Hybrid Retirement Plans, 64123-64147 [2010-25941]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Rules and Regulations]
[Pages 64123-64147]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-25941]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9505]
RIN 1545-BG36


Hybrid Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

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

DATES: Effective Date: These regulations are effective on October 19, 
2010.
    Applicability Date: These regulations generally apply to plan years 
that begin on or after January 1, 2011. However, see the ``Effective/
Applicability Dates'' section in this preamble for additional 
information regarding the applicability of these regulations.

FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu, Lauson C. Green, or 
Linda S. F. Marshall at (202) 622-6090 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

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

[[Page 64124]]

average compensation. Under section 411(a)(13)(C)(ii), the Secretary of 
the Treasury is to issue regulations which include in the definition of 
an applicable defined benefit plan any defined benefit plan (or portion 
of such a plan) which has an effect similar to a plan described in 
section 411(a)(13)(C)(i).
    Section 411(b)(1)(H)(i) provides that a defined benefit plan fails 
to comply with section 411(b) if, under the plan, an employee's benefit 
accrual is ceased, or the rate of an employee's benefit accrual is 
reduced, because of the attainment of any age. Section 411(b)(5), which 
was added to the Code by section 701(b)(1) of PPA '06, provides 
additional rules related to section 411(b)(1)(H)(i). Section 
411(b)(5)(A) generally provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) if a participant's 
accrued benefit, as determined as of any date under the terms of the 
plan, would be equal to or greater than that of any similarly situated, 
younger individual who is or could be a participant. For this purpose, 
section 411(b)(5)(A)(iv) provides that the accrued benefit may, under 
the terms of the plan, be expressed as an annuity payable at normal 
retirement age, the balance of a hypothetical account, or the current 
value of the accumulated percentage of the employee's final average 
compensation. Section 411(b)(5)(G) provides that, for purposes of 
section 411(b)(5), any reference to the accrued benefit of a 
participant refers to the participant's benefit accrued to date.
    Section 411(b)(5)(B) imposes certain requirements on an applicable 
defined benefit plan in order for the plan to satisfy section 
411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is 
treated as failing to meet the requirements of section 411(b)(1)(H) if 
the terms of the plan provide for an interest credit (or an equivalent 
amount) for any plan year at a rate that is greater than a market rate 
of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as 
having an above-market rate merely because the plan provides for a 
reasonable minimum guaranteed rate of return or for a rate of return 
that is equal to the greater of a fixed or variable rate of return. 
Section 411(b)(5)(B)(i)(II) provides that an applicable defined benefit 
plan is treated as failing to meet the requirements of section 
411(b)(1)(H) unless the plan provides that an interest credit (or an 
equivalent amount) of less than zero can in no event result in the 
account balance or similar amount being less than the aggregate amount 
of contributions credited to the account. Section 411(b)(5)(B)(i)(III) 
authorizes the Secretary of the Treasury to provide by regulation for 
rules governing the calculation of a market rate of return for purposes 
of section 411(b)(5)(B)(i)(I) and for permissible methods of crediting 
interest to the account (including fixed or variable interest rates) 
resulting in effective rates of return meeting the requirements of 
section 411(b)(5)(B)(i)(I).
    Section 411(b)(5)(B)(ii), (iii), and (iv) contains additional 
requirements that apply if, after June 29, 2005, an applicable plan 
amendment is adopted. Section 411(b)(5)(B)(v)(I) defines an applicable 
plan amendment as an amendment to a defined benefit plan which has the 
effect of converting the plan to an applicable defined benefit plan. 
Under section 411(b)(5)(B)(ii), if, after June 29, 2005, an applicable 
plan amendment is adopted, the plan is treated as failing to meet the 
requirements of section 411(b)(1)(H) unless the requirements of section 
411(b)(5)(B)(iii) are met with respect to each individual who was a 
participant in the plan immediately before the adoption of the 
amendment. Section 411(b)(5)(B)(iii) specifies that, subject to section 
411(b)(5)(B)(iv), the requirements of section 411(b)(5)(B)(iii) are met 
with respect to any participant if the accrued benefit of the 
participant under the terms of the plan as in effect after the 
amendment is not less than the sum of: (I) The participant's accrued 
benefit for years of service before the effective date of the 
amendment, determined under the terms of the plan as in effect before 
the amendment; plus (II) the participant's accrued benefit for years of 
service after the effective date of the amendment, determined under the 
terms of the plan as in effect after the amendment. Section 
411(b)(5)(B)(iv) provides that, for purposes of section 
411(b)(5)(B)(iii)(I), the plan must credit the participant's account or 
similar amount with the amount of any early retirement benefit or 
retirement-type subsidy for the plan year in which the participant 
retires if, as of such time, the participant has met the age, years of 
service, and other requirements under the plan for entitlement to such 
benefit or subsidy.
    Section 411(b)(5)(B)(v) sets forth certain provisions related to an 
applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if 
the benefits under two or more defined benefit plans of an employer are 
coordinated in such a manner as to have the effect of adoption of an 
applicable plan amendment, the plan sponsor is treated as having 
adopted an applicable plan amendment as of the date the coordination 
begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the 
Treasury to issue regulations to prevent the avoidance of the purposes 
of section 411(b)(5)(B) through the use of two or more plan amendments 
rather than a single amendment.
    Section 411(b)(5)(B)(vi) provides special rules for determining 
benefits upon termination of an applicable defined benefit plan. Under 
section 411(b)(5)(B)(vi)(I), an applicable defined benefit plan is not 
treated as satisfying the requirements of section 411(b)(5)(B)(i) 
(regarding permissible interest crediting rates) unless the plan 
provides that, upon plan termination, if the interest crediting rate 
under the plan is a variable rate, the rate of interest used to 
determine accrued benefits under the plan is equal to the average of 
the rates of interest used under the plan during the 5-year period 
ending on the termination date. In addition, under section 
411(b)(5)(B)(vi)(II), the plan must provide that, upon plan 
termination, the interest rate and mortality table used to determine 
the amount of any benefit under the plan payable in the form of an 
annuity payable at normal retirement age is the rate and table 
specified under the plan for this purpose as of the termination date, 
except that if the interest rate is a variable rate, the rate used is 
the average of the rates used under the plan during the 5-year period 
ending on the termination date.
    Section 411(b)(5)(C) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H)(i) solely because the 
plan provides offsets against benefits under the plan to the extent the 
offsets are otherwise allowable in applying the requirements of section 
401(a). Section 411(b)(5)(D) provides that a plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H) solely because 
the plan provides a disparity in contributions or benefits with respect 
to which the requirements of section 401(l) (relating to permitted 
disparity for Social Security benefits and related matters) are met.
    Section 411(b)(5)(E) provides that a plan is not treated as failing 
to meet the requirements of section 411(b)(1)(H) solely because the 
plan provides for indexing of accrued benefits under the plan. Under 
section 411(b)(5)(E)(iii), indexing means the periodic adjustment of 
the accrued benefit by means of the application of a recognized 
investment index or methodology. Section 411(b)(5)(E)(ii) requires 
that, except in the case of a variable annuity, the indexing not result 
in a smaller benefit

