[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Proposed Rules]
[Pages 19713-19727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9529]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 54 and 602
[REG-136193-01]
RIN 1545-BA08
Notice of Significant Reduction in the Rate of Future Benefit
Accrual
AGENCY: Internal Revenue Service (IRS), Treasury.
[[Page 19714]]
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
requirements of section 4980F of the Internal Revenue Code (Code) and
section 204(h) of the Employee Retirement Income Security Act of 1974
(ERISA), as amended, which apply to defined benefit plans and to
individual account plans that are subject to the funding standards of
section 412 of the Code and section 302 of ERISA. These regulations
provide guidance on the requirements for plan administrators to give
notice of plan amendments to adversely affected plan participants and
other parties when those amendments provide for a significant reduction
in the rate of future benefit accrual or the elimination or significant
reduction in an early retirement benefit or retirement-type subsidy.
These regulations will affect retirement plan sponsors and
administrators, participants in and beneficiaries of retirement plans,
and employee organizations representing retirement plan participants.
This document also provides a notice of public hearing on these
proposed regulations.
DATES: Written or electronic comments must be received by July 22,
2002.
Requests to speak (with outlines of oral comments to be discussed)
at the public hearing scheduled for August 15, 2002, at 10 a.m., must
be received by July 22, 2002.
ADDRESSES: Send submissions to: CC:ITA:RU (REG-136193-01), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-136193-01),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively, taxpayers may submit comments
electronically directly to the IRS Internet site at www.irs.gov/regs.
The public hearing will be held in the IRS Auditorium, Seventh Floor,
Internal Revenue Service, 1111 Constitution Ave., NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Janet A.
Laufer at (202) 622-6090 or Diane S. Bloom at (202) 283-9888;
concerning submissions, Donna Poindexter at (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington,
DC 20224. Comments on the collection of Information should be received
by June 24, 2002. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collections of information in this proposed regulation are in
Sec. 54.4980F-1. Responses to this collection of information are
required in order to obtain a benefit. Specifically, this information
is required for a taxpayer who wants to amend a plan that is subject to
the requirements of section 204(h) or section 4980F to significantly
reduce the rate of future benefit accrual or significantly reduce an
early retirement benefit or retirement-type subsidy. This information
will be used to notify participants, alternate payees, and employee
organizations of the amendment.
Estimated total annual reporting burden: 40,000 hours.
The estimated annual burden per respondent varies from one hour to
80 hours, depending on individual circumstances, with an estimated
average of 10 hours.
Estimated number of respondents: 4,000.
Estimated annual frequency of responses: Once.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 204(h) was added to ERISA by section 11006(a) of the
Single-Employer Pension Plan Amendments Act of 1986, Title XI of Public
Law 99-272 (100 Stat. 237) and was amended by section 1879(u)(1) of the
Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2913) (TRA '86).
As amended by TRA '86, section 204(h) of ERISA (section 204(h))
required a plan administrator to provide notice to participants and
other interested persons after the date of adoption and at least 15
days before the effective date of a plan amendment providing for a
significant reduction in the rate of future benefit accrual.
Pursuant to section 101(a) of Reorganization Plan No. 4 of 1978, 29
U.S.C. 1001nt, the Secretary of the Treasury generally has authority to
issue regulations under parts 2 and 3 of subtitle B of title I of
ERISA, including section 204 of ERISA. Under section 104 of
Reorganization Plan No. 4, the Secretary of Labor retains enforcement
authority with respect to parts 2 and 3 of subtitle B of title I of
ERISA, but, in exercising such authority, is bound by the regulations
issued by the Secretary of the Treasury. On December 15, 1995,
temporary regulations (TD 8631), under section 411 of the Internal
Revenue Code (Code), 26 U.S.C. 411, were published in the Federal
Register (60 FR 64320), along with a notice of proposed rulemaking
cross-referencing the temporary regulations (60 FR 64401). Those
temporary regulations addressed the notice requirements of section
204(h). On December 14, 1998, final regulations (TD 8795) addressing
the notice requirements of section 204(h) were published in the Federal
Register. See Sec. 1.411(d)-6.
