
section, generally only plan amendments adopted within a 3-year period 
are taken into account.
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits. [Reserved].
    (4) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) Facts. Plan A provides an annual benefit of 2% of 
career average pay times years of service commencing at normal 
retirement age (age 65). Plan A is amended on November 1, 2006, 
effective as of January 1, 2007, to provide for an annual benefit of 
1.3% of final pay times years of service, with final pay computed as 
the average of a participant's highest 3 consecutive years of 
compensation. As of January 1, 2007, Participant M has 16 years of 
service, M's career average pay is $37,500, and the average of M's 
highest 3 consecutive years of compensation is $67,308. Thus, 
Participant M's accrued benefit as of the applicable amendment date 
is increased from $12,000 per year at normal retirement age (2% 
times $37,500 times 16 years of service) to $14,000 per year at 
normal retirement age (1.3% times $67,308 times 16 years of 
service). As of January 1, 2007, Participant N has 6 years of 
service, N's career average pay is $50,000, and the average of N's 
highest 3 consecutive years of compensation is $51,282. Participant 
N's accrued benefit as of the applicable amendment date is decreased 
from $6,000 per year at normal retirement age (2% times $50,000 
times 6 years of service) to $4,000 per year at normal retirement 
age (1.3% times $51,282 times 6 years of service).
    (ii) Conclusion. While the plan amendment increases the accrued 
benefit of Participant M, the plan amendment fails to satisfy the 
requirements of section 411(d)(6)(A) because the amendment decreases 
the accrued benefit of Participant N below the level of the accrued 
benefit of Participant N immediately before the applicable amendment 
date.
    Example 2 (i) Facts. The facts are the same as Example 1, except 
that Plan A includes a provision under which Participant N's accrued 
benefit cannot be less than what it was immediately before the 
applicable amendment date (so that Participant N's accrued benefit 
could not be less than $6,000 per year at normal retirement age).
    (ii) Conclusion. The amendment does not violate the requirements 
of section 411(d)(6)(A) with respect to Participant M (whose accrued 
benefit has been increased) or with respect to Participant N 
(although Participant N would not accrue any benefits until the 
point in time at which the new formula amount would exceed the 
amount payable under the minimum provision, approximately 3 years 
after the amendment becomes effective).

    (b) Protection of section 411(d)(6)(B) protected benefits--(1) 
General rule--(i) Prohibition against plan amendments eliminating or 
reducing section 411(d)(6)(B) protected benefits. Except as provided in 
this section, a plan is treated as decreasing an accrued benefit if it 
is amended to eliminate or reduce a section 411(d)(6)(B) protected 
benefit as defined in paragraph (g)(15) of this section. This paragraph 
(b)(1) applies to participants who satisfy (either before or after the 
plan amendment) the preamendment conditions for a section 411(d)(6)(B) 
protected benefit.
    (ii) Contingent benefits. The rules of paragraph (b)(1)(i) of this 
section apply to participants who satisfy (either before or after the 
plan amendment) the preamendment conditions for the section 
411(d)(6)(B) protected benefit even if the condition on which the 
eligibility for the section 411(d)(6)(B) protected benefit depends is 
an unpredictable contingent event (e.g., a plant shutdown).
    (iii) Application of general rules in paragraph (a) of this section 
to section 411(d)(6)(B) protected benefits. For purposes of determining 
whether a participant's section 411(d)(6)(B) protected benefit is 
eliminated or reduced, the rules of paragraph (a) of this section apply 
to section 411(d)(6)(B) protected benefits in the same manner as they 
apply to accrued benefits described in section 411(d)(6)(A). As an 
example of the application of paragraph (a)(2)(ii) of this section to 
section 411(d)(6)(B) protected benefits, if there are two amendments 
with the same applicable amendment date and one amendment increases 
accrued benefits and the other amendment decreases the early retirement 
factors that are used to determine the early retirement annuity, the 
amendments are treated as one amendment and only violate section 
411(d)(6) if, after the two amendments,

[[Page 47117]]

