[Federal Register: August 12, 2005 (Volume 70, Number 155)]
[Rules and Regulations]
[Page 47109-47127]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12au05-12]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 54
[TD 9219]
RIN 1545-BC26
Section 411(d)(6) Protected Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations providing guidance
regarding the anti-cutback rules of section 411(d)(6) of the Internal
Revenue Code, which generally protect accrued benefits, early
retirement benefits, retirement-type subsidies, and optional forms of
benefit under qualified retirement plans. The regulations address the
limited circumstances under which a qualified retirement plan is
permitted to be amended to eliminate or reduce early retirement
benefits, retirement-type subsidies, or optional forms of benefit. The
final regulations also provide related guidance concerning the notice
requirements of section 4980F. These final regulations generally affect
sponsors of, and participants in, qualified retirement plans.
DATES: Effective date: These regulations are effective on August 12,
2005.
Applicability date: For dates of applicability of these
regulations, see Sec. 1.411(d)-3(j) of these regulations.
FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard at (202) 622-6060
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR parts 1 and 54 under
sections 411(d)(6) and 4980F of the Internal Revenue Code (Code). This
Treasury Decision amends Sec. 1.411(d)3 of the Treasury regulations to
reflect changes to section 411(d)(6) made by the Economic Growth and
Tax Relief Reconciliation Act of 2001, Public Law 107-16 (155 Stat. 38)
(EGTRRA). In addition, this Treasury Decision
[[Page 47110]]
includes rules relating to changes to section 411(d)(6) made by the
Retirement Equity Act of 1984, Public Law 98-397 (98 Stat. 1426) (REA)
and makes conforming amendments to Sec. 1.411(d)-4. This Treasury
Decision also amends Sec. 54.4980F-1(b), relating to the notice
requirement for certain plan amendments that eliminate or significantly
reduce early retirement benefits or retirement-type subsidies.
Section 401(a)(7) provides that a trust does not constitute a
qualified trust unless its related plan satisfies the requirements of
section 411 (relating to minimum vesting standards). Section
411(d)(6)(A) provides that a plan is treated as not satisfying the
requirements of section 411 if the accrued benefit of a participant is
decreased by an amendment of the plan, other than an amendment
described in section 412(c)(8) of the Code or section 4281 of the
Employee Retirement Income Security Act of 1974 (ERISA), as amended.
Section 411(a)(7)(A) defines the term accrued benefit. For a
defined contribution plan, a participant's accrued benefit is the
balance of the participant's account. For a defined benefit plan, a
participant's accrued benefit is the participant's benefit under the
terms of the plan expressed in the form of an annual benefit commencing
at normal retirement age. Under section 411(c)(3), if a participant's
accrued benefit under a defined benefit plan is to be determined as an
amount other than an annual benefit commencing at normal retirement
age, the participant's accrued benefit is the actuarial equivalent of
such benefit.
Section 301(a) of REA amended Code section 411(d)(6) to add
subparagraph (B), which provides that a plan amendment that has the
effect of eliminating or reducing an early retirement benefit or a
retirement-type subsidy, or eliminating an optional form of benefit,
with respect to benefits attributable to service before the amendment
is treated as impermissibly reducing accrued benefits. For a
retirement-type subsidy, this protection applies only with respect to
an employee who satisfies the preamendment conditions for the subsidy
(either before or after the amendment). Section 411(d)(6)(B) also
authorizes the Secretary of the Treasury to provide, through
regulations, that section 411(d)(6)(B) does not apply to any plan
amendment that eliminates optional forms of benefit (other than a plan
amendment that has the effect of eliminating or reducing an early
retirement benefit or a retirement-type subsidy).
On July 11, 1988, final regulations (TD 8212) under section
411(d)(6) were published in the Federal Register (53 FR 26050) (the
1988 regulations). Under those regulations, section 411(d)(6) protects
certain benefits, to the extent they have accrued, so that such
benefits cannot be reduced or eliminated by plan amendment, except to
the extent permitted by regulations (see Sec. 1.411(d)-4, Q&A-1(a)).
Section 1.411(d)-4 specifies circumstances under which a plan is
permitted to be amended to reduce or eliminate an optional form of
benefit.
Section 645(b)(1) of EGTRRA amended section 411(d)(6)(B) of the
Code to direct the Secretary to issue regulations providing that the
requirements of section 411(d)(6)(B) do not apply to any amendment that
reduces or eliminates early retirement benefits or retirement-type
subsidies that create significant burdens or complexities for the plan
and plan participants unless such amendment adversely affects the
rights of any participant in a more than de minimis manner. As amended
by EGTRRA, section 4980F of the Code and section 204(h) of ERISA each
require that a plan administrator give notice of a plan amendment to
affected plan participants and beneficiaries when the plan amendment
provides for a significant reduction in the rate of future benefit
accrual or the elimination or significant reduction of an early
retirement benefit or a retirement-type subsidy.
Section 204(g) of ERISA contains parallel rules to Code section
411(d)(6), including a similar directive to the Secretary of the
Treasury to issue regulations providing that section 204(g) does not
apply to any amendment that reduces or eliminates early retirement
benefits or retirement-type subsidies that create significant burdens
or complexities for the plan and plan participants unless such
amendment adversely affects the rights of any participant in a more
than de minimis manner. Under section 101 of Reorganization Plan No. 4
of 1978 (43 FR 47713) and section 204(g) of ERISA, the Secretary of the
Treasury has interpretive jurisdiction over the subject matter
addressed in these regulations for purposes of ERISA, as well as the
Code. Thus, these final regulations issued under sections 411(d)(6) of
the Code apply as well for purposes of section 204(g) of ERISA.
On March 24, 2004, proposed regulations (REG-128309-03) under
sections 411(d)(6) and 4980F of the Code were published in the Federal
Register (69 FR 13769). On June 24, 2004, the IRS held a public hearing
on the proposed regulations. Written comments responding to the notice
of proposed rulemaking were also received. After consideration of all
the comments, the proposed regulations are adopted, as amended by this
Treasury Decision. The revisions are discussed below.
Explanation of Provisions
I. Overview
These regulations respond to the EGTRRA directive for purposes
of both section 411(d)(6) of the Code and section 204(g) of ERISA by
specifying the circumstances under which a plan may be amended to
reduce or eliminate early retirement benefits, retirement-type
subsidies, and optional forms of benefit (section 411(d)(6)(B)
protected benefits). The circumstances specified in the regulations
are designed to implement the statutory directive to permit
reduction or elimination of section 411(d)(6)(B) protected benefits
that create significant burdens or complexities for the plan and its
participants, but only if the elimination does not adversely affect
the rights of any participant in a more than de minimis manner.
These provisions relating to the permissible elimination of benefits
protected by section 411(d)(6)(B) are in addition to the rules
permitting a plan to be amended to eliminate optional forms of
benefit under Sec. 1.411(d)-4.
These regulations provide 2 permitted methods for eliminating or
reducing section 411(d)(6)(B) protected benefits under the EGTRRA
directive: elimination of redundant optional forms of benefit and
elimination of noncore optional forms of benefits where core options
are offered. Either of these 2 alternative methods can be applied with
respect to any optional form of benefit. A plan sponsor may determine
that one method of elimination works for some plan participants or some
optional forms of benefit, but not for the remaining plan participants
or other optional forms of benefit. However, a plan must satisfy all of
the requirements of the applicable method with respect to any optional
form of benefit being eliminated.
These final regulations also include general guidance on section
411(d)(6), including the meaning of the terms used therein, the
scope of the section 411(d)(6)(A) protection against plan amendments
decreasing a participant's accrued benefit, and the scope of section
411(d)(6)(B) protection for early retirement benefits, retirement-
type subsidies, and optional forms of benefit. This Treasury
Decision also makes conforming amendments to Sec. 1.411(d)-4,
including amendments to the definition of optional form of benefit
and the multiple amendment rule described in this preamble (under
the heading Multiple amendment rule.
This Treasury Decision completely replaces the provisions in former
Sec. 1.411(d)-3. However, the rules in
[[Page 47111]]
former Sec. 1.411(d)-3 generally have been carried over to this
Treasury Decision, except to the extent needed to reflect statutory
changes (such as the elimination of class-year vesting and the
enactment of section 411(d)(6)(B)).
II. Scope of Section 411(d)(6) Protections
A. General Rules Under Section 411(d)(6)
These final regulations take into account and respond to judicial
decisions interpreting section 411(d)(6) (or its parallel provision at
section 204(g) of ERISA).\1\ For example, the regulations provide that
section 411(d)(6) protection applies to a participant's entire accrued
benefit as of the applicable amendment date, without regard to whether
the entire accrued benefit was accrued before a participant's severance
from employment, or whether some portion of the accrued benefit was the
result of an increase pursuant to a plan amendment adopted after the
participant's severance from employment.\2\
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\1\ See Bellas v. CBS, Inc., 221 F. 3d 517 (3rd Cir. 2000),
cert. denied, 531 U.S. 1104 (2001) (holding early retirement benefit
that is more valuable than actuarially reduced normal retirement
benefit and that is payable on occurrence of unpredictable
contingent event is retirement-type subsidy, and therefore is
protected under section 204(g)), Board of Trustees of the Sheet
Metal Workers' National Pension Fund v. C.I.R., 318 F.3d 599 (4th
Cir. 2003) (stating provision for automatic cost-of-living
adjustments granted by plan amendment is not accrued benefit for
participants who retired before effective date of amendment and,
thus, holding subsequent plan amendment eliminating future
adjustments did not violate anti-cutback rule of section 411(d)(6)),
and Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001)
(holding plan amendment providing for actuarial offset of early
retirement benefits previously received by rehire upon subsequent
retirement violates ERISA section 204(g), even though net effect of
amendment is increase in retirement benefit of participant).
\2\ This is contrary to the analysis in Board of Trustees of the
Sheet Metal Workers' National Pension Fund v. C.I.R..
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The regulations generally retain the rules from former Sec.
1.411(d)-3. Thus, for purposes of determining whether or not any
participant's accrued benefit is decreased, all plan amendments
affecting, directly or indirectly, the computation of accrued benefits
are taken into account and, in determining whether a reduction has
occurred, all plan amendments with the same applicable amendment date
(the later of the adoption date or the effective date of the amendment)
are treated as one amendment. The regulations also provide that these
rules apply to section 411(d)(6)(B) protected benefits. Thus, for
example, if there are 2 amendments with the same applicable amendment
date, one of which increases accrued benefits and the other of which
decreases the early retirement factors that are used to determine the
early retirement annuity, the 2 amendments are treated as one amendment
and only violate section 411(d)(6) if, after the 2 amendments, the net
dollar amount of any early retirement annuity, with respect to the
accrued benefit of any participant as of the applicable amendment date,
is lower on that applicable amendment date than it would have been
without the 2 amendments.\3\
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\3\ 3 This is contrary to the analysis in Michael v. Riverside
Cement.
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B. Definitions of Section 411(d)(6) Protected Benefits
The legislative history of REA provides that:
[T]he term ``retirement-type subsidy'' is to be defined by
Treasury regulations. The committee intends that under these
regulations, a subsidy that continues after retirement is generally
to be considered a retirement-type subsidy. The committee expects,
however, that a qualified disability benefit, a medical benefit, a
social security supplement, a death benefit (including life
insurance), or a plant shutdown benefit (that does not continue
after retirement age) will not be considered a retirement-type
subsidy. The committee expects that Treasury regulations will
prevent the recharacterization of retirement-type benefits as
benefits that are not protected [under section 411(d)(6)].\4\
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\4\ S. Rep. 98-575, at 30 (1984).
These final regulations reflect the rules in the 1988 regulations
(see Sec. 1.411(d)-4, Q&A-1(d)) that ancillary benefits and other
rights or features are not protected under section 411(d)(6). In
addition, taking the REA legislative history into account, these
regulations define the terms early retirement benefit, retirement-type
benefit, and retirement-type subsidy. These definitions differ in
several respects from the proposed regulations.
