Bulletin No. 2010-48November 29, 2010

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Notice 2010–75, page 781.Credit for carbon dioxide sequestration, 2010 section45Q inflation adjustment factor. The notice publishes the in-flation adjustment factor for the credit for carbon dioxide (CO2)sequestration under section 45Q of the Code for calendar year2010. The amount of credit must be adjusted for inflation fortaxable years beginning in a calendar year after 2009.

EMPLOYEE PLANS

T.D. 9505, page 755.Final regulations under sections 411(a)(13) and 411(b)(5) of theCode, which were added by section 701(b) of the Pension Pro-tection Act of 2006 (PPA ‘06), provide guidance concerninghybrid defined benefit pension plans, including cash balanceplans. The regulations under section 411(a)(13) generally de-scribe the plans that are treated as statutory hybrid plans andprovide special benefit calculation and vesting rules with re-spect to those plans. The regulations under section 411(b)(5)provide rules for statutory hybrid plans to comply with age dis-crimination requirements, including rules governing design ofand conversion to a statutory hybrid plan, and rules governingoperation of those plans, including providing interest creditsthat do not exceed a market rate of return.

REG–132554–08, page 783.Proposed regulations under sections 411(a)(13) and 411(b)(5)of the Code, as well as section 411(b)(1), provide additionalguidance concerning hybrid defined benefit pension plans, in-cluding cash balance plans. In particular, these proposed reg-ulations provide guidance as to the scope of relief under sec-tion 411(a)(13)(A), contain a special rule regarding the applica-tion of the 1331/3 percent rule under section 411(b)(1)(B) to

statutory hybrid plans that credit interest using a variable rate,provide an alternative method of satisfying the conversion pro-tection requirements under section 411(b)(5)(B)(ii), and provideadditional guidance with respect to the market rate of returnrules under section 411(b)(5)(B)(i). A public hearing is sched-uled for January 26, 2011.

ADMINISTRATIVE

Rev. Proc. 2010–41, page 781.This procedure describes the procedures foreign persons andU.S. citizens without a social security number, due to conscien-tious religious objection, must follow to obtain a preparer taxidentification number (PTIN) and provides temporary relief dur-ing the 2011 filing season for these individuals who experiencedelay in obtaining PTINs.

Finding Lists begin on page ii.Index for July through November begins on page iv.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

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For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

November 29, 2010 2010–48 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 411.—MinimumVesting Standards26 CFR 1.411(a)(13)–1: Statutory hybrid plans.

T.D. 9505

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Hybrid Retirement Plans

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final Regulations.

SUMMARY: This document containsfinal regulations providing guidance re-lating to certain provisions of the InternalRevenue Code (Code) that apply to hy-brid defined benefit pension plans. Theseregulations provide guidance on changesmade by the Pension Protection Act of2006, as amended by the Worker, Retiree,and Employer Recovery Act of 2008.These regulations affect sponsors, admin-istrators, participants, and beneficiaries ofhybrid defined benefit pension plans.

DATES: Effective Date: These regulationsare effective on October 19, 2010.

Applicability Date: These regulationsgenerally apply to plan years that begin onor after January 1, 2011. However, seethe “Effective/Applicability Dates” sec-tion in this preamble for additional infor-mation regarding the applicability of theseregulations.

FOR FURTHER INFORMATIONCONTACT: Neil S. Sandhu,Lauson C. Green, or Linda S. F. Marshallat (202) 622–6090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments tothe Income Tax Regulations (26 CFR part1) under sections 411(a)(13) and 411(b)(5)of the Code. Generally, a defined benefitpension plan must satisfy the minimum

vesting standards of section 411(a) andthe accrual requirements of section 411(b)in order to be qualified under section401(a) of the Code. Sections 411(a)(13)and 411(b)(5), which modify the mini-mum vesting standards of section 411(a)and the accrual requirements of section411(b), were added to the Code by section701(b) of the Pension Protection Act of2006, Public Law 109–280 (120 Stat. 780(2006)) (PPA ’06). Sections 411(a)(13)and 411(b)(5), as well as certain effec-tive date provisions related to these sec-tions, were subsequently amended by theWorker, Retiree, and Employer RecoveryAct of 2008, Public Law 110–458 (122Stat. 5092 (2008)) (WRERA ’08).

Section 411(a)(13)(A) provides that anapplicable defined benefit plan (which isdefined in section 411(a)(13)(C)) is nottreated as failing to meet either (i) therequirements of section 411(a)(2) (sub-ject to a special vesting rule in section411(a)(13)(B) with respect to benefits de-rived from employer contributions) or (ii)the requirements of section 411(a)(11),411(c), or 417(e), with respect to accruedbenefits derived from employer contribu-tions, merely because the present value ofthe accrued benefit (or any portion thereof)of any participant is, under the terms ofthe plan, equal to the amount expressedas the balance of a hypothetical accountor as an accumulated percentage of theparticipant’s final average compensation.Section 411(a)(13)(B) requires an appli-cable defined benefit plan to provide thatan employee who has completed at least 3years of service has a nonforfeitable rightto 100 percent of the employee’s accruedbenefit derived from employer contribu-tions.

Under section 411(a)(13)(C)(i), anapplicable defined benefit plan is de-fined as a defined benefit plan underwhich the accrued benefit (or any por-tion thereof) of a participant is calculatedas the balance of a hypothetical accountmaintained for the participant or as an ac-cumulated percentage of the participant’sfinal average compensation. Under sec-tion 411(a)(13)(C)(ii), the Secretary ofthe Treasury is to issue regulations whichinclude in the definition of an applicable

defined benefit plan any defined benefitplan (or portion of such a plan) which hasan effect similar to a plan described insection 411(a)(13)(C)(i).

Section 411(b)(1)(H)(i) provides thata defined benefit plan fails to complywith section 411(b) if, under the plan, anemployee’s benefit accrual is ceased, orthe rate of an employee’s benefit accrualis reduced, because of the attainment ofany age. Section 411(b)(5), which wasadded to the Code by section 701(b)(1)of PPA ’06, provides additional rules re-lated to section 411(b)(1)(H)(i). Section411(b)(5)(A) generally provides that aplan is not treated as failing to meet therequirements of section 411(b)(1)(H)(i) ifa participant’s accrued benefit, as deter-mined as of any date under the terms ofthe plan, would be equal to or greater thanthat of any similarly situated, younger in-dividual who is or could be a participant.For this purpose, section 411(b)(5)(A)(iv)provides that the accrued benefit may, un-der the terms of the plan, be expressed asan annuity payable at normal retirementage, the balance of a hypothetical account,or the current value of the accumulatedpercentage of the employee’s final aver-age compensation. Section 411(b)(5)(G)provides that, for purposes of section411(b)(5), any reference to the accruedbenefit of a participant refers to the partic-ipant’s benefit accrued to date.

Section 411(b)(5)(B) imposes cer-tain requirements on an applicable de-fined benefit plan in order for the planto satisfy section 411(b)(1)(H). Section411(b)(5)(B)(i) provides that such a plan istreated as failing to meet the requirementsof section 411(b)(1)(H) if the terms of theplan provide for an interest credit (or anequivalent amount) for any plan year at arate that is greater than a market rate ofreturn. Under section 411(b)(5)(B)(i)(I), aplan is not treated as having an above- mar-ket rate merely because the plan providesfor a reasonable minimum guaranteed rateof return or for a rate of return that isequal to the greater of a fixed or variablerate of return. Section 411(b)(5)(B)(i)(II)provides that an applicable defined benefitplan is treated as failing to meet the re-quirements of section 411(b)(1)(H) unless

2010–48 I.R.B. 755 November 29, 2010

the plan provides that an interest credit (oran equivalent amount) of less than zero canin no event result in the account balance orsimilar amount being less than the aggre-gate amount of contributions credited tothe account. Section 411(b)(5)(B)(i)(III)authorizes the Secretary of the Treasury toprovide by regulation for rules governingthe calculation of a market rate of returnfor purposes of section 411(b)(5)(B)(i)(I)and for permissible methods of creditinginterest to the account (including fixedor variable interest rates) resulting ineffective rates of return meeting the re-quirements of section 411(b)(5)(B)(i)(I).

Section 411(b)(5)(B)(ii), (iii), and (iv)contains additional requirements that ap-ply if, after June 29, 2005, an applicableplan amendment is adopted. Section411(b)(5)(B)(v)(I) defines an applica-ble plan amendment as an amendmentto a defined benefit plan which has theeffect of converting the plan to an appli-cable defined benefit plan. Under section411(b)(5)(B)(ii), if, after June 29, 2005,an applicable plan amendment is adopted,the plan is treated as failing to meet therequirements of section 411(b)(1)(H)unless the requirements of section411(b)(5)(B)(iii) are met with respect toeach individual who was a participantin the plan immediately before theadoption of the amendment. Section411(b)(5)(B)(iii) specifies that, subject tosection 411(b)(5)(B)(iv), the requirementsof section 411(b)(5)(B)(iii) are met withrespect to any participant if the accruedbenefit of the participant under the termsof the plan as in effect after the amendmentis not less than the sum of: (I) theparticipant’s accrued benefit for years ofservice before the effective date of theamendment, determined under the terms ofthe plan as in effect before the amendment;plus (II) the participant’s accrued benefitfor years of service after the effectivedate of the amendment, determined underthe terms of the plan as in effect afterthe amendment. Section 411(b)(5)(B)(iv)provides that, for purposes of section411(b)(5)(B)(iii)(I), the plan must creditthe participant’s account or similar amountwith the amount of any early retirementbenefit or retirement-type subsidy forthe plan year in which the participant

retires if, as of such time, the participanthas met the age, years of service, andother requirements under the plan forentitlement to such benefit or subsidy.