Section 659 of the Economic Growth and Tax Relief Reconciliation
Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) added section
4980F of the Code, which imposes an excise tax when a plan
administrator fails to provide timely notice of plan amendments that
provide for a significant reduction in the rate of future benefit
accrual, and, for this purpose, treats the elimination or
[[Page 19715]]
reduction of an early retirement benefit or retirement-type subsidy as
a reduction in the rate of future benefit accrual. EGTRRA also amended
section 204(h) to treat the elimination or reduction of an early
retirement benefit or retirement-type subsidy as a reduction in the
rate of future benefit accrual. The requirement in section 204(h)(1)
that notice be given after the date of adoption and at least 15 days in
advance of the amendment's effective date was replaced by a requirement
contained in both section 4980F(e)(3) and section 204(h)(3) that,
except as provided in regulations, the notice be provided within a
``reasonable time'' before the effective date of the amendment. The
notice requirements in section 4980F of the Code are essentially
identical to the notice requirements in section 204(h), as amended by
EGTRRA. In addition, section 204(h) has been amended by EGTRRA to
provide that, in the case of an egregious failure to meet the notice
requirements, the provisions of the plan are applied as if the
amendment entitled applicable individuals to the greater of the
benefits to which they would have been entitled without regard to the
amendment or the benefits under the plan as amended.
The Job Creation and Worker Assistance Act of 2002, Public Law 107-
147 (116 Stat. 21) included certain technical corrections to section
659 of EGTRRA.
These proposed regulations, when finalized, would replace the
Treasury regulations currently at Sec. 1.411(d)-6 to reflect the EGTRRA
changes outlined above. Since the notice requirements of section 204(h)
are now also required under section 4980F of the Code, these proposed
regulations are issued under section 4980F, but apply for purposes of
section 204(h), as well as for purposes of section 4980F.
Explanation of Provisions
Statutory Requirements After EGTRRA
Section 4980F(e) of the Code and section 204(h) of ERISA require
notice to be provided when a defined benefit plan or a money purchase
pension or other individual account plan that is subject to the funding
standards of section 412 of the Code is amended to significantly reduce
the rate of future benefit accrual. This notice must be provided to
participants and alternate payees for whom the amendment is reasonably
expected to significantly reduce the rate of future benefit accrual,
and to employee organizations representing such participants. For
purposes of these rules, an amendment that eliminates or reduces an
early retirement benefit or retirement-type subsidy is treated as an
amendment that reduces the rate of future benefit accrual. The notice
must contain sufficient information (as determined in accordance with
regulations) to enable such individuals to understand the effect of the
amendment and, except to the extent provided in regulations, must be
provided within a reasonable time before the effective date of the
amendment. Additionally, section 4980F(e)(2) of the Code and section
204(h)(2) of ERISA authorize the Secretary to provide special rules for
plans covering fewer than 100 participants and for plans that offer
participants the option to choose between the new benefit formula and
the old benefit formula.
A plan amendment that is subject to the notice requirements of
section 4980F of the Code and section 204(h) of ERISA (section 204(h)
amendment) may be subject to additional reporting and disclosure
requirements under title I of ERISA, such as the requirement to provide
a summary of material modifications (SMM) describing the amendment.
Notice under section 4980F of the Code and section 204(h) of ERISA
(referred to in the proposed regulations as section 204(h) notice) must
be provided in accordance with the provisions of these regulations even
though sections 102(a) and 104(b) of ERISA also may require that an SMM
describing the plan amendment be furnished to participants covered
under the plan and beneficiaries receiving benefits under the plan. The
Department of Labor has advised the IRS that, at least until the
effective date of final regulations under section 4980F of the Code, a
plan administrator that provides a section 204(h) notice to applicable
individuals in accordance with these proposed regulations will be
treated as having furnished those individuals with an SMM regarding the
section 204(h) amendment. The plan administrator is required to satisfy
any other requirements regarding the furnishing of SMMs or updated
summary plan descriptions, including, for example, satisfaction of the
requirement to furnish an SMM to any other participants covered under
the plan, and to beneficiaries receiving benefits under the plan, who
are entitled to an SMM regarding the amendment.