The definition of the term ancillary benefit in these regulations
reflects changes from the proposed regulations regarding death
benefits. Because the account balance is the accrued benefit in a
defined contribution plan, the payment of the account balance upon the
death of a participant is the payment of the accrued benefit rather
than an ancillary benefit. Therefore, in contrast to the proposed
regulations, the final regulations do not categorize a right to a death
benefit under a defined contribution plan as an ancillary benefit, and
this right is protected under section 411(d)(6). For a defined benefit
plan, these regulations provide that a death benefit that is not part
of an optional form of benefit is an ancillary benefit and, therefore,
is not protected under section 411(d)(6), even if paid after
retirement. The regulations also clarify when a death benefit under a
defined benefit plan is part of an optional form of benefit. The
definition of optional form of benefit is defined in Sec. 1.411(d)-
3(g)(6)(ii) of these final regulations and in Sec. 1.411(d)-4, Q&A-
1(b)(1), which has been revised by this Treasury Decision to coordinate
with the definition of optional form of benefit in these final
regulations.
The regulations also include changes to the definitions of
ancillary benefit and retirement-type benefit, relating to benefits
that are not permitted to be in a qualified plan. These changes are
relevant for purposes of applying section 204(g) of ERISA (the parallel
rule to section 411(d)(6)), which applies to both qualified and
nonqualified plans. The final regulations provide that, in addition to
social security supplements, disability benefits, life insurance
benefits, medical benefits under section 401(h), and certain death
benefits, the only other ancillary benefits are plant shutdown benefits
and other similar benefits that do not continue past retirement age, do
not affect the payment of the accrued benefit, and are permitted to be
in a qualified pension plan. These regulations also provide that a
retirement-type benefit is either the payment of a distribution
alternative with respect to an accrued benefit or the payment of any
other benefit under a defined benefit plan (including a QSUPP as
defined in Sec. 1.401(a)(4)-12) that is permitted to be in a qualified
pension plan, continues after retirement, and is not an ancillary
benefit.
These regulations include a number of clarifications regarding
section 411(d)(6)(B) protected benefits that were included in the
proposed regulations with minor modifications. The regulations clarify
that if, after a plan amendment, there is another optional form of
benefit available to a participant under the plan that is of inherently
equal or greater value, the plan amendment is not treated as
eliminating an optional form of benefit, or eliminating or reducing an
early retirement benefit or a retirement-type subsidy. For example, a
change in the method of calculating a joint and survivor annuity from
using a 90% adjustment factor on account of the survivorship payment at
particular ages for a participant and a spouse to using a 91%
adjustment factor at the same
[[Page 47112]]
ages is treated as not eliminating an optional form of benefit.
C. Multiple Amendment Rule
Under the proposed regulations, a plan amendment would violate the
requirements of section 411(d)(6) if it is one of a series of plan
amendments made at different times that, when taken together, have the
effect of reducing or eliminating a section 411(d)(6) protected benefit
in a manner that would be prohibited under section 411(d)(6) if
accomplished through a single amendment. The 1988 regulations contained
a similar rule under which a plan amendment that modified an optional
form of benefit with respect to benefits already accrued was evaluated
in light of previous amendments (see Sec. 1.411(d)-4, Q&A-2(c), as in
effect prior to amendment by these regulations).
Commentators raised concerns about the multiple amendment rule in
the proposed regulations, including its complexity and the uncertainty
as to when the rule would apply. In response to these comments, this
multiple amendment rule has been revised to add an objective rule that
generally only combines plan amendments adopted within a 3-year period.
The final regulations also retain an application of the multiple
amendment rule from the proposed regulations relating to restrictions
against creating burdens or complexities. Under this rule, if a plan is
amended to add a retirement-type subsidy in order to eliminate another
retirement-type subsidy within 3 years, the plan amendment eliminating
the retirement-type subsidy will not be treated as reducing or
eliminating burdens and complexities for the plan and its participants,
even if the elimination of the subsidy would not adversely affect the
rights of any plan participant in a more than de minimis manner.
These final regulations also make a conforming change to Sec.
1.411(d)-4, Q&A-2(c), by replacing the serial amendment rule under
those regulations with a revised version of the multiple amendment
rule. These regulations do not modify the rule in Sec. 1.411(d)-4,
Q&A-1(c)(1), which provides that if an employer establishes a pattern
of repeated plan amendments providing for similar benefits in similar
situations for substantially consecutive, limited periods of time, then
those similar benefits will be treated as provided under the terms of
the plan, without regard to the limited period of time, to the extent
necessary to carry out the purposes of sections 411(d)(6) and, where
applicable, the definitely determinable requirement of section 401(a),
including section 401(a)(25).
D. Application of Section 411(d)(6) to Certain Amendments Eliminating
Impermissible Benefits
Commentators suggested that the final regulations clarify that a
plan is permitted under section 411(d)(6) to eliminate an optional form
of benefit that is inconsistent with the plan qualification
requirements of section 401(a) (e.g., the requirements of section
401(a)(9)). In general, section 411(d)(6) does not permit the
elimination or reduction of a section 411(d)(6) protected benefit
solely because that benefit violates the plan qualification
requirements. However, in the past, the IRS has exercised its authority
to issue guidance that, in certain situations, permit certain plan
amendments that eliminate or reduce certain optional forms of benefit
that violate the plan qualification requirements. For example, Sec.
1.401(a)(9)-8, Q&A-12, provides that a plan will not fail to satisfy
section 411(d)(6) merely because the plan is amended to eliminate the
availability of an optional form of benefit to the extent that the
optional form does not satisfy section 401(a)(9).\5\
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\5\ See also Sec. 1.401(a)(9)-1, Q&A-3, providing that,
notwithstanding any other plan provision, a plan is not permitted to
distribute benefits under any optional form of benefit that does not
satisfy section 401(a)(9).
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III. Elimination of Benefits of De Minimis Value Under EGTRRA
A. Elimination of Redundant Optional Forms of Benefit
These regulations generally retain the rule from the proposed
regulations that a plan is permitted to be amended to eliminate an
optional form of benefit for a participant with respect to benefits
accrued before the applicable amendment date if the optional form of
benefit is redundant with respect to a retained optional form of
benefit and certain conditions are satisfied. An optional form of
benefit is considered redundant with respect to a retained optional
form of benefit if the retained optional form of benefit is in the same
family of optional forms of benefit as the optional form of benefit
being eliminated and the participant's rights with respect to the
retained optional form of benefit are not subject to materially greater
restrictions than those that applied to the optional form of benefit
being eliminated.
These regulations also contain new terminology to facilitate the
application of certain rules. Various rules in these final regulations
use the term annuity commencement date instead of the term annuity
starting date, thereby accommodating the elimination of an optional
form of benefit that includes a retroactive annuity starting date. The
final regulations also define the term generalized optional form, which
means a group of optional forms of benefit that are identical except
for differences due to the actuarial factors that are used to determine
the amount of the distributions under those optional forms of benefit
and the annuity starting dates. The concept of a generalized optional
form is used in several places in these regulations, including the
redundancy rule and the rules concerning burdensome and de minimis
benefits.
Under the proposed regulations, among the conditions for
eliminating a section 411(d)(6)(B) protected benefit under the
redundancy rule is that the plan amendment not apply to an optional
form of benefit with an annuity starting date that is earlier than 90
days after the date the amendment is adopted. This 90-day waiting
period is based on a rule relating to the timing for the written
explanation of a qualified joint and survivor annuity under section
417(a)(3). Under that rule, the explanation cannot be provided more
than 90 days before the annuity starting date. See Sec. 1.417(e)-
1(b)(3)(ii). A commentator suggested that the regulations be revised to
increase the waiting period before the elimination of a redundant
optional form of benefit from 90 days after the amendment is adopted to
180 days after the amendment is adopted. The commentator reasoned that
this increase would give participants more time to adjust to the
elimination of the optional form of benefit and, thus, participants
would have more time to select from among the preamendment optional
forms of benefit. The commentator also noted that proposed legislation
had been introduced that would increase the number of days before the
annuity starting date that a QJSA explanation can be provided (the
maximum QJSA explanation period) from 90 days to 180 days.
In light of this comment, the final regulations explicitly link the
waiting period before the elimination of a redundant optional form of
benefit with the maximum QJSA explanation period, which is currently a
90-day period. Thus, these regulations provide that, for purposes of
the redundancy rule, a plan amendment cannot be applicable with respect
to an optional form of benefit with an annuity commencement date for
which a written explanation relating to a QJSA would have satisfied the
timing requirements of section 417(a)(3) had it
[[Page 47113]]
been provided on or before the date that the amendment is adopted. This
ensures that no participant will receive a QJSA explanation describing
an optional form of benefit which could be eliminated before the
election has been made. The waiting period before the elimination of a
redundant optional form of benefit under these final regulations would
change automatically if, at any future date, the maximum QJSA
explanation period were to be altered.
B. Permissible Elimination of Noncore Optional Forms of Benefit Where
Core Options Are Offered
The final regulations retain the rule from the proposed regulations
under which a plan is permitted to be amended to eliminate an optional
form of benefit for plan participants with respect to benefits accrued
before the applicable amendment date if, after the amendment, the plan
offers a designated set of core options to plan participants with
respect to benefits accrued both before and after the amendment. The
core options are defined as a straight life annuity, a 75% joint and
contingent annuity, a 10-year term certain and life annuity, and the
most valuable option for a participant with a short life expectancy. As
under the proposed regulations, the final regulations do not permit a
plan amendment to apply to optional forms of benefit with annuity
commencement dates that are earlier than 4 years after the date the
amendment is adopted. In addition, the final regulations retain the
rule that a plan may not be amended to eliminate an optional form of
benefit that includes a single-sum distribution that applies with
respect to at least 25% of a participant's accrued benefit as of the
date the optional form of benefit is eliminated.
Several commentators suggested that the 75% joint and contingent
annuity core option be replaced with a 50% joint and contingent annuity
core option. One commentator argued that if the 50% joint and
contingent annuity option is not available to participants, the higher
actuarial charge associated with the 75% joint and contingent annuity
option might discourage participants from electing any joint and
contingent annuity option. Other commentators pointed out that Sec.
1.411(d)-4, Q&A-2(b)(2)(ii), allows a plan that provides a range of 3
or more actuarially equivalent joint and survivor annuity options to be
amended to eliminate any of such options, other than the options with
the largest and smallest optional survivor payment percentages (the
bookends rule) and argued that the 75% joint and contingent annuity
core option rule would require plans to add back the 75% joint and
contingent annuity option that was eliminated under the bookends rule.
In light of these comments and to accomodate the bookends rule, the
final regulations retain the 75% joint and contingent annuity as a core
option, but provide a special rule that a plan is permitted to treat
both the 50% and 100% joint and contingent annuity options as core
options for purposes of the core options rule (in lieu of offering a
75% joint and contingent annuity) if the plan otherwise satisfies the
requirements of the core options rule.
As stated above, these regulations retain in the list of core
options the most valuable option for a participant with a short life
expectancy. This core option is defined as the optional form of benefit
that is reasonably expected to result in payments that have the largest
actuarial present value in the case of a participant who dies shortly
after the annuity starting date. Like the proposed regulations, these
regulations provide a safe harbor method for determining which optional
form of benefit under the plan is the most valuable option for a
participant with a short life expectancy. Under this safe harbor
method, a plan is permitted to treat a single-sum distribution option
with an actuarial present value that is not less than the actuarial
present value of any optional form of benefit being eliminated as the
most valuable option for a participant with a short life expectancy. If
a plan does not offer such a single-sum distribution option, the plan
is permitted to treat a joint and contingent annuity as the most
valuable option for a participant with a short life expectancy if the
continuation percentage under the amendment is at least 75% and is at
least as great as the highest continuation percentage available before
the amendment. In the event a plan has neither a single-sum
distribution option nor a joint and contingent annuity with a
continuation percentage of at least 75%, the plan is permitted to treat
a term certain and life annuity with a term certain period of at least
15 years as the most valuable option for a participant with a short
life expectancy.
Similar rules were in the proposed regulations, and a commentator
argued that the rules would overprotect single-sum distribution options
by providing 2 levels of protection: first, by not treating an
amendment as satisfying the core options rule if it eliminates an
optional form of benefit that includes a single-sum distribution that
applies with respect to at least 25% of the participant's accrued
benefit as of the date the optional form of benefit is eliminated; and,
second, by providing that a plan is permitted to treat a single-sum
distribution option with an actuarial present value that is not less
than the actuarial present value of any optional form of benefit
eliminated by the plan amendment as the most valuable option for a
participant with a short life expectancy. This comment is based on the
assumption that a single-sum distribution option will always be the
most valuable option for a participant with a short life expectancy.