Section 411(b)(5)(B)(v) sets forthcertain provisions related to an ap-plicable plan amendment. Section411(b)(5)(B)(v)(II) provides that if thebenefits under two or more defined ben-efit plans of an employer are coordinatedin such a manner as to have the effect ofadoption of an applicable plan amend-ment, the plan sponsor is treated as havingadopted an applicable plan amendmentas of the date the coordination begins.Section 411(b)(5)(B)(v)(III) directs theSecretary of the Treasury to issue regu-lations to prevent the avoidance of thepurposes of section 411(b)(5)(B) throughthe use of two or more plan amendmentsrather than a single amendment.

Section 411(b)(5)(B)(vi) provides spe-cial rules for determining benefits upontermination of an applicable defined bene-fit plan. Under section 411(b)(5)(B)(vi)(I),an applicable defined benefit plan is nottreated as satisfying the requirements ofsection 411(b)(5)(B)(i) (regarding per-missible interest crediting rates) unlessthe plan provides that, upon plan termi-nation, if the interest crediting rate underthe plan is a variable rate, the rate of in-terest used to determine accrued benefitsunder the plan is equal to the average ofthe rates of interest used under the planduring the 5-year period ending on thetermination date. In addition, under sec-tion 411(b)(5)(B)(vi)(II), the plan mustprovide that, upon plan termination, theinterest rate and mortality table used todetermine the amount of any benefit underthe plan payable in the form of an annuitypayable at normal retirement age is therate and table specified under the plan forthis purpose as of the termination date,except that if the interest rate is a variablerate, the rate used is the average of therates used under the plan during the 5-yearperiod ending on the termination date.

Section 411(b)(5)(C) provides that aplan is not treated as failing to meet therequirements of section 411(b)(1)(H)(i)solely because the plan provides offsetsagainst benefits under the plan to the ex-tent the offsets are otherwise allowable

in applying the requirements of section401(a). Section 411(b)(5)(D) providesthat a plan is not treated as failing to meetthe requirements of section 411(b)(1)(H)solely because the plan provides a dis-parity in contributions or benefits withrespect to which the requirements of sec-tion 401(l) (relating to permitted disparityfor Social Security benefits and relatedmatters) are met.

Section 411(b)(5)(E) provides that aplan is not treated as failing to meet the re-quirements of section 411(b)(1)(H) solelybecause the plan provides for indexing ofaccrued benefits under the plan. Undersection 411(b)(5)(E)(iii), indexing meansthe periodic adjustment of the accruedbenefit by means of the application of arecognized investment index or methodol-ogy. Section 411(b)(5)(E)(ii) requires that,except in the case of a variable annuity,the indexing not result in a smaller benefitthan the accrued benefit determined with-out regard to the indexing.

Section 701(a) of PPA ’06 added pro-visions to the Employee Retirement In-come Security Act of 1974, Public Law93–406 (88 Stat. 829 (1974)) (ERISA),that are parallel to sections 411(a)(13) and411(b)(5) of the Code. The guidance pro-vided in these regulations with respect tothe Code also applies for purposes of theparallel amendments to ERISA made bysection 701(a) of PPA ’06.1

Section 701(c) of PPA ’06 added pro-visions to the Age Discrimination inEmployment Act of 1967, Public Law90–202 (81 Stat. 602 (1967)) (ADEA),that are parallel to section 411(b)(5) of theCode. Executive Order 12067 requiresall Federal departments and agenciesto advise and offer to consult with theEqual Employment Opportunity Commis-sion (EEOC) during the development ofany proposed rules, regulations, policies,procedures, or orders concerning equalemployment opportunity. The TreasuryDepartment and the IRS have consultedwith the EEOC prior to the issuance ofthese regulations.

Section 701(d) of PPA ’06 provides thatnothing in the amendments made by sec-tion 701 should be construed to create aninference concerning the treatment of ap-plicable defined benefit plans or conver-

1 Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed by these regulations forpurposes of ERISA, as well as the Code.

November 29, 2010 756 2010–48 I.R.B.

sions of plans into applicable defined ben-efit plans under section 411(b)(1)(H), orconcerning the determination of whetheran applicable defined benefit plan fails tomeet the requirements of section 411(a)(2),411(c), or 417(e), as in effect before suchamendments, solely because the presentvalue of the accrued benefit (or any por-tion thereof) of any participant is, underthe terms of the plan, equal to the amountexpressed as the balance of a hypotheticalaccount or as an accumulated percentageof the participant’s final average compen-sation.

Section 701(e) of PPA ’06 sets forththe effective date provisions with respectto amendments made by section 701 ofPPA ’06. Section 701(e)(1) specifies thatthe amendments made by section 701generally apply to periods beginning onor after June 29, 2005. Thus, the agediscrimination safe harbors under section411(b)(5)(A) and section 411(b)(5)(E) areeffective for periods beginning on or afterJune 29, 2005. Section 701(e)(2) pro-vides that the special present value rulesof section 411(a)(13)(A) are effective fordistributions made after August 17, 2006(the date PPA ’06 was enacted).

Under section 701(e) of PPA ’06,the 3-year vesting rule under section411(a)(13)(B) is generally effective foryears beginning after December 31, 2007,for a plan in existence on June 29, 2005,while, pursuant to the amendments madeby section 107(c) of WRERA ’08, thisvesting rule is generally effective for planyears ending on or after June 29, 2005,for a plan not in existence on June 29,2005. The market rate of return limitationunder section 411(b)(5)(B)(i) is generallyeffective for years beginning after De-cember 31, 2007, for a plan in existenceon June 29, 2005, while the limitation isgenerally effective for periods beginningon or after June 29, 2005, for a plan notin existence on June 29, 2005. Section701(e)(4) of PPA ’06 contains specialeffective date provisions for collectivelybargained plans that modify these effectivedates.

Under section 701(e)(5) of PPA ’06,as amended by WRERA ’08, sections

411(b)(5)(B)(ii), (iii), and (iv) apply toa conversion amendment that is adoptedon or after, and takes effect on or after,June 29, 2005.

Under section 701(e)(6) of PPA ’06, asadded by WRERA ’08, the 3-year vestingrule under section 411(a)(13)(B) does notapply to a participant who does not havean hour of service after the date the 3-yearvesting rule would otherwise be effective.

Section 702 of PPA ’06 provides forregulations to be prescribed by August 16,2007, addressing the application of rulesset forth in section 701 of PPA ’06 wherethe conversion of a defined benefit pensionplan into an applicable defined benefit planis made with respect to a group of employ-ees who become employees by reason of amerger, acquisition, or similar transaction.

Under section 1107 of PPA ’06, a plansponsor is permitted to delay adopting aplan amendment pursuant to statutory pro-visions under PPA ’06 (or pursuant to anyregulation issued under PPA ’06) until thelast day of the first plan year beginningon or after January 1, 2009 (January 1,2011, in the case of governmental plans).As described in Rev. Proc. 2007–44,2007–2 C.B 54), this amendment dead-line applies to both interim and discre-tionary amendments that are made pur-suant to PPA ’06 statutory provisions orany regulation issued under PPA ’06. See§601.601(d)(2)(ii)(b).

Section 1107 of PPA ’06 also permitscertain amendments to reduce or eliminatesection 411(d)(6) protected benefits. Ex-cept to the extent permitted under section1107 of PPA ’06 (or under another statu-tory provision, including section 411(d)(6)and §§1.411(d)–3 and 1.411(d)–4), section411(d)(6) prohibits a plan amendment thatdecreases a participant’s accrued benefitsor that has the effect of eliminating or re-ducing an early retirement benefit or re-tirement-type subsidy, or eliminating anoptional form of benefit, with respect tobenefits attributable to service before theamendment. However, an amendment thateliminates or decreases benefits that havenot yet accrued does not violate section411(d)(6), provided that the amendment isadopted and effective before the benefits

accrue. If section 1107 of PPA ’06 appliesto an amendment of a plan, section 1107provides that the plan does not fail to meetthe requirements of section 411(d)(6) byreason of such amendment, except as pro-vided by the Secretary of the Treasury.