Time for Providing Section 204(h) Notice Under Proposed Regulations
The proposed regulations aim to strike a balance between giving
participants and other affected parties section 204(h) notice long
enough in advance to enable them to understand and consider the
information before the amendment goes into effect, and allowing
employers the ability to effect changes to their plans for business
reasons (such as to facilitate business reorganizations or to permit
small businesses the flexibility to reduce costs promptly) within a
reasonable time. The Treasury Department and IRS have concluded, based
on the history of the legislation, that the reason why the 15-day
advance notice required under section 204(h) as it existed prior to
EGTRRA was replaced by the ``reasonable time'' standard is because the
15-day standard was perceived as often being insufficient. Accordingly,
these proposed regulations would provide that a reasonable time
generally means at least 45 days before the effective date of the plan
amendment.
However, the proposed regulations include certain special timing
rules, including rules that would allow section 204(h) notice to be
provided as late as 15 days before the effective date of the amendment
in two types of cases. First, the proposed regulations would generally
permit section 204(h) notice to be provided 15 days in advance for
amendments adopted in connection with business mergers and
acquisitions. Second, the proposed regulations include a 15-day advance
notice requirement with respect to amendments of small plans. Thus, the
15-day standard that was in section 204(h) before EGTRRA would
generally continue to apply for small plans and for amendments adopted
in connection with business mergers and acquisitions for which notice
would have been required under section 204(h) as in effect before
EGTRRA. The proposed regulations provide an additional special timing
rule that applies in the case of an amendment that is adopted in
connection with a business merger or acquisition involving a plan-to-
plan transfer or merger and that affects only an early retirement
benefit or retirement-type subsidy (but does not reduce the rate of
future benefit accrual). In the case of such an amendment, the notice
must be provided no later than 30 days after the effective date of the
amendment.
In the case of a plan amendment which offers participants the
option to choose between the new benefit formula and the old benefit
formula, the general timing rules would apply, except that the proposed
regulations would allow certain additional information to be provided
at a later date, as described in Content of Section 204(h) Notice of
this preamble.
[[Page 19716]]
Content of Section 204(h) Notice
Section 4980F(e)(2) of the Code and section 204(h)(2) of ERISA
require section 204(h) notice to be written in a manner calculated to
be understood by the average plan participant and to provide sufficient
information (as determined in accordance with regulations) to allow
applicable individuals to understand ``the effect of'' the amendment.
The Conference report for EGTRRA states that the changes to the
section 204(h) of ERISA notice requirements were expected to ``provide
for alternative disclosures rather than a single disclosure methodology
that may not fit all situations,'' and also notes ``the need to
consider the complex actuarial calculations and assumptions involved in
providing necessary disclosures.'' H.R. Rep. 107-84, at 266. In
addition, particular concern was expressed about the effects of
conversion of traditional defined benefit plans to cash balance or
hybrid formula plans and the effects of ``wear-away'' provisions under
which participants earn no additional benefits for a period of time
after conversion. H.R. Rep. 107-84, at 266.
The content requirements in these proposed regulations take into
account this background and generally seek to ensure that adversely
affected participants receive sufficient information to enable them to
understand the impact and magnitude of the changes being made to their
pension plan, without imposing unduly burdensome requirements on
employers and while permitting latitude to employers in diverse
businesses with varying employee demographics to determine how to
communicate plan changes in an appropriately effective manner.
Accordingly, the proposed regulations provide general standards for the
content of a section 204(h) notice, rather than containing specific
requirements for each type of notice.
