Transitional Amendments To Satisfy the Market Rate of Return Rules for Hybrid Retirement Plans, 56305-56310 [2014-22292]
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Federal Register / Vol. 79, No. 182 / Friday, September 19, 2014 / Proposed Rules
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■ 14. Amend § 135.144 as follows:
■ A. In paragraph (a) introductory text,
remove ‘‘of the following’’;
■ B. In paragraph (b)(4) remove ‘‘or’’
following the semi-colon;
■ C. Redesignate paragraph (b)(5) as
paragraph (b)(6);
■ D. Add new paragraph (b)(5); and
■ E. In paragraph (c) remove the
reference ‘‘(b)(5)’’ and add in its place
‘‘(b)(6)’’.
The addition reads as follows:
§ 135.144
Portable electronic devices.
*
*
*
*
*
(b) * * *
(5) Portable oxygen concentrators that
comply with the requirements in
§ 135.91 of this part; or
*
*
*
*
*
Issued under the authority provided by 49
U.S.C. 106(f) and 44701(a) in Washington,
DC, on September 9, 2014.
John S. Duncan,
Director, Flight Standards Service.
[FR Doc. 2014–21964 Filed 9–18–14; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–111839–13]
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RIN 1545–BL62
Transitional Amendments To Satisfy
the Market Rate of Return Rules for
Hybrid Retirement Plans
This document contains
proposed regulations that would
provide guidance regarding certain
amendments to applicable defined
SUMMARY:
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Written or electronic comments
must be received by December 18, 2014.
Outlines of topics to be discussed at the
public hearing scheduled for January 9,
2015, at 10 a.m. must be received by
December 18, 2014.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–111839–13), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–111839–
13), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
https://www.regulations.gov (IRS REG–
111839–13). The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, Neil S.
Sandhu or Linda S. F. Marshall at (202)
317–6700; concerning submissions of
comments, the hearing, and/or being
placed on the building access list to
attend the hearing, Oluwafunmilayo
(Funmi) Taylor at (202) 317–6901 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
DATES:
Background
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
benefit plans. Applicable defined
benefit plans are defined benefit plans
that use a lump sum-based benefit
formula, including cash balance plans
and pension equity plans, as well as
other hybrid retirement plans that have
a similar effect. These proposed
regulations would permit an applicable
defined benefit plan that does not
comply with the requirement that the
plan not provide for interest credits (or
equivalent amounts) at an effective rate
that is greater than a market rate of
return to comply with that requirement
by changing to an interest crediting rate
that is permitted under the final hybrid
plan regulations, without violating the
anti-cutback rules of section 411(d)(6).
These regulations would affect
sponsors, administrators, participants,
and beneficiaries of these plans. This
document also provides a notice of a
public hearing on these proposed
regulations.
I. In General
This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1) under
section 411(b)(5) of the Internal Revenue
Code (Code).
Generally, a defined benefit pension
plan must satisfy the requirements of
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56305
section 411 in order to be qualified
under section 401(a) of the Code.
Section 411(b)(5), which modifies the
accrual requirements of section 411(b),
was 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). Section 411(b)(5) and
certain related effective date provisions
were subsequently amended by the
Worker, Retiree, and Employer Recovery
Act of 2008, Public Law 110–458 (122
Stat. 5092 (2008)) (WRERA ’08).
Under section 411(b)(5)(B)(i), a
statutory hybrid plan is treated as failing
to satisfy the requirements of section
411(b)(1)(H) (which provides that the
rate of an employee’s benefit accrual
must not be reduced because of the
attainment of any age) if the terms of the
plan provide any interest credit (or an
equivalent amount) for any plan year at
a rate that is in excess of a market rate
of return. Section 411(b)(5)(B)(i) is
generally effective for plan years
beginning after December 31, 2007.
Section 411(d)(6) provides generally
that a plan does not satisfy section 411
if an amendment to the plan decreases
a participant’s accrued benefit. For this
purpose, a plan amendment that has the
effect of eliminating or reducing an
early retirement benefit or a retirementtype subsidy or eliminating an optional
form of benefit with respect to benefits
attributable to service before the
amendment is treated as reducing
accrued benefits.
Sections 204(b)(5)(B)(i) and 204(g) of
the Employee Retirement Income
Security Act of 1974, Public Law 93–
406 (88 Stat. 829 (1974)), as amended
(ERISA), contain rules that are parallel
to sections 411(b)(5)(B)(i) and 411(d)(6),
respectively. 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 in these
proposed regulations for purposes of
ERISA, as well as the Code. Thus, these
proposed regulations would apply for
purposes of sections 411(b)(5)(B)(i) and
411(d)(6) of the Code, as well as for
purposes of sections 204(b)(5)(B)(i) and
204(g) of ERISA.
Section 1.411(d)–4, A–2(b)(1), of the
Income Tax Regulations provides, in
part, that the Commissioner may,
consistent with the provisions of
§ 1.411(d)–4, provide for the elimination
or reduction of section 411(d)(6)
protected benefits that have already
accrued to the extent that such
elimination or reduction is necessary to
permit compliance with other
requirements of section 401(a). The
Commissioner may exercise this
authority only through the publication
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of revenue rulings, notices, and other
documents of general applicability.
Section 1.411(d)–4, A–2(b)(2)(i),
provides that a plan may be amended to
eliminate or reduce a section 411(d)(6)
protected benefit, within the meaning of
§ 1.411(d)–4, A–1, if the following three
requirements are met: the amendment
constitutes timely compliance with a
change in law affecting plan
qualification; there is an exercise of
section 7805(b) relief by the
Commissioner; and the elimination or
reduction of the section 411(d)(6)
protected benefit is made only to the
extent necessary to enable the plan to
continue to satisfy the requirements for
qualified plans.
Final regulations (TD 9505) (2010
final hybrid plan regulations) were
published by the Treasury Department
and the IRS in the Federal Register on
October 19, 2010 (75 FR 64123). The
2010 final hybrid plan regulations
provide for certain interest crediting
rates that satisfy the requirements of
section 411(b)(5)(B)(i). The 2010 final
hybrid plan regulations provide,
effective for plan years that begin on or
after January 1, 2012, a list of interest
crediting rates and combinations of rates
that satisfy the requirement of section
411(b)(5)(B)(i) that the plan not provide
an effective rate of return in excess of a
market rate of return, while not
permitting other rates. The provisions
that provide for a list of rates are set
forth at § 1.411(b)(5)–1(d)(1)(iii),
(d)(1)(vi), and (d)(6)(i).
Proposed regulations (REG–132554–
08) (2010 proposed hybrid plan
regulations) were also published by the
Treasury Department and the IRS in the
Federal Register on October 19, 2010
(75 FR 64197). The 2010 proposed
hybrid plan regulations provide for
additional interest crediting rates that
satisfy the requirements of section
411(b)(5)(B)(i). The preamble to the
2010 proposed hybrid plan regulations
solicited comments with respect to
guidance needed to permit a plan to
change its interest crediting rate to
comply with the final hybrid plan
regulations.
II. Effective Dates
Notice 2011–85 (2011–44 IRB 605
(October 31, 2011)), (see
§ 601.601(d)(2)(ii)(b) of this chapter),
announced delayed effective/
applicability dates with respect to
certain provisions in the hybrid plan
regulations. Notice 2011–85 provided
that the Treasury Department and the
IRS intended to amend the hybrid plan
regulations to postpone the effective/
applicability date of § 1.411(b)(5)–
1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i), so
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that these provisions would be effective
at a future date, not earlier than January
1, 2013.
Notice 2011–85 also provided that,
when the 2010 proposed regulations
were finalized, it was expected that
relief from the requirements of section
411(d)(6) would be granted for certain
plan amendments that eliminate or
reduce a section 411(d)(6) protected
benefit. A plan amendment would be
eligible for this relief only if the plan
amendment were adopted by the last
day of the first plan year preceding the
plan year for which the 2010 proposed
regulations, once finalized, apply to the
plan, and the elimination or reduction
was made only to the extent necessary
to enable the plan to meet the
requirements of section 411(b)(5). In
addition, Notice 2011–85 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 2011–85, the deadline for these
amendments is the same as the deadline
for an amendment that is eligible for the
relief under section 411(d)(6) that is also
announced in the notice.