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 than it would have been without the two amendments. As an 
example of the application of paragraph (a)(2)(iii) of this section to 
section 411(d)(6)(B) protected benefits, a series of amendments made 
within a 3-year period that, when taken together, have the effect of 
reducing or eliminating early retirement benefits or retirement-type 
subsidies in a manner that adversely affects the rights of any 
participant in a more than de minimis manner violates section 
411(d)(6)(B) even if each amendment would be permissible pursuant to 
paragraphs (c), (d), or (f) of this section.
    (2) Permissible elimination of section 411(d)(6)(B) protected 
benefits--(i) In general. A plan is permitted to be amended to 
eliminate a section 411(d)(6)(B) protected benefit if the elimination 
is in accordance with this section or Sec.  1.411(d)-4.
    (ii) Increases in payment amounts do not eliminate an optional form 
of benefit. An amendment is not treated as eliminating an optional form 
of benefit or eliminating or reducing an early retirement benefit or 
retirement-type subsidy under the plan, if, effective after the plan 
amendment, there is another optional form of benefit available to the 
participant under the plan that is of inherently equal or greater value 
(within the meaning of Sec.  1.401(a)(4)-4(d)(4)(i)(A)). Thus, 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 not treated as an 
elimination of an optional form of benefit. Similarly, a plan that 
offers a subsidized qualified joint and survivor annuity option for 
married participants under which the amount payable during the 
participant's lifetime is not less than the amount payable under the 
plan's straight life annuity is permitted to be amended to eliminate 
the straight life annuity option for married participants.
    (3)  Permissible elimination of benefits that are not section 
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does 
not provide protection for benefits that are ancillary benefits, other 
rights and features, or any other benefits that are not described in 
section 411(d)(6). See Sec.  1.411(d)-4, Q&A-1(d). However, a plan may 
not be amended to recharacterize a retirement-type benefit as an 
ancillary benefit. Thus, for example, a plan amendment to 
recharacterize any portion of an early retirement subsidy as a social 
security supplement that is an ancillary benefit violates section 
411(d)(6).
    (ii) No protection for future benefit accruals. Section 411(d)(6) 
only protects benefits that accrue before the applicable amendment 
date. Thus, a plan is permitted to be amended to eliminate or reduce an 
early retirement benefit, a retirement-type subsidy, or an optional 
form of benefit with respect to benefits that accrue after the 
applicable amendment date without violating section 411(d)(6). However, 
section 4980F(e) of the Internal Revenue Code and section 204(h) of 
ERISA require notice of an amendment to an applicable pension plan that 
either provides for a significant reduction in the rate of future 
benefit accrual or that eliminates or significantly reduces an early 
retirement benefit or a retirement-type subsidy. See Sec.  54.4980F-1 
of this chapter generally, and see Sec.  54.4980F-1, Q&A-7(b) and Q&A-
8(c) of this chapter, with respect to the circumstances under which 
such notice is required for a reduction in an early retirement benefit 
or retirement-type subsidy.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b):

    Example 1. (i) Facts involving amendments to an early retirement 
subsidy. Plan A provides an annual benefit of 2% of career average 
pay times years of service commencing at normal retirement age (age 
65). Plan A is amended on November 1, 2006, effective as of January 
1, 2007, to provide for an annual benefit of 1.3% of final pay times 
years of service, with final pay computed as the average of a 
participant's highest 3 consecutive years of compensation. 
Participant M is age 50, M has 16 years of service, M's career 
average pay is $37,500, and the average of M's highest 3 consecutive 
years of compensation is $67,308. Thus, M's accrued benefit as of 
the effective date of the amendment is increased from $12,000 per 
year at normal retirement age (2% times $37,500 times 16 years of 
service) to $14,000 per year at normal retirement age (1.3% times 
$67,308 times 16 years of service). (These facts are similar to the 
facts in Example 1 in paragraph (a)(4) of this section.) Before the 
amendment, Plan A permitted a former employee to commence 
distribution of benefits as early as age 55 and, for a participant 
with at least 15 years of service, actuarially reduced the amount 
payable in the form of a straight life annuity commencing before 
normal retirement age by 3% per year from age 60 to age 65 and by 7% 
per year from age 55 through age 59. Thus, before the amendment, the 
amount of M's early retirement benefit that would be payable for 
commencement at age 55 was $6,000 per year ($12,000 per year minus 
3% for 5 years and minus 7% for 5 more years). The amendment also 
alters the actuarial reduction factor so that, for a participant 
with at least 15 years of service, the amount payable in a straight 
life annuity commencing before normal retirement age is reduced by 
6% per year. As a result, the amount of M's early retirement benefit 
at age 55 becomes $5,600 per year after the amendment ($14,000 minus 
6% for 10 years).
    (ii) Conclusion. The straight life annuity payable under Plan A 
at age 55 is an optional form of benefit that includes an early 
retirement subsidy. The plan amendment fails to satisfy the 
requirements of section 411(d)(6)(B) because the amendment decreases 
the optional form of benefit payable to Participant M below the 
level that Participant M was entitled to receive immediately before 
the effective date of the amendment. If instead Plan A had included 
a provision under which M's straight life annuity payable at any age 
could be not be less than what it was immediately before the 
amendment (so that M's straight life annuity payable at age 55 could 
not be less than $6,000 per year), then the amendment would not fail 
to satisfy the requirements of section 411(d)(6)(B) with respect to 
M's straight life annuity payable at age 55 (although the straight 
life annuity payable to M at age 55 would not increase until the 
point in time at which the new formula amount with the new actuarial 
reduction factors exceeds the amount payable under the minimum 
provision, approximately 14 months after the amendment becomes 
effective).
    Example 2. (i) Facts involving plant shutdown benefits. Plan B 
permits participants who have a severance from employment before 
normal retirement age (age 65) to commence distributions at any time 
after age 55 with the amount payable to be actuarially reduced using 
reasonable actuarial assumptions regarding interest and mortality 
specified in the plan, but provides that the annual reduction for 
any participant who has at least 20 years of service and who has a 
severance from employment after age 55 is only 3% per year (which is 
a smaller reduction than would apply under reasonable actuarial 
reductions). Plan B also provides 2 plant shutdown benefits to 
participants who have a severance of employment as a result of a 
plant shutdown. First, the favorable 3% per year actuarial reduction 
applies for commencement of benefits after age 55 and before age 65 
for any participant who has at least 10 years of service and who has 
a severance from employment as a result of a plant shutdown. Second, 
all participants who have at least 20 years of service and who have 
a severance from employment after age 55 (and before normal 
retirement age at age 65) as a result of a plant shutdown will 
receive supplemental payments. Under the supplemental payments, an 
additional amount equal to the participant's estimated old-age 
insurance benefit under the Social Security Act is payable until age 
65. The supplemental payments are not a QSUPP, as defined in Sec.  
1.401(a)(4)-12, because the plan's terms do not sta