[[Page 64125]]

than the accrued benefit determined without regard to the indexing.
    Section 701(a) of PPA '06 added provisions to the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 
(1974)) (ERISA), that are parallel to sections 411(a)(13) and 411(b)(5) 
of the Code. The guidance provided in these regulations with respect to 
the Code also applies for purposes of the parallel amendments to ERISA 
made by section 701(a) of PPA '06.\1\
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    \1\ Under section 101 of Reorganization Plan No. 4 of 1978 (43 
FR 47713), the Secretary of the Treasury has interpretive 
jurisdiction over the subject matter addressed by these regulations 
for purposes of ERISA, as well as the Code.
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    Section 701(c) of PPA '06 added provisions to the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602 (1967)) (ADEA), that are parallel to section 411(b)(5) of the Code. 
Executive Order 12067 requires all Federal departments and agencies to 
advise and offer to consult with the Equal Employment Opportunity 
Commission (EEOC) during the development of any proposed rules, 
regulations, policies, procedures, or orders concerning equal 
employment opportunity. The Treasury Department and the IRS have 
consulted with the EEOC prior to the issuance of these regulations.
    Section 701(d) of PPA '06 provides that nothing in the amendments 
made by section 701 should be construed to create an inference 
concerning the treatment of applicable defined benefit plans or 
conversions of plans into applicable defined benefit plans under 
section 411(b)(1)(H), or concerning the determination of whether an 
applicable defined benefit plan fails to meet the requirements of 
section 411(a)(2), 411(c), or 417(e), as in effect before such 
amendments, solely because the present value of the accrued benefit (or 
any portion thereof) of any participant is, under the terms of the 
plan, equal to the amount expressed as the balance of a hypothetical 
account or as an accumulated percentage of the participant's final 
average compensation.
    Section 701(e) of PPA '06 sets forth the effective date provisions 
with respect to amendments made by section 701 of PPA '06. Section 
701(e)(1) specifies that the amendments made by section 701 generally 
apply to periods beginning on or after June 29, 2005. Thus, the age 
discrimination safe harbors under section 411(b)(5)(A) and section 
411(b)(5)(E) are effective for periods beginning on or after June 29, 
2005. Section 701(e)(2) provides that the special present value rules 
of section 411(a)(13)(A) are effective for distributions made after 
August 17, 2006 (the date PPA '06 was enacted).
    Under section 701(e) of PPA '06, the 3-year vesting rule under 
section 411(a)(13)(B) is generally effective for years beginning after 
December 31, 2007, for a plan in existence on June 29, 2005, while, 
pursuant to the amendments made by section 107(c) of WRERA '08, this 
vesting rule is generally effective for plan years ending on or after 
June 29, 2005, for a plan not in existence on June 29, 2005. The market 
rate of return limitation under section 411(b)(5)(B)(i) is generally 
effective for years beginning after December 31, 2007, for a plan in 
existence on June 29, 2005, while the limitation is generally effective 
for periods beginning on or after June 29, 2005, for a plan not in 
existence on June 29, 2005. Section 701(e)(4) of PPA '06 contains 
special effective date provisions for collectively bargained plans that 
modify these effective dates.
    Under section 701(e)(5) of PPA '06, as amended by WRERA '08, 
sections 411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion 
amendment that is adopted on or after, and takes effect on or after, 
June 29, 2005.
    Under section 701(e)(6) of PPA '06, as added by WRERA '08, the 3-
year vesting rule under section 411(a)(13)(B) does not apply to a 
participant who does not have an hour of service after the date the 3-
year vesting rule would otherwise be effective.
    Section 702 of PPA '06 provides for regulations to be prescribed by 
August 16, 2007, addressing the application of rules set forth in 
section 701 of PPA '06 where the conversion of a defined benefit 
pension plan into an applicable defined benefit plan is made with 
respect to a group of employees who become employees by reason of a 
merger, acquisition, or similar transaction.
    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to statutory provisions under PPA 
'06 (or pursuant to any regulation issued under PPA '06) until the last 
day of the first plan year beginning on or after January 1, 2009 
(January 1, 2011, in the case of governmental plans). As described in 
Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to 
both interim and discretionary amendments that are made pursuant to PPA 
'06 statutory provisions or any regulation issued under PPA '06. See 
Sec.  601.601(d)(2)(ii)(b).
    Section 1107 of PPA '06 also permits certain amendments to reduce 
or eliminate section 411(d)(6) protected benefits. Except to the extent 
permitted under section 1107 of PPA '06 (or under another statutory 
provision, including section 411(d)(6) and Sec. Sec.  1.411(d)-3 and 
1.411(d)-4), section 411(d)(6) prohibits a plan amendment that 
decreases a participant's accrued benefits or that has the effect of 
eliminating or reducing an early retirement benefit or retirement-type 
subsidy, or eliminating an optional form of benefit, with respect to 
benefits attributable to service before the amendment. However, an 
amendment that eliminates or decreases benefits that have not yet 
accrued does not violate section 411(d)(6), provided that the amendment 
is adopted and effective before the benefits accrue. If section 1107 of 
PPA '06 applies to an amendment of a plan, section 1107 provides that 
the plan does not fail to meet the requirements of section 411(d)(6) by 
reason of such amendment, except as provided by the Secretary of the 
Treasury.
    Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and 
411(b)(2) were published by the Treasury Department and the IRS in the 
Federal Register on April 11, 1988 (53 FR 11876), as part of a package 
of regulations that also included proposed regulations under sections 
410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age 
for participation, vesting, normal retirement age, and actuarial 
adjustments after normal retirement age, respectively).\2\
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    \2\ On December 11, 2002, the Treasury Department and the IRS 
issued proposed regulations regarding the age discrimination 
requirements of section 411(b)(1)(H) that specifically addressed 
cash balance plans as part of a package of regulations that also 
addressed section 401(a)(4) nondiscrimination cross-testing rules 
applicable to cash balance plans (67 FR 76123). The 2002 proposed 
regulations were intended to replace the 1988 proposed regulations. 
In Ann. 2003-22 (2003-1 CB 847), see Sec.  601.601(d)(2)(ii)(b), the 
Treasury Department and the IRS announced the withdrawal of the 2002 
proposed regulations under section 401(a)(4), and in Ann. 2004-57 
(2004-2 CB 15), see Sec.  601.601(d)(2)(ii)(b), the Treasury 
Department and the IRS announced the withdrawal of the 2002 proposed 
regulations relating to age discrimination.
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    Notice 96-8 (1996-1 CB 359), see Sec.  601.601(d)(2)(ii)(b), 
described the application of sections 411 and 417(e) to a single-sum 
distribution under a cash balance plan where interest credits under the 
plan are frontloaded (that is, where the right to future interest 
credits with respect to an employee's hypothetical account balance is 
not conditioned upon future service and thus accrues at the same time 
that the benefits attributable to a hypothetical allocation to the 
account accrue). Under the analysis set forth in Notice 96-8, in order 
to comply with sections 411(a) and 417(e) in calculating the amount of