However, as illustrated in an example in these regulations, a single-
sum option is not always the most valuable option for a participant
with a short life expectancy, e.g., where the single-sum distribution
does not take into account an early retirement subsidy available in
another optional form of benefit (see Sec. 1.411(d)-3(h), Example 4).
Accordingly, the final regulations retain the separate protection for
single sum-distributions and the most valuable option for a participant
with a short life expectancy. However, the final regulations clarify
that the safe harbor hierarchy method for determining the most valuable
option for a participant with a short life expectancy is available only
if the single-sum distribution, joint and contingent annuity, or term
certain and life annuity optional forms satisfy the conditions set
forth in that rule at all relevant ages. Thus, when the safe harbor
hierarchy rule applies, the most valuable option for a participant with
a short life expectancy will be the generalized optional form for all
participants.
These regulations also retain the requirement in the proposed
regulations under which an amendment to eliminate an optional form of
benefit under the core options rule cannot apply to an optional form of
benefit with an annuity commencement date that is earlier than 4 years
after the date the amendment is adopted. Several commentators argued
that the waiting period before elimination of a noncore optional form
of benefit be shortened, with one commentator suggesting 90 days,
similar to the waiting period before the elimination of a redundant
optional form of benefit. Other commentators argued that the waiting
period before the elimination of a noncore optional form of benefit be
increased to 5 years, similar to the 5-year cliff vesting rule.
However, no commentator provided evidence that participants evaluate
benefit choices over a shorter or longer period. The Treasury
Department and the IRS
[[Page 47114]]
believe that the 4-year waiting period before elimination of a noncore
optional form of benefit strikes the right balance between protecting
participants' expectations about the various benefit choices in their
plans in coordination with decisions relating to retirement planning,
while reducing burdens on plans. Thus, the 4-year waiting period before
the elimination of a noncore optional form of benefit has been retained
in these regulations.
As stated earlier under the heading Multiple amendment rule, the
final regulations provide that a plan amendment violates section
411(d)(6) if it is one of a series of plan amendments that, when taken
together, have the effect of reducing or eliminating section 411(d)(6)
protected benefits in a manner that would violate section 411(d)(6) if
accomplished through a single amendment. These final regulations add a
rule that, for purposes of the multiple amendment rule, only plan
amendments made within a 3-year period are generally taken into
account. Notwithstanding this 3-year rule, the final regulations also
add a rule that if a plan is amended to eliminate an optional form of
benefit using the core option rule, the employer must wait 3 years
after the first annuity commencement date for which the optional form
of benefit is no longer available before reducing or eliminating any
core options offered under the plan.
C. Elimination of Early Retirement Benefits and Retirement-Type
Subsidies That Are of de minimis Value
The final regulations retain from the proposed regulations the
additional requirements that a plan amendment must satisfy if the
retained optional form of benefit or each core option offered under the
plan does not have the same annuity starting date or has a lower
actuarial present value than the optional form of benefit being
eliminated. In such a case, the plan amendment is only permitted to
reduce or eliminate a section 411(d)(6)(B) protected benefit that
creates significant burdens or complexities for the plan and its
participants, but only if elimination does not adversely affect the
rights of any participant in more than a de minimis manner.
The regulations generally retain the rule in the proposed
regulations which provides that a reduction in actuarial present value
is of no more than a de minimis amount if the reduction does not exceed
the greater of 2% of the present value of the retirement-type subsidy
under the eliminated optional form of benefit (if any) prior to the
amendment or 1% of the participant's compensation for the prior plan
year (as defined in section 415(c)(3)). Several commentators offered
suggestions to change this de minimis value test. Some commentators
suggested that the 2% threshold be increased in order to make the
ability to eliminate the subsidy more meaningful. The commentators
suggested an increase up to 5% of the retirement-type subsidy. In
addition, other commentators argued that 2% threshold should be changed
from a percentage of the retirement-type subsidy to a percentage of the
eliminated optional form of benefit. Under this suggestion, the margin
of difference would be permitted to be significantly greater. Other
commentators argued that the 2% threshold should be lowered in order to
reflect Congressional intent in the examples illustrating de minimis
reductions in the EGTRRA conference report.\6\ These suggestions ranged
from 1.5% to 1% of the retirement-type subsidy. These commentators also
recommended that the 1% of compensation de minimis threshold be
reduced. In addition, some commentators suggested that a plan amendment
eliminating a retirement-type subsidy should be required to satisfy
both tests, instead of the 2 tests being alternatives.
---------------------------------------------------------------------------
\6\ H.R. Conf. Rep. 107-84, at 254 (2001).
---------------------------------------------------------------------------
These final regulations do not adopt these suggestions. The
examples in the EGTRRA conference report are explicitly expressed as
examples, not rules. The percentage thresholds in the de minimis value
test are rounded percentages based on the dollar amounts in the EGTRRA
conference report, and, thus, they accurately reflect the intent of
EGTRRA and the legislative history. Accordingly, the final regulations
retain the percentage thresholds from the proposed regulations.
Several commentators also noted that the 1% of compensation test
would have no application to terminated vested participants because
terminated participants frequently have no current or prior year
compensation from the employer. Other commentators argued that the 1%
of compensation test does not accurately reflect all employment
situations, such as those participants who may take a leave of absence
or begin a reduced work schedule. In light of these comments, the
regulations provide that the 1% of compensation test is applied using
the greater of the participant's compensation (within the meaning of
section 415(c)(3)) for the prior plan year or the participant's average
compensation for his or her high 3 years (within the meaning of section
415(b)(1)(B) and (b)(3)).
These regulations retain the rule in the proposed regulations under
which a facts and circumstances analysis applies to determine whether a
plan amendment eliminates section 411(d)(6)(B) protected benefits that
create significant burdens and complexities for a plan and its
participants. Under this rule, for a plan amendment eliminating a
retirement-type subsidy or changing actuarial factors, the facts and
circumstances to consider include the number of different retirement-
type subsidies and other actuarial factors available under the plan,
whether the terms and conditions applicable to the plan's retirement-
type subsidies are difficult to summarize in a manner that is concise
and readily understandable to the average plan participant, whether
those different retirement-type subsidies and other actuarial factors
were added to the plan as a result of mergers, acquisitions, or other
business transactions, and whether the effect of the plan amendment is
to reduce the number of categories of retirement-type subsidies or
other actuarial factors.
Several commentators stated that this facts and circumstances
standard is vague and subjective. The commentators suggested that the
standard should be revised to provide for more objective criteria to
determine the circumstances under which a plan amendment is permitted
to eliminate a section 411(d)(6)(B) protected benefit that creates
significant burdens or complexities for a plan and its participants.
The commentators also suggested that the final regulations include
examples of the standard.
In light of these comments, the final regulations add 2 new factors
to the facts and circumstances analysis for retirement-type subsidies
and actuarial factors. These new factors are whether the plan amendment
eliminates one or more generalized optional forms and whether the plan
amendment replaces a complex optional form of benefit with a simpler
form. An example has been added to the final regulations to illustrate
this facts and circumstances analysis.
Like the proposed regulations, the final regulations provide a
rebuttable presumption for plan amendments that eliminate a set of
actuarial factors under the plan that, considered in the aggregate, are
burdensome or complex. If this is the case, then the elimination of any
set of actuarial factors is presumed to eliminate section 411(d)(6)(B)
protected benefits that create significant burdens or
[[Page 47115]]
complexities for the plan and its participants. However, the
regulations also provide that if the effect of a plan amendment with
respect to an optional form of benefit is merely to substitute one set
of actuarial factors for another set of actuarial factors, without any
reduction in the number of different actuarial factors, the plan
amendment would not be permitted. Commentators stated that this no
substitution rule in the proposed regulations would offer no relief to
plans that wish merely to update their plans with actuarial assumptions
that reflect more recent experience. Another commentator similarly
suggested that the regulations should permit a plan to update its
mortality tables. In response to these comments, the final regulations
provide an exception to the no substitution rule for situations in
which a plan is changing actuarial factors for determining optional
forms of benefit with new actuarial factors that are based on more
accurate mortality experience or more appropriate interest rates (e.g.,
interest rates that reflect more recent rates of returns).
IV. Other Issues
A. Contingent Event Benefits
In Notice 2003-10 (2003-1 C.B. 369), the Treasury Department and
the IRS announced that regulations would be proposed that would provide
guidance on benefits that are treated as early retirement benefits and
retirement-type subsidies for purposes of section 411(d)(6)(B). Notice
2003-10 also provided that the regulations will be prospective and the
IRS will not treat a plan as failing to satisfy the requirements of
section 401 merely because of a plan amendment that eliminates or
reduces an early retirement benefit or a retirement-type subsidy that
is conditioned on the occurrence of an unpredictable contingent event
(within the meaning of section 412(l)) if the amendment is adopted and
effective prior to the occurrence of the contingent event and prior to
the publication of the final regulations in the Federal Register.
These final regulations generally retain the rule in the proposed
regulations which provided that benefits that are contingent on the
occurrence of certain events, such as a plant shutdown or involuntary
separation, and that continue after retirement are retirement-type
subsidies that are protected under section 411(d)(6)(B), both before
and after the occurrence of the contingency.\7\ However, as noted above
under the heading Definitions of section 411(d)(6) protected benefits,
this rule is limited to benefits under a defined benefit plan that are
permitted to be in a qualified plan. This rule applies to amendments
adopted after December 31, 2005. For an amendment adopted before
January 1, 2006, the IRS will not treat a plan as failing to be tax
qualified under section 401(a) merely because the plan amendment
eliminates or reduces an early retirement benefit or a retirement-type
subsidy that is conditioned on the occurrence of an unpredictable
contingent event (within the meaning of section 412(l)) if the
amendment is adopted and effective prior to the occurrence of the
contingent event.
---------------------------------------------------------------------------
\7\ This rule follows the analysis in Bellas v. CBS, Inc.
---------------------------------------------------------------------------
B. Effect of Central Laborers' Decision
Since the issuance of the proposed regulations on March 24, 2004,
the Supreme Court issued its opinion in Central Laborers' Pension Fund
v. Heinz, 541 U.S. 749 (June 7, 2004). This case addressed an issue
that was reserved in the proposed regulations, pending the final
decision in Central Laborers', namely the interaction of the vesting
rules in section 411(a) with the anti-cutback rules in section
411(d)(6). This topic is reserved in these final regulations and
addressed in proposed regulations (REG-156518-04) that are being
published elsewhere in this issue of the Federal Register.
C. Utilization Test
Comments were made prior to the issuance of the proposed
regulations requesting relief from section 411(d)(6) to enable plans to
eliminate optional forms of benefit that participants rarely use. The
preamble to the proposed regulations noted the difficulty in applying a
utilization standard for plans where there are few retirements.
However, comments on the proposed regulations asked the Treasury
Department and the IRS to consider adding a utilization test to the
regulations as an acceptable method of eliminating optional forms of
benefit, early retirement benefits, and retirement-type subsidies that
are rarely used. The commentators argued that rarely used optional
forms create a burden both for plans and their participants and that
utilization of an optional form of benefit is a good measure of a
benefit's value to participants in a plan. In light of these comments,
the Treasury Department and IRS are proposing a utilization standard,
which is included in proposed regulations (REG-156518-04) being
published elsewhere in this issue of the Federal Register. Accordingly,
these final regulations provide a reserved paragraph for such a
utilization test.
Effective Dates
These final regulations apply to amendments adopted and effective
after August 12, 2005. However, there is a special effective date for
certain plan amendments as described above (under the heading
Contingent Event Benefits). Plan amendments adopted before August 12,
2005 are to be evaluated in light of the applicable authorities without
regard to these regulations. No implication is intended concerning
whether or not a rule adopted prospectively in these regulations is
applicable law before the effective date in these regulations.
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. In addition,
because no collection of information is imposed on small entities, the
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply, and therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Pamela R. Kinard of
the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities), Internal Revenue Service. However, personnel
from other offices of the Internal Revenue Service and Treasury
Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 54 are amended as follows:
[[Page 47116]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *.