The proposed regulations require a section 204(h) notice to include
sufficient information to allow applicable individuals to understand
the effect of the plan amendment, including the approximate magnitude
of the expected reduction. The type and amount of information necessary
to satisfy this standard varies depending on the nature of the change
resulting from the amendment. The information must be written in a
manner calculated to be understood by the average plan participant. The
notice must describe the affected provisions prior to plan amendment,
describe these provisions as amended, and state the effective date of
the amendment. This description of plan provisions might be similar to
the description of a plan's benefit accrual formula in a summary plan
description that satisfies the requirements under Sec. 2520.102-3 of
the Department of Labor regulations. If the amendment applies by its
terms differently to various classes of employees (such as where the
amendment applies differently depending on what division an employee is
in), the explanation must include sufficient information to allow an
affected participant to understand the general class or classes of
participants to whom the reduction applies. Also, these proposed
regulations clarify that, in cases in which a plan amendment affects
different classes of applicable individuals differently, the plan
administrator may provide different section 204(h) notices. A section
204(h) notice cannot include materially false or misleading information
(or omit information so as to cause the information provided to be
misleading).
If a section 204(h) amendment reduces an early retirement benefit
or retirement-type subsidy merely as a result of reducing the rate of
future benefit accrual, the section 204(h) notice need not contain a
separate description of that reduction in the early retirement benefit
or retirement-type subsidy.
Additional information may be necessary to make the approximate
magnitude of the reduction apparent. In cases in which it is not
reasonable to expect that the approximate magnitude of the reduction
will be reasonably apparent from a narrative description, one or more
illustrative examples are required to be included in the notice. Thus,
for example, illustrative examples would be required for a change from
a traditional defined benefit formula to a cash balance formula or a
change that results in a period of time during which there are no
accruals with regard to normal retirement benefits or an early
retirement subsidy (a wear-away period). However, examples are not
required to illustrate circumstances under which a participant's
benefit may increase as a result of the section 204(h) amendment.
Where an amendment may result in reductions that vary in their
impact on applicable individuals, the examples must show the
approximate range of the reductions. However, the range of reductions
need not include reductions that are likely to occur in only a de
minimis number of cases if a narrative statement is included to that
effect (for example, such a narrative might state that larger or
smaller reductions may occur in some other cases) and examples are
provided that show the approximate range of the reductions in cases
other than this de minimis number. For amendments for which the maximum
reduction occurs under identifiable circumstances with proportionately
smaller reductions in other cases, the range of reductions can be
illustrated by one example illustrating the maximum reduction, with a
statement that smaller reductions also occur. Further, assuming that
the reduction varies from small to large depending on service or other
factors, as might occur for an amendment that results in a wear-away,
two illustrative examples may be provided showing the smallest likely
reduction and the largest likely reduction.
Examples are not required to be based on any particular form of
payment (such as a life annuity or a single sum), but may be based on
whatever form appropriately illustrates the reduction. The examples may
be based on any reasonable assumptions, such as assumptions relating to
age, service, and compensation (and salary scale assumptions for
amendments that alter the compensation taken into account under the
plan, such as a change from a final pay plan to a career average pay
plan), but the section 204(h) notice must identify those assumptions.
The proposed regulations include special rules for determining whether
an amendment is reasonably expected to result in a wear-away period.
The proposed regulations include special rules for any case in
which an applicable individual can choose between the new formula and
the old formula. Under these rules, the individual must be provided
sufficient information to enable the individual to make an informed
choice between the new and old benefit formulas. The information to
enable the individual to make an informed choice is not required to be
provided at the same time as section 204(h) notice is otherwise
required to be provided, as long as it is provided within a period that
is reasonably contemporaneous with the individual's choice and that
allows sufficient advance notice to enable the individual to understand
and consider the additional information before making the choice.
A section 204(h) notice may include more information than is
required, but cannot include any false or misleading information and
cannot include so much additional information that the required
information fails to be provided in a manner calculated to come to the
attention of applicable individuals. While a notice for an amendment
converting a traditional
[[Page 19717]]
final pay plan to a cash balance plan must include an estimate of the
future normal retirement benefit of the participant in the illustration
even if that requires an estimate of future wage increases, a section
204(h) notice could also include alternative estimates. For example, an
alternative estimate could be based on an assumption that there are no
future wage increases.