Notice 2012–61 (2012–42 IRB 479
(October 15, 2012)), (see
§ 601.601(d)(2)(ii)(b) of this chapter),
announced that the regulations
described in Notice 2011–85 would not
be effective for plan years beginning
before January 1, 2014.
Final regulations (TD 9693) (2014
final hybrid plan regulations) that
finalize the 2010 proposed hybrid plan
regulations are being issued at the same
time as these proposed regulations. The
2014 final hybrid plan regulations
amend the effective/applicability date of
§ 1.411(b)(5)–1(d)(1)(iii), (d)(1)(vi), and
(d)(6)(i), so that these provisions apply
to plan years that begin on or after
January 1, 2016.
III. Permissible Interest Crediting Rates
Interest crediting rates can be broadly
characterized as either investment-based
rates or rates that are not investmentbased rates. An investment-based rate is
a rate of return provided by actual
investments, taking into account the
return attributable to any change in the
value of the underlying investments. A
rate of return that is based on the rate
of return for an index that measures the
change in the value of investments can
also be considered to be an investmentbased rate. Rates that are not
investment-based rates include fixed
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rates of interest and yields to maturity
of bonds.
Sections 1.411(b)(5)–1(d)(3) and (d)(4)
set forth permitted rates that are not
investment-based rates, such as the
third segment rate described in section
417(e)(3)(D) or 430(h)(2)(C)(iii), the
yield on 30-year Treasury Constant
Maturities, and a fixed 6 percent rate of
interest. Section 1.411(b)(5)–1(d)(5) sets
forth permitted investment-based rates,
such as the rate of return on certain
regulated investment companies (RICs),
as defined in section 851, and the rate
of return on plan assets. As provided in
§ 1.411(b)(5)–1(d)(6), certain annual (or
more frequent) floors are permitted in
combination with the bond-based rates
and cumulative floors (in excess of the
cumulative zero floor required under
section 411(b)(5)(i)(II)) are permitted in
combination with either the bond-based
rates or the investment-based rates.
Explanation of Provisions
Prior to the first day of the first plan
year that begins on or after January 1,
2016, a plan that uses an interest
crediting rate that is not permitted
under the final hybrid plan regulations
must be amended to change to an
interest crediting rate that is permitted
under those regulations. Although a
plan is permitted to be amended to
change the interest crediting rate with
respect to benefits that have not yet
accrued, an amendment that reduces the
interest crediting rate with respect to
benefits that have already accrued
would ordinarily be impermissible
under section 411(d)(6).
In order to resolve this conflict
between the market rate of return rules
of section 411(b)(5)(B)(i) and the anticutback rules of section 411(d)(6), these
proposed regulations would permit a
plan with a noncompliant interest
crediting rate to be amended with
respect to benefits that have already
accrued so that its interest crediting rate
complies with the market rate of return
rules. If the applicable requirements of
these regulations are satisfied, such an
amendment is permitted with respect to
benefits that have already accrued, but
only with respect to interest credits that
are credited for interest crediting
periods that begin on or after the later
of the effective date of the amendment
or the date the amendment is adopted
(the applicable amendment date within
the meaning of § 1.411(d)–3(g)(4)). To
qualify for this treatment, the
amendment would have to be adopted
prior to and effective no later than the
first day of the first plan year that begins
on or after January 1, 2016.
These proposed regulations set forth
amendments that would be eligible for
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this treatment by providing a specific
correction for each noncompliant
feature of a noncompliant interest
crediting rate.1 If the noncompliant
interest crediting rate has more than one
noncompliant feature, then each
noncompliant feature must be addressed
separately in the prescribed manner.
Examples are included to illustrate the
application of these rules.
The general approach in the
regulations is to permit amendments
that bring the plan into compliance by
changing the specific feature that causes
the plan’s interest crediting rate to be
noncompliant, while not changing other
features of the existing rate. For
example, if a plan uses what would
otherwise be a permissible bond-based
rate but provides for an impermissible
lookback month to determine interest
credits, then the plan must be amended
to correct the lookback month to a
permitted lookback month while
retaining the underlying bond-based
rate. The Treasury Department and the
IRS believe this general approach is the
most appropriate manner to resolve the
conflict between the market rate of
return rules of section 411(b)(5)(B)(i)
and the anti-cutback rules of section
411(d)(6).2
The proposed regulations take a
special approach with respect to a
noncompliant composite interest
crediting rate that is determined as the
greatest of two or more component rates,
because it is not always readily apparent
which specific feature or component
rate causes the composite rate to be
noncompliant. Two types of composite
rates are specifically addressed in the
proposed regulations, and a comment
request is included to solicit suggestions
for appropriate corrective amendments
with respect to a third type of composite
rate.
A composite rate that is the greater of
an otherwise permissible variable bond1 A plan may have been amended to change its
interest crediting rate under the rules of section
1107 of PPA ’06. Section 1107 of PPA ’06 provided
relief from the requirements of section 411(d)(6) for
amendments made pursuant to a change in law
under PPA ’06, if the amendment was adopted by
the last day of the first plan year that began on or
after January 1, 2009 (or 2011, in the case of a
governmental plan as defined in section 414(d)). If
an interest crediting rate adopted under the rules of
section 1107 of PPA ’06 is not permitted under the
final hybrid plan regulations, then these proposed
regulations would permit a subsequent amendment
to change the rate to a rate permitted under the final
hybrid plan regulations.
2 The standard in these proposed regulations for
resolving this conflict between section 411(d)(6)
and section 411(b)(5)(B)(i) is generally comparable
to the standard under the rules of § 1.411(d)–4,
A–2(b)(1) and (b)(2)(i) with respect to the
Commissioner’s exercise of authority to resolve a
conflict between section 411(d)(6) and another
qualification requirement under section 401(a).
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based rate and a fixed minimum rate in
excess of an annual interest crediting
rate of 6 percent (the maximum
permitted fixed rate) could be viewed
either as: (1) A noncompliant fixed rate
that must be brought into compliance by
reducing the fixed rate and eliminating
the variable bond-based rate component,
or (2) a noncompliant bond-based rate
that must be brought into compliance by
reducing the fixed minimum rate to the
highest permitted fixed minimum
interest crediting rate that is permitted
with the particular variable bond-based
rate (4 or 5 percent, as applicable). As
a result, in that particular case, the
proposed regulations would give the
plan sponsor the choice of either: (1)
Eliminating the variable rate while
changing to an annual interest crediting
rate of 6 percent or (2) retaining the
variable rate while reducing the fixed
minimum component to the extent
necessary to bring the plan into
compliance. These same options would
apply if the fixed minimum interest
crediting rate is greater than the highest
permitted fixed minimum interest
crediting rate that is permitted with the
particular variable bond-based rate but
is not greater than the highest permitted
fixed rate (6 percent).
In the case of a composite rate that is
the greatest of two or more otherwise
permissible variable bond-based rates, it
is also difficult to determine the most
appropriate method to bring the plan
into compliance. One reason for this
difficulty is because, in most of these
cases, the composite rate will not
exceed the rate of interest on long-term
investment grade corporate bonds. As a
result, in such a case, the proposed
regulations do not provide for the
elimination of any of the variable bondbased components. Instead, the
proposed regulations would provide
that the noncompliant composite rate
must be capped at a third segment rate.3
The proposed regulations also take a
special approach with respect to a
noncompliant interest crediting rate that
is an impermissible investment-based
rate. One example of an impermissible
investment-based rate is an investmentbased rate that is not equal to the rate
of return on a RIC or the actual rate of
return on the aggregate assets of a plan
or a specified subset of plan assets (even
if the rate of return is reasonably
expected to be not significantly more
volatile than the broad United States
equities market or a similarly broad
international equities market). Another
3 Any of the rates that are denominated a third
segment rate pursuant to § 1.411(d)(5)–1(d)(3) can
be specified by a plan for this purpose, as well as
for other purposes under these proposed regulations
for which a third segment rate is used.