Sec. 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and
section 645(b) of the Economic Growth and Tax Relief Reconciliation
Act of 2001, Public Law 107-16 (115 Stat. 38).* * *
0
Par. 2. Section 1.411(d)-3 is revised to read as follows:
Sec. 1.411(d)-3 Section 411(d)(6) protected benefits.
(a) Protection of accrued benefits--(1) General rule. Under section
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a
part of such plan is not a qualified trust) if a plan amendment
decreases the accrued benefit of any plan participant, except as
provided in section 412(c)(8), section 4281 of the Employee Retirement
Income Security Act of 1974 as amended (ERISA), or other applicable law
(e.g., section 1541(a)(2) of the Taxpayer Relief Act of 1997, Public
Law 105-34 (111 Stat. 788, 1085)). For purposes of this section, a plan
amendment includes any changes to the terms of a plan, including
changes resulting from a merger, consolidation, or transfer (as defined
in section 414(l)) or a plan termination. The protection of section
411(d)(6) applies to a participant's entire accrued benefit under the
plan as of the applicable amendment date, without regard to whether the
entire accrued benefit was accrued before a participant's severance
from employment or whether any portion was the result of an increase in
the accrued benefit of the participant pursuant to a plan amendment
adopted after the participant's severance from employment.
(2) Plan provisions taken into account--(i) Direct or indirect
reduction in accrued benefit. For purposes of determining whether a
participant's accrued benefit is decreased, all of the amendments to
the provisions of a plan affecting, directly or indirectly, the
computation of accrued benefits are taken into account. Plan provisions
indirectly affecting the computation of accrued benefits include, for
example, provisions relating to years of service and compensation.
(ii) Amendments effective with the same applicable amendment date.
In determining whether a reduction in a participant's accrued benefit
has occurred, all plan amendments with the same applicable amendment
date are treated as one amendment. Thus, if two amendments have the
same applicable amendment date and one amendment, standing alone,
increases participants' accrued benefits and the other amendment,
standing alone, decreases participants' accrued benefits, the
amendments are treated as one amendment and will only violate section
411(d)(6) if, for any participant, the net effect is to decrease
participants' accrued benefit as of that applicable amendment date.
(iii) Multiple amendments--(A) General rule. A plan amendment
violates the requirements of section 411(d)(6) if it is one of a series
of plan amendments that, when taken together, have the effect of
reducing or eliminating a section 411(d)(6) protected benefit in a
manner that would be prohibited by section 411(d)(6) if accomplished
through a single amendment.
(B) Determination of the time period for combining plan amendments.
For purposes of applying the rule in paragraph (a)(2)(iii)(A) of this
section, generally only plan amendments adopted within a 3-year period
are taken into account.
(3) Application of section 411(a) nonforfeitability provisions with
respect to section 411(d)(6) protected benefits. [Reserved].
(4) Examples. The following examples illustrate the application of
this paragraph (a):
Example 1. (i) Facts. Plan A provides an annual benefit of 2% of
career average pay times years of service commencing at normal
retirement age (age 65). Plan A is amended on November 1, 2006,
effective as of January 1, 2007, to provide for an annual benefit of
1.3% of final pay times years of service, with final pay computed as
the average of a participant's highest 3 consecutive years of
compensation. As of January 1, 2007, Participant M has 16 years of
service, M's career average pay is $37,500, and the average of M's
highest 3 consecutive years of compensation is $67,308. Thus,
Participant M's accrued benefit as of the applicable amendment date
is increased from $12,000 per year at normal retirement age (2%
times $37,500 times 16 years of service) to $14,000 per year at
normal retirement age (1.3% times $67,308 times 16 years of
service). As of January 1, 2007, Participant N has 6 years of
service, N's career average pay is $50,000, and the average of N's
highest 3 consecutive years of compensation is $51,282. Participant
N's accrued benefit as of the applicable amendment date is decreased
from $6,000 per year at normal retirement age (2% times $50,000
times 6 years of service) to $4,000 per year at normal retirement
age (1.3% times $51,282 times 6 years of service).
(ii) Conclusion. While the plan amendment increases the accrued
benefit of Participant M, the plan amendment fails to satisfy the
requirements of section 411(d)(6)(A) because the amendment decreases
the accrued benefit of Participant N below the level of the accrued
benefit of Participant N immediately before the applicable amendment
date.
Example 2 (i) Facts. The facts are the same as Example 1, except
that Plan A includes a provision under which Participant N's accrued
benefit cannot be less than what it was immediately before the
applicable amendment date (so that Participant N's accrued benefit
could not be less than $6,000 per year at normal retirement age).
(ii) Conclusion. The amendment does not violate the requirements
of section 411(d)(6)(A) with respect to Participant M (whose accrued
benefit has been increased) or with respect to Participant N
(although Participant N would not accrue any benefits until the
point in time at which the new formula amount would exceed the
amount payable under the minimum provision, approximately 3 years
after the amendment becomes effective).
(b) Protection of section 411(d)(6)(B) protected benefits--(1)
General rule--(i) Prohibition against plan amendments eliminating or
reducing section 411(d)(6)(B) protected benefits. Except as provided in
this section, a plan is treated as decreasing an accrued benefit if it
is amended to eliminate or reduce a section 411(d)(6)(B) protected
benefit as defined in paragraph (g)(15) of this section. This paragraph
(b)(1) applies to participants who satisfy (either before or after the
plan amendment) the preamendment conditions for a section 411(d)(6)(B)
protected benefit.
(ii) Contingent benefits. The rules of paragraph (b)(1)(i) of this
section apply to participants who satisfy (either before or after the
plan amendment) the preamendment conditions for the section
411(d)(6)(B) protected benefit even if the condition on which the
eligibility for the section 411(d)(6)(B) protected benefit depends is
an unpredictable contingent event (e.g., a plant shutdown).
(iii) Application of general rules in paragraph (a) of this section
to section 411(d)(6)(B) protected benefits. For purposes of determining
whether a participant's section 411(d)(6)(B) protected benefit is
eliminated or reduced, the rules of paragraph (a) of this section apply
to section 411(d)(6)(B) protected benefits in the same manner as they
apply to accrued benefits described in section 411(d)(6)(A). As an
example of the application of paragraph (a)(2)(ii) of this section to
section 411(d)(6)(B) protected benefits, if there are two amendments
with the same applicable amendment date and one amendment increases
accrued benefits and the other amendment decreases the early retirement
factors that are used to determine the early retirement annuity, the
amendments are treated as one amendment and only violate section
411(d)(6) if, after the two amendments,
[[Page 47117]]
the net dollar amount of any early retirement annuity with respect to
the accrued benefit of any participant as of the applicable amendment
date is lower than it would have been without the two amendments. As an
example of the application of paragraph (a)(2)(iii) of this section to
section 411(d)(6)(B) protected benefits, a series of amendments made
within a 3-year period that, when taken together, have the effect of
reducing or eliminating early retirement benefits or retirement-type
subsidies in a manner that adversely affects the rights of any
participant in a more than de minimis manner violates section
411(d)(6)(B) even if each amendment would be permissible pursuant to
paragraphs (c), (d), or (f) of this section.
(2) Permissible elimination of section 411(d)(6)(B) protected
benefits--(i) In general. A plan is permitted to be amended to
eliminate a section 411(d)(6)(B) protected benefit if the elimination
is in accordance with this section or Sec. 1.411(d)-4.
(ii) Increases in payment amounts do not eliminate an optional form
of benefit. An amendment is not treated as eliminating an optional form
of benefit or eliminating or reducing an early retirement benefit or
retirement-type subsidy under the plan, if, effective after the plan
amendment, there is another optional form of benefit available to the
participant under the plan that is of inherently equal or greater value
(within the meaning of Sec. 1.401(a)(4)-4(d)(4)(i)(A)). Thus, for
example, a change in the method of calculating a joint and survivor
annuity from using a 90% adjustment factor on account of the
survivorship payment at particular ages for a participant and a spouse
to using a 91% adjustment factor at the same ages is not treated as an
elimination of an optional form of benefit. Similarly, a plan that
offers a subsidized qualified joint and survivor annuity option for
married participants under which the amount payable during the
participant's lifetime is not less than the amount payable under the
plan's straight life annuity is permitted to be amended to eliminate
the straight life annuity option for married participants.
(3) Permissible elimination of benefits that are not section
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does
not provide protection for benefits that are ancillary benefits, other
rights and features, or any other benefits that are not described in
section 411(d)(6). See Sec. 1.411(d)-4, Q&A-1(d). However, a plan may
not be amended to recharacterize a retirement-type benefit as an
ancillary benefit. Thus, for example, a plan amendment to
recharacterize any portion of an early retirement subsidy as a social
security supplement that is an ancillary benefit violates section
411(d)(6).
(ii) No protection for future benefit accruals. Section 411(d)(6)
only protects benefits that accrue before the applicable amendment
date. Thus, a plan is permitted to be amended to eliminate or reduce an
early retirement benefit, a retirement-type subsidy, or an optional
form of benefit with respect to benefits that accrue after the
applicable amendment date without violating section 411(d)(6). However,
section 4980F(e) of the Internal Revenue Code and section 204(h) of
ERISA require notice of an amendment to an applicable pension plan that
either provides for a significant reduction in the rate of future
benefit accrual or that eliminates or significantly reduces an early
retirement benefit or a retirement-type subsidy. See Sec. 54.4980F-1
of this chapter generally, and see Sec. 54.4980F-1, Q&A-7(b) and Q&A-
8(c) of this chapter, with respect to the circumstances under which
such notice is required for a reduction in an early retirement benefit
or retirement-type subsidy.
(4) Examples. The following examples illustrate the application of
this paragraph (b):
Example 1. (i) Facts involving amendments to an early retirement
subsidy. Plan A provides an annual benefit of 2% of career average
pay times years of service commencing at normal retirement age (age
65). Plan A is amended on November 1, 2006, effective as of January
1, 2007, to provide for an annual benefit of 1.3% of final pay times
years of service, with final pay computed as the average of a
participant's highest 3 consecutive years of compensation.
Participant M is age 50, M has 16 years of service, M's career
average pay is $37,500, and the average of M's highest 3 consecutive
years of compensation is $67,308. Thus, M's accrued benefit as of
the effective date of the amendment is increased from $12,000 per
year at normal retirement age (2% times $37,500 times 16 years of
service) to $14,000 per year at normal retirement age (1.3% times
$67,308 times 16 years of service). (These facts are similar to the
facts in Example 1 in paragraph (a)(4) of this section.) Before the
amendment, Plan A permitted a former employee to commence
distribution of benefits as early as age 55 and, for a participant
with at least 15 years of service, actuarially reduced the amount
payable in the form of a straight life annuity commencing before
normal retirement age by 3% per year from age 60 to age 65 and by 7%
per year from age 55 through age 59. Thus, before the amendment, the
amount of M's early retirement benefit that would be payable for
commencement at age 55 was $6,000 per year ($12,000 per year minus
3% for 5 years and minus 7% for 5 more years). The amendment also
alters the actuarial reduction factor so that, for a participant
with at least 15 years of service, the amount payable in a straight
life annuity commencing before normal retirement age is reduced by
6% per year. As a result, the amount of M's early retirement benefit
at age 55 becomes $5,600 per year after the amendment ($14,000 minus
6% for 10 years).
(ii) Conclusion. The straight life annuity payable under Plan A
at age 55 is an optional form of benefit that includes an early
retirement subsidy. The plan amendment fails to satisfy the
requirements of section 411(d)(6)(B) because the amendment decreases
the optional form of benefit payable to Participant M below the
level that Participant M was entitled to receive immediately before
the effective date of the amendment. If instead Plan A had included
a provision under which M's straight life annuity payable at any age
could be not be less than what it was immediately before the
amendment (so that M's straight life annuity payable at age 55 could
not be less than $6,000 per year), then the amendment would not fail
to satisfy the requirements of section 411(d)(6)(B) with respect to
M's straight life annuity payable at age 55 (although the straight
life annuity payable to M at age 55 would not increase until the
point in time at which the new formula amount with the new actuarial
reduction factors exceeds the amount payable under the minimum
provision, approximately 14 months after the amendment becomes
effective).