The proposed regulations include several examples, including
examples that are intended to show the illustrations that are required
for a cash balance conversion amendment that is a based on a very
simplified form of conversion. For more complex conversion amendments,
it is expected that more illustrations may be appropriate. However,
these regulations do not require section 204(h) notice to include
different illustrative examples to address the amount of the reduction
for every demographic variation (e.g., differences in compensation or
years of service).
Excise Tax Under Internal Revenue Code Section 4980F(c)(1)
Section 4980F(c)(1) of the Code provides that no excise tax is
imposed on a failure for any period during which it is established to
the satisfaction of the Secretary that the employer (or other person
responsible for the tax) did not know that the failure existed and
exercised reasonable diligence to meet the notice requirements. The
proposed regulations provide that the requirements of section
4980F(c)(1) of the Code are satisfied if and only if the person that
would be responsible for the tax exercised reasonable diligence in
attempting to deliver timely section 204(h) notice to applicable
individuals (by the latest date permitted under the regulations) and
believed that section 204(h) notice was actually and timely delivered
to each applicable individual. An example of this illustrates that
section 4980F(c)(1) of the Code would apply to a situation in which a
plan administrator relies on an overnight delivery service to send
materials to the persons who are expected to hand deliver section
204(h) notice to participants, and the overnight delivery service is
late in making that delivery.
ERISA Provisions Regarding Egregious Failures
Section 204(h)(6)(A) of ERISA, as amended by EGTRRA, provides that
in the case of an egregious failure to meet the notice requirements,
the provisions of the plan are applied as if the plan amendment
entitled applicable individuals to the greater of the benefits to which
they would have been entitled without regard to the amendment or the
benefits under the plan as amended. Section 204(h)(6)(B) of ERISA
provides that, for this purpose, there is an egregious failure to meet
the section 204(h) notice requirements if such failure is within the
control of the plan sponsor and is an intentional failure (including
any failure to promptly provide the required notice or information
after the plan administrator discovers an unintentional failure to meet
notice requirements) or a failure to provide most of the individuals
with most of the information they are entitled to receive. The proposed
regulations provide that a failure is not egregious if the plan
administrator reasonably determines, taking into account the statute,
administrative guidance, and relevant facts and circumstances, that the
reduction is not significant. The proposed regulations clarify that, in
the case of a failure that is not egregious, the failure will not
preclude the amendment from becoming effective. However, where there is
a failure, whether or not egregious, recourse may be available under
ERISA section 502 to, among other things, recover benefits due under
the plan, enforce rights under the terms of the plan, clarify rights to
future benefits under the plan, obtain equitable relief, or otherwise
redress such violation. This might occur, for example, if a participant
receives and thus uses materially inadequate or misleading information
in making a choice between the new and the old benefit formula.
Method of Delivery of Section 204(h) Notice
As a general standard, the section 204(h) notice either must be
provided through a method that results in actual receipt of the notice
or the plan administrator must take appropriate and necessary measures
reasonably calculated to ensure that the method for providing the
notice results in actual receipt. Therefore, section 204(h) notice may
not be provided by ``posting.''
Section 4980F(g) of the Code and section 204(h)(7) of ERISA, as
amended by EGTRRA, state that the Secretary of the Treasury may by
regulation allow 204(h) notice to be provided using new technologies.
Because those provisions specifically relate to electronic delivery and
were enacted after enactment of the Electronic Signatures in Global and
National Commerce Act (114 Stat. 464) (2000) (E-SIGN Act), the
authority conferred by those provisions on the Secretary to decide
whether to permit, and under what conditions to permit, electronic
delivery of section 204(h) notice is not constrained by the provisions
of the E-SIGN Act.
Section 4980F(g) of the Code and section 204(h)(7) of ERISA give
the Secretary of the Treasury authority to impose appropriate criteria
for the provision of section 204(h) notice through electronic methods
to ensure that applicable individuals will receive section 204(h)
notice electronically and are able to access it timely. As noted above,
section 204(h) notice either must be provided through a method that
results in actual receipt of the notice or the plan administrator must
take appropriate and necessary measures reasonably calculated to ensure
that the method for providing the notice results in actual receipt.
