Amendment of Prohibited Payment Option Under Single-Employer Defined Benefit Plan of Plan Sponsor in Bankruptcy, 66915-66918 [2012-27336]
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Rules and Regulations
Federal Register
Vol. 77, No. 217
Thursday, November 8, 2012
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9601]
RIN 1545–BK94
Amendment of Prohibited Payment
Option Under Single-Employer Defined
Benefit Plan of Plan Sponsor in
Bankruptcy
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document contains final
regulations that provide guidance under
the anti-cutback rules of section
411(d)(6) of the Internal Revenue Code,
which generally prohibit plan
amendments eliminating or reducing
accrued benefits, early retirement
benefits, retirement-type subsidies, and
optional forms of benefit under
qualified retirement plans. These
regulations provide an additional
limited exception to the anti-cutback
rules to permit a plan sponsor that is a
debtor in a bankruptcy proceeding to
amend its single-employer defined
benefit plan to eliminate a single-sum
distribution option (or other optional
form of benefit providing for accelerated
payments) under the plan if certain
specified conditions are satisfied. These
regulations affect administrators,
employers, participants, and
beneficiaries of such a plan.
DATES: Effective date: These regulations
are effective on November 8, 2012.
Applicability date: These regulations
apply to plan amendments that are
adopted and effective after November 8,
2012.
FOR FURTHER INFORMATION CONTACT: Neil
S. Sandhu or Linda S.F. Marshall at
(202) 622–6090.
SUPPLEMENTARY INFORMATION:
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SUMMARY:
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Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 411(d)(6) of the
Internal Revenue Code (Code). These
final regulations amend § 1.411(d)–4 of
the Treasury regulations.
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(d)(2) of the Code or section
4281 of the Employee Retirement
Income Security Act of 1974, Public
Law 93–406 (88 Stat. 829 (1974)), as
amended (ERISA).
Section 411(d)(6)(B) 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 a
participant who satisfies (either before
or after the amendment) the
preamendment conditions for the
subsidy. The last sentence of section
411(d)(6)(B) provides that the Secretary
may by regulations provide that section
411(d)(6)(B) does not apply to a plan
amendment that eliminates an optional
form of benefit (other than a plan
amendment that has the effect of
eliminating or reducing an early
retirement benefit or a retirement-type
subsidy).
Section 436(d)(2) provides that a
defined benefit plan which is a singleemployer plan must provide that,
during any period in which the plan
sponsor is a debtor in a case under title
11, United States Code, or similar
Federal or State law (a ‘‘bankruptcy
case’’), the plan may not pay any
‘‘prohibited payment.’’ However, that
limitation does not apply in a plan year
on or after the date on which the
enrolled actuary of the plan certifies
that the adjusted funding target
attainment percentage (as defined in
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section 436(j)(2)) of the plan for the plan
year is not less than 100 percent.
Section 436(d)(5) sets forth a
definition of the term prohibited
payment. Under this definition, a
‘‘prohibited payment’’ is: (1) Any
payment in excess of the monthly
amount paid under a single life annuity
(plus any social security supplements
described in the last sentence of section
411(a)(9)) to a participant or beneficiary
whose annuity starting date (as defined
in section 417(f)(2)) occurs during any
period a limitation under section
436(d)(1) or section 436(d)(2) is in
effect; (2) any payment for the purchase
of an irrevocable commitment from an
insurer to pay benefits; and (3) any other
payment specified by the Secretary by
regulations. The term ‘‘prohibited
payment’’ does not include the payment
of a benefit which under section
411(a)(11) may be immediately
distributed without the consent of the
participant.
Section 1.411(d)–4, Q&A–1(a)
provides that the term section 411(d)(6)
protected benefit includes: (1) Benefits
described in section 411(d)(6)(A); (2)
early retirement benefits (as defined in
§ 1.411(d)–3(g)(6)(i)) and retirement type
subsidies (as defined in § 1.411(d)–
3(g)(6)(iv)); and (3) optional forms of
benefit described in section
411(d)(6)(B)(ii).
Section 1.411(d)–4, Q&A–1(b)(1)
provides that the term optional form of
benefit for purposes of § 1.411(d)–4 has
the same meaning as in § 1.411(d)–
3(g)(6)(ii). Section 1.411(d)–3(g)(6)(ii)(A)
defines the term ‘‘optional form of
benefit’’ as ‘‘a distribution alternative
(including the normal form of benefit)
that is available under the plan with
respect to an accrued benefit or a
distribution alternative with respect to a
retirement-type benefit. Different
optional forms of benefit exist if a
distribution alternative is not payable
on substantially the same terms as
another distribution alternative. The
relevant terms include all terms
affecting the value of the optional form,
such as the method of benefit
calculation and the actuarial factors or
assumptions used to determine the
amount distributed. Thus, for example,
different optional forms of benefit may
result from differences in terms relating
to the payment schedule, timing,
commencement, medium of distribution
(for example, in cash or in kind),
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / Rules and Regulations
election rights, differences in eligibility
requirements, or the portion of the
benefit to which the distribution
alternative applies.’’