Proposed regulations (EE–184–86) un-der sections 411(b)(1)(H) and 411(b)(2)were published by the Treasury Depart-ment and the IRS in the Federal Reg-ister on April 11, 1988 (53 FR 11876),as part of a package of regulations thatalso included proposed regulations undersections 410(a), 411(a)(2), 411(a)(8), and411(c) (relating to the maximum age forparticipation, vesting, normal retirementage, and actuarial adjustments after normalretirement age, respectively).2

Notice 96–8, 1996–1 C.B. 359, see§601.601(d)(2)(ii)(b), described the ap-plication of sections 411 and 417(e) to asingle-sum distribution under a cash bal-ance plan where interest credits under theplan are frontloaded (that is, where theright to future interest credits with respectto an employee’s hypothetical accountbalance is not conditioned upon future ser-vice and thus accrues at the same time thatthe benefits attributable to a hypotheticalallocation to the account accrue). Underthe analysis set forth in Notice 96–8, inorder to comply with sections 411(a) and417(e) in calculating the amount of a sin-gle-sum distribution under a cash balanceplan, the balance of an employee’s hy-pothetical account must be projected tonormal retirement age and converted to anannuity under the terms of the plan, andthen the employee must be paid at leastthe present value of the projected annuity,determined in accordance with section417(e). Under that analysis, where a cashbalance plan provides frontloaded interestcredits using an interest rate that is higherthan the section 417(e) applicable interestrate, payment of a single-sum distributionequal to the current hypothetical accountbalance as a complete distribution of theemployee’s accrued benefit may result ina violation of section 417(e) or a forfeiturein violation of section 411(a). In addition,Notice 96–8 proposed a safe harbor whichprovided that, if frontloaded interest cred-

2 On December 11, 2002, the Treasury Department and the IRS issued proposed regulations regarding the age discrimination requirements of section 411(b)(1)(H) that specifically addressedcash balance plans as part of a package of regulations that also addressed section 401(a)(4) nondiscrimination cross-testing rules applicable to cash balance plans (67 FR 76123). The 2002proposed regulations were intended to replace the 1988 proposed regulations. In Ann. 2003–22, 2003–1 C.B. 846), see §601.601(d)(2)(ii)(b), the Treasury Department and the IRS announcedthe withdrawal of the 2002 proposed regulations under section 401(a)(4), and in Ann. 2004–57, 2004–2 C.B. 15, see §601.601(d)(2)(ii)(b), the Treasury Department and the IRS announcedthe withdrawal of the 2002 proposed regulations relating to age discrimination.

2010–48 I.R.B. 757 November 29, 2010

its are provided under a plan at a rate nogreater than the sum of identified standardindices and associated margins, no vio-lation of section 411(a) or 417(e) wouldresult if the employee’s entire accruedbenefit were to be distributed in the formof a single-sum distribution equal to theemployee’s hypothetical account balance,provided the plan uses appropriate annuityconversion factors. Since the issuance ofNotice 96–8, four Federal appellate courtshave followed the analysis set out in theNotice: Esden v. Bank of Boston, 229F.3d 154 (2d Cir. 2000), cert. dismissed,531 U.S. 1061 (2001); West v. AK SteelCorp. Ret. Accumulation Pension Plan,484 F.3d 395 (6th Cir. 2007), cert. denied,129 S. Ct. 895 (2009); Berger v. XeroxCorp. Ret. Income Guarantee Plan, 338F.3d 755 (7th Cir. 2003), reh’g and reh’gen banc denied, No. 02–3674, 2003 U.S.App. LEXIS 19374 (7th Cir. Sept. 15,2003); Lyons v. Georgia-Pacific SalariedEmployees Ret. Plan, 221 F.3d 1235 (11thCir. 2000), cert. denied, 532 U.S. 967(2001).

Notice 2007–6, 2007–1 C.B. 272, see§601.601(d)(2)(ii)(b), provides transi-tional guidance with respect to certainrequirements of sections 411(a)(13) and411(b)(5) and section 701(b) of PPA ’06.Notice 2007–6 includes certain specialdefinitions, including: accumulated ben-efit, which is defined as a participant’sbenefit accrued to date under a plan; lumpsum-based plan, which is defined as adefined benefit plan under the terms ofwhich the accumulated benefit of a par-ticipant is expressed as the balance of ahypothetical account maintained for theparticipant or as the current value of theaccumulated percentage of the partici-pant’s final average compensation; andstatutory hybrid plan, which is defined asa lump sum-based plan or a plan whichhas an effect similar to a lump sum-basedplan. Notice 2007–6 provides guidance ona number of issues, including a rule underwhich a plan that provides for indexedbenefits described in section 411(b)(5)(E)is a statutory hybrid plan (because it has aneffect similar to a lump sum-based plan),unless the plan either solely provides forpost-retirement adjustment of the amountspayable to a participant or is a variableannuity plan under which the assumed in-

terest rate used to determine adjustments isat least 5 percent. Notice 2007–6 providesa safe harbor for applying the rules setforth in section 701 of PPA ’06 where theconversion of a defined benefit pensionplan into an applicable defined benefitplan is made with respect to a group ofemployees who become employees byreason of a merger, acquisition, or similartransaction. This transitional guidance,along with the other guidance provided inPart III of Notice 2007–6, applies pendingthe issuance of further guidance and, thus,does not apply for periods to which thesefinal regulations apply.

Proposed regulations (REG–104946–07,2008–1 C.B. 596) under sections411(a)(13) and 411(b)(5) (2007 proposedregulations) were published by theTreasury Department and the IRS in theFederal Register on December 28, 2007(72 FR 73680). The Treasury Departmentand the IRS received written commentson the 2007 proposed regulations and apublic hearing was held on June 6, 2008.

Announcement 2009–82, 2009–48I.R.B. 720 and Notice 2009–97, 2009–52I.R.B. 972, see §601.601(d)(2)(ii)(b),announced certain expected relief withrespect to the requirements of section411(b)(5). In particular, Announcement2009–82 stated that the rules in the reg-ulations specifying permissible marketrates of return are not expected to go intoeffect before the first plan year that beginson or after January 1, 2011. In addition,Notice 2009–97 stated that, once finalregulations under sections 411(a)(13) and411(b)(5) are issued, it is expected thatrelief from the requirements of section411(d)(6) will be granted for a plan amend-ment that eliminates or reduces a section411(d)(6) protected benefit, provided thatthe amendment is adopted by the last dayof the first plan year that begins on orafter January 1, 2010, and the eliminationor reduction is made only to the extentnecessary to enable the plan to meetthe requirements of section 411(b)(5).3

Notice 2009–97 also extended the deadlinefor amending cash balance and otherapplicable defined benefit plans, within themeaning of section 411(a)(13)(C), to meetthe requirements of section 411(a)(13)(other than section 411(a)(13)(A)) andsection 411(b)(5), relating to vesting and

other special rules applicable to theseplans. Under Notice 2009–97, the deadlinefor these amendments is the last day ofthe first plan year that begins on or afterJanuary 1, 2010.

After consideration of the commentsreceived in response to the 2007 proposedregulations, these final regulations gen-erally adopt the provisions of the 2007proposed regulations with certain modi-fications as described under the heading“Explanation of Provisions.” In addition,the Treasury Department and the IRSare issuing proposed regulations (2010proposed regulations) that address cer-tain issues under sections 411(a)(13) and411(b)(5) that have not been addressed inthese final regulations (and that are gen-erally indicated as “RESERVED” in thesefinal regulations), and that also addressa related issue under section 411(b)(1).The 2010 proposed regulations are beingissued at the same time as these final reg-ulations.

Explanation of Provisions

Overview

In general, these final regulations incor-porate the transitional guidance providedunder Notice 2007–6 as well as the pro-visions of the 2007 proposed regulations.The regulations adopt the terminologyused in the proposed regulations (suchas “statutory hybrid benefit formula” and“lump sum-based benefit formula”) to takeinto account situations where plans pro-vide more than one benefit formula. Theseregulations also provide additional guid-ance with respect to sections 411(a)(13)and 411(b)(5), taking into account com-ments received in response to the 2007proposed regulations and also reflectingthe enactment of WRERA ’08.

I. Section 411(a)(13): Applicabledefinitions, relief of section 411(a)(13)(A),and special vesting rules for applicabledefined benefit plans

A. Definitions

The regulations under section411(a)(13) contain certain definitions thatapply both for purposes of the regulations

3 However, see footnote 6 in the preamble to the 2010 proposed regulations described in the next paragraph.

November 29, 2010 758 2010–48 I.R.B.

under section 411(a)(13) and the regu-lations under section 411(b)(5). Section411(b)(5)(G) provides that, for purposesof section 411(b)(5), any reference to theaccrued benefit means the benefit accruedto date. The final regulations refer tothis as the “accumulated benefit”, whichis distinct from the participant’s accruedbenefit under section 411(a)(7) (an an-nuity beginning at normal retirement agethat is actuarially equivalent to the par-ticipant’s accumulated benefit). As in the2007 proposed regulations, the regulationsuse the term “statutory hybrid plan” torefer to an applicable defined benefit plandescribed in section 411(a)(13)(C). Underthe regulations, a statutory hybrid plan is adefined benefit plan that contains a statu-tory hybrid benefit formula, and a “statu-tory hybrid benefit formula” is a benefitformula that is either a lump sum-basedbenefit formula or a formula that has aneffect similar to a lump sum-based benefitformula.