These proposed regulations would apply the same standard to the
electronic delivery of section 204(h) notice by requiring that the
method used result in actual receipt or that the plan administrator
take appropriate and necessary measures to ensure that any provision of
the notice in electronic format results in actual receipt of the
transmitted information. Additionally, the plan administrator must
offer to provide each applicable individual a paper version of the
notice free of charge. Of course, the requirements of these regulations
must otherwise be satisfied when section 204(h) notice is provided in
electronic format. The proposed regulations include a number of
examples illustrating the rules applicable to the electronic provision
of a section 204(h) notice and also include a safe harbor, which has
conditions similar to the consumer protection provisions of section
101(c) of the E-SIGN Act.
Under the proposed regulations, permitted electronic means for
furnishing section 204(h) notice would include e-mail, a site on the
Internet, or other electronic communications site, and a DVD or CD that
could generally be accessed using a computer at an employee's worksite.
However, section 204(h) notice information is not considered provided
merely because it is available through a computer kiosk, even when the
kiosk is at the individual's workplace and the individual is otherwise
provided notice of the availability of information at the kiosk,
because, like posting, providing such information through a kiosk
places a burden on participants to seek out the information.
Nevertheless, information made available through a kiosk is considered
provided to those applicable individuals who actually access the
information through the kiosk.
[[Page 19718]]
Proposed Effective Date
These proposed regulations would apply to amendments that go into
effect on or after the date that is 120 days after publication of final
regulations in the Federal Register. The proposed regulations also
restate the general statutory effective date and special effective date
rules that are in section 659(c) of EGTRRA. Thus, the proposed
regulations include the transition rule of section 659(c)(2) of EGTRRA
that provides that, for amendments taking effect on or after the date
of enactment of EGTRRA (June 7, 2001) and prior to the effective date
of the final regulations, the notice requirements of section
4980F(e)(2) and (3) of the Code, and of section 204(h) of ERISA as
amended by EGTRRA, are treated as satisfied if the plan administrator
makes a reasonable, good faith effort to comply with those
requirements.
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 also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations.
It is hereby certified that the collection of information in these
proposed regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based upon
the fact that small entities generally do not have very complex benefit
structures in their plans, or many different classes of participants
who will be differently affected by an amendment reducing the rate of
future benefit accrual. Small entities also have fewer employees, and
so those small entities that are required to provide section 204(h)
notice need to provide it to fewer individuals. Accordingly, the time
required for them to prepare and provide section 204(h) notice will
usually be modest. Furthermore, because most small entities will only
be affected when they amend the retirement plans they sponsor to reduce
or eliminate benefits, and most small entities will not so amend the
retirement plans frequently, it is generally expected that most small
entities would be required to provide section 204(h) notice only once
over the course of several years. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f) of the Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and (8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury Department and IRS specifically request comments on
the clarity of the proposed rules and how they may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for August 15, 2002, beginning
at 10 a.m., in the IRS Auditorium, Seventh Floor, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC. Due to building
security procedures, visitors must enter at the main entrance, located
at 1111 Constitution Avenue, NW. All visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 15 minutes before the hearing starts. For information about having
your name placed on the building access list to attend the hearing, see
the For Further Information Contact portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written or electronic
comments and an outline of the topics to be discussed and time to be
devoted to each topic (preferably a signed original and eight (8)
copies) by June 18, 2002. A period of 10 minutes will be allotted to
each person for making comments. An agenda showing the scheduling of
the speakers will be prepared after the deadline for receiving outlines
has passed. Copies of the agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of these regulations is Janet A. Laufer,
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS 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.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 54 and 602 are proposed to be amended
as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.411(d)(6) [Removed]
Par. 2. Section 1.411(d)-6 is removed
PART 54--PENSION EXCISE TAXES
Par. 3. The authority citation for part 54 is amended by adding the
following citation in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 54.4980F-1 is also issued under 26 U.S.C. 4980. * * *
Par.4. Section 54.4980F-1 is added to read as follows:
Sec. 54.4980F-1 Notice requirements for certain pension plan
amendments significantly reducing benefit accruals.