Section 1.411(d)–4, Q&A–2(a)(1)
provides that a plan is not permitted to
be amended to eliminate or reduce a
section 411(d)(6) protected benefit that
has already accrued, except as provided
in § 1.411(d)–3 or § 1.411(d)–4. Under
§ 1.411(d)–4, Q&A–2(b)(1), the
Commissioner is authorized to provide
for the elimination or reduction of an
optional form of benefit to the extent
that plan participants do not lose either
a valuable right or an employersubsidized optional form of benefit
when a similar optional form of benefit
with a comparable subsidy is not
provided.1 In addition, § 1.411(d)–4,
Q&A–2(b)(2)(i) through (xi) sets forth
specific situations under which the
elimination or reduction of certain
section 411(d)(6) protected benefits that
have already accrued does not violate
section 411(d)(6). These exceptions have
been included in regulations pursuant
to the IRS’s authority under the last
sentence of section 411(d)(6)(B) to
permit a plan amendment that
eliminates or reduces 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).
Section 1.436–1(d)(2) provides that a
plan satisfies the requirements of
section 436(d)(2) and § 1.436–1(d)(2)
only if the plan provides that a
participant or beneficiary is not
permitted to elect an optional form of
benefit that includes a prohibited
payment, and the plan will not pay any
prohibited payment, with an annuity
starting date that occurs during any
period in which the plan sponsor is a
debtor in a case under title 11, United
States Code, or similar Federal or State
law, except for payments made with an
annuity starting date that occurs on or
after the date within the plan year on
which the enrolled actuary of the plan
certifies that the plan’s adjusted funding
target attainment percentage for the plan
year is not less than 100 percent.
Title IV of ERISA provides for a
pension plan termination insurance
program that is administered by the
Pension Benefit Guaranty Corporation
(PBGC). PBGC guarantees nonforfeitable
benefits, up to specified limits, for
defined benefit pension plans that are
covered under the program.2 If a single1 Such an amendment can be authorized only
through the publication of revenue rulings, notices,
and other documents of general applicability. See
§ 601.601(d)(2)(ii)(b).
2 See section 4021 of ERISA.
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employer plan terminates in a distress
termination under section 4041(c) of
ERISA or an involuntary termination
under section 4042 of ERISA, and the
plan assets are not sufficient to provide
all guaranteed benefits, PBGC pays
benefits to participants and beneficiaries
under the provisions of Title IV and
PBGC’s regulations.3 PBGC allows a
participant who is not in pay status at
the time of the termination to elect
among the various annuity forms
described in 29 CFR 4022.8. In addition,
under 29 CFR 4022.7, PBGC does not
pay benefits in a single sum in excess
of $5,000 (except under certain limited
circumstances).
Section 204(g) of ERISA contains
rules that are parallel to Code section
411(d)(6). 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 regulations issued under
section 411(d)(6) of the Code apply as
well for purposes of section 204(g) of
ERISA.
On June 21, 2012, the IRS issued
proposed regulations under section
411(d)(6) (77 FR 37349) to provide an
additional limited exception to the anticutback rules to permit a plan sponsor
that is a debtor in a bankruptcy
proceeding to amend its singleemployer defined benefit plan to
eliminate a single-sum distribution
option (or other optional form of benefit
providing for accelerated payments)
under the plan if certain conditions are
satisfied. Several comments were
received on the proposed regulations.
No public hearing was requested or
held. After consideration of the
comments received, the IRS and the
Treasury Department are issuing these
final regulations to adopt the rules set
forth in the proposed regulations with
minor modifications.
Explanation of Provisions
These final regulations provide a
limited exception under section
411(d)(6)(B) to permit a plan sponsor
that is a debtor in a bankruptcy
proceeding to amend its singleemployer defined benefit plan to
eliminate a single-sum distribution
option (or other optional form of benefit
providing for accelerated payments) if
certain conditions are satisfied.
In particular, the regulations permit a
single-employer plan that is covered
under section 4021 of ERISA to be
amended, effective for a plan
3 See
PO 00000
section 4022 of ERISA.
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amendment that is both adopted and
effective after November 8, 2012, to
eliminate an optional form of benefit
that includes a prohibited payment
described in section 436(d)(5), provided
that four conditions are satisfied on the
later of the date the amendment is
adopted or effective (the applicable
amendment date, as defined in
§ 1.411(d)–3(g)(4)). First, the enrolled
actuary of the plan has certified that the
plan’s adjusted funding target
attainment percentage (as defined in
section 436(j)(2)) for the plan year that
contains the applicable amendment date
is less than 100 percent. Second, the
plan is not permitted to pay any
prohibited payment, due to application
of the requirements of section 436(d)(2)
of the Code and section 206(g)(3)(B) of
ERISA, because the plan sponsor is a
debtor in a bankruptcy case (that is, a
case under title 11, United States Code,
or under similar Federal or State law).