[[Page 64126]]

a single-sum distribution under a cash balance plan, the balance of an 
employee's hypothetical account must be projected to normal retirement 
age and converted to an annuity under the terms of the plan, and then 
the employee must be paid at least the present value of the projected 
annuity, determined in accordance with section 417(e). Under that 
analysis, where a cash balance plan provides frontloaded interest 
credits using an interest rate that is higher than the section 417(e) 
applicable interest rate, payment of a single-sum distribution equal to 
the current hypothetical account balance as a complete distribution of 
the employee's accrued benefit may result in a violation of section 
417(e) or a forfeiture in violation of section 411(a). In addition, 
Notice 96-8 proposed a safe harbor which provided that, if frontloaded 
interest credits are provided under a plan at a rate no greater than 
the sum of identified standard indices and associated margins, no 
violation of section 411(a) or 417(e) would result if the employee's 
entire accrued benefit were to be distributed in the form of a single-
sum distribution equal to the employee's hypothetical account balance, 
provided the plan uses appropriate annuity conversion factors. Since 
the issuance of Notice 96-8, four Federal appellate courts have 
followed the analysis set out in the Notice: Esden v. Bank of Boston, 
229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); 
West v. AK Steel Corp. Ret. Accumulation Pension Plan, 484 F.3d 395 
(6th Cir. 2007), cert. denied, 129 S. Ct. 895 (2009); Berger v. Xerox 
Corp. Ret. Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003), reh'g 
and reh'g en banc denied, No. 02-3674, 2003 U.S. App. LEXIS 19374 (7th 
Cir. Sept. 15, 2003); Lyons v. Georgia-Pacific Salaried Employees Ret. 
Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 
(2001).
    Notice 2007-6 (2007-1 CB 272), see Sec.  601.601(d)(2)(ii)(b), 
provides transitional guidance with respect to certain requirements of 
sections 411(a)(13) and 411(b)(5) and section 701(b) of PPA '06. Notice 
2007-6 includes certain special definitions, including: Accumulated 
benefit, which is defined as a participant's benefit accrued to date 
under a plan; lump sum-based plan, which is defined as a defined 
benefit plan under the terms of which the accumulated benefit of a 
participant is expressed as the balance of a hypothetical account 
maintained for the participant or as the current value of the 
accumulated percentage of the participant's final average compensation; 
and statutory hybrid plan, which is defined as a lump sum-based plan or 
a plan which has an effect similar to a lump sum-based plan. Notice 
2007-6 provides guidance on a number of issues, including a rule under 
which a plan that provides for indexed benefits described in section 
411(b)(5)(E) is a statutory hybrid plan (because it has an effect 
similar to a lump sum-based plan), unless the plan either solely 
provides for post-retirement adjustment of the amounts payable to a 
participant or is a variable annuity plan under which the assumed 
interest rate used to determine adjustments is at least 5 percent. 
Notice 2007-6 provides a safe harbor for applying the rules set forth 
in section 701 of PPA '06 where the conversion of a defined benefit 
pension plan into an applicable defined benefit plan is made with 
respect to a group of employees who become employees by reason of a 
merger, acquisition, or similar transaction. This transitional 
guidance, along with the other guidance provided in Part III of Notice 
2007-6, applies pending the issuance of further guidance and, thus, 
does not apply for periods to which these final regulations apply.
    Proposed regulations (REG-104946-07) under sections 411(a)(13) and 
411(b)(5) (2007 proposed regulations) were published by the Treasury 
Department and the IRS in the Federal Register on December 28, 2007 (72 
FR 73680). The Treasury Department and the IRS received written 
comments on the 2007 proposed regulations and a public hearing was held 
on June 6, 2008.
    Announcement 2009-82 (2009-48 IRB 720) and Notice 2009-97 (2009-52 
IRB 972), see Sec.  601.601(d)(2)(ii)(b), announced certain expected 
relief with respect to the requirements of section 411(b)(5). In 
particular, Announcement 2009-82 stated that the rules in the 
regulations specifying permissible market rates of return are not 
expected to go into effect before the first plan year that begins on or 
after January 1, 2011. In addition, Notice 2009-97 stated that, once 
final regulations under sections 411(a)(13) and 411(b)(5) are issued, 
it is expected that relief from the requirements of section 411(d)(6) 
will be granted for a plan amendment that eliminates or reduces a 
section 411(d)(6) protected benefit, provided that the amendment is 
adopted by the last day of the first plan year that begins on or after 
January 1, 2010, and the elimination or reduction is made only to the 
extent necessary to enable the plan to meet the requirements of section 
411(b)(5).\3\ Notice 2009-97 also extended the deadline for amending 
cash balance and other applicable defined benefit plans, within the 
meaning of section 411(a)(13)(C), to meet the requirements of section 
411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5), 
relating to vesting and other special rules applicable to these plans. 
Under Notice 2009-97, the deadline for these amendments is the last day 
of the first plan year that begins on or after January 1, 2010.
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    \3\ However, see footnote 6 in the preamble to the 2010 proposed 
regulations described in the next paragraph.
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    After consideration of the comments received in response to the 
2007 proposed regulations, these final regulations generally adopt the 
provisions of the 2007 proposed regulations with certain modifications 
as described under the heading ``Explanation of Provisions.'' In 
addition, the Treasury Department and the IRS are issuing proposed 
regulations (2010 proposed regulations) that address certain issues 
under sections 411(a)(13) and 411(b)(5) that have not been addressed in 
these final regulations (and that are generally indicated as 
``RESERVED'' in these final regulations), and that also address a 
related issue under section 411(b)(1). The 2010 proposed regulations 
are being issued at the same time as these final regulations.