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example of an impermissible
investment-based rate is the rate of
return on a RIC that has most of its
assets invested in securities of issuers
(including other RICs) concentrated in
an industry sector.
If an investment-based rate is
noncompliant, the proposed regulations
would require the plan sponsor to
amend the plan to credit interest using
a permitted investment-based rate with
similar risk and return characteristics as
the noncompliant rate, if possible. If it
is not possible to select a permitted
investment-based rate with similar risk
and return characteristics as the
noncompliant rate, then the proposed
regulations would require the plan
sponsor to amend the plan to credit
interest using a permitted investmentbased rate that is otherwise similar to
the noncompliant rate (which would
generally require the use of a rate that
is less volatile than the noncompliant
rate but is otherwise similar to the
noncompliant rate).
Several commenters suggested that
the IRS and the Treasury Department
should permit a change from a
noncompliant interest crediting rate to
any of the maximum compliant interest
crediting rates. However, this suggested
approach was not taken in these
proposed regulations because this
approach would not require a sufficient
connection between the correction and
the specific feature that caused an
interest crediting rate to be
noncompliant, and would permit a plan
sponsor to reduce the interest crediting
rate more than is appropriate.
Proposed Effective/Applicability Dates
These regulations are proposed to
apply to amendments adopted on or
after the date regulations that finalize
these proposed regulations are
published in the Federal Register. In
addition, it is proposed that taxpayers
be permitted, pursuant to section
7805(b)(7), to elect to apply these
regulations, as finalized, to plan
amendments that are adopted during
earlier periods.
Special Analyses
It has been determined that these
proposed regulations are not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulation does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
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section 7805(f) of the Code, these
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The
Treasury Department and the IRS
request comments on all aspects of the
proposed rules.
In addition, comments are specifically
requested as to the amendment required
to bring a plan into compliance if the
plan credits interest using a composite
rate that is an investment-based rate of
return with an impermissible annual (or
more frequent) fixed or variable
minimum rate. Some of these plans
might currently be applying a reduction
to the investment-based rate of return,
in order to take into account the value
provided by the minimum rate. For a
plan that credits interest using an
investment-based rate of return with an
impermissible minimum rate:
• Should the required amendment
eliminate the minimum rate (and
eliminate any reduction to the
investment-based rate of return), so that
the required rate after amendment is the
unreduced investment-based rate of
return?
• Should the required amendment
change the interest crediting rate to
another permitted rate that is less
volatile than the unreduced investmentbased rate (such as a rate described in
§ 1.411(b)(5)–1(d)(3) with a fixed
minimum rate of 4 percent per year)?
• Should the required amendment
depend on the level of the minimum
rate and the extent of any reduction to
the investment-based rate of return?
• Should the plan sponsor have a
choice among alternative required
amendments to bring the plan into
compliance?
Comments are also requested as to
whether there are statutory hybrid plans
other than those described in the
specific request for comments that use
a noncompliant interest crediting rate
that is not addressed in the regulations
and for which an amendment is
necessary to bring the plan into
compliance with the market rate of
return rules. If so, comments are
requested as to the appropriate
amendment to bring the plan into
compliance in such a case.
All comments will be available for
public inspection and copying at
www.regulations.gov or upon request. A
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public hearing has been scheduled for
January 9, 2015, beginning at 10 a.m. in
the Auditorium, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC. Due to building
security procedures, visitors must enter
at the Constitution Avenue entrance. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written or electronic
comments by December 18, 2014 and
submit an outline of topics to be
discussed and the amount of time to be
devoted to each topic (a signed original
and eight (8) copies) by December 18,
2014.
A period of 10 minutes will be
allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the
agenda will be available free of charge
at the hearing.
Drafting Information
The principal authors of these
regulations are Neil S. Sandhu and
Linda S. F. Marshall, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department
participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.411(b)(5)–1 is
amended by adding paragraph (e)(3)(vi)
to read as follows:
■
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§ 1.411(b)(5)–1 Reduction in rate of benefit
accrual under a defined benefit plan.
*
*
*
*
*
(e) * * *
(3) * * *
(vi) Transitional amendments needed
to satisfy the market rate of return
rules—(A) In general. Notwithstanding
the requirements of section 411(d)(6), if
the requirements set forth in this
paragraph (e)(3)(vi) are satisfied, a plan
may be amended to change its interest
crediting rate with respect to benefits
that have already accrued in order to
comply with the requirements of section
411(b)(5)(B)(i) and paragraph (d) of this
section. A plan amendment is eligible
for the treatment provided under this
paragraph (e)(3)(vi)(A) to the extent that
the amendment modifies an interest
crediting rate that does not satisfy the
requirements of section 411(b)(5)(B)(i)
and paragraph (d) of this section in the
manner specified in paragraph
(e)(3)(vi)(C) of this section.
(B) Rules of application—(1) Multiple
noncompliant features. If a plan’s
interest crediting rate has more than one
noncompliant feature as described in
paragraph (e)(3)(vi)(C) of this section,
then each noncompliant feature must be
addressed separately in the manner
specified in paragraph (e)(3)(vi)(C) of
this section.
(2) Definition of investment-based
rate. The application of the rules of
paragraph (e)(3)(vi)(C) of this section to
an interest crediting rate depends on
whether the interest crediting rate is an
investment-based rate. For purposes of
this paragraph (e)(3)(vi), an investmentbased rate is either a rate of return
provided by actual investments (taking
into account the return attributable to
any change in the value of the
underlying investments) or a rate that is
based on the rate of return for an index
that measures the change in the value of
investments.
(3) Timing rules for permitted
amendments. The rules under this
paragraph (e)(3)(vi) apply only to a plan
amendment that is adopted prior to and
effective no later than the first day of the
first plan year described in paragraph
(f)(2)(i)(B) of this section. In addition,
the rules under this paragraph (e)(3)(vi)
apply to a plan amendment only with
respect to interest credits that are
credited for interest crediting periods
that begin after the applicable
amendment date (within the meaning of
§ 1.411(d)–3(g)(4)).
(C) Noncompliant feature and
amendment to bring plan into
compliance—(1) Timing rules not
satisfied. If a plan does not satisfy the
timing rules relating to how interest
credits are determined and credited (as
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set forth in paragraph (d)(1)(iv) of this
section), then the plan must be amended
to correct the aspect of the plan’s
interest crediting rate that fails to
comply with those rules with respect to
its underlying interest crediting rate.
(2) Fixed rate in excess of 6 percent.
If a plan credits interest using a fixed
rate in excess of the rate described in
paragraph (d)(4)(v) of this section, then
the plan must be amended to reduce the
interest crediting rate to an annual
interest crediting rate of 6 percent.
(3) Bond-based rate with margin
exceeding maximum permitted margin.
If a plan credits interest using a rate that
would be described in paragraph (d)(3)
or (d)(4) of this section except that the
plan applies a margin that exceeds the
maximum permitted margin under
paragraph (d)(3) or (d)(4) of this section,
then the plan must be amended to
reduce the margin to the maximum
permitted margin for the underlying rate
used by the plan.
(4) Bond-based rate with fixed
minimum rate exceeding maximum
permitted fixed minimum rate. If a plan
credits interest using a variable rate
described in paragraph (d)(3) or (d)(4) of
this section in combination with a fixed
minimum rate in excess of the highest
permitted fixed minimum rate under
paragraph (d)(6)(ii)(A)(2) or (B)(2) of this
section (as applicable), then the plan
must be amended either—
(i) To reduce the fixed minimum rate
to the highest permitted fixed minimum
rate that can be used in combination
with the plan’s variable rate; or
(ii) To credit interest using an annual
interest crediting rate of 6 percent.