Third, the court overseeing the
bankruptcy case has issued an order,
after notice to the affected parties and a
hearing,4 finding that the adoption of
the amendment eliminating that
optional form of benefit is necessary to
avoid a distress termination of the plan
pursuant to section 4041(c) of ERISA or
an involuntary termination of the plan
pursuant to section 4042 of ERISA
before the plan sponsor emerges from
bankruptcy (or before the bankruptcy
case is otherwise completed). Fourth,
PBGC has issued a determination that
the adoption of the amendment
eliminating that optional form of benefit
is necessary to avoid a distress or
involuntary termination of the plan
before the plan sponsor emerges from
bankruptcy (or before the bankruptcy
case is otherwise completed) and that
the plan is not sufficient for guaranteed
benefits within the meaning of section
4041(d)(2) of ERISA.
These regulations exercise the
Secretary’s authority under the last
sentence of section 411(d)(6)(B) in order
to permit this type of amendment that
eliminates an optional form of benefit in
these limited circumstances. The
legislative history of section
411(d)(6)(B), which was added by
section 301(a) of the Retirement Equity
Act of 1984, Public Law 98–397, states
the intent that Treasury regulations
could permit the elimination of an
optional form of benefit if ‘‘(1) the
elimination of the option does not
eliminate a valuable right of a
participant or beneficiary, and (2) the
option is not subsidized or a similar
benefit with a comparable subsidy is
4 See
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11 U.S.C. 102(1).
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / Rules and Regulations
provided.’’ 5 The legislative history
further states that the committee
‘‘expects that the regulations will not
permit the elimination of a ‘lump-sum
distribution option’ because, for a
participant or beneficiary with
substandard mortality, the elimination
of that option could eliminate a valuable
right even if a benefit of equal actuarial
value (based on standard mortality) is
available under the plan.’’ 6
If the four conditions set forth in the
regulations are satisfied, a single-sum
distribution option or other optional
form of benefit that includes a
prohibited payment (generally a
payment that is in excess of the monthly
amounts payable under a single life
annuity) would not currently be
available and would not be available in
the future. The plan would not currently
be permitted to pay that optional form
of benefit because section 436(d)(2)
(which imposes restrictions on the
payment of prohibited payments while
the plan sponsor is in bankruptcy) bars
the payment of such an optional form of
benefit under these conditions.
Furthermore, the bankruptcy court and
the PBGC would each have issued a
determination that the plan would be
terminated in a distress or involuntary
termination unless that optional form of
benefit were eliminated. In addition, the
PBGC would have determined that the
plan is not sufficient for guaranteed
benefits. In such a case, pursuant to
§ 4022.7 and § 4022.8 of the PBGC
regulations, the optional form of benefit
would not have been available after the
plan termination. Accordingly, the
elimination of the optional form of
benefit would not result in the loss of
a valuable right of a participant or
beneficiary.
In addition, the plan amendment
would not eliminate or reduce early
retirement benefits or retirement-type
subsidies, which would continue to be
available under the plan. Because the
plan would not be terminated in a
distress or involuntary termination,
participants would continue to be
credited with additional service under
the plan and could become eligible for
early retirement benefits and retirementtype subsidies, regardless of whether
participants received benefit accruals
with respect to the additional service.
Moreover, because the plan would not
be terminated, the plan might have the
opportunity to recover from its
underfunded status.
Under these final regulations, a
judicial determination must be made,
after notice to the plan participants and
5 S.
Rep. No. 98–575, at 30 (1984).
6 Id.
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beneficiaries, each employee
organization representing plan
participants, and the PBGC, and a
hearing, that the amendment is
necessary to avoid termination of the
plan in a distress or involuntary
termination before the plan sponsor
emerges from bankruptcy (or before the
bankruptcy case is otherwise
completed). The primary purpose of this
notice and hearing requirement is to
afford plan participants who may be
affected the opportunity to be heard on
whether the amendment is necessary to
avoid plan termination. The proposed
regulations required notice to each
affected party, within the meaning of
section 4001(a)(21) of ERISA, and a
hearing. At the suggestion of a
commenter, the language with respect to
this notice and hearing requirement has
been modified slightly from the
proposed regulations to clarify that a
failure to notify a particular participant
or beneficiary does not automatically
invalidate the amendment. Specifically,
the change clarifies that the standard in
11 U.S.C. 102(1) applies for purposes of
determining whether adequate notice
has been provided under the
requirement in the final regulations that
there be a notice and a hearing before
the order is issued by the Bankruptcy
Court. The final regulations require that
notice be provided to the affected
parties, as defined in section 4001(a)(21)
of ERISA.
The preamble to the proposed
regulations requests comments on
whether the regulations should impose
additional conditions on the prospective
elimination of the single-sum
distribution option (or other optional
form of benefit that includes a
prohibited payment), such as a
condition that, after the amendment, the
plan must offer annuity distribution
options that provide substantial
survivor benefits, such as both (1) a life
annuity with a term certain of 15 or
more years and (2) a 100% joint and
survivor annuity, in order to give
participants who have substandard
mortality the opportunity to protect
their survivors. Two commenters
indicated support for these additional
conditions, and one commenter
questioned their value to participants.
After consideration of the comments
received on this issue, the IRS and the
Treasury Department have determined
not to impose this requirement as a
condition of making a plan amendment
permitted under these regulations.