The regulations define a “lump sum-based benefit formula” as a benefit for-mula used to determine all or any partof a participant’s accumulated benefit un-der which the accumulated benefit pro-vided under the formula is expressed asthe current balance of a hypothetical ac-count maintained for the participant or asthe current value of the accumulated per-centage of the participant’s final averagecompensation. The final regulations adoptthe rules of the 2007 proposed regulationswhereby the determination as to whether abenefit formula is a lump sum-based bene-fit formula is made based on how the ac-cumulated benefit of a participant is ex-pressed under the terms of the plan, anddoes not depend on whether the plan pro-vides an optional form of benefit in theform of a single-sum payment. Similarly,a formula does not fail to be a lump sum-based benefit formula merely because theplan’s terms state that the participant’s ac-crued benefit is an annuity at normal re-tirement age that is actuarially equivalentto the balance of a hypothetical accountmaintained for the participant.

The preamble to the 2007 proposed reg-ulations asked for comments on plan for-mulas that calculate benefits as the cur-rent value of an accumulated percentage ofthe participant’s final average compensa-tion (often referred to as “pension equityplans” or “PEPs”). Commenters indicated

that some of these plans never credit inter-est, directly or indirectly, some explicitlycredit interest after cessation of PEP ac-cruals, and some do not credit interest ex-plicitly but provide for specific amounts tobe payable after cessation of accruals (bothimmediately and at future dates) based onactuarial equivalence using specified actu-arial factors applied after cessation of ac-cruals.

In response to these comments, the finalregulations clarify that a benefit formula isexpressed as the balance of a hypotheticalaccount maintained for the participant if itis expressed as a current single-sum dollaramount. A lump sum-based benefit for-mula that credits interest is subject to themarket rate of return rules, so that in anycase in which a PEP formula provides forinterest credits after cessation of PEP ac-cruals, the interest credits are subject to themarket rate of return rules.

The 2007 proposed regulations con-tained a rule whereby a benefit formulawould not have been treated as a lumpsum-based benefit formula with respectto a participant merely because the par-ticipant is entitled to a benefit that is notless than the benefit properly attributableto after-tax employee contributions. In re-sponse to comments received that this rulebe broadened, the final regulations providethat the benefit properly attributable toafter-tax employee contributions, rollovercontributions, and other similar employeecontributions is disregarded when deter-mining whether a benefit formula is alump sum-based benefit formula with re-spect to a participant. Thus, for example,a plan is not a statutory hybrid plan witha lump sum-based benefit formula withrespect to a participant merely because theplan provides that the participant’s benefitis equal to the sum-of or greater-of thebenefit properly attributable to employeecontributions and the benefit under a tra-ditional defined benefit formula.

The regulations provide that a benefit isnot properly attributable to employee con-tributions if such contributions are creditedwith interest at a rate that exceeds a rea-sonable rate of interest or if the conversionfactors used to calculate the benefit basedon such employee contributions are not ac-tuarially reasonable. The regulations clar-ify that section 411(c) merely provides anexample of an acceptable methodology forpurposes of determining the benefit that is

properly attributable to employee contri-butions.

The 2007 proposed regulations pro-vided that a benefit formula under a de-fined benefit plan has an effect similarto a lump sum-based benefit formula ifthe formula provides that a participant’saccumulated benefit payable at normalretirement age (or at benefit commence-ment, if later) is expressed as a benefit thatincludes periodic adjustments (including aformula that provides for indexed benefitsdescribed in section 411(b)(5)(E)) that arereasonably expected to result in a smallerannual benefit at normal retirement age(or at benefit commencement, if later) forthe participant, when compared to a sim-ilarly situated, younger individual who isor could be a participant in the plan. Anumber of commenters suggested that therule in the 2007 proposed regulations wastoo broad generally and also suggestedthat certain types of plans, such as plansdescribed in section 411(b)(5)(E), be ex-empted entirely. However, the TreasuryDepartment and the IRS believe that akey purpose of sections 411(a)(13) and411(b)(5) is to address defined benefitplan formulas where younger participantsreceive a larger annual benefit at normalretirement age when compared to similarlysituated, older participants. Therefore, thefinal regulations do not significantly nar-row the definition of a benefit formula thathas an effect similar to a lump sum-basedbenefit formula.

The regulations clarify that a benefitformula under a defined benefit plan hasan effect similar to a lump sum-basedbenefit formula if the formula providesthat a participant’s accumulated benefit isexpressed as a benefit that includes adjust-ments (including a formula that providesfor indexed benefits described in section411(b)(5)(E)) for a future period and thetotal dollar amount of the adjustments isreasonably expected to be smaller for theparticipant, when compared to a similarlysituated, younger individual who is orcould be a participant in the plan. Thus, aformula that provides that a participant’saccumulated benefit is expressed as abenefit that includes the right to periodicadjustments is treated as having an ef-fect similar to a lump sum-based benefitformula based on a comparison of theexpected total dollar amount of the adjust-ments through benefit commencement,

2010–48 I.R.B. 759 November 29, 2010

rather than the expected total accumulatedbenefit after application of these adjust-ments.

As in the 2007 proposed regulations,the regulations provide that a benefit for-mula under a plan has an effect similar toa lump sum-based benefit formula wherethe right to future adjustments accrues atthe same time as the benefit that is sub-ject to those adjustments. In addition, theregulations provide that a benefit formulathat does not include adjustments is never-theless treated as a formula with an effectsimilar to a lump sum-based benefit for-mula where benefits are adjusted pursuantto a pattern of repeated plan amendmentsand the total dollar amount of those adjust-ments is reasonably expected to be smallerfor the participant than for any similarlysituated, younger individual who is orcould be a participant. See §1.411(d)–4,A–1(c)(1).

Like the 2007 proposed regulations, theregulations provide that certain benefitsare disregarded when determining whethera benefit formula has an effect similar toa lump sum-based benefit formula. Forexample, the regulations provide that, forpurposes of determining whether a bene-fit formula has an effect similar to a lumpsum-based benefit formula, indexing thatapplies to adjust benefits after the annuitystarting date (for example, cost-of-livingincreases) is disregarded. In addition, ben-efits properly attributable to certain em-ployee contributions that are disregardedfor purposes of determining whether a par-ticipant is treated as having a lump-sumbased benefit formula are also disregardedfor purposes of determining whether a for-mula has an effect similar to a lump sum-based benefit formula.

The regulations include an example thatillustrates that a defined benefit formula isnot treated as a statutory hybrid benefit for-mula merely because the formula providesfor actuarial increases after normal retire-ment age. This is because actuarial in-creases after normal retirement age do notprovide smaller adjustments for older par-ticipants when compared to similarly situ-ated, younger participants.

The 2007 proposed regulations pro-vided that variable annuity benefit formu-las with assumed interest rates (sometimesreferred to as “hurdle rates”) of at least 5percent are not treated as having an effect

similar to a lump sum-based benefit for-mula. A number of commenters requestedthat the regulations extend this rule tovariable annuity plans with lower hurdlerates. However, plans with lower hurdlerates are more likely to provide positiveadjustments for future periods than planswith higher hurdle rates and, as a result,younger participants are more likely toreceive a meaningfully larger total dollaramount of adjustments than older partic-ipants under these plans. The TreasuryDepartment and the IRS are concernedthat exempting these plans would meanthat participants would lose the protectionsafforded to participants in statutory hybridplans (including 3-year vesting and con-version protection). Therefore, the finalregulations retain the rule whereby ad-justments under a variable annuity do nothave an effect similar to a lump sum-basedbenefit formula if the assumed interest rateused to determine the adjustments is 5 per-cent or higher. Such an annuity does nothave an effect similar to a lump sum-basedbenefit formula even if post-annuity start-ing date adjustments are made using aspecified assumed interest rate that is lessthan 5 percent.

B. Relief under section 411(a)(13)(A)

The regulations reflect new section411(a)(13)(A) by providing that a statu-tory hybrid plan is not treated as fail-ing to meet the requirements of section411(a)(2), or, with respect to the par-ticipant’s accrued benefit derived fromemployer contributions, the requirementsof sections 411(a)(11), 411(c), or 417(e),merely because the plan provides that thepresent value of benefits as determinedunder a lump sum-based benefit formulais equal to the then-current balance of thehypothetical account maintained for theparticipant or the then-current value ofthe accumulated percentage of the partic-ipant’s final average compensation underthat formula. However, section 411(a)(13)does not alter the definition of the accruedbenefit under section 411(a)(7)(A) (whichgenerally defines the participant’s accruedbenefit as the annual benefit commencingat normal retirement age), nor does it alterthe definition of the normal retirementbenefit under section 411(a)(9) (whichgenerally defines the participant’s normalretirement benefit as the benefit under the

plan commencing at normal retirementage).