(5) Greatest of two or more variable
bond-based rates. If a plan credits
interest using a composite rate that is
the greatest of two or more variable rates
described in paragraph (d)(3) or (d)(4) of
this section, then the plan must be
amended to credit interest using the
lesser of the composite rate and a rate
described in paragraph (d)(3) of this
section.
(6) Impermissible bond-based rate. If
a plan credits interest using a variable
rate that is not an investment-based rate
of return and is not described in
paragraph (d)(3) or (d)(4) of this section
(after application of the rule of
paragraph (e)(3)(vi)(C)(3) of this section,
if applicable), then—
(i) If a variable rate described in
paragraph (d)(3) or (d)(4) of this section
that has similar duration and quality
characteristics as the plan’s variable rate
can be selected, then the plan must be
amended to credit interest based on
such a rate; or
(ii) If a variable rate described in
paragraph (d)(3) or (d)(4) of this section
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that has similar duration and quality
characteristics as the plan’s variable rate
cannot be selected, then the plan must
be amended to provide that the plan
credits interest using the lesser of the
plan’s variable rate and a rate described
in paragraph (d)(3) of this section.
(7) Impermissible investment-based
rate. If a plan credits interest using an
investment-based rate of return that is
not described in paragraph (d)(5) of this
section, then—
(i) If a permitted investment-based
rate described in paragraph (d)(5)(ii)(A),
(d)(5)(ii)(B), or (d)(5)(iv) of this section
that has similar risk and return
characteristics as the plan’s
impermissible investment-based rate
can be selected, then the plan must be
amended to credit interest based on
such a permitted investment-based rate;
or
(ii) If a permitted investment-based
rate described in paragraph (d)(5)(ii)(A)
(d)(5)(ii)(B), or (d)(5)(iv) of this section
that has similar risk and return
characteristics as the plan’s
impermissible investment-based rate
cannot be selected, then the plan must
be amended to credit interest based on
a rate of return described in paragraph
(d)(5)(ii)(A), (d)(5)(ii)(B), or (d)(5)(iv) of
this section that is otherwise similar to
the plan’s impermissible investmentbased rate (generally requiring the use of
a rate that is less volatile than the plan’s
impermissible investment-based rate but
is otherwise similar to that rate).
(D) Examples. The following
examples illustrate the application of
the rules of this paragraph (e)(3)(vi).
Each plan has a plan year that is the
calendar year, and all amendments are
adopted on October 1, 2015 and become
effective for interest crediting periods
beginning on or after January 1, 2016.
Example 1. (i) Facts. A plan determines
interest credits for a plan year using the
average yield on 30-year Treasury Constant
Maturities for the last week of the preceding
plan year (which is an impermissible period
for this purpose pursuant to paragraph
(d)(1)(iv)(B) of this section because it is not
a month).
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(1) of this section, the plan must
be amended to determine interest credits for
a plan year using the average yield on 30-year
Treasury Constant Maturities for a period
that complies with the requirements of
paragraph (d)(1)(iv)(B) of this section.
Example 2. (i) Facts. The facts are the same
as in Example 1, except that the plan’s
interest crediting rate is determined as the
average yield on 30-year Treasury Constant
Maturities for the period, plus 50 basis
points.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(B)(1) of this section, the plan must
be amended to correct both the
impermissible lookback period and the
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Fmt 4702
Sfmt 4702
56309
excess margin. Accordingly, pursuant to
paragraph (e)(3)(vi)(C)(1) and (3) of this
section, the plan must be amended to
determine interest credits for a plan year
using the average yield on 30-year Treasury
Constant Maturities (with no margin) for a
period that complies with the requirements
of paragraph (d)(1)(iv)(B) of this section.
Example 3. (i) Facts. A plan credits interest
for a plan year using the rate of return on
plan assets for the preceding plan year.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(1) of this section, the plan must
be amended to determine interest credits for
each plan year using the rate of return on
plan assets for that plan year.
Example 4. (i) Facts. A plan credits interest
using the average yield on 30-year Treasury
Constant Maturities for December of the
preceding plan year with a minimum rate of
5.5 percent per year.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(4) of this section, the plan must
be amended to change the plan’s interest
crediting rate. The new interest crediting rate
under the plan must be either the average
yield on 30-year Treasury Constant
Maturities for December of the preceding
plan year with a minimum rate of 5 percent
per year or an annual interest crediting rate
of 6 percent.
Example 5. (i) Facts. A plan credits interest
using the greater of the unadjusted yield on
30-year Treasury Constant Maturities and the
yield on 1-year Treasury Constant Maturities
plus 100 basis points.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(5) of this section, the plan must
be amended to credit interest using the lesser
of a third segment rate described in
paragraph (d)(3) of this section and the
composite rate used under the plan before
the amendment (the greater of the unadjusted
yield on 30-year Treasury Constant
Maturities and the yield on 1-year Treasury
Constant Maturities plus 100 basis points).
Example 6. (i) Facts. A plan credits interest
using a broad-based index that measures the
yield to maturity on a group of long-term
investment grade corporate bonds.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(6)(i) of this section, the plan
must be amended to credit interest using a
third segment rate described in paragraph
(d)(3) of this section.
Example 7. (i) Facts. A plan credits interest
using the rate of return for a broad-based
index that measures the yield to maturity on
a group of short-term non-investment grade
corporate bonds.
(ii) Conclusion. Pursuant to paragraph
(e)(3)(vi)(C)(6)(ii) of this section, the plan
must be amended to credit interest at the
lesser of the rate of return for the index used
under the plan before the amendment date
and a third segment rate described in
paragraph (d)(3) of this section.
Example 8. (i) Facts. A plan credits interest
using the rate of return for the S&P 500
index. To bring the plan into compliance
with the market rate of return rules, the plan
sponsor amends the plan to credit interest
based on the rate of return on a RIC that is
designed to track the rate of return on the
S&P 500 index.
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Federal Register / Vol. 79, No. 182 / Friday, September 19, 2014 / Proposed Rules
(ii) Conclusion. The amendment satisfies
the rule of paragraph (e)(3)(vi)(C)(7)(i) of this
section.
Example 9. (i) Facts. A plan credits interest
based on the rate of return on a collective
trust that holds a balanced portfolio of equity
and fixed income investments, which
provides a rate of return that is reasonably
expected to be not significantly more volatile
than the broad U.S. equities market or a
similarly broad international equities market.
To bring the plan into compliance with the
market rate of return rules, the plan sponsor
amends the plan to credit interest based on
the actual rate of return on the assets within
a specified subset of the plan’s assets that is
invested in the collective trust.
(ii) Conclusion. The amendment satisfies
the rule of paragraph (e)(3)(vi)(C)(7)(i) of this
section.
*
*
*
*
*
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Background
[FR Doc. 2014–22292 Filed 9–18–14; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–105739–11]
RIN 1545–BK08
Removal of Allocation Rule for
Disbursements From Designated Roth
Accounts to Multiple Destinations
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed amendments to the
regulations that address the tax
treatment of distributions from
designated Roth accounts under taxfavored retirement plans. The proposed
regulations would limit the applicability
of the rule regarding the allocation of
after-tax amounts when disbursements
are made to multiple destinations so the
allocation rule applies only to
distributions made before the earlier of
January 1, 2015 or a date chosen by the
taxpayer that is on or after September
18, 2014. These regulations would affect
administrators of, employers
maintaining, participants in, and
beneficiaries of designated Roth
accounts under tax-favored retirement
plans.
asabaliauskas on DSK5VPTVN1PROD with PROPOSALS
SUMMARY:
Written or electronic comments
and requests for a public hearing must
be received by December 18, 2014.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–105739–11), Room
DATES:
VerDate Sep<11>2014
16:59 Sep 18, 2014
Jkt 232001
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washingtonm, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–105739–
11), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
https://www.regulations.gov (IRS REG–
105739–11).
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, Michael P.