If a plan sponsor eliminates a singlesum distribution option (or other
optional form of benefit that includes a
prohibited payment) pursuant to these
regulations under a plan that does not
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66917
offer other optional forms of benefit that
provide substantial survivor benefits,
then, in order to continue to provide
participants who have substandard
mortality the opportunity to protect
their survivors, the plan sponsor can
add other optional forms of benefit that
provide substantial survivor benefits
(including other optional forms of
benefit that are prohibited payments
under section 436(d)(5)) as part of the
same amendment that eliminates the
single-sum distribution option (or other
optional form of benefit that includes a
prohibited payment). All provisions of
such a plan amendment (including both
the elimination of the single-sum
distribution option and the addition of
optional forms of benefit that provide
substantial survivor benefits) would be
considered together for purposes of
determining whether the plan
amendment would be permitted to take
effect in accordance with the rules of
section 436(c).
Effective/Applicability Dates
These regulations apply to plan
amendments that are adopted and
effective after November 8, 2012. This
date is modified from the proposed
regulations to avoid a retroactive
effective date.
Special Analyses
It has been determined that these
regulations are not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulation does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the
proposed regulations preceding these
final regulations were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal authors of these
regulations are Neil S. Sandhu and
Linda S.F. Marshall, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department
participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / Rules and Regulations
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411(d)–4 is amended
by adding a new paragraph A–
2(b)(2)(xii) to read as follows:
■
§ 1.411(d)–4
benefits.
Section 411(d)(6) protected
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*
*
*
*
*
A–2: * * *
(b) * * *
(2) * * *
(xii) Prohibited payment option under
single-employer defined benefit plan of
plan sponsor in bankruptcy. A singleemployer plan that is covered under
section 4021 of the Employee
Retirement Income Security Act of 1974,
Public Law 93–406 (88 Stat. 829 (1974)),
as amended (ERISA), may be amended,
effective for a plan amendment that is
both adopted and effective after
November 8, 2012, to eliminate an
optional form of benefit that includes a
prohibited payment described in section
436(d)(5), provided that the following
conditions are satisfied on the
applicable amendment date (as defined
in § 1.411(d)–3(g)(4)):
(A) The enrolled actuary of the plan
has certified that the plan’s adjusted
funding target attainment percentage (as
defined in section 436(j)(2)) for the plan
year that contains the applicable
amendment date is less than 100
percent.
(B) The plan is not permitted to pay
any prohibited payment, due to
application of the requirements of
section 436(d)(2) of the Internal
Revenue Code and section 206(g)(3)(B)
of ERISA, because the plan sponsor is a
debtor in a bankruptcy case (that is, a
case under title 11, United States Code,
or under similar Federal or State law).
(C) The court overseeing the
bankruptcy case has issued an order,
after notice to the affected parties (as
defined in section 4001(a)(21) of ERISA)
and a hearing, within the meaning of 11
U.S.C. 102(1), finding that the adoption
of the amendment eliminating that
optional form of benefit is necessary to
avoid a distress termination of the plan
pursuant to section 4041(c) of ERISA or
an involuntary termination of the plan
pursuant to section 4042 of ERISA
before the plan sponsor emerges from
bankruptcy (or before the bankruptcy
case is otherwise completed).
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(D) The Pension Benefit Guaranty
Corporation has issued a determination
that—
(1) The adoption of the amendment
eliminating that optional form of benefit
is necessary to avoid a distress or
involuntary termination of the plan
before the plan sponsor emerges from
bankruptcy (or before the bankruptcy
case is otherwise completed); and
(2) The plan is not sufficient for
guaranteed benefits within the meaning
of section 4041(d)(2) of ERISA.
*
*
*
*
*
Approved: November 2, 2012.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2012–27336 Filed 11–7–12; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Office of Foreign Assets Control
31 CFR Part 561
Iranian Financial Sanctions
Regulations
Office of Foreign Assets
Control, Treasury.
ACTION: Final rule.
AGENCY:
The Department of the
Treasury’s Office of Foreign Assets
Control is amending the Iranian
Financial Sanctions Regulations in
order to implement sections 214
through 216 of the Iran Threat
Reduction and Syria Human Rights Act
of 2012.
DATES: Effective Date: November 8,
2012.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Assistant Director for Sanctions
Compliance & Evaluation, tel.: 202/622–
2490, Assistant Director for Licensing,
tel.: 202/622–2480, Assistant Director
for Policy, tel: 202/622–4855, Office of
Foreign Assets Control, or Chief Counsel
(Foreign Assets Control), tel.: 202/622–
2410, Office of the General Counsel,
Department of the Treasury (not toll free
numbers).
SUPPLEMENTARY INFORMATION:
Electronic and Facsimile Availability
This document and additional
information concerning OFAC are
available from OFAC’s Web site
(www.treas.gov/ofac). Certain general
information pertaining to OFAC’s
sanctions programs also is available via
PO 00000
Frm 00004
Fmt 4700
Sfmt 4700
facsimile through a 24-hour fax-ondemand service, tel.: 202/622–0077.