Example 2. (i) Facts involving plant shutdown benefits. Plan B
permits participants who have a severance from employment before
normal retirement age (age 65) to commence distributions at any time
after age 55 with the amount payable to be actuarially reduced using
reasonable actuarial assumptions regarding interest and mortality
specified in the plan, but provides that the annual reduction for
any participant who has at least 20 years of service and who has a
severance from employment after age 55 is only 3% per year (which is
a smaller reduction than would apply under reasonable actuarial
reductions). Plan B also provides 2 plant shutdown benefits to
participants who have a severance of employment as a result of a
plant shutdown. First, the favorable 3% per year actuarial reduction
applies for commencement of benefits after age 55 and before age 65
for any participant who has at least 10 years of service and who has
a severance from employment as a result of a plant shutdown. Second,
all participants who have at least 20 years of service and who have
a severance from employment after age 55 (and before normal
retirement age at age 65) as a result of a plant shutdown will
receive supplemental payments. Under the supplemental payments, an
additional amount equal to the participant's estimated old-age
insurance benefit under the Social Security Act is payable until age
65. The supplemental payments are not a QSUPP, as defined in Sec.
1.401(a)(4)-12, because the plan's terms do not state that the
supplement is treated as an early retirement benefit that is
protected under section 411(d)(6).
(ii) Conclusion with respect to plant shutdown benefits. The
benefits payable with the 3% annual reduction are retirement-type
[[Page 47118]]
benefits. The excess of the actuarial present value of the early
retirement benefit using the 3% annual reduction over the actuarial
present value of the normal retirement benefit is a retirement-type
subsidy and the right to receive payments of the benefit at age 55
is an early retirement benefit. These conclusions apply not only
with respect to the rights that apply to participants who have at
least 20 years of service, but also to participants with at least 10
years of service who have a severance from employment as a result of
a plant shutdown. Thus, the right to receive benefits based on a 3%
annual reduction for participants with at least 10 years of service
at the time of a plant shutdown is an early retirement benefit that
provides a retirement-type subsidy and is a section 411(d)(6)(B)
protected benefit (even though no plant shutdown has occurred).
Therefore, a plan amendment cannot eliminate this benefit with
respect to benefits accrued before the applicable amendment date,
even before the occurrence of the plant shutdown. Because the plan
provides that the supplemental payments cannot exceed the OASDI
benefit under the Social Security Act, the supplemental payments
constitute a social security supplement (but not a QSUPP as defined
in Sec. 1.401(a)(4)-12), which is an ancillary benefit that is not
a section 411(d)(6)(B) protected benefit and accordingly is not
taken into account in determining whether a prohibited reduction has
occurred.
(c) Permissible elimination of optional forms of benefit that are
redundant--(1) General rule. Except as otherwise provided in paragraph
(c)(5) of this section, a plan is permitted to be amended to eliminate
an optional form of benefit for a participant with respect to benefits
accrued before the applicable amendment date if--
(i) The optional form of benefit is redundant with respect to a
retained optional form of benefit, within the meaning of paragraph
(c)(2) of this section;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity commencement date that is
earlier than the number of days in the maximum QJSA explanation period
(as defined in paragraph (g)(9) of this section) after the date the
amendment is adopted; and
(iii) The requirements of paragraph (e) of this section are
satisfied in any case in which either:
(A) The retained optional form of benefit for the participant does
not commence on the same annuity commencement date as the optional form
of benefit that is being eliminated; or
(B) As of the date the amendment is adopted, the actuarial present
value of the retained optional form of benefit for the participant is
less than the actuarial present value of the optional form of benefit
that is being eliminated.
(2) Similar types of optional forms of benefit are redundant--(i)
General rule. An optional form of benefit is redundant with respect to
a retained optional form of benefit if, after the amendment becomes
applicable--
(A) There is a retained optional form of benefit available to the
participant that is in the same family of optional forms of benefit,
within the meaning of paragraphs (c)(3) and (4) of this section, as the
optional form of benefit being eliminated; and
(B) The participant's rights with respect to the retained optional
form of benefit are not subject to materially greater restrictions
(such as conditions relating to eligibility, restrictions on a
participant's ability to designate the person who is entitled to
benefits following the participant's death, or restrictions on a
participant's right to receive an in-kind distribution) than applied to
the optional form of benefit being eliminated.
(ii) Special rule for core options. An optional form of benefit
that is a core option as defined in paragraph (g)(5) of this section
may not be eliminated as a redundant benefit under the rules of this
paragraph (c) unless the retained optional form of benefit and the
eliminated core option are identical except for differences described
in paragraph (c)(3)(ii) of this section. Thus, for example, a
particular 10-year term certain and life annuity may not be eliminated
by plan amendment unless the retained optional form of benefit is
another 10-year term certain and life annuity.
(3) Family of optional forms of benefit--(i) In general. Paragraph
(c)(4) of this section describes certain families of optional forms of
benefits. Not every optional form of benefit that is offered under a
plan necessarily fits within a family of optional forms of benefit as
described in paragraph (c)(4) of this section. Each optional form of
benefit that is not included in any particular family of optional forms
of benefit listed in paragraph (c)(4) of this section is in a separate
family of optional forms of benefit with other optional forms of
benefit that would be identical to that optional form of benefit but
for differences that are disregarded under paragraph (c)(3)(ii) of this
section.
(ii) Certain differences among optional forms of benefit--(A)
Differences in actuarial factors and annuity starting dates. The
determination of whether two optional forms of benefit are within a
family of optional forms of benefit is made without regard to actuarial
factors or annuity starting dates. Thus, any optional forms of benefit
that are part of the same generalized optional form (within the meaning
of paragraph (g)(8) of this section) are in the same family of optional
forms of benefit. For example, if a plan has a single-sum distribution
option for some participants that is calculated using a 5% interest
rate and a specific mortality table (but no less than the minimum
present value as determined under section 417(e)) and another single-
sum distribution option for other participants that is calculated using
the applicable interest rate as defined in section 417(e)(3)(A)(ii)(II)
and the applicable mortality table as defined in section
417(e)(3)(A)(ii)(I), both single-sum distribution options are part of
the same generalized optional form and thus in the same family of
optional forms of benefit under the rules of paragraph (c)(3)(i) of
this section. However, differences in actuarial factors and annuity
starting dates are taken into account for purposes of the requirements
in paragraph (e)(3) of this section.
(B) Differences in pop-up provisions and cash refund features for
joint and contingent options. The determination of whether two optional
forms of benefit are within a family of optional forms of benefit
relating to joint and contingent families (as described in paragraph
(c)(4)(i) and (ii) of this section) is made without regard to the
following features--
(1) Pop-up provisions (under which payments increase upon the death
of the beneficiary or another event that causes the beneficiary not to
be entitled to a survivor annuity);
(2) Cash refund features (under which payment is provided upon the
death of the last annuitant in an amount that is not greater than the
excess of the present value of the annuity at the annuity starting date
over the total of payments before the death of the last annuitant); or
(3) Term-certain provisions for optional forms of benefit within a
joint and contingent family.
(C) Differences in social security leveling features, refund of
employee contributions features, and retroactive annuity starting date
features. The determination of whether 2 optional forms of benefit are
within a family of optional forms of benefit is made without regard to
social security leveling features, refund of employee contributions
features, or retroactive annuity starting date features. But see
paragraph (c)(5) of this section for special rules relating to social
security leveling, refund of employee contributions, and retroactive
annuity
[[Page 47119]]
starting date features in optional forms of benefit.
(4) List of families. The following are families of optional forms
of benefit for purposes of this paragraph (c):
(i) Joint and contingent options with continuation percentages of
50% to 100%. An optional form of benefit is within the 50% or more
joint and contingent family if it provides a life annuity to the
participant and a survivor annuity to an individual that is at least
50% and no more than 100% of the annuity payable during the joint lives
of the participant and the participant's survivor.
(ii) Joint and contingent options with continuation percentages
less than 50%. An optional form of benefit is within the less than 50%
joint and contingent family if it provides a life annuity to the
participant and a survivor annuity to an individual that is less than
50% of the annuity payable during the joint lives of the participant
and the participant's survivor.
(iii) Term certain and life annuity options with a term of 10 years
or less. An optional form of benefit is within the 10 years or less
term certain and life family if it is a life annuity with a guarantee
that payments will continue to the participant's beneficiary for the
remainder of a fixed period that is 10 years or less if the participant
dies before the end of the fixed period.
(iv) Term certain and life annuity options with a term longer than
10 years. An optional form of benefit is within the longer than 10
years term certain and life family if it is a life annuity with a
guarantee that payments will continue to the participant's beneficiary
for the remainder of a fixed period that is in excess of 10 years if
the participant dies before the end of the fixed period.
(v) Level installment payment options over a period of 10 years or
less. An optional form of benefit is within the 10 years or less
installment family if it provides for substantially level payments to
the participant for a fixed period of at least 2 years and not in
excess of 10 years with a guarantee that payments will continue to the
participant's beneficiary for the remainder of the fixed period if the
participant dies before the end of the fixed period.
(vi) Level installment payment options over a period of more than
10 years. An optional form of benefit is within the more than 10 years
installment family if it provides for substantially level payments to
the participant for a fixed period that is in excess of 10 years with a
guarantee that payments will continue to the participant's beneficiary
for the remainder of the fixed period if the participant dies before
the end of the fixed period.
(5) Special rules for certain features included in optional forms
of benefit. For purposes of applying this paragraph (c), to the extent
an optional form of benefit that is being eliminated includes either a
social security leveling feature or a refund of employee contributions
feature, the retained optional form of benefit must also include that
feature, and, to the extent that the optional form of benefit that is
being eliminated does not include a social security leveling feature or
a refund of employee contributions feature, the retained optional form
of benefit must not include that feature. For purposes of applying this
paragraph (c), to the extent an optional form of benefit that is being
eliminated does not include a retroactive annuity starting date
feature, the retained optional form of benefit must not include the
feature.
(d) Permissible elimination of noncore optional forms of benefit
where core options are offered--(1) General rule. Except as otherwise
provided in paragraph (d)(2) of this section, a plan is permitted to be
amended to eliminate an optional form of benefit for a participant with
respect to benefits accrued before the applicable amendment date if--
(i) After the amendment becomes applicable, each of the core
options described in paragraph (g)(5) of this section is available to
the participant with respect to benefits accrued before and after the
amendment;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity commencement date that is
earlier than 4 years after the date the amendment is adopted; and
(iii) The requirements of paragraph (e) of this section are
satisfied in any case in which either:
(A) One or more of the core options are not available commencing on
the same annuity commencement date as the optional form of benefit that
is being eliminated; or
(B) As of the date the amendment is adopted, the actuarial present
value of the benefit payable under any core option with the same
annuity commencement date is less than the actuarial present value of
benefits payable under the optional form of benefit that is being
eliminated.
(2) Special rules--(i) Treatment of certain features included in
optional forms of benefit. For purposes of applying this paragraph (d),
to the extent an optional form of benefit that is being eliminated
includes either a social security leveling feature or a refund of
employee contributions feature, at least one of the core options must
also be available with that feature, and, to the extent that the
optional form of benefit that is being eliminated does not include a
social security leveling feature or a refund of employee contributions
feature, each of the core options must be available without that
feature. For purposes of applying this paragraph (d), to the extent an
optional form of benefit that is being eliminated does not include a
retroactive annuity starting date feature, each of the core options
must be available without that feature.
(ii) Eliminating the most valuable option for a participant with a
short life expectancy. For purposes of applying this paragraph (d), if
the most valuable option for a participant with a short life expectancy
(as defined in paragraph (g)(5)(iii) of this section) is eliminated,
then, after the plan amendment, an optional form of benefit that is
identical, except for differences described in paragraph (c)(3)(ii) of
this section, must be available to the participant. However, such a
plan amendment cannot eliminate a refund of employee contributions
feature from the most valuable option for a participant with a short
life expectancy.
(iii) Single-sum distributions. A plan amendment is not treated as
satisfying this paragraph (d) if it eliminates an optional form of
benefit that includes a single-sum distribution that applies with
respect to at least 25% of the participant's accrued benefit as of the
date the optional form of benefit is eliminated. But see Sec.