Brewer at (202) 317–6700; concerning
submission of comments or to requests
for a public hearing, Oluwafunmilayo
(Funmi) Taylor at (202) 317–6901 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Section 402(a) provides generally that
any amount distributed from a trust
described in section 401(a) that is
exempt from tax under section 501(a) is
taxable to the distributee under section
72 in the taxable year of the distributee
in which distributed. Under section
403(b)(1), any amount distributed from
a section 403(b) plan is also taxable to
the distributee under section 72.
If a participant’s account balance in a
plan qualified under section 401(a) or in
a section 403(b) plan includes both
after-tax and pretax amounts, then,
under section 72(e)(8), each distribution
(other than a distribution that is paid as
part of an annuity) from the plan will
include a pro rata share of both after-tax
and pretax amounts. (Under section
72(d), a different allocation method
applies to annuity distributions.)
Under section 402A(d)(4), section 72
is applied separately with respect to
distributions and payments from a
designated Roth account and other
distributions and payments from the
plan.
Section 402(c) prescribes rules for
amounts that are rolled over from
qualified trusts to eligible retirement
plans, including individual retirement
accounts or annuities (‘‘IRAs’’). Subject
to certain exceptions, section 402(c)(1)
provides that if any portion of an
eligible rollover distribution paid to an
employee from a qualified trust is
transferred to an eligible retirement
plan, the portion of the distribution so
transferred is not includible in gross
income in the taxable year in which
paid.
Under section 402(c)(2), the
maximum portion of an eligible rollover
distribution that may be rolled over in
a transfer to which section 402(c)(1)
applies generally cannot exceed the
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Fmt 4702
Sfmt 4702
portion of the distribution that is
otherwise includible in gross income.
However, under section 402(c)(2)(A)
and (B), the general rule does not apply
to such a distribution to the extent that
such portion is transferred in a direct
trustee-to-trustee transfer to a qualified
trust or to an annuity contract described
in section 403(b) and such trust or
contract provides for separate
accounting for amounts so transferred
(and earnings thereon), including
separately accounting for the portion of
such distribution which is includible in
gross income and the portion of such
distribution which is not so includible,
or such portion is transferred to an IRA.
In addition, section 402(c)(2) that, in
the case of a transfer described in
subparagraph (A) or (B), the amount
transferred shall be treated as consisting
first of the portion of such distribution
that is includible in gross income
(determined without regard to section
402(c)(1)).
Under section 402A, an applicable
retirement plan may include a
designated Roth account. An applicable
retirement plan is defined in section
402A(e)(1) to mean a plan qualified
under section 401(a), a section 403(b)
plan, and a governmental section 457(b)
plan. Section 402A(d) provides that a
qualified distribution (as defined in
section 402A(d)(2)) from a designated
Roth account is not includible in gross
income.
Section 1.402A–1, Q&A–5(a), of the
Income Tax Regulations prescribes
taxability rules for a distribution from a
designated Roth account that is rolled
over. Q&A–5(a) provides, in part, that
‘‘any amount paid in a direct rollover is
treated as a separate distribution from
any amount paid directly to the
employee.’’
Section 402(f) requires that the plan
administrator of a plan qualified under
section 401(a) provide any recipient of
an eligible rollover distribution with a
written explanation describing certain
provisions of law. Notice 2009–68,
2009–2 CB 423 (September 28, 2009),
contains two safe harbor explanations
that may be provided to recipients of
eligible rollover distributions from an
employer plan in order to satisfy section
402(f). The safe harbor explanation with
respect to distributions that are not from
a designated Roth account provides in
part (under the heading ‘‘If your
payment includes after-tax
contributions’’) that ‘‘[i]f you do a direct
rollover of only a portion of the amount
paid from the Plan and a portion is paid
to you, each of the payments will
include an allocable portion of the aftertax contributions.’’ Similarly, for
distributions from a designated Roth
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]]>Agencies
[Federal Register Volume 79, Number 182 (Friday, September 19, 2014)]
[Proposed Rules]
[Pages 56305-56310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22292]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-111839-13]
RIN 1545-BL62
Transitional Amendments To Satisfy the Market Rate of Return
Rules for Hybrid Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that would provide
guidance regarding certain amendments to applicable defined benefit
plans. Applicable defined benefit plans are defined benefit plans that
use a lump sum-based benefit formula, including cash balance plans and
pension equity plans, as well as other hybrid retirement plans that
have a similar effect. These proposed regulations would permit an
applicable defined benefit plan that does not comply with the
requirement that the plan not provide for interest credits (or
equivalent amounts) at an effective rate that is greater than a market
rate of return to comply with that requirement by changing to an
interest crediting rate that is permitted under the final hybrid plan
regulations, without violating the anti-cutback rules of section
411(d)(6). These regulations would affect sponsors, administrators,
participants, and beneficiaries of these plans. This document also
provides a notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by December 18,
2014. Outlines of topics to be discussed at the public hearing
scheduled for January 9, 2015, at 10 a.m. must be received by December
18, 2014.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111839-13), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
111839-13), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at https://www.regulations.gov (IRS REG-111839-13).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Neil S.
Sandhu or Linda S. F. Marshall at (202) 317-6700; concerning
submissions of comments, the hearing, and/or being placed on the
building access list to attend the hearing, Oluwafunmilayo (Funmi)
Taylor at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 411(b)(5) of the Internal
Revenue Code (Code).
Generally, a defined benefit pension plan must satisfy the
requirements of section 411 in order to be qualified under section
401(a) of the Code. Section 411(b)(5), which modifies the accrual
requirements of section 411(b), was 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). Section 411(b)(5) and certain related effective
date provisions were subsequently amended by the Worker, Retiree, and
Employer Recovery Act of 2008, Public Law 110-458 (122 Stat. 5092
(2008)) (WRERA '08).
Under section 411(b)(5)(B)(i), a statutory hybrid plan is treated
as failing to satisfy the requirements of section 411(b)(1)(H) (which
provides that the rate of an employee's benefit accrual must not be
reduced because of the attainment of any age) if the terms of the plan
provide any interest credit (or an equivalent amount) for any plan year
at a rate that is in excess of a market rate of return. Section
411(b)(5)(B)(i) is generally effective for plan years beginning after
December 31, 2007.
Section 411(d)(6) provides generally that a plan does not satisfy
section 411 if an amendment to the plan decreases a participant's
accrued benefit. For this purpose, 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
reducing accrued benefits.
Sections 204(b)(5)(B)(i) and 204(g) of the Employee Retirement
Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)),
as amended (ERISA), contain rules that are parallel to sections
411(b)(5)(B)(i) and 411(d)(6), respectively. 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 in these proposed regulations for purposes of ERISA, as well
as the Code. Thus, these proposed regulations would apply for purposes
of sections 411(b)(5)(B)(i) and 411(d)(6) of the Code, as well as for
purposes of sections 204(b)(5)(B)(i) and 204(g) of ERISA.
Section 1.411(d)-4, A-2(b)(1), of the Income Tax Regulations
provides, in part, that the Commissioner may, consistent with the
provisions of Sec. 1.411(d)-4, provide for the elimination or
reduction of section 411(d)(6) protected benefits that have already
accrued to the extent that such elimination or reduction is necessary
to permit compliance with other requirements of section 401(a). The
Commissioner may exercise this authority only through the publication
[[Page 56306]]
of revenue rulings, notices, and other documents of general
applicability.
Section 1.411(d)-4, A-2(b)(2)(i), provides that a plan may be
amended to eliminate or reduce a section 411(d)(6) protected benefit,
within the meaning of Sec. 1.411(d)-4, A-1, if the following three
requirements are met: the amendment constitutes timely compliance with
a change in law affecting plan qualification; there is an exercise of
section 7805(b) relief by the Commissioner; and the elimination or
reduction of the section 411(d)(6) protected benefit is made only to
the extent necessary to enable the plan to continue to satisfy the
requirements for qualified plans.