Explanation of Provisions

Overview

    In general, these final regulations incorporate the transitional 
guidance provided under Notice 2007-6 as well as the provisions of the 
2007 proposed regulations. The regulations adopt the terminology used 
in the proposed regulations (such as ``statutory hybrid benefit 
formula'' and ``lump sum-based benefit formula'') to take into account 
situations where plans provide more than one benefit formula. These 
regulations also provide additional guidance with respect to sections 
411(a)(13) and 411(b)(5), taking into account comments received in 
response to the 2007 proposed regulations and also reflecting the 
enactment of WRERA '08.

I. Section 411(a)(13): Applicable Definitions, Relief of Section 
411(a)(13)(A), and Special Vesting Rules for Applicable Defined Benefit 
Plans

A. Definitions

    The regulations under section 411(a)(13) contain certain 
definitions

[[Page 64127]]

that apply both for purposes of the regulations under section 
411(a)(13) and the regulations under section 411(b)(5). Section 
411(b)(5)(G) provides that, for purposes of section 411(b)(5), any 
reference to the accrued benefit means the benefit accrued to date. The 
final regulations refer to this as the ``accumulated benefit'', which 
is distinct from the participant's accrued benefit under section 
411(a)(7) (an annuity beginning at normal retirement age that is 
actuarially equivalent to the participant's accumulated benefit). As in 
the 2007 proposed regulations, the regulations use the term ``statutory 
hybrid plan'' to refer to an applicable defined benefit plan described 
in section 411(a)(13)(C). Under the regulations, a statutory hybrid 
plan is a defined benefit plan that contains a statutory hybrid benefit 
formula, and a ``statutory hybrid benefit formula'' is a benefit 
formula that is either a lump sum-based benefit formula or a formula 
that has an effect similar to a lump sum-based benefit formula.
    The regulations define a ``lump sum-based benefit formula'' as a 
benefit formula used to determine all or any part of a participant's 
accumulated benefit under which the accumulated benefit provided under 
the formula is expressed as the current balance of a hypothetical 
account maintained for the participant or as the current value of the 
accumulated percentage of the participant's final average compensation. 
The final regulations adopt the rules of the 2007 proposed regulations 
whereby the determination as to whether a benefit formula is a lump 
sum-based benefit formula is made based on how the accumulated benefit 
of a participant is expressed under the terms of the plan, and does not 
depend on whether the plan provides an optional form of benefit in the 
form of a single-sum payment. Similarly, a formula does not fail to be 
a lump sum-based benefit formula merely because the plan's terms state 
that the participant's accrued benefit is an annuity at normal 
retirement age that is actuarially equivalent to the balance of a 
hypothetical account maintained for the participant.
    The preamble to the 2007 proposed regulations asked for comments on 
plan formulas that calculate benefits as the current value of an 
accumulated percentage of the participant's final average compensation 
(often referred to as ``pension equity plans'' or ``PEPs''). Commenters 
indicated that some of these plans never credit interest, directly or 
indirectly, some explicitly credit interest after cessation of PEP 
accruals, and some do not credit interest explicitly but provide for 
specific amounts to be payable after cessation of accruals (both 
immediately and at future dates) based on actuarial equivalence using 
specified actuarial factors applied after cessation of accruals.
    In response to these comments, the final regulations clarify that a 
benefit formula is expressed as the balance of a hypothetical account 
maintained for the participant if it is expressed as a current single-
sum dollar amount. A lump sum-based benefit formula that credits 
interest is subject to the market rate of return rules, so that in any 
case in which a PEP formula provides for interest credits after 
cessation of PEP accruals, the interest credits are subject to the 
market rate of return rules.
    The 2007 proposed regulations contained a rule whereby a benefit 
formula would not have been treated as a lump sum-based benefit formula 
with respect to a participant merely because the participant is 
entitled to a benefit that is not less than the benefit properly 
attributable to after-tax employee contributions. In response to 
comments received that this rule be broadened, the final regulations 
provide that the benefit properly attributable to after-tax employee 
contributions, rollover contributions, and other similar employee 
contributions is disregarded when determining whether a benefit formula 
is a lump sum-based benefit formula with respect to a participant. 
Thus, for example, a plan is not a statutory hybrid plan with a lump 
sum-based benefit formula with respect to a participant merely because 
the plan provides that the participant's benefit is equal to the sum-of 
or greater-of the benefit properly attributable to employee 
contributions and the benefit under a traditional defined benefit 
formula.
    The regulations provide that a benefit is not properly attributable 
to employee contributions if such contributions are credited with 
interest at a rate that exceeds a reasonable rate of interest or if the 
conversion factors used to calculate the benefit based on such employee 
contributions are not actuarially reasonable. The regulations clarify 
that section 411(c) merely provides an example of an acceptable 
methodology for purposes of determining the benefit that is properly 
attributable to employee contributions.
    The 2007 proposed regulations provided that a benefit formula under 
a defined benefit plan has an effect similar to a lump sum-based 
benefit formula if the formula provides that a participant's 
accumulated benefit payable at normal retirement age (or at benefit 
commencement, if later) is expressed as a benefit that includes 
periodic adjustments (including a formula that provides for indexed 
benefits described in section 411(b)(5)(E)) that are reasonably 
expected to result in a smaller annual benefit at normal retirement age 
(or at benefit commencement, if later) for the participant, when 
compared to a similarly situated, younger individual who is or could be 
a participant in the plan. A number of commenters suggested that the 
rule in the 2007 proposed regulations was too broad generally and also 
suggested that certain types of plans, such as plans described in 
section 411(b)(5)(E), be exempted entirely. However, the Treasury 
Department and the IRS believe that a key purpose of sections 
411(a)(13) and 411(b)(5) is to address defined benefit plan formulas 
where younger participants receive a larger annual benefit at normal 
retirement age when compared to similarly situated, older participants. 
Therefore, the final regulations do not significantly narrow the 
definition of a benefit formula that has an effect similar to a lump 
sum-based benefit formula.
    The regulations clarify that a benefit formula under a defined 
benefit plan has an effect similar to a lump sum-based benefit formula 
if the formula provides that a participant's accumulated benefit is 
expressed as a benefit that includes adjustments (including a formula 
that provides for indexed benefits described in section 411(b)(5)(E)) 
for a future period and the total dollar amount of the adjustments is 
reasonably expected to be smaller for the participant, when compared to 
a similarly situated, younger individual who is or could be a 
participant in the plan. Thus, a formula that provides that a 
participant's accumulated benefit is expressed as a benefit that 
includes the right to periodic adjustments is treated as having an 
effect similar to a lump sum-based benefit formula based on a 
comparison of the expected total dollar amount of the adjustments 
through benefit commencement, rather than the expected total 
accumulated benefit after application of these adjustments.
    As in the 2007 proposed regulations, the regulations provide that a 
benefit formula under a plan has an effect similar to a lump sum-based 
benefit formula where the right to future adjustments accrues at the 
same time as the benefit that is subject to those adjustments. In 
addition, the regulations provide that a benefit formula that does not 
include adjustments is nevertheless treated as a formula with an effect 
similar to a lump sum-based benefit formula where benefits are adjusted