1.411(d)-4, Q&A-2(b)(2)(v), relating to involuntary single-sum
distributions for benefits with a present value not in excess of the
maximum dollar amount in section 411(a)(11).
(iv) Application of multiple amendment rule to core option rule.
Notwithstanding paragraph (a)(2)(iii)(B) of this section, if a plan is
amended to eliminate an optional form of benefit using the core options
rule in this paragraph (d), then the employer must wait 3 years after
the first annuity commencement date for which the optional form of
benefit is no longer available before making any changes to the core
options offered under the plan (other than a change that is not treated
as an elimination under paragraph (b)(2)(ii) of this section). Thus,
for example, if a plan amendment eliminates an optional form of benefit
for a participant using the core options rule under this paragraph (d),
with an adoption date of January 1, 2006 and an
[[Page 47120]]
effective date of January 1, 2010, the plan would not be permitted to
be amended to make changes to the core options offered under the plan
(and the core options would continue to apply with respect to the
participant's accrued benefit) until January 1, 2013.
(v) Special rule for joint and contingent annuity core option. If a
plan offers joint and contingent annuities under which a participant is
entitled to a life annuity with a survivor annuity for the individual
designated by the participant (including a non-spousal contingent
annuitant) with continuation percentage options of both 50% and 100%
(after adjustments permitted under paragraph (g)(5)(ii) of this section
to comply with applicable law), the plan is permitted to treat both of
these options as core options for purposes of this paragraph (d), in
lieu of a 75% joint and contingent annuity. Thus, such a plan is
permitted to use the rules of this paragraph (d) if the plan satisfies
all of the requirements of this paragraph (d) (taking into account the
modification rule in paragraph (g)(5)(ii) of this section) other than
the requirement of offering a 75% joint and contingent annuity as
described in paragraph (g)(5)(i)(B) of this section.
(e) Permissible plan amendments under paragraphs (c) and (d)
eliminating or reducing section 411(d)(6)(B) protected benefits that
are burdensome and of de minimis value--(1) In general. A plan
amendment that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of
this section, is required to satisfy this paragraph (e) satisfies this
paragraph (e) if--
(i) The amendment eliminates section 411(d)(6)(B) protected
benefits that create significant burdens or complexities for the plan
and its participants as described in paragraph (e)(2) of this section;
and
(ii) The amendment does not adversely affect the rights of any
participant in a more than de minimis manner as described in paragraph
(e)(3) of this section.
(2) Plan amendments eliminating section 411(d)(6)(B) protected
benefits that create significant burdens and complexities--(i) Facts
and circumstances analysis--(A) In general. The determination of
whether a plan amendment eliminates section 411(d)(6)(B) protected
benefits that create significant burdens or complexities for the plan
and its participants is based on facts and circumstances.
(B) Early retirement benefits. In the case of an amendment that
eliminates an early retirement benefit, relevant factors include
whether the annuity starting dates under the plan considered in the
aggregate are burdensome or complex (e.g., the number of categories of
early retirement benefits, whether the terms and conditions applicable
to the plan's early retirement benefits are difficult to summarize in a
manner that is concise and readily understandable to the average plan
participant, and whether those different early retirement benefits were
added to the plan as a result of a plan merger, transfer, or
consolidation), and whether the effect of the plan amendment is to
reduce the number of categories of early retirement benefits.
(C) Retirement-type subsidies and actuarial factors. In the case of
a plan amendment eliminating a retirement-type subsidy or changing the
actuarial factors used to determine optional forms of benefit, relevant
factors include whether the actuarial factors used for determining
optional forms of benefit available under the plan considered in the
aggregate are burdensome or complex (e.g., the number of different
retirement-type subsidies and other actuarial factors available under
the plan, whether the terms and conditions applicable to the plan's
retirement-type subsidies are difficult to summarize in a manner that
is concise and readily understandable to the average plan participant,
whether the plan is eliminating one or more generalized optional forms,
whether the plan is replacing a complex optional form of benefit that
contains a retirement-type subsidy with a simpler form, and whether the
different retirement-type subsidies and other actuarial factors were
added to the plan as a result of a plan merger, transfer, or
consolidation), and whether the effect of the plan amendment is to
reduce the number of categories of retirement-type subsidies or other
actuarial factors.
(D) Example. The following example illustrates the application of
this paragraph (e)(2)(i):
Example. (i) Facts. Plan A is a defined benefit plan under which
employees may select a distribution in the form of a straight life
annuity, a straight life annuity with cost-of-living increases, a
50% qualified joint and survivor annuity with a pop-up provision, or
a 10-year term certain and life annuity. On January 15, 2007, Plan A
is amended, effective June 1, 2007, to eliminate the 50% qualified
joint and survivor annuity with a pop-up provision as described in
paragraph (c)(3)(ii)(B)(1) of this section and replace it with a 50%
qualified joint and survivor annuity without the pop-up provision
(and using the same actuarial factor).
(ii) Conclusion. Plan A satisfies the requirements of paragraph
(e)(2)(i)(B) of this section because, based on the relevant facts
and circumstances (e.g., the amendment replaces a complex optional
form of benefit with a simpler form), the amendment eliminates
section 411(d)(6)(B) protected benefits that create significant
burdens and complexities. Accordingly, the plan amendment is
permitted to eliminate the pop-up provision, provided that the plan
amendment satisfies all the other applicable requirements in
paragraph (c) or (d) of this section. For example, the plan
amendment must not eliminate the most valuable option for a
participant with a short life expectancy (as defined in paragraph
(g)(5)(iii) of this section) and the plan amendment must not
adversely affect the rights of any participant in a more than de
minimis manner, taking into account the actuarial factors for the
joint and survivor annuity with the pop-up provision and the joint
and survivor annuity without the pop-up provision, as described in
paragraph (e)(3) of this section.
(ii) Presumptions for certain amendments--(A) Presumption for
amendments eliminating certain annuity starting dates. If the annuity
starting dates under the plan considered in the aggregate are
burdensome or complex, then elimination of any one of the annuity
starting dates is presumed to eliminate section 411(d)(6)(B) protected
benefits that create significant burdens or complexities for the plan
and its participants. However, if the effect of a plan amendment with
respect to a set of optional forms of benefit is merely to substitute
one set of annuity starting dates for another set of annuity starting
dates, without any reduction in the number of different annuity
starting dates, then the plan amendment does not satisfy the
requirements of this paragraph (e)(2).
(B) Presumption for amendments changing certain actuarial factors.
If the actuarial factors used for determining benefit distributions
available under a generalized optional form considered in the aggregate
are burdensome or complex, then replacing some of the actuarial factors
for the generalized optional form is presumed to eliminate section
411(d)(6)(B) protected benefits that create significant burdens or
complexities for the plan and its participants. However, if the effect
is merely to substitute one set of actuarial factors for another set of
actuarial factors, without any reduction in the number of different
actuarial factors or the complexity of those factors, then the plan
amendment does not satisfy the requirements of this paragraph (e)(2)
unless the change of actuarial factors is merely to replace one or more
of the plan's actuarial factors for determining optional forms of
benefit with new actuarial factors that are more accurate (e.g.,
reflecting more recent mortality experience or more recent market rates
of interest).
[[Page 47121]]
(iii) Restrictions against creating burdens or complexities. See
paragraphs (a)(2)(iii) and (b)(1)(iii) of this section for general
rules applicable to multiple amendments. In accordance with these
rules, a plan amendment does not eliminate a section 411(d)(6)(B)
protected benefit that creates burdens and complexities for a plan and
its participants if, less than 3 years earlier, a plan was previously
amended to add another retirement-type subsidy in order to facilitate
the elimination of the original retirement-type subsidy, even if the
elimination of the other subsidy would not adversely affect the rights
of any plan participant in a more than de minimis manner as provided in
paragraph (e)(3) of this section.
(3) Elimination of early retirement benefits or retirement-type
subsidies that are de minimis--(i) Rules for retained optional forms of
benefit under paragraph (c) of this section. For purposes of paragraph
(c) of this section, the elimination of an optional form of benefit
does not adversely affect the rights of any participant in a more than
de minimis manner if--
(A) The retained optional form of benefit described in paragraph
(c) of this section has substantially the same annuity commencement
date as the optional form of benefit that is being eliminated, as
described in paragraph (e)(4) of this section; and
(B) Either the actuarial present value of the benefit payable in
the optional form of benefit that is being eliminated does not exceed
the actuarial present value of the benefit payable in the retained
optional form of benefit by more than a de minimis amount, as described
in paragraph (e)(5) of this section, or the amendment satisfies the
requirements of paragraph (e)(6) of this section relating to a delayed
effective date.
(ii) Rules for core options under paragraph (d) of this section.
For purposes of paragraph (d) of this section, the elimination of an
optional form of benefit does not adversely affect the rights of any
participant in a more than de minimis manner if, with respect to each
of the core options--
(A) The core option is available after the amendment with
substantially the same annuity commencement date as the optional form
of benefit that is being eliminated, as described in paragraph (e)(4)
of this section; and
(B) Either the actuarial present value of the benefit payable in
the optional form of benefit that is being eliminated does not exceed
the actuarial present value of the benefit payable under the core
option by more than a de minimis amount, as described in paragraph
(e)(5) of this section, or the amendment satisfies the requirements of
paragraph (e)(6) of this section.
(4) Definition of substantially the same annuity starting dates.
For purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this
section, annuity starting dates are considered substantially the same
if they are within 6 months of each other.
(5) Definition of de minimis difference in actuarial present value.
For purposes of applying paragraph (e)(3)(i)(B) and (ii)(B) of this
section, a difference in actuarial present value between the optional
form of benefit being eliminated and the retained optional form of
benefit or core option is not more than a de minimis amount if, as of
the date the amendment is adopted, the difference between the actuarial
present value of the eliminated optional form of benefit and the
actuarial present value of the retained optional form of benefit or
core option is not more than the greater of--
(i) 2% of the present value of the retirement-type subsidy (if any)
under the eliminated optional form of benefit prior to the amendment;
or
(ii) 1% of the greater of the participant's compensation (as
defined in section 415(c)(3)) for the prior plan year or the
participant's average compensation for his or her high 3 years (within
the meaning of section 415(b)(1)(B) and (b)(3)).
(6) Delayed effective date--(i) General rule. For purposes of
applying paragraph (e)(3)(i)(B) and (ii)(B) of this section, an
amendment that eliminates an optional form of benefit satisfies the
requirements of this paragraph (e)(6) if the elimination of the
optional form of benefit is not applicable to any annuity commencement
date before the end of the expected transition period for that optional
form of benefit.
(ii) Determination of expected transition period--(A) General rule.
The expected transition period for a plan amendment eliminating an
optional form of benefit is the period that begins when the amendment
is adopted and ends when it is reasonable to expect, with respect to a
section 411(d)(6)(B) protected benefit (i.e., not taking into account
benefits that accrue in the future), that the form being eliminated
would be subsumed by another optional form of benefit after taking into
account expected future benefit accruals.
(B) Determination of expected transition period using conservative
actuarial assumptions. The expected transition period for a plan
amendment eliminating an optional form of benefit must be determined in
accordance with actuarial assumptions that are reasonable at the time
of the amendment and that are conservative (i.e., reasonable actuarial
assumptions that are likely to result in the longest period of time
until the eliminated optional form of benefit would be subsumed). For
this purpose, actuarial assumptions are not treated as conservative
unless they include assumptions that a participant's compensation will
not increase and that future benefit accruals will not exceed accruals
in recent periods.
(C) Effect of subsequent amendments reducing future benefit
accruals on the expected transition period. If, during the expected
transition period for a plan amendment eliminating an optional form of
benefit, the plan is subsequently amended to reduce the rate of future
benefit accrual (or otherwise to lengthen the expected transition
period), thus that subsequent plan amendment must provide that the
elimination of the optional form of benefit is void or must provide for
the effective date for elimination of the optional form of benefit to
be further extended to a new expected transition period that satisfies
this paragraph (e)(6) taking into account the subsequent amendment.