Background
On August 10, 2012, the President
signed into law the Iran Threat
Reduction and Syria Human Rights Act
of 2012 (Pub. L. 112–158) (the ‘‘TRA’’),
in order to strengthen the sanctions
imposed against Iran. Sections 214 and
215 of the TRA amend section 104(c)(2)
of the Comprehensive Iran Sanctions,
Accountability, and Divestment Act of
2010 (Pub. L. 111–195) (22 U.S.C. 8501–
8551) (‘‘CISADA’’) by expanding the
categories of sanctionable activities set
forth in that section.
Section 104(c)(2) of CISADA sets forth
the activities for which the Secretary of
the Treasury is authorized to prohibit or
impose strict conditions on the opening
or maintaining in the United States of a
correspondent account or a payablethrough account by a foreign financial
institution if the Secretary finds that the
foreign financial institution knowingly
engages in one or more of those
activities. Under section 104(c)(2)(B) of
CISADA, facilitating the activities of a
person subject to financial sanctions
pursuant to a United Nations Security
Council resolution that imposes
sanctions with respect to Iran is listed
as a sanctionable activity. Section 214 of
the TRA amends section 104(c)(2)(B) of
CISADA by expanding this sanctionable
category to include facilitating the
activities of ‘‘a person acting on behalf
of or at the direction of, or owned or
controlled by,’’ a person sanctioned
under such United Nations Security
Council resolutions.
Section 215 of the TRA amends
section 104(c)(2)(E) of CISADA to
authorize the imposition of CISADA
sanctions on a foreign financial
institution that knowingly facilitates
significant transactions or provides
significant financial services for a
‘‘person’’ (formerly, a ‘‘financial
institution’’) whose property and
interests in property are blocked
pursuant to the International Emergency
Economic Powers Act (50 U.S.C. 1701 et
seq.) in connection with Iran’s
proliferation of weapons of mass
destruction (‘‘WMD’’) or delivery
systems for WMD or Iran’s support for
international terrorism.
Section 216 of the TRA amends
CISADA by adding new section 104A
after section 104 of CISADA. That new
section requires the Secretary of the
Treasury to revise the regulations
prescribed under CISADA section 104(c)
to apply, to the same extent that they
apply to a foreign financial institution
found to knowingly engage in an
activity described in CISADA section
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]]>Agencies
[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Rules and Regulations]
[Pages 66915-66918]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27336]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 /
Rules and Regulations
[[Page 66915]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9601]
RIN 1545-BK94
Amendment of Prohibited Payment Option Under Single-Employer
Defined Benefit Plan of Plan Sponsor in Bankruptcy
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that provide guidance
under the anti-cutback rules of section 411(d)(6) of the Internal
Revenue Code, which generally prohibit plan amendments eliminating or
reducing accrued benefits, early retirement benefits, retirement-type
subsidies, and optional forms of benefit under qualified retirement
plans. These regulations provide an additional limited exception to the
anti-cutback rules to permit a plan sponsor that is a debtor in a
bankruptcy proceeding to amend its single-employer defined benefit plan
to eliminate a single-sum distribution option (or other optional form
of benefit providing for accelerated payments) under the plan if
certain specified conditions are satisfied. These regulations affect
administrators, employers, participants, and beneficiaries of such a
plan.
DATES: Effective date: These regulations are effective on November 8,
2012.
Applicability date: These regulations apply to plan amendments that
are adopted and effective after November 8, 2012.
FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu or Linda S.F. Marshall
at (202) 622-6090.
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 411(d)(6) of the Internal Revenue Code
(Code). These final regulations amend Sec. 1.411(d)-4 of the Treasury
regulations.
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(d)(2) of the Code or section 4281 of the
Employee Retirement Income Security Act of 1974, Public Law 93-406 (88
Stat. 829 (1974)), as amended (ERISA).
Section 411(d)(6)(B) 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 a
participant who satisfies (either before or after the amendment) the
preamendment conditions for the subsidy. The last sentence of section
411(d)(6)(B) provides that the Secretary may by regulations provide
that section 411(d)(6)(B) does not apply to a plan amendment that
eliminates an optional form of benefit (other than a plan amendment
that has the effect of eliminating or reducing an early retirement
benefit or a retirement-type subsidy).
Section 436(d)(2) provides that a defined benefit plan which is a
single-employer plan must provide that, during any period in which the
plan sponsor is a debtor in a case under title 11, United States Code,
or similar Federal or State law (a ``bankruptcy case''), the plan may
not pay any ``prohibited payment.'' However, that limitation does not
apply in a plan year on or after the date on which the enrolled actuary
of the plan certifies that the adjusted funding target attainment
percentage (as defined in section 436(j)(2)) of the plan for the plan
year is not less than 100 percent.