Section 411(a)(13)(A) applies onlywith respect to a benefit provided under alump sum-based benefit formula. A statu-tory hybrid plan that provides benefitsunder a benefit formula that is a statutoryhybrid benefit formula other than a lumpsum-based benefit formula (such as a planthat provides for indexing as described insection 411(b)(5)(E)) must comply withthe present value rules of section 417(e)with respect to an optional form of ben-efit that is subject to the requirements ofsection 417(e).

The regulations do not provide guid-ance as to how section 411(a)(13)(A) ap-plies with respect to payments that are notmade in the form of a single-sum distri-bution of the hypothetical account balanceor accumulated percentage of final averagecompensation, such as payments made inthe form of an annuity. That issue is be-ing addressed in the 2010 proposed regu-lations.

C. Special vesting rules for applicabledefined benefit plans

Pursuant to section 411(a)(13)(B), theregulations provide that, in the case of aparticipant whose accrued benefit (or anyportion thereof) under a defined benefitplan is determined under a statutory hy-brid benefit formula, the plan is treated asfailing to satisfy the requirements of sec-tion 411(a)(2) unless the plan provides thatthe participant has a nonforfeitable rightto 100 percent of the participant’s accruedbenefit derived from employer contribu-tions if the participant has 3 or more yearsof service. As in the 2007 proposed reg-ulations, the final regulations provide thatthis requirement applies on a participant-by-participant basis and applies to the par-ticipant’s entire benefit derived from em-ployer contributions under a statutory hy-brid plan (not just the portion of the par-ticipant’s benefit that is determined undera statutory hybrid benefit formula). Fur-thermore, the regulations retain the ruleunder which, if a participant is entitledto the greater of two (or more) benefitamounts under a plan, where each amountis determined under a different benefit for-mula (including a benefit determined pur-suant to an offset among formulas withinthe plan or a benefit determined as the

November 29, 2010 760 2010–48 I.R.B.

greater of a protected benefit under section411(d)(6) and another benefit amount), atleast one of which is a benefit calculatedunder a statutory hybrid benefit formula,the 3-year vesting requirement applies tothat participant’s entire accrued benefit un-der the plan even if the participant’s benefitunder the statutory hybrid benefit formulais ultimately smaller than under the otherformula.

The 2007 proposed regulations re-quested comments regarding the appli-cation of the 3-year vesting requirementto a floor plan that is not a statutory hy-brid plan but that is part of a floor-offsetarrangement with an independent planthat is a statutory hybrid plan. A num-ber of commenters suggested that the3-year vesting requirement should applyon a plan-by-plan basis, without regardto whether a plan is part of a floor-offsetarrangement. In contrast, one commentersuggested that the 3-year vesting require-ment should apply to both plans that arepart of a floor-offset arrangement even ifonly one of the plans is a statutory hybridplan, because the commenter felt that de-termining the amount of the offset in anarrangement involving plans with differ-ent vesting schedules would be inherentlydifficult. However, this concern is miti-gated because, in the view of the TreasuryDepartment and the IRS, a floor-offsetarrangement where the benefit payableunder a floor plan is reduced by the benefitpayable under an independent plan is onlypermissible if the arrangement limits theoffset to amounts that are vested under theindependent plan.4 Therefore, the regula-tions retain the rule whereby the 3-yearvesting requirement is limited to plans thatcontain a statutory hybrid benefit formulaand provide an example illustrating thisrule with respect to a floor-offset arrange-ment where the benefit payable under afloor plan that does not include a statutoryhybrid benefit formula is reduced by thevested accrued benefit payable under anindependent plan that includes a statutoryhybrid benefit formula.

II. Section 411(b)(5): Safe harbor for agediscrimination, conversion protection,and market rate of return limitation

A. Safe harbor for age discrimination

The regulations reflect new section411(b)(5)(A), which provides that a planis not treated as failing to meet the re-quirements of section 411(b)(1)(H)(i) withrespect to certain benefit formulas if, asdetermined as of any date, a participant’saccumulated benefit expressed under oneof those formulas would not be less thanany similarly situated, younger partic-ipant’s accumulated benefit expressedunder the same formula. A plan that doesnot satisfy this test is required to satisfy thegeneral age discrimination rule of section411(b)(1)(H)(i).

As in the 2007 proposed regulations,the regulations provide that the safe har-bor standard under section 411(b)(5)(A) isavailable only where a participant’s accu-mulated benefit under the terms of the planis expressed as an annuity payable at nor-mal retirement age (or current age, if later),the current balance of a hypothetical ac-count, or the current value of the accumu-lated percentage of the employee’s finalaverage compensation. For this purpose,if the accumulated benefit of a participantis expressed as an annuity payable at nor-mal retirement age (or current age, if later)under the plan terms, then the comparisonof benefits is made using such an annu-ity. Similarly, if the accumulated benefitof a participant is expressed under the planterms as the current balance of a hypothet-ical account or the current value of an ac-cumulated percentage of the participant’sfinal average compensation, then the com-parison of benefits is made using the cur-rent balance of a hypothetical account orthe current value of the accumulated per-centage of the participant’s final averagecompensation, respectively.

The regulations require a comparisonof the accumulated benefit of each possi-ble participant in the plan to the accumu-lated benefit of each other similarly situ-ated, younger individual who is or couldbe a participant in the plan. For this pur-pose, as in the 2007 proposed regulations,the regulations provide that an individualis similarly situated to another individual

if the individual is identical to that otherindividual in every respect that is relevantin determining a participant’s benefit un-der the plan (including, but not limitedto, period of service, compensation, posi-tion, date of hire, work history, and anyother respect) except for age. In determin-ing whether an individual is similarly situ-ated to another individual, any characteris-tic that is relevant for determining benefitsunder the plan and that is based directly orindirectly on age is disregarded. For ex-ample, if a particular benefit formula ap-plies to a participant on account of the par-ticipant’s age, an individual to whom thebenefit formula does not apply and whois identical to a participant in all respectsother than age is similarly situated to theparticipant. By contrast, an individual isnot similarly situated to a participant if adifferent benefit formula applies to the in-dividual and the application of the differentformula is based neither directly nor indi-rectly on age. For example, if the benefitformula under a plan is changed from onetype to another for employees hired afterthe effective date of the change, employ-ees hired after the relevant date would notbe similarly situated with employees hiredbefore that date because the benefit for-mula for new hires is not based directly norindirectly on age.

The comparison of accumulated bene-fits is made without regard to any subsi-dized portion of any early retirement ben-efit that is included in a participant’s accu-mulated benefit. For this purpose, the sub-sidized portion of an early retirement bene-fit is the retirement-type subsidy within themeaning of §1.411(d)–3(g)(6) that is con-tingent on a participant’s severance fromemployment and commencement of bene-fits before normal retirement age.

In addition, like the 2007 proposed reg-ulations, the regulations provide that thesafe harbor is generally not available withrespect to a participant if the benefit ofany similarly situated, younger individualis expressed in a different form than theparticipant’s benefit. Thus, for example,the safe harbor is not available for com-paring the accumulated benefit of a partic-ipant expressed as an annuity at normal re-tirement age with the accumulated benefitof a similarly situated, younger participant

4 See Rev. Rul. 76–259, 1976–2 C.B. 111, see §601.601(d)(2)(ii)(b).

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expressed as the current balance of a hypo-thetical account.

Like the 2007 proposed regulations, theregulations generally permit a plan thatprovides the sum-of or the greater-of ben-efits that are expressed in two or more dif-ferent forms of benefit to satisfy the safeharbor if the plan would separately sat-isfy the safe harbor for each separate formof benefit. For purposes of the safe har-bor comparisons involving greater-of andsum-of benefit formulas, the 2007 pro-posed regulations contained a rule wherea similarly situated, younger participantwould be treated as having an accumu-lated benefit of zero under a benefit for-mula that does not apply to the participant.While the sum-of and greater-of provi-sions are organized differently in these reg-ulations, the regulations effectively retainthis rule because sum-of and greater-of for-mulas are eligible for the safe harbor evenwhere older participants receive benefitsexpressed in a different form than the ben-efits of similarly situated, younger partic-ipants, as long as younger participants arenot entitled to benefits expressed in a dif-ferent form than the benefits of similarlysituated, older participants.

Several commenters requested that theregulations clarify that the safe harbor isalso available to plans that allow older par-ticipants to choose, at the time a new statu-tory hybrid benefit formula goes into ef-fect, whether to receive a benefit under thestatutory hybrid benefit formula or underthe pre-existing traditional defined bene-fit formula. In response to such com-ments, the regulations adopt similar rulesas the sum-of and greater-of rules for plansthat provide participants with the choice ofbenefits that are expressed in two or moredifferent forms.