(iii) Applicability of the delayed effective date rule limited to
employees who continue to accrue benefits through the end of expected
transition period. An amendment eliminating an optional form of benefit
under this paragraph (e)(6) must be limited to participants who
continue to accrue benefits under the plan through the end of the
expected transition period. Thus, for example, the plan amendment may
not apply to any participant who has a severance from employment during
the expected transition period.
(iv) Special rule for section 204(h) notice. See Sec. 54.4980F-
1(b), Q&A-8(c) of this chapter for a special rule relating to this
paragraph (e)(6).
(f) Utilization test. [Reserved]
(g) Definitions and use of terms. The definitions in this paragraph
(g) apply for purposes of this section.
(1) Actuarial present value. The term actuarial present value means
actuarial present value (within the meaning of Sec. 1.401(a)(4)-12)
determined using reasonable actuarial assumptions.
(2) Ancillary benefit. The term ancillary benefit means--
(i) A social security supplement under a defined benefit plan
(other than a QSUPP as defined in Sec. 1.401(a)(4)-12);
(ii) A benefit payable under a defined benefit plan in the event of
disability (to the extent that the benefit exceeds the benefit
otherwise payable), but only if the total benefit payable in the event
of disability does not exceed the maximum
[[Page 47122]]
qualified disability benefit, as defined in section 411(a)(9);
(iii) A life insurance benefit;
(iv) A medical benefit described in section 401(h);
(v) A death benefit under a defined benefit plan other than a death
benefit which is a part of an optional form of benefit; or
(vi) A plant shutdown benefit or other similar benefit in a defined
benefit plan that does not continue past retirement age and does not
affect the payment of the accrued benefit, but only to the extent that
such plant shutdown benefit, or other similar benefit (if any), is
permitted in a qualified pension plan (see Sec. 1.401-1(b)(1)(i)).
(3) Annuity commencement date. The term annuity commencement date
generally means the annuity starting date, except that, in the case of
a retroactive annuity starting date under section 417(a)(7), annuity
commencement date means the date of the first payment of benefits
pursuant to a participant election of a retroactive annuity starting
date, as defined in Sec. 1.417(e)-1(b)(3)(iv).
(4) Applicable amendment date. The term applicable amendment date,
with respect to a plan amendment, means the later of the effective date
of the amendment or the date the amendment is adopted.
(5) Core options--(i) General rule. With respect to a plan, the
term core options means--
(A) A straight life annuity generalized optional form under which
the participant is entitled to a level life annuity with no benefit
payable after the participant's death;
(B) A 75% joint and contingent annuity generalized optional form
under which the participant is entitled to a life annuity with a
survivor annuity for any individual designated by the participant
(including a non-spousal contingent annuitant) that is 75% of the
amount payable during the participant's life (but see paragraph
(d)(2)(v) of this section for a special rule relating to the joint and
contingent annuity core option);
(C) A 10-year term certain and life annuity generalized optional
form under which the participant is entitled to a life annuity with a
guarantee that payments will continue to any person designated by the
participant for the remainder of a fixed period of 10 years if the
participant dies before the end of the 10-year period; and
(D) The most valuable option for a participant with a short life
expectancy (as defined in paragraph (g)(5)(iii) of this section).
(ii) Modification of core options to satisfy other requirements. An
annuity does not fail to be a core option (e.g., a joint and contingent
annuity described in paragraph (g)(5)(i)(B) of this section or a 10-
year term certain and life annuity described in paragraph (g)(5)(i)(C)
of this section) as a result of differences to comply with applicable
law, such as limitations on death benefits to comply with the
incidental benefit requirement of Sec. 1.401-1(b)(1)(i) or on account
of the spousal consent rules of section 417.
(iii) Most valuable option for a participant with a short life
expectancy--(A) General definition. Except as provided in paragraph
(g)(5)(iii)(B) of this section, most valuable option for a participant
with a short life expectancy means, for an annuity starting date, the
optional form of benefit that is reasonably expected to result in
payments that have the largest actuarial present value in the case of a
participant who dies shortly after the annuity starting date, taking
into account both payments due to the participant prior to the
participant's death and any payments due after the participant's death.
For this purpose, a plan is permitted to assume that the spouse of the
participant is the same age as the participant. In addition, a plan is
permitted to assume that the optional form of benefit that is the most
valuable option for a participant with a short life expectancy when the
participant is age 70\1/2\ also is the most valuable option for a
participant with a short life expectancy at all older ages, and that
the most valuable option for a participant with a short life expectancy
at age 55 is the most valuable option for a participant with a short
life expectancy at all younger ages.
(B) Safe harbor hierarchy--(1) A plan is permitted to treat a
single-sum distribution option with an actuarial present value that is
not less than the actuarial present value of any optional form of
benefit eliminated by the plan amendment as the most valuable option
for a participant with a short life expectancy for all of a
participant's annuity starting dates if such single-sum distribution
option is available at all such dates, without regard to whether the
option was available before the plan amendment.
(2) If the plan before the amendment does not offer a single-sum
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this
section, a plan is permitted to treat a joint and contingent annuity
with a continuation percentage that is at least 75% and that is at
least as great as the highest continuation percentage available before
the amendment as the most valuable option for a participant with a
short life expectancy for all of a participant's annuity starting dates
if such joint and contingent annuity is available at all such dates,
without regard to whether the option was available before the plan
amendment.
(3) If the plan before the amendment offers neither a single-sum
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this
section nor a joint and contingent annuity with a continuation
percentage as described in paragraph (g)(5)(iii)(B)(2) of this section,
a plan is permitted to treat a term certain and life annuity with a
term certain period no less than 15 years as the most valuable option
for a participant with a short life expectancy for each annuity
starting date if such 15-year term certain and life annuity is
available at all annuity starting dates, without regard to whether the
option was available before the plan amendment.
(6) Definitions of types of section 411(d)(6)(B) protected
benefits--(i) Early retirement benefit. The term early retirement
benefit means the right, under the terms of a plan, to commence
distribution of a retirement-type benefit at a particular date after
severance from employment with the employer and before normal
retirement age. Different early retirement benefits result from
differences in terms relating to timing.
(ii) Optional form of benefit--(A) In general. The term optional
form of benefit means a distribution alternative (including the normal
form of benefit) that is available under the plan with respect to an
accrued benefit or a distribution alternative with respect to a
retirement-type benefit. Different optional forms of benefit exist if a
distribution alternative is not payable on substantially the same terms
as another distribution alternative. The relevant terms include all
terms affecting the value of the optional form, such as the method of
benefit calculation and the actuarial factors or assumptions used to
determine the amount distributed. Thus, for example, different optional
forms of benefit may result from differences in terms relating to the
payment schedule, timing, commencement, medium of distribution (e.g.,
in cash or in kind), election rights, differences in eligibility
requirements, or the portion of the benefit to which the distribution
alternative applies. Likewise, differences in the normal retirement
ages of employees or in the form in which the accrued benefit of
employees is payable at normal retirement age under a plan are taken
into account in determining whether a distribution alternative
constitutes one or more optional forms of benefit.
[[Page 47123]]
(B) Death benefits. If a death benefit is payable after the annuity
starting date for a specific optional form of benefit and the same
death benefit would not be provided if another optional form of benefit
were elected by a participant, then that death benefit is part of the
specific optional form of benefit and is thus protected under section
411(d)(6). A death benefit is not treated as part of a specific
optional form of benefit merely because the same benefit is not
provided to a participant who has received his or her entire accrued
benefit prior to death. For example, a $5,000 death benefit that is
payable to all participants except any participant who has received his
or her accrued benefit in a single-sum distribution is not part of a
specific optional form of benefit.
(iii) Retirement-type benefit. The term retirement-type benefit
means--
(A) The payment of a distribution alternative with respect to an
accrued benefit; or
(B) The payment of any other benefit under a defined benefit plan
(including a QSUPP as defined in Sec. 1.401(a)(4)-12) that is
permitted to be in a qualified pension plan, continues after
retirement, and is not an ancillary benefit.
(iv) Retirement-type subsidy. The term retirement-type subsidy
means the excess, if any, of the actuarial present value of a
retirement-type benefit over the actuarial present value of the accrued
benefit commencing at normal retirement age or at actual commencement
date, if later, with both such actuarial present values determined as
of the date the retirement-type benefit commences. Examples of
retirement-type subsidies include a subsidized early retirement benefit
and a subsidized qualified joint and survivor annuity.
(v) Subsidized early retirement benefit or early retirement
subsidy. The terms subsidized early retirement benefit or early
retirement subsidy mean the right, under the terms of a plan, to
commence distribution of a retirement-type benefit at a particular date
after severance from employment with the employer and before normal
retirement age where the actuarial present value of the optional forms
of benefit available to the participant under the plan at that annuity
starting date exceeds the actuarial present value of the accrued
benefit commencing at normal retirement age (with such actuarial
present values determined as of the annuity starting date). Thus, an
early retirement subsidy is an early retirement benefit that provides a
retirement-type subsidy.
(7) Eliminate; elimination; reduce; reduction. The terms eliminate
or elimination when used in connection with a section 411(d)(6)(B)
protected benefit mean to eliminate or the elimination of an optional
form of benefit or an early retirement benefit and to reduce or a
reduction in a retirement-type subsidy. The terms reduce or reduction
when used in connection with a retirement-type subsidy mean to reduce
or a reduction in the amount of the subsidy. For purposes of this
section, an elimination includes a reduction and a reduction includes
an elimination.
(8) Generalized optional form. The term generalized optional form
means a group of optional forms of benefit that are identical except
for differences due to the actuarial factors that are used to determine
the amount of the distributions under those optional forms of benefit
and the annuity starting dates.
(9) Maximum QJSA explanation period. The term maximum QJSA
explanation period means the maximum number of days before an annuity
starting date for a qualified joint and survivor annuity for which a
written explanation relating to the qualified joint and survivor
annuity would satisfy the timing requirements of section 417(a)(3) and
Sec. 1.417(e)-1(b)(3)(ii).
(10) Other right and feature. The term other right or feature has
the meaning set forth at Sec. 1.401(a)(4)-4(e)(3)(ii).
(11) Refund of employee contributions feature. The term refund of
employee contributions features means a feature with respect to an
optional form of benefit that provides for employee contributions and
interest thereon to be paid in a single sum at the annuity starting
date with the remainder to be paid in another form beginning on that
date.
(12) Retirement; retirement age. For purposes of this section, the
date of retirement means the annuity starting date. Thus, retirement
age means a participant's age at the annuity starting date.
(13) Retroactive annuity starting date feature. The term
retroactive annuity starting date feature means a feature with respect
to an optional form of benefit under which the annuity starting date
for the distribution occurs on or before the date the written
explanation required by section 417(a)(3) is provided to the
participant.
(14) Section 411(d)(6) protected benefit. The term section
411(d)(6) protected benefit means the accrued benefit of a participant
as of the applicable amendment date described in section 411(d)(6)(A)
and any section 411(d)(6)(B) protected benefit.
(15) Section 411(d)(6)(B) protected benefit. The term section
411(d)(6)(B) protected benefit means the portion of an early retirement
benefit, a retirement-type subsidy, or an optional form of benefit
attributable to benefits accrued before the applicable amendment date.
(16) Social security leveling feature. The term social security
leveling feature means a feature with respect to an optional form of
benefit commencing prior to a participant's expected commencement of
social security benefits that provides for a temporary period of higher
payments which is designed to result in an approximately level amount
of income when the participant's estimated old age benefits from Social
Security are taken into account.
(h) Examples. The following examples illustrate the application of
paragraphs (c) through (g) of this section:
Example 1. (i) Facts involving elimination of optional forms of
benefit as redundant. Plan C is a defined benefit plan under which
employees may elect to commence distributions at any time after the
later of termination of employment or attainment of age 55. At each
potential annuity commencement date, Plan C permits employees to
select, with spousal consent where required, a straight life annuity
or any of a number of actuarially equivalent alternative forms of
payment, including a straight life annuity with cost-of-living
increases and a joint and contingent annuity with the participant
having the right to select any beneficiary and any continuation
percentage from 1% to 100%, subject to modification to the extent
necessary to satisfy the requirements of the incidental benefit
requirement of Sec. 1.401-1(b)(1)(i). The amount of any alternative
payment is determined as the actuarial equivalent of the straight
life annuity payable at the same age using reasonable actuarial
assumptions. On June 2, 2006, Plan C is amended to delete all
continuation percentages for joint and contingent options other than
25%, 50%, 75%, or 100%, effective with respect to annuity
commencement dates that are on or after January 1, 2007.