Section 436(d)(5) sets forth a definition of the term prohibited
payment. Under this definition, a ``prohibited payment'' is: (1) Any
payment in excess of the monthly amount paid under a single life
annuity (plus any social security supplements described in the last
sentence of section 411(a)(9)) to a participant or beneficiary whose
annuity starting date (as defined in section 417(f)(2)) occurs during
any period a limitation under section 436(d)(1) or section 436(d)(2) is
in effect; (2) any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits; and (3) any other payment
specified by the Secretary by regulations. The term ``prohibited
payment'' does not include the payment of a benefit which under section
411(a)(11) may be immediately distributed without the consent of the
participant.
Section 1.411(d)-4, Q&A-1(a) provides that the term section
411(d)(6) protected benefit includes: (1) Benefits described in section
411(d)(6)(A); (2) early retirement benefits (as defined in Sec.
1.411(d)-3(g)(6)(i)) and retirement type subsidies (as defined in Sec.
1.411(d)-3(g)(6)(iv)); and (3) optional forms of benefit described in
section 411(d)(6)(B)(ii).
Section 1.411(d)-4, Q&A-1(b)(1) provides that the term optional
form of benefit for purposes of Sec. 1.411(d)-4 has the same meaning
as in Sec. 1.411(d)-3(g)(6)(ii). Section 1.411(d)-3(g)(6)(ii)(A)
defines the term ``optional form of benefit'' as ``a distribution
alternative (including the normal form of benefit) that is available
under the plan with respect to an accrued benefit or a distribution
alternative with respect to a retirement-type benefit. Different
optional forms of benefit exist if a distribution alternative is not
payable on substantially the same terms as another distribution
alternative. The relevant terms include all terms affecting the value
of the optional form, such as the method of benefit calculation and the
actuarial factors or assumptions used to determine the amount
distributed. Thus, for example, different optional forms of benefit may
result from differences in terms relating to the payment schedule,
timing, commencement, medium of distribution (for example, in cash or
in kind),
[[Page 66916]]
election rights, differences in eligibility requirements, or the
portion of the benefit to which the distribution alternative applies.''
Section 1.411(d)-4, Q&A-2(a)(1) provides that a plan is not
permitted to be amended to eliminate or reduce a section 411(d)(6)
protected benefit that has already accrued, except as provided in Sec.
1.411(d)-3 or Sec. 1.411(d)-4. Under Sec. 1.411(d)-4, Q&A-2(b)(1),
the Commissioner is authorized to provide for the elimination or
reduction of an optional form of benefit to the extent that plan
participants do not lose either a valuable right or an employer-
subsidized optional form of benefit when a similar optional form of
benefit with a comparable subsidy is not provided.\1\ In addition,
Sec. 1.411(d)-4, Q&A-2(b)(2)(i) through (xi) sets forth specific
situations under which the elimination or reduction of certain section
411(d)(6) protected benefits that have already accrued does not violate
section 411(d)(6). These exceptions have been included in regulations
pursuant to the IRS's authority under the last sentence of section
411(d)(6)(B) to permit a plan amendment that eliminates or reduces
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).
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\1\ Such an amendment can be authorized only through the
publication of revenue rulings, notices, and other documents of
general applicability. See Sec. 601.601(d)(2)(ii)(b).
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Section 1.436-1(d)(2) provides that a plan satisfies the
requirements of section 436(d)(2) and Sec. 1.436-1(d)(2) only if the
plan provides that a participant or beneficiary is not permitted to
elect an optional form of benefit that includes a prohibited payment,
and the plan will not pay any prohibited payment, with an annuity
starting date that occurs during any period in which the plan sponsor
is a debtor in a case under title 11, United States Code, or similar
Federal or State law, except for payments made with an annuity starting
date that occurs on or after the date within the plan year on which the
enrolled actuary of the plan certifies that the plan's adjusted funding
target attainment percentage for the plan year is not less than 100
percent.
Title IV of ERISA provides for a pension plan termination insurance
program that is administered by the Pension Benefit Guaranty
Corporation (PBGC). PBGC guarantees nonforfeitable benefits, up to
specified limits, for defined benefit pension plans that are covered
under the program.\2\ If a single-employer plan terminates in a
distress termination under section 4041(c) of ERISA or an involuntary
termination under section 4042 of ERISA, and the plan assets are not
sufficient to provide all guaranteed benefits, PBGC pays benefits to
participants and beneficiaries under the provisions of Title IV and
PBGC's regulations.\3\ PBGC allows a participant who is not in pay
status at the time of the termination to elect among the various
annuity forms described in 29 CFR 4022.8. In addition, under 29 CFR
4022.7, PBGC does not pay benefits in a single sum in excess of $5,000
(except under certain limited circumstances).
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\2\ See section 4021 of ERISA.
\3\ See section 4022 of ERISA.
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Section 204(g) of ERISA contains rules that are parallel to Code
section 411(d)(6). 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 regulations issued under section 411(d)(6) of the
Code apply as well for purposes of section 204(g) of ERISA.
On June 21, 2012, the IRS issued proposed regulations under section
411(d)(6) (77 FR 37349) to provide an additional limited exception to
the anti-cutback rules to permit a plan sponsor that is a debtor in a
bankruptcy proceeding to amend its single-employer defined benefit plan
to eliminate a single-sum distribution option (or other optional form
of benefit providing for accelerated payments) under the plan if
certain conditions are satisfied. Several comments were received on the
proposed regulations. No public hearing was requested or held. After
consideration of the comments received, the IRS and the Treasury
Department are issuing these final regulations to adopt the rules set
forth in the proposed regulations with minor modifications.