As part of the sum-of, greater-of, andchoice-of rules, the regulations reflect thefact that the sum of benefits expressed intwo or more forms is never less than thegreater of the same benefits and that thegreater of benefits expressed in two ormore forms is never less than the choiceof the same benefits. As a result, the reg-ulations provide that in order for the safeharbor to be available with respect to a par-ticipant who is provided with the greater ofbenefits expressed in two or more differentforms, the plan must not provide any simi-larly situated, younger participant with thesum of the same benefits. Similarly, the

regulations provide that in order for thesafe harbor to be available with respect to aparticipant who is provided with the choiceof benefits expressed in two or more dif-ferent forms, the plan must not provideany similarly situated, younger participantwith either the sum of or the greater of thesame benefits. In addition, in order for thesafe harbor to be available, the plan cannotprovide for any other relationship betweenbenefits expressed in different forms otherthan sum-of, greater-of, or choice-of ben-efits.

The regulations reflect new section411(b)(5)(C), which provides that a planis not treated as failing to meet the re-quirements of section 411(b)(1)(H) solelybecause the plan provides offsets of ben-efits under the plan to the extent suchoffsets are allowable in applying the re-quirements under section 401 and theapplicable requirements of ERISA andADEA. The regulations incorporate theprovisions of section 411(b)(5)(D) (relat-ing to permitted disparity under section401(l)) without providing additional guid-ance. These rules are unchanged from the2007 proposed regulations.

The regulations contain a number ofnew examples that illustrate the applica-tion of the safe harbor under various factpatterns. One of these examples illustratesthat the safe harbor is not satisfied in thecase of a plan that contains a suspensionof benefits provision that reduces or elim-inates interest credits for participants whocontinue in service after normal retirementage.

The regulations also reflect new section411(b)(5)(E), which provides for the dis-regard of certain indexing of benefits forpurposes of the age discrimination rulesof section 411(b)(1)(H). As in the 2007proposed regulations, the regulations limitthe disregard of indexing to formulas un-der defined benefit plans other than lumpsum-based formulas. In addition, the reg-ulations clarify that the disregard of index-ing is limited to situations in which the ex-tent of the indexing for a participant wouldnot be less than the indexing applicable toa similarly situated, younger participant.Thus, the disregard of indexing is onlyavailable if the indexing is neither termi-nated nor reduced on account of the attain-ment of any age.

Section 411(b)(5)(E) requires that theindexing be accomplished by applica-

tion of a recognized investment indexor methodology. The 2007 proposedregulations limited a recognized invest-ment index or methodology to an eligi-ble cost-of-living index as described in§1.401(a)(9)–6, A–14(b), the rate of re-turn on the aggregate assets of the plan, orthe rate of return on the annuity contractfor the employee issued by an insurancecompany licensed under the laws of aState. The final regulations expand the listof what constitutes a recognized index ormethodology by treating any rate of returnthat satisfies the market rate of return rulesunder these regulations as a recognizedindex or methodology.

As under the 2007 proposed regula-tions, the section 411(b)(5)(E)(ii) protec-tion against loss (“no-loss”) requirementfor an indexed plan (which requires thatthe indexing not result in a smaller accruedbenefit than if no indexing had applied) isimplemented under the final regulationsby applying the “preservation of capital”rule of section 411(b)(5)(B)(i)(II) to in-dexed plans. (The preservation of capitalrule is discussed in section II. C. of thispreamble.) The final regulations clarifythat variable annuity benefit formulas (asdefined in the regulations) are exemptfrom the no-loss and preservation of capi-tal rules.

B. Conversion protection

The regulations provide guidance onthe new conversion protections under sec-tion 411(b)(5)(B)(ii), (iii), and (iv) whichis similar to the 2007 proposed regula-tions. Under the regulations, a participantwhose benefits are affected by a conver-sion amendment that was both adopted andeffective on or after June 29, 2005, mustgenerally be provided with a benefit af-ter the conversion that is at least equal tothe sum of the benefits accrued through thedate of the conversion and benefits earnedafter the conversion, with no permitted in-teraction between these two portions. Thisassures participants that there will be no“wear-away” as a result of a conversion,both with respect to the participant’s ac-crued benefits and any early retirementsubsidy to which the participant is entitledbased on the pre-conversion benefits.

The 2007 proposed regulations in-cluded an alternative mechanism underwhich a plan could provide for the es-

November 29, 2010 762 2010–48 I.R.B.

tablishment of an opening hypotheticalaccount balance or opening accumulatedpercentage of the participant’s final aver-age compensation as part of the conversionand keep separate track of (1) the benefitattributable to the opening hypotheticalaccount balance (including interest creditsattributable thereto) or attributable to theopening accumulated percentage of theparticipant’s final average compensationand (2) the benefit attributable to post-con-version service under the post-conversionbenefit formula. Comments on this rulewere favorable and it is retained under thefinal regulations. A variety of examplesillustrating application of the alternativeare included in the regulations. Under thisalternative, when a participant commencesbenefits, it must be determined whetherthe benefit attributable to the opening hy-pothetical account or attributable to theopening accumulated percentage that ispayable in the particular optional form ofbenefit selected is greater than or equal tothe benefit accrued under the plan priorto the date of conversion and that waspayable in the same generalized optionalform of benefit (within the meaning of§1.411(d)–3(g)(8)) at the same annuitystarting date. If the benefit attributableto the opening hypothetical account bal-ance or opening accumulated percentageis greater, then the plan must provide thatsuch benefit is paid in lieu of the pre-con-version benefit, in addition to the benefitattributable to post-conversion service un-der the post-conversion benefit formula.If the benefit attributable to the openinghypothetical account balance or openingaccumulated percentage is less, then theplan must provide that such benefit willbe increased sufficiently to provide thepre-conversion benefit, in addition to thebenefit attributable to post-conversionservice under the post-conversion benefitformula.

As in the 2007 proposed regulations,the final regulations provide under this al-ternative that, if an optional form of bene-fit is available on the annuity starting datewith respect to the benefit attributable tothe opening hypothetical account balanceor opening accumulated percentage, but nooptional form (such as a single-sum dis-tribution) within the same generalized op-tional form of benefit was available at thatannuity starting date under the terms of aplan as in effect immediately prior to the

effective date of the conversion amend-ment, then the comparison must still bemade by assuming that the pre-conversionplan had such an optional form of benefit.

The preamble to the 2007 proposed reg-ulations asked for comments on another al-ternative means of satisfying the conver-sion requirements that would involve es-tablishing an opening hypothetical accountbalance, but would not require a compari-son of benefits at the annuity starting dateif certain requirements are met. Com-ments on this alternative were favorable,but some commenters requested that thealternative only be available where therewas sufficient protection to ensure that par-ticipants’ benefits would not be less thanwould apply under the rules in the 2007proposed regulations. While these finalregulations do not permit this additional al-ternative, it is included in the 2010 pro-posed regulations.

The regulations also provide guid-ance that is unchanged from the 2007proposed regulations on what constitutesa conversion amendment under section411(b)(5)(B)(v). Under the final reg-ulations, whether an amendment is aconversion amendment is determined ona participant-by-participant basis. Theregulations provide that an amendment(including multiple amendments) is aconversion amendment with respect toa participant if it meets two criteria: (1)the amendment reduces or eliminates thebenefits that, but for the amendment, theparticipant would have accrued after theeffective date of the amendment under abenefit formula that is not a statutory hy-brid benefit formula and under which theparticipant was accruing benefits prior tothe amendment; and (2) after the effectivedate of the amendment, all or a portionof the participant’s benefit accruals underthe plan are determined under a statutoryhybrid benefit formula.

The regulations clarify that onlyamendments that reduce or eliminateaccrued benefits described in section411(a)(7), or retirement-type subsidiesdescribed in section 411(d)(6)(B)(i), thatwould otherwise accrue as a result of fu-ture service are treated as amendmentsthat reduce or eliminate the participant’sbenefits that would have accrued after theeffective date of the amendment undera benefit formula that is not a statutoryhybrid benefit formula. As under the 2007

proposed regulations, a plan is treated ashaving been amended for this purpose if,under the terms of the plan, a change inthe conditions of a participant’s employ-ment results in a reduction or eliminationof the benefits that the participant wouldhave accrued in the future under a benefitformula that is not a statutory hybrid ben-efit formula (for example, a job transferfrom an operating division covered by anon-statutory hybrid defined benefit planto an operating division that is coveredby a formula expressed as the balanceof a hypothetical account). However, inthe absence of coordination between theformulas, the special requirements forconversion amendments typically will besatisfied automatically.

A number of commenters recom-mended that the effective date of a con-version amendment generally be the dateaccruals begin under a statutory hybridbenefit formula, rather than the date thatfuture accruals are reduced under thenon-statutory hybrid benefit formula. Sev-eral commenters suggested that, if thisrecommendation was not implementedgenerally, it should nevertheless apply atthe effective date of an amendment whichprovides participants with the greater ofbenefits under the prior formula and astatutory hybrid benefit formula for a pe-riod of time before benefit accruals ceaseunder the prior formula, especially if theamendment applies to a subgroup of exist-ing older, long service employees. How-ever, some comments expressed concernthat such a change in the proposed defini-tion of the effective date of a conversionamendment would allow plans to delaythe statutory anti-wearaway protections byadding a less valuable cash balance benefitfor the grandfathered group at a date, eventhough “the effect of converting” (withinthe meaning of section 411(b)(5)(B)(v)(I))their traditional benefit into a cash balancebenefit would occur for them at the laterdate when their benefit accruals cease un-der the prior formula.