(ii) Conclusion--(A) Categorization of family members under the
redundancy rule. The optional forms of benefit described in
paragraph (i) of this Example 1 are members of 4 families: a
straight life annuity; a straight life annuity with cost-of-living
increases; joint and contingent options with continuation
percentages of less than 50%; and joint and contingent options with
continuation percentages of 50% or more. The amendment does not
affect either of the first 2 families, but affects the 2 families
relating to joint and contingent options.
(B) Conclusion for elimination of optional forms of benefit as
redundant. The amendment satisfies the requirements of paragraph (c)
of this section. First, the eliminated optional forms of benefit are
redundant with respect to the retained optional forms of benefit
because each
[[Page 47124]]
eliminated joint and contingent annuity option with a continuation
percentage of less than 50% is redundant with respect to the 25%
continuation option and each eliminated joint and contingent annuity
option with a continuation percentage of 50% or higher is redundant
with respect to any one of the retained 50%, 75%, or 100%
continuation options. In addition, to the extent that the optional
form of benefit that is being eliminated does not include a social
security leveling feature, return of employee contribution feature,
or retroactive annuity starting date feature, the retained optional
form of benefit does not include that feature. Second, the amendment
is not effective with respect to annuity commencement dates before
September 1, 2006, as required under paragraph (c)(1)(ii) of this
section. Third, the plan amendment does not eliminate any available
core option, including the most valuable option for a participant
with a short life expectancy, treating a joint and contingent
annuity with a 100% continuation percentage as this optional form of
benefit pursuant to paragraph (g)(5)(iii)(B)(2) of this section.
Finally, the amendment need not satisfy the requirements of
paragraph (e) of this section because the retained optional forms of
benefit are available on the same annuity commencement dates and
have the same actuarial present value as the optional forms of
benefit that are being eliminated.
Example 2. (i) Facts involving elimination of optional forms of
benefit as redundant if additional restrictions are imposed. The
facts are the same as Example 1, except that the plan amendment also
restricts the class of beneficiaries that may be elected under the 4
retained joint and contingent annuities to the employee's spouse.
(ii) Conclusion. The amendment fails to satisfy the requirements
of paragraph (c)(2)(i)(B) of this section because the retained joint
and contingent annuities have materially greater restrictions on the
beneficiary designation than did the eliminated joint and contingent
annuities. Thus, the joint and contingent annuities being eliminated
are not redundant with respect to the retained joint and contingent
annuities. In addition, the amendment fails to satisfy the
requirements of the core option rules in paragraph (d) of this
section because the amendment fails to be limited to annuity
commencement dates that are at least 4 years after the date the
amendment is adopted, the amendment fails to include the core option
in paragraph (g)(5)(i)(B) of this section because the participant
does not have the right to designate any beneficiary, and the
amendment fails to include the core option described in paragraph
(g)(5)(i)(C) of this section because the plan does not provide a 10-
year term certain and life annuity.
Example 3. (i) Facts involving elimination of a social security
leveling feature and a period certain annuity as redundant. Plan D
is a defined benefit plan under which participants may elect to
commence distributions in the following actuarially equivalent
forms, with spousal consent if applicable: a straight life annuity;
a 50%, 75%, or 100% joint and contingent annuity; a 5-year, 10-year,
or a 15-year term certain and life annuity; and an installment
refund annuity (i.e., an optional form of benefit that provides a
period certain, the duration of which is based on the participant's
age), with the participant having the right to select any
beneficiary. In addition, each annuity offered under the plan, if
payable to a participant who is less than age 65, is available both
with and without a social security leveling feature. The social
security leveling feature provides for an assumed commencement of
social security benefits at any age selected by the participant
between age 62 and 65. Plan D is amended on June 2, 2006, effective
as of January 1, 2007, to eliminate the installment refund form of
benefit and to restrict the social security leveling feature to an
assumed social security commencement age of 65.
(ii) Conclusion. The amendment satisfies the requirements of
paragraph (c) of this section. First, the installment refund annuity
option is redundant with respect to the 15-year certain and life
annuity (except for advanced ages where, because of shorter life
expectancies, the installment refund annuity option is redundant
with respect to the 5-year certain and life annuity and also
redundant with respect to the 10-year certain and life annuity).
Second, with respect to restricting the social security leveling
feature to an assumed social security commencement age of 65, under
paragraph (c)(3)(ii)(C) of this section, straight life annuities
with social security leveling features that have different social
security commencement ages are treated as members of the same family
as straight life annuities without social security leveling
features. To the extent an optional form of benefit that is being
eliminated includes a social security leveling feature, the retained
optional form of benefit must also include that feature, but it is
permitted to have a different assumed age for commencement of social
security benefits. Third, to the extent that the optional form of
benefit that is being eliminated does not include a social security
leveling feature, a return of employee contribution feature, or
retroactive annuity starting date feature, the retained optional
form of benefit must not include that feature. Fourth, the plan
amendment does not eliminate any available core option, including
the most valuable option for a participant with a short life
expectancy, treating a joint and contingent annuity with a 100%
continuation percentage as this optional form of benefit pursuant to
paragraph (g)(5)(iii)(B)(2) of this section. Fifth, the amendment is
not effective with respect to annuity commencement dates before
September 1, 2006, as required under paragraph (c)(1)(ii) of this
section. The amendment need not satisfy the requirements of
paragraph (e) of this section because the retained optional forms of
benefit are available on the same annuity commencement dates and
have the same actuarial present value as the optional forms of
benefit that are being eliminated.
Example 4. (i) Facts involving elimination of noncore options.
Employer N sponsors Plan E, a defined benefit plan that permits
every participant to elect payment in the following actuarially
equivalent optional forms of benefit (Plan E's uniformly available
options), with spousal consent if applicable: a straight life
annuity; a 50%, 75%, or 100% joint and contingent annuity with no
restrictions on designation of beneficiaries; and a 5-, 10-, or 15-
year term certain and life annuity. In addition, each can be elected
in conjunction with a social security leveling feature, with the
participant permitted to select a social security commencement age
from age 62 to age 67. None of Plan E's uniformly available options
include a single-sum distribution. The plan has been in existence
for over 30 years, during which time Employer N has acquired a large
number of other businesses, including merging over 20 defined
benefit plans of acquired entities into Plan E. Many of the merged
plans offered optional forms of benefit that were not among Plan E's
uniformly available options, including some plans funded through
insurance products, often offering all of the insurance annuities
that the insurance carrier offers, and with some of the merged plans
offering single-sum distributions. In particular, under the XYZ
acquisition that occurred in 1990, the XYZ acquired plan offered a
single-sum distribution option that was frozen at the time of the
acquisition. On April 1, 2006, each single-sum distribution option
applies to less than 25% of the XYZ participants' accrued benefits.
Employer N has generally, but not uniformly, followed the practice
of limiting the optional forms of benefit for an acquired unit to an
employee's service before the date of the merger, and has uniformly
followed this practice with respect to each of the early retirement
subsidies in the acquired unit's plan. As a result, as of April 1,
2007, Plan E includes a large number of generalized optional forms
which are not members of families of optional forms of benefit
identified in paragraph (c)(4) of this section, but there are no
participants who are entitled to any early retirement subsidies
because any subsidies have been subsumed by the actuarially reduced
accrued benefit. Plan E is amended in April of 2007 to eliminate all
of the optional forms of benefit that Plan E offers other than Plan
E's uniformly available options, except that the amendment does not
eliminate any single-sum distribution option except with respect to
XYZ participants and permits any commencement date that was
permitted under Plan E before the amendment. Plan E also eliminates
the single-sum distribution option for XYZ participants. Further,
each of Plan E's uniformly available options has an actuarial
present value that is not less than the actuarial present value of
any optional form of benefit offered before the amendment. The
amendment is effective with respect to annuity commencement dates
that are on or after May 1, 2011.
(ii) Conclusion. The amendment satisfies the requirements of
paragraph (d) of this section. First, Plan E, as amended, does not
eliminate any single-sum distribution option as provided in
paragraph (d)(2)(iii) of this section except for single-sum
distribution options that apply to less than 25% of a plan
participant's accrued benefit as of the date the option is
eliminated (May 1, 2011). Second, Plan E, as amended, includes each
of the core options as defined in paragraph (g)(5) of this section,
including offering the most valuable option for a participant with
[[Page 47125]]
a short life expectancy (treating the 100% joint and contingent
annuity as this benefit, under paragraph (g)(5)(iii)(B)(2) of this
section). The 100% joint and contingent annuity option (and not the
grandfathered single-sum distribution option) is the most valuable
option for a participant with a short life expectancy because the
grandfathered single-sum distribution option is not available with
respect to a participant's entire accrued benefit. In addition, as
required under paragraph (d)(2) of this section, to the extent an
optional form of benefit that is being eliminated includes either a
social security leveling feature or a refund of employee
contributions feature, at least one of the core options is available
with that feature and, to the extent that the optional form of
benefit that is being eliminated does not include a social security
leveling feature or a refund of employee contributions feature, each
of the core options is available without that feature. Third, the
amendment is not effective with respect to annuity commencement
dates that are less than 4 years after the date the amendment is
adopted. Finally, the amendment need not satisfy the requirements of
paragraph (e) of this section because the retained optional forms of
benefit are available on the same annuity commencement date and have
the same actuarial present value as the optional forms of benefit
that are being eliminated. The conclusion that the amendment
satisfies the requirements of paragraph (d) of this section assumes
that no amendments are made to change the core options before May 1,
2014.
Example 5. (i) Facts involving reductions in actuarial present
value. (A) Plan F is a defined benefit plan providing an accrued
benefit of 1% of the average of a participant's highest 3
consecutive years' pay times years of service, payable as a straight
life annuity beginning at the normal retirement age at age 65. Plan
F permits employees to elect to commence actuarially reduced
distributions at any time after the later of termination of
employment or attainment of age 55. At each potential annuity
commencement date, Plan F permits employees to select, with spousal
consent, either a straight life annuity, a joint and contingent
annuity with the participant having the right to select any
beneficiary and a continuation percentage of 50%, 66 2/3%, 75%, or
100%, or a 10-year certain and life annuity with the participant
having the right to select any beneficiary, subject to modification
to the extent necessary to satisfy the requirements of the
incidental benefit requirement of Sec. 1.401-1(b)(1)(i). The amount
of any joint and contingent annuity and the 10-year certain and life
annuity is determined as the actuarial equivalent of the straight
life annuity payable at the same age using reasonable actuarial
assumptions. The plan covers employees at 4 divisions, one of which,
Division X, was acquired on January 1, 1999. The plan provides for
distributions before normal retirement age to be actuarially
reduced, but, if a participant retires after attainment of age 55
and completion of 10 years of service, the applicable early
retirement reduction factor is 3% per year for the years between age
65 and 62 and 6% per year for the ages from 62 to 55 for all
employees at any division, except for employees who were in Division
X on January 1, 1999, for whom the early retirement reduction factor
for retirement after age 55 and 10 years of service is 5% for each
year before age 65. On June 2, 2006, effective January 1, 2007, Plan
F is amended to change the early retirement reduction factors for
all employees of Division X to be the same as for other employees,
effective with respect to annuity commencement dates that are on or
after January 1, 2008, but only with respect to participants who are
employees on or after January 1, 2008 and only if Plan F continues
accruals at the current rate through January 1, 2008 (or the
effective date of the change in reduction factors is delayed to
reflect the change in the accrual rate). For purposes of this
Example 5, it is assumed that an actuarially equivalent early
retirement factor would have a reduction shown in column 4 of the
following table, which compares the reduction factors for Division X
before and after the amendment:
----------------------------------------------------------------------------------------------------------------
Actuarially
Age Old division X New factor (as equivalent Column 3 minus
factor (as a %) a %) factor (as a %) column 2
1 2 3 4 5
-----------------------------------------
65...................................... NA NA NA NA
64...................................... 95 97 91.1 +2
63...................................... 90 94 83.2 +4
62...................................... 85 91 76.1 +5
61...................................... 80 85 69.8 +5
60