[[Page 64128]]

pursuant to a pattern of repeated plan amendments and the total dollar 
amount of those adjustments is reasonably expected to be smaller for 
the participant than for any similarly situated, younger individual who 
is or could be a participant. See Sec.  1.411(d)-4, A-1(c)(1).
    Like the 2007 proposed regulations, the regulations provide that 
certain benefits are disregarded when determining whether a benefit 
formula has an effect similar to a lump sum-based benefit formula. For 
example, the regulations provide that, for purposes of determining 
whether a benefit formula has an effect similar to a lump sum-based 
benefit formula, indexing that applies to adjust benefits after the 
annuity starting date (for example, cost-of-living increases) is 
disregarded. In addition, benefits properly attributable to certain 
employee contributions that are disregarded for purposes of determining 
whether a participant is treated as having a lump-sum based benefit 
formula are also disregarded for purposes of determining whether a 
formula has an effect similar to a lump sum-based benefit formula.
    The regulations include an example that illustrates that a defined 
benefit formula is not treated as a statutory hybrid benefit formula 
merely because the formula provides for actuarial increases after 
normal retirement age. This is because actuarial increases after normal 
retirement age do not provide smaller adjustments for older 
participants when compared to similarly situated, younger participants.
    The 2007 proposed regulations provided that variable annuity 
benefit formulas with assumed interest rates (sometimes referred to as 
``hurdle rates'') of at least 5 percent are not treated as having an 
effect similar to a lump sum-based benefit formula. A number of 
commenters requested that the regulations extend this rule to variable 
annuity plans with lower hurdle rates. However, plans with lower hurdle 
rates are more likely to provide positive adjustments for future 
periods than plans with higher hurdle rates and, as a result, younger 
participants are more likely to receive a meaningfully larger total 
dollar amount of adjustments than older participants under these plans. 
The Treasury Department and the IRS are concerned that exempting these 
plans would mean that participants would lose the protections afforded 
to participants in statutory hybrid plans (including 3-year vesting and 
conversion protection). Therefore, the final regulations retain the 
rule whereby adjustments under a variable annuity do not have an effect 
similar to a lump sum-based benefit formula if the assumed interest 
rate used to determine the adjustments is 5 percent or higher. Such an 
annuity does not have an effect similar to a lump sum-based benefit 
formula even if post-annuity starting date adjustments are made using a 
specified assumed interest rate that is less than 5 percent.

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

    The regulations reflect new section 411(a)(13)(A) by providing that 
a statutory hybrid plan is not treated as failing to meet the 
requirements of section 411(a)(2), or, with respect to the 
participant's accrued benefit derived from employer contributions, the 
requirements of sections 411(a)(11), 411(c), or 417(e), merely because 
the plan provides that the present value of benefits as determined 
under a lump sum-based benefit formula is equal to the then-current 
balance of the hypothetical account maintained for the participant or 
the then-current value of the accumulated percentage of the 
participant's final average compensation under that formula. However, 
section 411(a)(13) does not alter the definition of the accrued benefit 
under section 411(a)(7)(A) (which generally defines the participant's 
accrued benefit as the annual benefit commencing at normal retirement 
age), nor does it alter the definition of the normal retirement benefit 
under section 411(a)(9) (which generally defines the participant's 
normal retirement benefit as the benefit under the plan commencing at 
normal retirement age).
    Section 411(a)(13)(A) applies only with respect to a benefit 
provided under a lump sum-based benefit formula. A statutory hybrid 
plan that provides benefits under a benefit formula that is a statutory 
hybrid benefit formula other than a lump sum-based benefit formula 
(such as a plan that provides for indexing as described in section 
411(b)(5)(E)) must comply with the present value rules of section 
417(e) with respect to an optional form of benefit that is subject to 
the requirements of section 417(e).
    The regulations do not provide guidance as to how section 
411(a)(13)(A) applies with respect to payments that are not made in the 
form of a single-sum distribution of the hypothetical account balance 
or accumulated percentage of final average compensation, such as 
payments made in the form of an annuity. That issue is being addressed 
in the 2010 proposed regulations.