Final regulations (TD 9505) (2010 final hybrid plan regulations)
were published by the Treasury Department and the IRS in the Federal
Register on October 19, 2010 (75 FR 64123). The 2010 final hybrid plan
regulations provide for certain interest crediting rates that satisfy
the requirements of section 411(b)(5)(B)(i). The 2010 final hybrid plan
regulations provide, effective for plan years that begin on or after
January 1, 2012, a list of interest crediting rates and combinations of
rates that satisfy the requirement of section 411(b)(5)(B)(i) that the
plan not provide an effective rate of return in excess of a market rate
of return, while not permitting other rates. The provisions that
provide for a list of rates are set forth at Sec. 1.411(b)(5)-
1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i).
Proposed regulations (REG-132554-08) (2010 proposed hybrid plan
regulations) were also published by the Treasury Department and the IRS
in the Federal Register on October 19, 2010 (75 FR 64197). The 2010
proposed hybrid plan regulations provide for additional interest
crediting rates that satisfy the requirements of section
411(b)(5)(B)(i). The preamble to the 2010 proposed hybrid plan
regulations solicited comments with respect to guidance needed to
permit a plan to change its interest crediting rate to comply with the
final hybrid plan regulations.
II. Effective Dates
Notice 2011-85 (2011-44 IRB 605 (October 31, 2011)), (see Sec.
601.601(d)(2)(ii)(b) of this chapter), announced delayed effective/
applicability dates with respect to certain provisions in the hybrid
plan regulations. Notice 2011-85 provided that the Treasury Department
and the IRS intended to amend the hybrid plan regulations to postpone
the effective/applicability date of Sec. 1.411(b)(5)-1(d)(1)(iii),
(d)(1)(vi), and (d)(6)(i), so that these provisions would be effective
at a future date, not earlier than January 1, 2013.
Notice 2011-85 also provided that, when the 2010 proposed
regulations were finalized, it was expected that relief from the
requirements of section 411(d)(6) would be granted for certain plan
amendments that eliminate or reduce a section 411(d)(6) protected
benefit. A plan amendment would be eligible for this relief only if the
plan amendment were adopted by the last day of the first plan year
preceding the plan year for which the 2010 proposed regulations, once
finalized, apply to the plan, and the elimination or reduction was made
only to the extent necessary to enable the plan to meet the
requirements of section 411(b)(5). In addition, Notice 2011-85 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 2011-85, the deadline for these
amendments is the same as the deadline for an amendment that is
eligible for the relief under section 411(d)(6) that is also announced
in the notice.
Notice 2012-61 (2012-42 IRB 479 (October 15, 2012)), (see Sec.
601.601(d)(2)(ii)(b) of this chapter), announced that the regulations
described in Notice 2011-85 would not be effective for plan years
beginning before January 1, 2014.
Final regulations (TD 9693) (2014 final hybrid plan regulations)
that finalize the 2010 proposed hybrid plan regulations are being
issued at the same time as these proposed regulations. The 2014 final
hybrid plan regulations amend the effective/applicability date of Sec.
1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i), so that these
provisions apply to plan years that begin on or after January 1, 2016.
III. Permissible Interest Crediting Rates
Interest crediting rates can be broadly characterized as either
investment-based rates or rates that are not investment-based rates. An
investment-based rate is a rate of return provided by actual
investments, taking into account the return attributable to any change
in the value of the underlying investments. A rate of return that is
based on the rate of return for an index that measures the change in
the value of investments can also be considered to be an investment-
based rate. Rates that are not investment-based rates include fixed
rates of interest and yields to maturity of bonds.
Sections 1.411(b)(5)-1(d)(3) and (d)(4) set forth permitted rates
that are not investment-based rates, such as the third segment rate
described in section 417(e)(3)(D) or 430(h)(2)(C)(iii), the yield on
30-year Treasury Constant Maturities, and a fixed 6 percent rate of
interest. Section 1.411(b)(5)-1(d)(5) sets forth permitted investment-
based rates, such as the rate of return on certain regulated investment
companies (RICs), as defined in section 851, and the rate of return on
plan assets. As provided in Sec. 1.411(b)(5)-1(d)(6), certain annual
(or more frequent) floors are permitted in combination with the bond-
based rates and cumulative floors (in excess of the cumulative zero
floor required under section 411(b)(5)(i)(II)) are permitted in
combination with either the bond-based rates or the investment-based
rates.
Explanation of Provisions
Prior to the first day of the first plan year that begins on or
after January 1, 2016, a plan that uses an interest crediting rate that
is not permitted under the final hybrid plan regulations must be
amended to change to an interest crediting rate that is permitted under
those regulations. Although a plan is permitted to be amended to change
the interest crediting rate with respect to benefits that have not yet
accrued, an amendment that reduces the interest crediting rate with
respect to benefits that have already accrued would ordinarily be
impermissible under section 411(d)(6).
In order to resolve this conflict between the market rate of return
rules of section 411(b)(5)(B)(i) and the anti-cutback rules of section
411(d)(6), these proposed regulations would permit a plan with a
noncompliant interest crediting rate to be amended with respect to
benefits that have already accrued so that its interest crediting rate
complies with the market rate of return rules. If the applicable
requirements of these regulations are satisfied, such an amendment is
permitted with respect to benefits that have already accrued, but only
with respect to interest credits that are credited for interest
crediting periods that begin on or after the later of the effective
date of the amendment or the date the amendment is adopted (the
applicable amendment date within the meaning of Sec. 1.411(d)-
3(g)(4)). To qualify for this treatment, the amendment would have to be
adopted prior to and effective no later than the first day of the first
plan year that begins on or after January 1, 2016.
These proposed regulations set forth amendments that would be
eligible for
[[Page 56307]]
this treatment by providing a specific correction for each noncompliant
feature of a noncompliant interest crediting rate.\1\ If the
noncompliant interest crediting rate has more than one noncompliant
feature, then each noncompliant feature must be addressed separately in
the prescribed manner. Examples are included to illustrate the
application of these rules.
---------------------------------------------------------------------------
\1\ A plan may have been amended to change its interest
crediting rate under the rules of section 1107 of PPA '06. Section
1107 of PPA '06 provided relief from the requirements of section
411(d)(6) for amendments made pursuant to a change in law under PPA
'06, if the amendment was adopted by the last day of the first plan
year that began on or after January 1, 2009 (or 2011, in the case of
a governmental plan as defined in section 414(d)). If an interest
crediting rate adopted under the rules of section 1107 of PPA '06 is
not permitted under the final hybrid plan regulations, then these
proposed regulations would permit a subsequent amendment to change
the rate to a rate permitted under the final hybrid plan
regulations.
---------------------------------------------------------------------------
The general approach in the regulations is to permit amendments
that bring the plan into compliance by changing the specific feature
that causes the plan's interest crediting rate to be noncompliant,
while not changing other features of the existing rate. For example, if
a plan uses what would otherwise be a permissible bond-based rate but
provides for an impermissible lookback month to determine interest
credits, then the plan must be amended to correct the lookback month to
a permitted lookback month while retaining the underlying bond-based
rate. The Treasury Department and the IRS believe this general approach
is the most appropriate manner to resolve the conflict between the
market rate of return rules of section 411(b)(5)(B)(i) and the anti-
cutback rules of section 411(d)(6).\2\
---------------------------------------------------------------------------
\2\ The standard in these proposed regulations for resolving
this conflict between section 411(d)(6) and section 411(b)(5)(B)(i)
is generally comparable to the standard under the rules of Sec.
1.411(d)-4, A-2(b)(1) and (b)(2)(i) with respect to the
Commissioner's exercise of authority to resolve a conflict between
section 411(d)(6) and another qualification requirement under
section 401(a).
---------------------------------------------------------------------------
The proposed regulations take a special approach with respect to a
noncompliant composite interest crediting rate that is determined as
the greatest of two or more component rates, because it is not always
readily apparent which specific feature or component rate causes the
composite rate to be noncompliant. Two types of composite rates are
specifically addressed in the proposed regulations, and a comment
request is included to solicit suggestions for appropriate corrective
amendments with respect to a third type of composite rate.