Explanation of Provisions
These final regulations provide a limited exception under section
411(d)(6)(B) to permit a plan sponsor that is a debtor in a bankruptcy
proceeding to amend its single-employer defined benefit plan to
eliminate a single-sum distribution option (or other optional form of
benefit providing for accelerated payments) if certain conditions are
satisfied.
In particular, the regulations permit a single-employer plan that
is covered under section 4021 of ERISA to be amended, effective for a
plan amendment that is both adopted and effective after November 8,
2012, to eliminate an optional form of benefit that includes a
prohibited payment described in section 436(d)(5), provided that four
conditions are satisfied on the later of the date the amendment is
adopted or effective (the applicable amendment date, as defined in
Sec. 1.411(d)-3(g)(4)). First, the enrolled actuary of the plan has
certified that the plan's adjusted funding target attainment percentage
(as defined in section 436(j)(2)) for the plan year that contains the
applicable amendment date is less than 100 percent. Second, the plan is
not permitted to pay any prohibited payment, due to application of the
requirements of section 436(d)(2) of the Code and section 206(g)(3)(B)
of ERISA, because the plan sponsor is a debtor in a bankruptcy case
(that is, a case under title 11, United States Code, or under similar
Federal or State law). Third, the court overseeing the bankruptcy case
has issued an order, after notice to the affected parties and a
hearing,\4\ finding that the adoption of the amendment eliminating that
optional form of benefit is necessary to avoid a distress termination
of the plan pursuant to section 4041(c) of ERISA or an involuntary
termination of the plan pursuant to section 4042 of ERISA before the
plan sponsor emerges from bankruptcy (or before the bankruptcy case is
otherwise completed). Fourth, PBGC has issued a determination that the
adoption of the amendment eliminating that optional form of benefit is
necessary to avoid a distress or involuntary termination of the plan
before the plan sponsor emerges from bankruptcy (or before the
bankruptcy case is otherwise completed) and that the plan is not
sufficient for guaranteed benefits within the meaning of section
4041(d)(2) of ERISA.
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\4\ See 11 U.S.C. 102(1).
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These regulations exercise the Secretary's authority under the last
sentence of section 411(d)(6)(B) in order to permit this type of
amendment that eliminates an optional form of benefit in these limited
circumstances. The legislative history of section 411(d)(6)(B), which
was added by section 301(a) of the Retirement Equity Act of 1984,
Public Law 98-397, states the intent that Treasury regulations could
permit the elimination of an optional form of benefit if ``(1) the
elimination of the option does not eliminate a valuable right of a
participant or beneficiary, and (2) the option is not subsidized or a
similar benefit with a comparable subsidy is
[[Page 66917]]
provided.'' \5\ The legislative history further states that the
committee ``expects that the regulations will not permit the
elimination of a `lump-sum distribution option' because, for a
participant or beneficiary with substandard mortality, the elimination
of that option could eliminate a valuable right even if a benefit of
equal actuarial value (based on standard mortality) is available under
the plan.'' \6\
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\5\ S. Rep. No. 98-575, at 30 (1984).
\6\ Id.
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If the four conditions set forth in the regulations are satisfied,
a single-sum distribution option or other optional form of benefit that
includes a prohibited payment (generally a payment that is in excess of
the monthly amounts payable under a single life annuity) would not
currently be available and would not be available in the future. The
plan would not currently be permitted to pay that optional form of
benefit because section 436(d)(2) (which imposes restrictions on the
payment of prohibited payments while the plan sponsor is in bankruptcy)
bars the payment of such an optional form of benefit under these
conditions. Furthermore, the bankruptcy court and the PBGC would each
have issued a determination that the plan would be terminated in a
distress or involuntary termination unless that optional form of
benefit were eliminated. In addition, the PBGC would have determined
that the plan is not sufficient for guaranteed benefits. In such a
case, pursuant to Sec. 4022.7 and Sec. 4022.8 of the PBGC
regulations, the optional form of benefit would not have been available
after the plan termination. Accordingly, the elimination of the
optional form of benefit would not result in the loss of a valuable
right of a participant or beneficiary.
In addition, the plan amendment would not eliminate or reduce early
retirement benefits or retirement-type subsidies, which would continue
to be available under the plan. Because the plan would not be
terminated in a distress or involuntary termination, participants would
continue to be credited with additional service under the plan and
could become eligible for early retirement benefits and retirement-type
subsidies, regardless of whether participants received benefit accruals
with respect to the additional service. Moreover, because the plan
would not be terminated, the plan might have the opportunity to recover
from its underfunded status.