C. Special Vesting Rules for Applicable Defined Benefit Plans

    Pursuant to section 411(a)(13)(B), the regulations provide that, in 
the case of a participant whose accrued benefit (or any portion 
thereof) under a defined benefit plan is determined under a statutory 
hybrid benefit formula, the plan is treated as failing to satisfy the 
requirements of section 411(a)(2) unless the plan provides that the 
participant has a nonforfeitable right to 100 percent of the 
participant's accrued benefit derived from employer contributions if 
the participant has 3 or more years of service. As in the 2007 proposed 
regulations, the final regulations provide that this requirement 
applies on a participant-by-participant basis and applies to the 
participant's entire benefit derived from employer contributions under 
a statutory hybrid plan (not just the portion of the participant's 
benefit that is determined under a statutory hybrid benefit formula). 
Furthermore, the regulations retain the rule under which, if a 
participant is entitled to the greater of two (or more) benefit amounts 
under a plan, where each amount is determined under a different benefit 
formula (including a benefit determined pursuant to an offset among 
formulas within the plan or a benefit determined as the greater of a 
protected benefit under section 411(d)(6) and another benefit amount), 
at least one of which is a benefit calculated under a statutory hybrid 
benefit formula, the 3-year vesting requirement applies to that 
participant's entire accrued benefit under the plan even if the 
participant's benefit under the statutory hybrid benefit formula is 
ultimately smaller than under the other formula.
    The 2007 proposed regulations requested comments regarding the 
application of the 3-year vesting requirement to a floor plan that is 
not a statutory hybrid plan but that is part of a floor-offset 
arrangement with an independent plan that is a statutory hybrid plan. A 
number of commenters suggested that the 3-year vesting requirement 
should apply on a plan-by-plan basis, without regard to whether a plan 
is part of a floor-offset arrangement. In contrast, one commenter 
suggested that the 3-year vesting requirement should apply to both 
plans that are part of a floor-offset arrangement even if only one of 
the plans is a statutory hybrid plan, because the commenter felt that 
determining the amount of the offset in an arrangement involving plans 
with different vesting schedules would be inherently difficult. 
However, this concern is mitigated because, in the view of the Treasury

[[Page 64129]]

Department and the IRS, a floor-offset arrangement where the benefit 
payable under a floor plan is reduced by the benefit payable under an 
independent plan is only permissible if the arrangement limits the 
offset to amounts that are vested under the independent plan.\4\ 
Therefore, the regulations retain the rule whereby the 3-year vesting 
requirement is limited to plans that contain a statutory hybrid benefit 
formula and provide an example illustrating this rule with respect to a 
floor-offset arrangement where the benefit payable under a floor plan 
that does not include a statutory hybrid benefit formula is reduced by 
the vested accrued benefit payable under an independent plan that 
includes a statutory hybrid benefit formula.
---------------------------------------------------------------------------

    \4\ See Rev. Rul. 76-259 (1976-2 CB 111), see Sec.  
601.601(d)(2)(ii)(b).
---------------------------------------------------------------------------

II. Section 411(b)(5): Safe Harbor for Age Discrimination, Conversion 
Protection, and Market Rate of Return Limitation

A. Safe Harbor for Age Discrimination

    The regulations reflect new section 411(b)(5)(A), which provides 
that a plan is not treated as failing to meet the requirements of 
section 411(b)(1)(H)(i) with respect to certain benefit formulas if, as 
determined as of any date, a participant's accumulated benefit 
expressed under one of those formulas would not be less than any 
similarly situated, younger participant's accumulated benefit expressed 
under the same formula. A plan that does not satisfy this test is 
required to satisfy the general age discrimination rule of section 
411(b)(1)(H)(i).
    As in the 2007 proposed regulations, the regulations provide that 
the safe harbor standard under section 411(b)(5)(A) is available only 
where a participant's accumulated benefit under the terms of the plan 
is expressed as an annuity payable at normal retirement age (or current 
age, if later), the current balance of a hypothetical account, or the 
current value of the accumulated percentage of the employee's final 
average compensation. For this purpose, if the accumulated benefit of a 
participant is expressed as an annuity payable at normal retirement age 
(or current age, if later) under the plan terms, then the comparison of 
benefits is made using such an annuity. Similarly, if the accumulated 
benefit of a participant is expressed under the plan terms as the 
current balance of a hypothetical account or the current value of an 
accumulated percentage of the participant's final average compensation, 
then the comparison of benefits is made using the current balance of a 
hypothetical account or the current value of the accumulated percentage 
of the participant's final average compensation, respectively.
    The regulations require a comparison of the accumulated benefit of 
each possible participant in the plan to the accumulated benefit of 
each other similarly situated, younger individual who is or could be a 
participant in the plan. For this purpose, as in the 2007 proposed 
regulations, the regulations provide that an individual is similarly 
situated to another individual if the individual is identical to that 
other individual in every respect that is relevant in determining a 
participant's benefit under the plan (including, but not limited to, 
period of service, compensation, position, date of hire, work history, 
and any other respect) except for age. In determining whether an 
individual is similarly situated to another individual, any 
characteristic that is relevant for determining benefits under the plan 
and that is based directly or indirectly on age is disregarded. For 
example, if a particular benefit formula applies to a participant on 
account of the participant's age, an individual to whom the benefit 
formula does not apply and who is identical to a participant in all 
respects other than age is similarly situated to the participant. By 
contrast, an individual is not similarly situated to a participant if a 
different benefit formula applies to the individual and the application 
of the different formula is based neither directly nor indirectly on 
age. For example, if the benefit formula under a plan is changed from 
one type to another for employees hired after the effective date of the 
change, employees hired after the relevant date would not be similarly 
situated with employees hired before that date because the benefit 
formula for new hires is not based directly nor indirectly on age.
    The comparison of accumulated benefits is made without regard to 
any subsidized portion of any early retirement benefit that is included 
in a participant's accumulated benefit. For this purpose, the 
subsidized portion of an early retirement benefit is the retirement-
type subsidy within the meaning of Sec.  1.411(d)-3(g)(6) that is 
contingent on a participant's severance from employment and 
commencement of benefits before normal retirement age.
    In addition, like the 2007 proposed regulations, the regulations 
provide that the safe harbor is generally not available with respect to 
a participant if the benefit of any similarly situated, younger 
individual is expressed in a different form than the participant's 
benefit. Thus, for example, the safe harbor is not available for 
comparing the accumulated benefit of a participant expressed as an 
annuity at normal retirement age with the accumulated benefit of a 
similarly situated, younger participant expressed as the current 
balance of a hypothetical account.
    Like the 2007 proposed regulations, the regulations generally 
permit a plan that provides the sum-of or the greater-of benefits that 
are expressed in two or more different forms of benefit to satisfy the 
safe harbor if the plan would separately satisfy the safe harbor for 
each separate form of benefit. For purposes of the safe harbor 
comparisons involving greater-of and sum-of benefit formulas, the 2007 
proposed regulations contained a rule where a similarly situated, 
younger participant would be treated as having an accumulated benefit 
of zero under a benefit formula that does not apply to the participant. 
While the sum-of and greater-of provisions are organized differently in 
these regulations, the regulations effectively retain this rule because 
sum-of and greater-of formulas are eligible for the safe harbor even 
where older participants receive benefits expressed in a different form 
than the benefits of similarly situated, younger participants, as long 
as younger participants are not entitled to benefits expressed in a 
different form than the benefits of similarly situated, older 
participants.
    Several commenters requested that the regulations clarify that the 
safe harbor is also available to plans that allow older participants to 
choose, at the time a new statutory hybrid benefit formula goes into 
effect, whether to receive a benefit under the statutory hybrid benefit 
formula or under the pre-existing traditional defined benefit formula. 
In response to such comments, the regulations adopt similar rules as 
the sum-of and greater-of rules for plans that provide participants 
with the choice of benefits that are expressed in two or more different 
forms.
    As part of the sum-of, greater-of, and choice-of rules, the 
regulations reflect the fact that the sum of benefits expressed in two 
or more forms is never less than the greater of the same benefits and 
that the greater of benefits expressed in two or more forms is never 
less than the choice of the same benefits. As a result, the regulations 
provide that in order for the safe harbor to be available with respect 
to a participant who is provided with the greater of benefits expressed 
in two or more different forms, the plan must not provide any similarly 
situated, younger participant with the sum of the same