The Treasury Department and the IRSare concerned that the requested changein the proposed rule would circumvent akey purpose behind the conversion protec-tion requirements by allowing for a de-layed wear-away that would occur at thetime accruals cease under the prior for-mula. For example, if a plan were gener-ally converted to a cash balance plan, but

2010–48 I.R.B. 763 November 29, 2010

the plan were to provide for some classof participants, such as participants whoare age 55 or older, to receive the greaterof accruals under the prior formula or thenew cash balance formula for a period of5 years, the change requested in the com-ments would define the effective date ofthe conversion amendment for all partic-ipants to be the date the cash balance for-mula went into effect (rather than apply-ing a participant by participant rule). As aresult, 5 years after the cash balance for-mula went into effect, the hypothetical ac-count balance for these older participantscould provide benefits that are less thanthe frozen amount under the prior formula,a circumstance that would produce no ad-ditional accruals for some period of timeafter the end of the 5-year period. There-fore, the approach suggested by these com-ments would allow the type of wear-awaythe statute was intended to prevent. Ac-cordingly, like the 2007 proposed regula-tions, the regulations adopt a rule wherebythe effective date of a conversion amend-ment is, with respect to a participant, thedate as of which the reduction occurs in thebenefits that the participant would have ac-crued after the effective date of the amend-ment under a benefit formula that is nota statutory hybrid benefit formula. In ac-cordance with section 411(d)(6), the reg-ulations provide that the date future ben-efit accruals are reduced cannot be earlierthan the date of adoption of the conversionamendment.

The regulations provide rules, similarto those in the 2007 proposed regula-tions, prohibiting the avoidance of theconversion protections through the use ofmultiple plans or multiple employers. Un-der these rules, an employer is treated ashaving adopted a conversion amendmentif the employer adopts an amendment un-der which a participant’s benefits undera plan that is not a statutory hybrid planare coordinated with a separate plan thatis a statutory hybrid plan, such as througha reduction (offset) of the benefit underthe plan that is not a statutory hybrid plan.In addition, if an employee’s employerchanges as a result of a merger, acqui-sition, or other transaction described in§1.410(b)–2(f), then the employee’s oldand new employers would be treated as asingle employer for this purpose. Thus,for example, in an acquisition, if the buyer

adopts an amendment to its statutoryhybrid plan under which a participant’sbenefits under the seller’s plan (that isnot a statutory hybrid plan) are coordi-nated with benefits under the buyer’s plan,such as through a reduction (offset) of thebuyer’s plan benefits, the seller and buyerwould be treated as a single employer andas having adopted a conversion amend-ment. However, if there is no coordinationbetween the plans, there is no conversionamendment.

The regulations retain the rule from the2007 proposed regulations under which aconversion amendment also includes mul-tiple amendments that result in a conver-sion amendment, even if the amendmentswould not be conversion amendments in-dividually. If an amendment to providea benefit under a statutory hybrid bene-fit formula is adopted within 3 years afteradoption of an amendment to reduce ben-efits under a non-statutory hybrid bene-fit formula, then those amendments wouldbe consolidated in determining whether aconversion amendment has been adopted.In the case of an amendment to providea benefit under a statutory hybrid benefitformula that is adopted more than 3 yearsafter adoption of an amendment to reducenon-statutory hybrid benefit formula bene-fits, there is a presumption that the amend-ments are not consolidated unless the factsand circumstances indicate that adoptionof an amendment to provide a benefit un-der a statutory hybrid benefit formula wasintended at the time of the reduction in thenon-statutory hybrid benefit formula ben-efits.

A number of commenters expressedconcern that the interaction betweenemployee transfers and the conversionprotection effective date provisions wasunclear under the 2007 proposed regu-lations. In response to such comments,the regulations clarify that a conversionamendment must be both adopted onor after June 29, 2005, and be effectiveon or after June 29, 2005, in order forthe conversion protection provisions toapply to such amendment. Therefore, ifa transfer provision was adopted beforeJune 29, 2005, an employee transferis not treated as part of a conversionamendment to which the conversionprotection provisions apply, even if thetransfer occurs on or after June 29, 2005.

C. Market rate of return limitation

The regulations reflect the rule in sec-tion 411(b)(5)(B)(i)(I) under which a statu-tory hybrid plan is treated as failing to sat-isfy section 411(b)(1)(H) if it provides aninterest crediting rate with respect to ben-efits determined under a statutory hybridbenefit formula that is in excess of a mar-ket rate of return. Several commenterssuggested that the definition of interestcrediting rate in the 2007 proposed regula-tions be revised to exclude not only adjust-ments conditioned on current service butalso adjustments made as a result of pastand imputed service as well as ad hoc ad-justments. In response to the comments,the regulations expand the exclusions fromthe definition of interest credit to also ex-clude adjustments made as a result of im-puted service, as well as certain one-timeadjustments.

The final regulations provide that an in-terest credit generally means any increaseor decrease for a period to a participant’saccumulated benefit under a statutory hy-brid benefit formula, under the terms of theplan at the beginning of the period, that iscalculated by applying a rate of interest orrate of return (including a rate of increaseor decrease under an index) to the partic-ipant’s accumulated benefit (or a portionthereof) as of the beginning of the period,to the extent the increase or decrease is notconditioned on current service and is notmade on account of imputed service; aswell as any other increase for a period toa participant’s accumulated benefit undera statutory hybrid benefit formula, underthe terms of the plan at the beginning ofthe period, to the extent the increase is notconditioned on current service and is notmade on account of imputed service.

Under the regulations, notwithstandingthe general rule described in the previousparagraph, an increase to a participant’s ac-cumulated benefit is not treated as an inter-est credit to the extent the increase is madeas a result of a plan amendment provid-ing for a one-time adjustment to the partic-ipant’s accumulated benefit. However, apattern of repeated plan amendments eachof which provides for a one-time adjust-ment to a participant’s accumulated benefitwill cause such adjustments to be treatedas provided on a permanent basis under theterms of the plan.

November 29, 2010 764 2010–48 I.R.B.

The interest crediting rate for a periodwith respect to a participant generallyequals the total amount of interest creditsfor the period divided by the participant’saccumulated benefit at the beginning ofthe period.

Under the regulations, a principal creditmeans any increase to a participant’s ac-cumulated benefit under a statutory hy-brid benefit formula that is not an interestcredit. As a result, a principal credit in-cludes an increase to a participant’s accu-mulated benefit to the extent the increaseis conditioned on current service or madeon account of imputed service. Thus, forexample, even if the plan denominates anincrease to a hypothetical account balanceas an interest credit, the increase is treatedas a principal credit to the extent the in-crease is conditioned on current service.Similarly, a principal credit includes an in-crease to the current value of an accumu-lated percentage of the participant’s finalaverage compensation. For indexed bene-fits, a principal credit includes an increaseto the participant’s accrued benefit otherthan an increase provided by indexing. Inaddition, pursuant to the rule set forth ear-lier, a principal credit generally includesan increase to a participant’s accumulatedbenefit to the extent the increase is made asa result of a plan amendment providing fora one-time adjustment to the participant’saccumulated benefit. Thus, for example,a principal credit includes an opening hy-pothetical account balance or opening ac-cumulated percentage of the participant’sfinal average compensation.

Consistent with the requirement un-der §1.401–1(b)(1)(i) that a pension planprovide definitely determinable benefits,a plan that credits interest must specifyhow the plan determines interest creditsand must specify how and when interestcredits are credited. Under the regulations,a plan must determine the plan’s interestcrediting rate that will apply for each planyear (or portion of a plan year) using oneof two permitted methods — either usingthe applicable periodic interest creditingrate that applies over the current period or,for certain rates, using the rate that appliedin a specified lookback month with respectto a stability period. For this purpose, theplan’s lookback month and stability pe-riod must satisfy the rules for selecting thelookback month and stability period under§1.417(e)–1(d)(4). However, the stability

period and lookback month need not bethe same as those used under the plan forpurposes of section 417(e)(3).

In addition, the regulations require in-terest credits under a plan to be providedon an annual or more frequent periodic ba-sis and also require interest credits for eachperiod to be credited as of the end of theperiod. If, under a plan, interest is cred-ited more frequently than annually (for ex-ample, daily, monthly or quarterly) basedon one of the permissible annual interestrates, then the plan does not provide anabove market rate of return if the periodicinterest credits are provided under an in-terest crediting rate that is no greater thana pro rata portion of the applicable annualinterest crediting rate. However, the reg-ulations provide a special rule whereby aplan that credits interest daily based on oneof these annual rates may credit interest ata rate which is 1/360th of the applicable an-nual rate (instead of 1/365th) without vi-olating the general rule of the precedingsentence. In addition, the regulations pro-vide that interest credits based on one ofthese annual rates are not treated as cre-ating an effective rate of return in excessof a market rate of return merely becausean otherwise permissible interest creditingrate for a plan year is compounded morefrequently than annually. Thus, for exam-ple, if a plan’s terms provide for interestto be credited monthly and for the interestcrediting rate to be equal to the interest rateon long-term investment grade corporatebonds and the applicable annual rate onthese bonds for the plan year is 6 percent,then the accumulated benefit at the begin-ning of each month could be increased asa result of interest credits by as much as0.5 percent per month during the plan yearwithout resulting in an interest creditingrate that is in excess of a market rate of re-turn. These rules are similar to those in the2007 proposed regulations.