Under these final regulations, a judicial determination must be
made, after notice to the plan participants and beneficiaries, each
employee organization representing plan participants, and the PBGC, and
a hearing, that the amendment is necessary to avoid termination of the
plan in a distress or involuntary termination before the plan sponsor
emerges from bankruptcy (or before the bankruptcy case is otherwise
completed). The primary purpose of this notice and hearing requirement
is to afford plan participants who may be affected the opportunity to
be heard on whether the amendment is necessary to avoid plan
termination. The proposed regulations required notice to each affected
party, within the meaning of section 4001(a)(21) of ERISA, and a
hearing. At the suggestion of a commenter, the language with respect to
this notice and hearing requirement has been modified slightly from the
proposed regulations to clarify that a failure to notify a particular
participant or beneficiary does not automatically invalidate the
amendment. Specifically, the change clarifies that the standard in 11
U.S.C. 102(1) applies for purposes of determining whether adequate
notice has been provided under the requirement in the final regulations
that there be a notice and a hearing before the order is issued by the
Bankruptcy Court. The final regulations require that notice be provided
to the affected parties, as defined in section 4001(a)(21) of ERISA.
The preamble to the proposed regulations requests comments on
whether the regulations should impose additional conditions on the
prospective elimination of the single-sum distribution option (or other
optional form of benefit that includes a prohibited payment), such as a
condition that, after the amendment, the plan must offer annuity
distribution options that provide substantial survivor benefits, such
as both (1) a life annuity with a term certain of 15 or more years and
(2) a 100% joint and survivor annuity, in order to give participants
who have substandard mortality the opportunity to protect their
survivors. Two commenters indicated support for these additional
conditions, and one commenter questioned their value to participants.
After consideration of the comments received on this issue, the IRS and
the Treasury Department have determined not to impose this requirement
as a condition of making a plan amendment permitted under these
regulations.
If a plan sponsor eliminates a single-sum distribution option (or
other optional form of benefit that includes a prohibited payment)
pursuant to these regulations under a plan that does not offer other
optional forms of benefit that provide substantial survivor benefits,
then, in order to continue to provide participants who have substandard
mortality the opportunity to protect their survivors, the plan sponsor
can add other optional forms of benefit that provide substantial
survivor benefits (including other optional forms of benefit that are
prohibited payments under section 436(d)(5)) as part of the same
amendment that eliminates the single-sum distribution option (or other
optional form of benefit that includes a prohibited payment). All
provisions of such a plan amendment (including both the elimination of
the single-sum distribution option and the addition of optional forms
of benefit that provide substantial survivor benefits) would be
considered together for purposes of determining whether the plan
amendment would be permitted to take effect in accordance with the
rules of section 436(c).
Effective/Applicability Dates
These regulations apply to plan amendments that are adopted and
effective after November 8, 2012. This date is modified from the
proposed regulations to avoid a retroactive effective date.
Special Analyses
It has been determined that these regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the regulation does
not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code, the proposed regulations
preceding these final regulations were submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal authors of these regulations are Neil S. Sandhu and
Linda S.F. Marshall, Office of Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the
IRS and the Treasury Department participated in the development of
these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
[[Page 66918]]
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.411(d)-4 is amended by adding a new paragraph A-
2(b)(2)(xii) to read as follows:
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
A-2: * * *
(b) * * *
(2) * * *
(xii) Prohibited payment option under single-employer defined
benefit plan of plan sponsor in bankruptcy. A single-employer plan that
is covered under section 4021 of the Employee Retirement Income
Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as
amended (ERISA), may be amended, effective for a plan amendment that is
both adopted and effective after November 8, 2012, to eliminate an
optional form of benefit that includes a prohibited payment described
in section 436(d)(5), provided that the following conditions are
satisfied on the applicable amendment date (as defined in Sec.
1.411(d)-3(g)(4)):
(A) The enrolled actuary of the plan has certified that the plan's
adjusted funding target attainment percentage (as defined in section
436(j)(2)) for the plan year that contains the applicable amendment
date is less than 100 percent.
(B) The plan is not permitted to pay any prohibited payment, due to
application of the requirements of section 436(d)(2) of the Internal
Revenue Code and section 206(g)(3)(B) of ERISA, because the plan
sponsor is a debtor in a bankruptcy case (that is, a case under title
11, United States Code, or under similar Federal or State law).
(C) The court overseeing the bankruptcy case has issued an order,
after notice to the affected parties (as defined in section 4001(a)(21)
of ERISA) and a hearing, within the meaning of 11 U.S.C. 102(1),
finding that the adoption of the amendment eliminating that optional
form of benefit is necessary to avoid a distress termination of the
plan pursuant to section 4041(c) of ERISA or an involuntary termination
of the plan pursuant to section 4042 of ERISA before the plan sponsor
emerges from bankruptcy (or before the bankruptcy case is otherwise
completed).
(D) The Pension Benefit Guaranty Corporation has issued a
determination that--
(1) The adoption of the amendment eliminating that optional form of
benefit is necessary to avoid a distress or involuntary termination of
the plan before the plan sponsor emerges from bankruptcy (or before the
bankruptcy case is otherwise completed); and
(2) The plan is not sufficient for guaranteed benefits within the
meaning of section 4041(d)(2) of ERISA.
* * * * *
Approved: November 2, 2012.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-27336 Filed 11-7-12; 8:45 am]
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