[[Page 64130]]

benefits. Similarly, the regulations provide that in order for the safe 
harbor to be available with respect to a participant who is provided 
with the choice of benefits expressed in two or more different forms, 
the plan must not provide any similarly situated, younger participant 
with either the sum of or the greater of the same benefits. In 
addition, in order for the safe harbor to be available, the plan cannot 
provide for any other relationship between benefits expressed in 
different forms other than sum-of, greater-of, or choice-of benefits.
    The regulations reflect new section 411(b)(5)(C), which provides 
that a plan is not treated as failing to meet the requirements of 
section 411(b)(1)(H) solely because the plan provides offsets of 
benefits under the plan to the extent such offsets are allowable in 
applying the requirements under section 401 and the applicable 
requirements of ERISA and ADEA. The regulations incorporate the 
provisions of section 411(b)(5)(D) (relating to permitted disparity 
under section 401(l)) without providing additional guidance. These 
rules are unchanged from the 2007 proposed regulations.
    The regulations contain a number of new examples that illustrate 
the application of the safe harbor under various fact patterns. One of 
these examples illustrates that the safe harbor is not satisfied in the 
case of a plan that contains a suspension of benefits provision that 
reduces or eliminates interest credits for participants who continue in 
service after normal retirement age.
    The regulations also reflect new section 411(b)(5)(E), which 
provides for the disregard of certain indexing of benefits for purposes 
of the age discrimination rules of section 411(b)(1)(H). As in the 2007 
proposed regulations, the regulations limit the disregard of indexing 
to formulas under defined benefit plans other than lump sum-based 
formulas. In addition, the regulations clarify that the disregard of 
indexing is limited to situations in which the extent of the indexing 
for a participant would not be less than the indexing applicable to a 
similarly situated, younger participant. Thus, the disregard of 
indexing is only available if the indexing is neither terminated nor 
reduced on account of the attainment of any age.
    Section 411(b)(5)(E) requires that the indexing be accomplished by 
application of a recognized investment index or methodology. The 2007 
proposed regulations limited a recognized investment index or 
methodology to an eligible cost-of-living index as described in Sec.  
1.401(a)(9)-6, A-14(b), the rate of return on the aggregate assets of 
the plan, or the rate of return on the annuity contract for the 
employee issued by an insurance company licensed under the laws of a 
State. The final regulations expand the list of what constitutes a 
recognized index or methodology by treating any rate of return that 
satisfies the market rate of return rules under these regulations as a 
recognized index or methodology.
    As under the 2007 proposed regulations, the section 
411(b)(5)(E)(ii) protection against loss (``no-loss'') requirement for 
an indexed plan (which requires that the indexing not result in a 
smaller accrued benefit than if no indexing had applied) is implemented 
under the final regulations by applying the ``preservation of capital'' 
rule of section 411(b)(5)(B)(i)(II) to indexed plans. (The preservation 
of capital rule is discussed in section II. C. of this preamble.) The 
final regulations clarify that variable annuity benefit formulas (as 
defined in the regulations) are exempt from the no-loss and 
preservation of capital rules.

B. Conversion Protection

    The regulations provide guidance on the new conversion protections 
under section 411(b)(5)(B)(ii), (iii), and (iv) which is similar to the 
2007 proposed regulations. Under the regulations, a participant whose 
benefits are affected by a conversion amendment that was both adopted 
and effective on or after June 29, 2005, must generally be provided 
with a benefit after the conversion that is at least equal to the sum 
of the benefits accrued through the date of the conversion and benefits 
earned after the conversion, with no permitted interaction between 
these two portions. This assures participants that there will be no 
``wear-away'' as a result of a conversion, both with respect to the 
participant's accrued benefits and any early retirement subsidy to 
which the participant is entitled based on the pre-conversion benefits.
    The 2007 proposed regulations included an alternative mechanism 
under which a plan could provide for the establishment of an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation as part of the conversion and 
keep separate track of (1) the benefit attributable to the opening 
hypothetical account balance (including interest credits attributable 
thereto) or attributable to the opening accumulated percentage of the 
participant's final average compensation and (2) the benefit 
attributable to post-conversion service under the post-conversion 
benefit formula. Comments on this rule were favorable and it is 
retained under the final regulations. A variety of examples 
illustrating application of the alternative are included in the 
regulations. Under this alternative, when a participant commences 
benefits, it must be determined whether the benefit attributable to the 
opening hypothetical account or attributable to the opening accumulated 
percentage that is payable in the particular optional form of benefit 
selected is greater than or equal to the benefit accrued under the plan 
prior to the date of conversion and that was payable in the same 
generalized optional form of benefit (within the meaning of Sec.  
1.411(d)-3(g)(8)) at the same annuity starting date. If the benefit 
attributable to the opening hypothetical account balance or opening 
accumulated percentage is greater, then the plan must provide that such 
benefit is paid in lieu of the pre-conversion benefit, in addition to 
the benefit attributable to post-conversion service under the post-
conversion benefit formula. If the benefit attributable to the opening 
hypothetical account balance or opening accumulated percentage is less, 
then the plan must provide that such benefit will be increased 
sufficiently to provide the pre-conversion benefit, in addition to the 
benefit attributable to post-conversion service under the post-
conversion benefit formula.
    As in the 2007 proposed regulations, the final regulations provide 
under this alternative that, if an optional form of benefit is 
available on the annuity starting date with respect to the benefit 
attributable to the opening hypothetical account balance or opening 
accumulated percentage, but no optional form (such as a single-sum 
distribution) within the same generalized optional form of benefit was 
available at that annuity starting date under the terms of a plan as in 
effect immediately prior to the effective date of the conversion 
amendment, then the comparison must still be made by assuming that the 
pre-conversion plan had such an optional form of benefit.
    The preamble to the 2007 proposed regulations asked for comments on 
another alternative means of satisfying the conversion requirements 
that would involve establishing an opening hypothetical account 
balance, but would not require a comparison of benefits at the annuity 
starting date if certain requirements are met. Comments on this 
alternative were favorable, but some commenters requested that the 
alternative only be available where there was sufficient protection to 
ensure that