A composite rate that is the greater of an otherwise permissible
variable bond-based rate and a fixed minimum rate in excess of an
annual interest crediting rate of 6 percent (the maximum permitted
fixed rate) could be viewed either as: (1) A noncompliant fixed rate
that must be brought into compliance by reducing the fixed rate and
eliminating the variable bond-based rate component, or (2) a
noncompliant bond-based rate that must be brought into compliance by
reducing the fixed minimum rate to the highest permitted fixed minimum
interest crediting rate that is permitted with the particular variable
bond-based rate (4 or 5 percent, as applicable). As a result, in that
particular case, the proposed regulations would give the plan sponsor
the choice of either: (1) Eliminating the variable rate while changing
to an annual interest crediting rate of 6 percent or (2) retaining the
variable rate while reducing the fixed minimum component to the extent
necessary to bring the plan into compliance. These same options would
apply if the fixed minimum interest crediting rate is greater than the
highest permitted fixed minimum interest crediting rate that is
permitted with the particular variable bond-based rate but is not
greater than the highest permitted fixed rate (6 percent).
In the case of a composite rate that is the greatest of two or more
otherwise permissible variable bond-based rates, it is also difficult
to determine the most appropriate method to bring the plan into
compliance. One reason for this difficulty is because, in most of these
cases, the composite rate will not exceed the rate of interest on long-
term investment grade corporate bonds. As a result, in such a case, the
proposed regulations do not provide for the elimination of any of the
variable bond-based components. Instead, the proposed regulations would
provide that the noncompliant composite rate must be capped at a third
segment rate.\3\
---------------------------------------------------------------------------
\3\ Any of the rates that are denominated a third segment rate
pursuant to Sec. 1.411(d)(5)-1(d)(3) can be specified by a plan for
this purpose, as well as for other purposes under these proposed
regulations for which a third segment rate is used.
---------------------------------------------------------------------------
The proposed regulations also take a special approach with respect
to a noncompliant interest crediting rate that is an impermissible
investment-based rate. One example of an impermissible investment-based
rate is an investment-based rate that is not equal to the rate of
return on a RIC or the actual rate of return on the aggregate assets of
a plan or a specified subset of plan assets (even if the rate of return
is reasonably expected to be not significantly more volatile than the
broad United States equities market or a similarly broad international
equities market). Another example of an impermissible investment-based
rate is the rate of return on a RIC that has most of its assets
invested in securities of issuers (including other RICs) concentrated
in an industry sector.
If an investment-based rate is noncompliant, the proposed
regulations would require the plan sponsor to amend the plan to credit
interest using a permitted investment-based rate with similar risk and
return characteristics as the noncompliant rate, if possible. If it is
not possible to select a permitted investment-based rate with similar
risk and return characteristics as the noncompliant rate, then the
proposed regulations would require the plan sponsor to amend the plan
to credit interest using a permitted investment-based rate that is
otherwise similar to the noncompliant rate (which would generally
require the use of a rate that is less volatile than the noncompliant
rate but is otherwise similar to the noncompliant rate).
Several commenters suggested that the IRS and the Treasury
Department should permit a change from a noncompliant interest
crediting rate to any of the maximum compliant interest crediting
rates. However, this suggested approach was not taken in these proposed
regulations because this approach would not require a sufficient
connection between the correction and the specific feature that caused
an interest crediting rate to be noncompliant, and would permit a plan
sponsor to reduce the interest crediting rate more than is appropriate.
Proposed Effective/Applicability Dates
These regulations are proposed to apply to amendments adopted on or
after the date regulations that finalize these proposed regulations are
published in the Federal Register. In addition, it is proposed that
taxpayers be permitted, pursuant to section 7805(b)(7), to elect to
apply these regulations, as finalized, to plan amendments that are
adopted during earlier periods.
Special Analyses
It has been determined that these proposed regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to
[[Page 56308]]
section 7805(f) of the Code, these regulations have been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury Department and the IRS request comments on all
aspects of the proposed rules.
In addition, comments are specifically requested as to the
amendment required to bring a plan into compliance if the plan credits
interest using a composite rate that is an investment-based rate of
return with an impermissible annual (or more frequent) fixed or
variable minimum rate. Some of these plans might currently be applying
a reduction to the investment-based rate of return, in order to take
into account the value provided by the minimum rate. For a plan that
credits interest using an investment-based rate of return with an
impermissible minimum rate:
Should the required amendment eliminate the minimum rate
(and eliminate any reduction to the investment-based rate of return),
so that the required rate after amendment is the unreduced investment-
based rate of return?
Should the required amendment change the interest
crediting rate to another permitted rate that is less volatile than the
unreduced investment-based rate (such as a rate described in Sec.
1.411(b)(5)-1(d)(3) with a fixed minimum rate of 4 percent per year)?
Should the required amendment depend on the level of the
minimum rate and the extent of any reduction to the investment-based
rate of return?
Should the plan sponsor have a choice among alternative
required amendments to bring the plan into compliance?
Comments are also requested as to whether there are statutory
hybrid plans other than those described in the specific request for
comments that use a noncompliant interest crediting rate that is not
addressed in the regulations and for which an amendment is necessary to
bring the plan into compliance with the market rate of return rules. If
so, comments are requested as to the appropriate amendment to bring the
plan into compliance in such a case.
All comments will be available for public inspection and copying at
www.regulations.gov or upon request. A public hearing has been
scheduled for January 9, 2015, beginning at 10 a.m. in the Auditorium,
Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.
Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by December 18, 2014 and submit an outline of
topics to be discussed and the amount of time to be devoted to each
topic (a signed original and eight (8) copies) by December 18, 2014.
A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Neil S. Sandhu and
Linda S. F. Marshall, Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and the Treasury Department participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
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(b)(5)-1 is amended by adding paragraph (e)(3)(vi)
to read as follows:
Sec. 1.411(b)(5)-1 Reduction in rate of benefit accrual under a
defined benefit plan.
* * * * *
(e) * * *
(3) * * *
(vi) Transitional amendments needed to satisfy the market rate of
return rules--(A) In general. Notwithstanding the requirements of
section 411(d)(6), if the requirements set forth in this paragraph
(e)(3)(vi) are satisfied, a plan may be amended to change its interest
crediting rate with respect to benefits that have already accrued in
order to comply with the requirements of section 411(b)(5)(B)(i) and
paragraph (d) of this section. A plan amendment is eligible for the
treatment provided under this paragraph (e)(3)(vi)(A) to the extent
that the amendment modifies an interest crediting rate that does not
satisfy the requirements of section 411(b)(5)(B)(i) and paragraph (d)
of this section in the manner specified in paragraph (e)(3)(vi)(C) of
this section.
(B) Rules of application--(1) Multiple noncompliant features. If a
plan's interest crediting rate has more than one noncompliant feature
as described in paragraph (e)(3)(vi)(C) of this section, then each
noncompliant feature must be addressed separately in the manner
specified in paragraph (e)(3)(vi)(C) of this section.
(2) Definition of investment-based rate. The application of the
rules of paragraph (e)(3)(vi)(C) of this section to an interest
crediting rate depends on whether the interest crediting rate is an
investment-based rate. For purposes of this paragraph (e)(3)(vi), an
investment-based rate is either a rate of return provided by actual
investments (taking into account the return attributable to any change
in the value of the underlying investments) or a rate that is based on
the rate of return for an index that measures the change in the value
of investments.
(3) Timing rules for permitted amendments. The rules under this
paragraph (e)(3)(vi) apply only to a plan amendment that is adopted
prior to and effective no later than the first day of the first plan
year described in paragraph (f)(2)(i)(B) of this section. In addition,
the rules under this paragraph (e)(3)(vi) apply to a plan amendment
only with respect to interest credits that are credited for interest
crediting periods that begin after the applicable amendment date
(within the meaning of Sec. 1.411(d)-3(g)(4)).