The 2007 proposed regulations pro-vided that an interest crediting rate is notin excess of a market rate of return if itis always less than a particular interestcrediting rate that meets the market rateof return limitation. A number of com-menters suggested that this rule be revisedto clarify that rates that may sometimesequal but are never greater than anotherpermissible rate are also permissible. Inresponse to these comments, the final reg-ulations provide that an interest crediting

rate is not in excess of a market rate ofreturn if it can never be in excess of aparticular rate that meets the market rateof return limitation. Thus, a rate that is apercentage (no greater than 100 percent)of a particular rate that meets the marketrate of return limitation is not in excess ofa market rate of return and a rate that is afixed amount less than a particular rate thatmeets the market rate of return limitationis also not in excess of a market rate ofreturn. Similarly, an interest crediting rateis not in excess of a market rate of return ifit always equals the lesser of two or morerates where at least one of the rates meetsthe market rate of return limitation.

In addition, the regulations clarify thata statutory hybrid plan does not provide aneffective interest crediting rate that is inexcess of a market rate of return merelybecause the plan determines an interestcredit by applying different rates to dif-ferent predetermined portions of the accu-mulated benefit, provided each rate wouldseparately satisfy the market rate of returnlimitations if the rate applied to the en-tire accumulated benefit. Thus, under thisrule, statutory hybrid plans may, in effect,provide participants with rates that are ablend of two or more rates and may alsoapply different rates to portions of the ben-efit attributable to different principal cred-its. However, as in the 2007 proposed reg-ulations, the final regulations provide thatinterest credits that are determined by ap-plying the greater of two or more rates gen-erally exceed a market rate of return exceptunder certain limited circumstances.

The regulations provide that an interestcrediting rate for a plan year is not in ex-cess of a market rate of return if it is basedon the rate of interest provided under oneof several specified indices. Like the 2007proposed regulations, these rates includethe rate of interest on long-term investmentgrade corporate bonds (as described in sec-tion 412(b)(5)(B)(ii)(II) prior to amend-ment by PPA ’06 for plan years beginningbefore January 1, 2008, and the third seg-ment rate used under section 430(h) forsubsequent plan years), the interest rateon 30-year Treasury securities, the inter-est rates on shorter term Treasuries withthe associated margins that were safe har-bor rates described in Notice 96–8, as wellas certain cost-of-living indices. Severalcommenters on the 2007 proposed regula-tions suggested that this list be expanded

2010–48 I.R.B. 765 November 29, 2010

to also include all of the interest rates per-missible under section 417(e). The Trea-sury Department and the IRS agree withthis suggestion and, as a result, the regu-lations expand the list of safe-harbor ratesto include the first and second segmentrates, as defined in either section 417(e)or 430(h) and whether calculated with orwithout regard to the transition rules ofsection 417(e)(3) or 430(h)(2)(G).

The regulations provide that an interestcrediting rate based on a specified indexmust be adjusted on at least an annual ba-sis. These rates are market yields to matu-rity on outstanding bonds and, as a result,these rates do not reflect defaults nor dothese rates reflect the change in the mar-ket value of an outstanding bond as a re-sult of future changes in the interest rateenvironment or in a bond issuer’s risk pro-file. Because the interest rate does not re-flect the change in the market value of anoutstanding bond when an issuer becomeshigher risk or the bond goes into default,the bonds have been limited to investmentgrade bonds in the top three quality levelswhere the risk of default is relatively small.

The regulations also set forth certaininterest crediting rates that satisfy thestatutory market rate of return requirementbut that are not safe harbor rates. Theregulations provide that, in the case ofindexed benefits as described in section411(b)(5)(E), an interest crediting rateequal to the actual rate of return on theaggregate assets of the plan, includingboth positive returns and negative returns,is not in excess of a market rate of returnif the plan’s assets are diversified so asto minimize the volatility of returns. Theregulations further provide that this re-quirement that plan assets be diversifiedso as to minimize the volatility of returnsdoes not require greater diversificationthan is required under section 404(a)(1)(C)of Title I of the Employee Retirement In-come Security Act of 1974, Public Law93–406 (88 Stat. 829 (1974)) with respectto defined benefit pension plans. Further-more, the regulations provide that the rateof return on the annuity contract for theemployee issued by an insurance companylicensed under the laws of a State is not inexcess of a market rate of return, subjectto an anti-abuse rule. The 2010 proposed

regulations provide that certain additionalinterest crediting rates satisfy the marketrate of return limitation.

The regulations reflect the preser-vation of capital rule in section411(b)(5)(B)(i)(II) that requires a statu-tory hybrid plan to provide that interestcredits will not result in a hypotheticalaccount balance (or similar amount) be-ing less than the aggregate amount of thehypothetical allocations. Under the 2007proposed regulations, this requirement ap-plied at the participant’s annuity startingdate. In addition, the 2007 proposed reg-ulations provided that the combination ofthis preservation of capital protection witha rate of return that otherwise satisfies themarket rate of return limitation will notresult in an effective interest crediting ratethat is in excess of a market rate of return.Responses to these rules were favorableand they are retained in these regulations.Hypothetical allocations are referred toas principal credits in the regulations, asdescribed earlier in this preamble. Theregulations clarify that the preservation ofcapital requirement applies to all principalcredits that were credited under the planas of the annuity starting date, includingprincipal credits that were credited beforethe statutory effective date of the preserva-tion of capital requirement under section411(b)(5)(b)(i)(II).

These regulations do not address sec-tion 411(b)(5)(B)(vi), which requires thata plan’s provisions reflect special rules ap-plicable upon plan termination. These plantermination rules are addressed in the 2010proposed regulations.

Section 123 of WRERA ’08 amendedADEA to provide that, in the case of a gov-ernmental plan that is described in the firstsentence of section 414(d) of the Code,5

a rate of return or a method of creditinginterest established pursuant to any pro-vision of Federal, State, or local law istreated as a market rate of return for cer-tain purposes under ADEA as long as suchrate or method does not violate any otherrequirement of ADEA. No changes havebeen made to these regulations as a resultof section 123 of WRERA ’08 because thatprovision does not amend the Internal Rev-enue Code.

III. Section 411(d)(6): Changes in aplan’s interest crediting rate

The 2007 proposed regulations pro-vided that, to the extent that benefits haveaccrued under the terms of a statutoryhybrid plan that entitle the participant tofuture interest credits, an amendment tothe plan to change the interest creditingrate for such interest credits violates sec-tion 411(d)(6) if the revised rate underany circumstances could result in a lowerinterest crediting rate as of any date af-ter the applicable amendment date of theamendment changing the interest creditingrate. Several commenters on the 2007 pro-posed regulations requested clarificationof this rule. In particular, one commenternoted that there are several circumstancesin which an amendment that results in alower interest credit for a particular periodafter amendment than would have beenprovided for the same period under the oldrate may not result in a reduction undersection 411(d)(6), such as where the plan’saggregate interest credits after the applica-ble amendment date but before the periodat issue exceeded the interest credits thatwould have been provided under the oldrate or where the plan was also amended toincrease benefits under other provisions,such as providing for larger principal cred-its than were provided before the changein interest crediting rates.

In response to these comments, the reg-ulations clarify that the right to interestcredits in the future that are not condi-tioned on future service constitutes a sec-tion 411(d)(6) protected benefit. Thus, tothe extent that benefits have accrued underthe terms of a statutory hybrid plan that en-title the participant to future interest cred-its, an amendment to the plan to change theinterest crediting rate must comply withsection 411(d)(6) if the revised rate underany circumstances could result in interestcredits that are smaller as of any date af-ter the applicable amendment date of theplan amendment than the interest creditsthat would have been provided without re-gard to the amendment.

The regulations retain the rule in the2007 proposed regulations under which aplan is not treated as providing smallerinterest credits in the future for purposesof section 411(d)(6) merely because of an

5 A governmental plan in the first sentence of section 414(d) means a plan that is established and maintained for its employees by the Government of the United States, by the government ofany State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.

November 29, 2010 766 2010–48 I.R.B.

amendment that changes the plan’s interestcrediting rate with respect to future interestcredits from one of the safe harbor marketrates of interest (for example, a rate basedon an eligible cost-of-living index or a ratebased on Treasury bonds with the mar-gins specified in the regulations) to the rateof interest on long-term investment gradecorporate bonds (the third segment rate un-der section 417(e) or 430(h)), if certain re-quirements are