[[Page 64131]]

participants' benefits would not be less than would apply under the 
rules in the 2007 proposed regulations. While these final regulations 
do not permit this additional alternative, it is included in the 2010 
proposed regulations.
    The regulations also provide guidance that is unchanged from the 
2007 proposed regulations on what constitutes a conversion amendment 
under section 411(b)(5)(B)(v). Under the final regulations, whether an 
amendment is a conversion amendment is determined on a participant-by-
participant basis. The regulations provide that an amendment (including 
multiple amendments) is a conversion amendment with respect to a 
participant if it meets two criteria: (1) The amendment reduces or 
eliminates the benefits that, but for the amendment, the participant 
would have accrued after the effective date of the amendment under a 
benefit formula that is not a statutory hybrid benefit formula and 
under which the participant was accruing benefits prior to the 
amendment; and (2) after the effective date of the amendment, all or a 
portion of the participant's benefit accruals under the plan are 
determined under a statutory hybrid benefit formula.
    The regulations clarify that only amendments that reduce or 
eliminate accrued benefits described in section 411(a)(7), or 
retirement-type subsidies described in section 411(d)(6)(B)(i), that 
would otherwise accrue as a result of future service are treated as 
amendments that reduce or eliminate the participant's benefits that 
would have accrued after the effective date of the amendment under a 
benefit formula that is not a statutory hybrid benefit formula. As 
under the 2007 proposed regulations, a plan is treated as having been 
amended for this purpose if, under the terms of the plan, a change in 
the conditions of a participant's employment results in a reduction or 
elimination of the benefits that the participant would have accrued in 
the future under a benefit formula that is not a statutory hybrid 
benefit formula (for example, a job transfer from an operating division 
covered by a non-statutory hybrid defined benefit plan to an operating 
division that is covered by a formula expressed as the balance of a 
hypothetical account). However, in the absence of coordination between 
the formulas, the special requirements for conversion amendments 
typically will be satisfied automatically.
    A number of commenters recommended that the effective date of a 
conversion amendment generally be the date accruals begin under a 
statutory hybrid benefit formula, rather than the date that future 
accruals are reduced under the non-statutory hybrid benefit formula. 
Several commenters suggested that, if this recommendation was not 
implemented generally, it should nevertheless apply at the effective 
date of an amendment which provides participants with the greater of 
benefits under the prior formula and a statutory hybrid benefit formula 
for a period of time before benefit accruals cease under the prior 
formula, especially if the amendment applies to a subgroup of existing 
older, long service employees. However, some comments expressed concern 
that such a change in the proposed definition of the effective date of 
a conversion amendment would allow plans to delay the statutory anti-
wearaway protections by adding a less valuable cash balance benefit for 
the grandfathered group at a date, even though ``the effect of 
converting'' (within the meaning of section 411(b)(5)(B)(v)(I)) their 
traditional benefit into a cash balance benefit would occur for them at 
the later date when their benefit accruals cease under the prior 
formula.
    The Treasury Department and the IRS are concerned that the 
requested change in the proposed rule would circumvent a key purpose 
behind the conversion protection requirements by allowing for a delayed 
wear-away that would occur at the time accruals cease under the prior 
formula. For example, if a plan were generally converted to a cash 
balance plan, but the plan were to provide for some class of 
participants, such as participants who are age 55 or older, to receive 
the greater of accruals under the prior formula or the new cash balance 
formula for a period of 5 years, the change requested in the comments 
would define the effective date of the conversion amendment for all 
participants to be the date the cash balance formula went into effect 
(rather than applying a participant by participant rule). As a result, 
5 years after the cash balance formula went into effect, the 
hypothetical account balance for these older participants could provide 
benefits that are less than the frozen amount under the prior formula, 
a circumstance that would produce no additional accruals for some 
period of time after the end of the 5-year period. Therefore, the 
approach suggested by these comments would allow the type of wear-away 
the statute was intended to prevent. Accordingly, like the 2007 
proposed regulations, the regulations adopt a rule whereby the 
effective date of a conversion amendment is, with respect to a 
participant, the date as of which the reduction occurs in the benefits 
that the participant would have accrued after the effective date of the 
amendment under a benefit formula that is not a statutory hybrid 
benefit formula. In accordance with section 411(d)(6), the regulations 
provide that the date future benefit accruals are reduced cannot be 
earlier than the date of adoption of the conversion amendment.
    The regulations provide rules, similar to those in the 2007 
proposed regulations, prohibiting the avoidance of the conversion 
protections through the use of multiple plans or multiple employers. 
Under these rules, an employer is treated as having adopted a 
conversion amendment if the employer adopts an amendment under which a 
participant's benefits under a plan that is not a statutory hybrid plan 
are coordinated with a separate plan that is a statutory hybrid plan, 
such as through a reduction (offset) of the benefit under the plan that 
is not a statutory hybrid plan. In addition, if an employee's employer 
changes as a result of a merger, acquisition, or other transaction 
described in Sec.  1.410(b)-2(f), then the employee's old and new 
employers would be treated as a single employer for this purpose. Thus, 
for example, in an acquisition, if the buyer adopts an amendment to its 
statutory hybrid plan under which a participant's benefits under the 
seller