(C) Noncompliant feature and amendment to bring plan into
compliance--(1) Timing rules not satisfied. If a plan does not satisfy
the timing rules relating to how interest credits are determined and
credited (as
[[Page 56309]]
set forth in paragraph (d)(1)(iv) of this section), then the plan must
be amended to correct the aspect of the plan's interest crediting rate
that fails to comply with those rules with respect to its underlying
interest crediting rate.
(2) Fixed rate in excess of 6 percent. If a plan credits interest
using a fixed rate in excess of the rate described in paragraph
(d)(4)(v) of this section, then the plan must be amended to reduce the
interest crediting rate to an annual interest crediting rate of 6
percent.
(3) Bond-based rate with margin exceeding maximum permitted margin.
If a plan credits interest using a rate that would be described in
paragraph (d)(3) or (d)(4) of this section except that the plan applies
a margin that exceeds the maximum permitted margin under paragraph
(d)(3) or (d)(4) of this section, then the plan must be amended to
reduce the margin to the maximum permitted margin for the underlying
rate used by the plan.
(4) Bond-based rate with fixed minimum rate exceeding maximum
permitted fixed minimum rate. If a plan credits interest using a
variable rate described in paragraph (d)(3) or (d)(4) of this section
in combination with a fixed minimum rate in excess of the highest
permitted fixed minimum rate under paragraph (d)(6)(ii)(A)(2) or (B)(2)
of this section (as applicable), then the plan must be amended either--
(i) To reduce the fixed minimum rate to the highest permitted fixed
minimum rate that can be used in combination with the plan's variable
rate; or
(ii) To credit interest using an annual interest crediting rate of
6 percent.
(5) Greatest of two or more variable bond-based rates. If a plan
credits interest using a composite rate that is the greatest of two or
more variable rates described in paragraph (d)(3) or (d)(4) of this
section, then the plan must be amended to credit interest using the
lesser of the composite rate and a rate described in paragraph (d)(3)
of this section.
(6) Impermissible bond-based rate. If a plan credits interest using
a variable rate that is not an investment-based rate of return and is
not described in paragraph (d)(3) or (d)(4) of this section (after
application of the rule of paragraph (e)(3)(vi)(C)(3) of this section,
if applicable), then--
(i) If a variable rate described in paragraph (d)(3) or (d)(4) of
this section that has similar duration and quality characteristics as
the plan's variable rate can be selected, then the plan must be amended
to credit interest based on such a rate; or
(ii) If a variable rate described in paragraph (d)(3) or (d)(4) of
this section that has similar duration and quality characteristics as
the plan's variable rate cannot be selected, then the plan must be
amended to provide that the plan credits interest using the lesser of
the plan's variable rate and a rate described in paragraph (d)(3) of
this section.
(7) Impermissible investment-based rate. If a plan credits interest
using an investment-based rate of return that is not described in
paragraph (d)(5) of this section, then--
(i) If a permitted investment-based rate described in paragraph
(d)(5)(ii)(A), (d)(5)(ii)(B), or (d)(5)(iv) of this section that has
similar risk and return characteristics as the plan's impermissible
investment-based rate can be selected, then the plan must be amended to
credit interest based on such a permitted investment-based rate; or
(ii) If a permitted investment-based rate described in paragraph
(d)(5)(ii)(A) (d)(5)(ii)(B), or (d)(5)(iv) of this section that has
similar risk and return characteristics as the plan's impermissible
investment-based rate cannot be selected, then the plan must be amended
to credit interest based on a rate of return described in paragraph
(d)(5)(ii)(A), (d)(5)(ii)(B), or (d)(5)(iv) of this section that is
otherwise similar to the plan's impermissible investment-based rate
(generally requiring the use of a rate that is less volatile than the
plan's impermissible investment-based rate but is otherwise similar to
that rate).
(D) Examples. The following examples illustrate the application of
the rules of this paragraph (e)(3)(vi). Each plan has a plan year that
is the calendar year, and all amendments are adopted on October 1, 2015
and become effective for interest crediting periods beginning on or
after January 1, 2016.
Example 1. (i) Facts. A plan determines interest credits for a
plan year using the average yield on 30-year Treasury Constant
Maturities for the last week of the preceding plan year (which is an
impermissible period for this purpose pursuant to paragraph
(d)(1)(iv)(B) of this section because it is not a month).
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this
section, the plan must be amended to determine interest credits for
a plan year using the average yield on 30-year Treasury Constant
Maturities for a period that complies with the requirements of
paragraph (d)(1)(iv)(B) of this section.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that the plan's interest crediting rate is determined as the
average yield on 30-year Treasury Constant Maturities for the
period, plus 50 basis points.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(B)(1) of this
section, the plan must be amended to correct both the impermissible
lookback period and the excess margin. Accordingly, pursuant to
paragraph (e)(3)(vi)(C)(1) and (3) of this section, the plan must be
amended to determine interest credits for a plan year using the
average yield on 30-year Treasury Constant Maturities (with no
margin) for a period that complies with the requirements of
paragraph (d)(1)(iv)(B) of this section.
Example 3. (i) Facts. A plan credits interest for a plan year
using the rate of return on plan assets for the preceding plan year.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this
section, the plan must be amended to determine interest credits for
each plan year using the rate of return on plan assets for that plan
year.
Example 4. (i) Facts. A plan credits interest using the average
yield on 30-year Treasury Constant Maturities for December of the
preceding plan year with a minimum rate of 5.5 percent per year.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(4) of this
section, the plan must be amended to change the plan's interest
crediting rate. The new interest crediting rate under the plan must
be either the average yield on 30-year Treasury Constant Maturities
for December of the preceding plan year with a minimum rate of 5
percent per year or an annual interest crediting rate of 6 percent.
Example 5. (i) Facts. A plan credits interest using the greater
of the unadjusted yield on 30-year Treasury Constant Maturities and
the yield on 1-year Treasury Constant Maturities plus 100 basis
points.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(5) of this
section, the plan must be amended to credit interest using the
lesser of a third segment rate described in paragraph (d)(3) of this
section and the composite rate used under the plan before the
amendment (the greater of the unadjusted yield on 30-year Treasury
Constant Maturities and the yield on 1-year Treasury Constant
Maturities plus 100 basis points).
Example 6. (i) Facts. A plan credits interest using a broad-
based index that measures the yield to maturity on a group of long-
term investment grade corporate bonds.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(i) of
this section, the plan must be amended to credit interest using a
third segment rate described in paragraph (d)(3) of this section.
Example 7. (i) Facts. A plan credits interest using the rate of
return for a broad-based index that measures the yield to maturity
on a group of short-term non-investment grade corporate bonds.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(ii) of
this section, the plan must be amended to credit interest at the
lesser of the rate of return for the index used under the plan
before the amendment date and a third segment rate described in
paragraph (d)(3) of this section.
Example 8. (i) Facts. A plan credits interest using the rate of
return for the S&P 500 index. To bring the plan into compliance with
the market rate of return rules, the plan sponsor amends the plan to
credit interest based on the rate of return on a RIC that is
designed to track the rate of return on the S&P 500 index.
[[Page 56310]]
(ii) Conclusion. The amendment satisfies the rule of paragraph
(e)(3)(vi)(C)(7)(i) of this section.
Example 9. (i) Facts. A plan credits interest based on the rate
of return on a collective trust that holds a balanced portfolio of
equity and fixed income investments, which provides a rate of return
that is reasonably expected to be not significantly more volatile
than the broad U.S. equities market or a similarly broad
international equities market. To bring the plan into compliance
with the market rate of return rules, the plan sponsor amends the
plan to credit interest based on the actual rate of return on the
assets within a specified subset of the plan's assets that is
invested in the collective trust.
(ii) Conclusion. The amendment satisfies the rule of paragraph
(e)(3)(vi)(C)(7)(i) of this section.
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-22292 Filed 9-18-14; 8:45 am]
BILLING CODE 4830-01-P