(a) Table of contents. This paragraph contains a list of the
questions in Sec. 54.4980F-1(b).
Q-1. What are the notice requirements of section 4980F(e) of the
Internal Revenue Code and section 204(h) of ERISA?
Q-2. What are the differences between section 4980F and section
204(h)?
Q-3. What is an ``applicable pension plan'' to which section
4980F of the Internal Revenue Code and section 204(h) apply?
Q-4. What is ``section 204(h) notice'' and what is a ``section
204(h) amendment''?
Q-5. For which amendments is section 204(h) notice required?
Q-6. What is an amendment that reduces the rate of future
benefit accrual or reduces an early retirement benefit or
retirement-type subsidy for purposes of determining whether section
204(h) notice is required?
Q-7. What plan provisions are taken into account in determining
whether an amendment is a section 204(h) amendment?
Q-8. What is the basic principle used in determining whether a
reduction in the rate of future benefit accrual or an early
retirement benefit or retirement-type subsidy is significant for
purposes of section 204(h)?
Q-9. When must section 204(h) notice be provided?
Q-10. To whom must section 204(h) notice be provided?
Q-11. What information is required to be provided in a section
204(h) notice?
[[Page 19719]]
Q-12. What special rules apply if participants can choose
between the old and new benefit formulas?
Q-13. How may section 204(h) notice be provided?
Q-14. What are the consequences if a plan administrator fails to
provide section 204(h) notice?
Q-15. What are some of the rules that apply with respect to the
excise tax under section 4980F?
Q-16. How do section 4980F and section 204(h) apply when a
business is sold?
Q-17. How are amendments to cease accruals and terminate a plan
treated under section 4980F and section 204(h)?
Q-18. What is the effective date of section 4980F of the
Internal Revenue Code, section 204(h) of ERISA, as amended by
EGTRRA, and these regulations?
(b) Questions and answers. The questions and answers are as
follows:
Q-1. What are the notice requirements of section 4980F(e) of the
Internal Revenue Code and section 204(h) of ERISA?
A-1. (a) Requirements of Internal Revenue Code section 4980F(e) and
ERISA section 204(h). Section 4980F of the Internal Revenue Code
(section 4980F) and section 204(h) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), 29 U.S.C. 1054(h) (section
204(h)) each generally requires 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 retirement-type subsidy. The
notice is required to be provided to plan participants or alternate
payees who are applicable individuals (as defined in Q&A-10 of this
section) and to certain employee organizations. The plan administrator
must generally provide the notice before the effective date of the plan
amendment. Q&A-9 of this section sets forth the time frames for
providing notice, Q&A-11 of this section sets forth the content
requirements for the notice, and Q&A-12 of this section contains
special rules for cases in which participants can choose between the
old and new benefit formulas.
(b) Other notice requirements. Other provisions of law may require
that certain parties be notified of a plan amendment. See, for example,
sections 102 and 104 of ERISA, and the regulations thereunder, for
requirements relating to summary plan descriptions and summaries of
material modifications.
Q-2. What are the differences between section 4980F and section
204(h)?
A-2. Section 4980F was added to the Internal Revenue Code by the
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law
107-16 (115 Stat. 38) (2001) (EGTRRA). EGTRRA also amended section
204(h) to, among other things, extend the notice requirement to a plan
amendment that eliminates or significantly reduces an early retirement
benefit or retirement-type subsidy, even if it does not significantly
reduce the rate of future benefit accrual. The notice requirements of
section 4980F generally are parallel to the notice requirements of
section 204(h), as amended by EGTRRA. However, the consequences of the
two provisions differ: section 4980F imposes an excise tax on a failure
to satisfy the notice requirements, while section 204(h)(6), as amended
by EGTRRA, contains a special rule with respect to egregious failures.
See Q&A-14 and Q&A-15 of this section. Except to the extent
specifically indicated, these regulations apply both to section 4980F
and to section 204(h).
Q-3. What is an ``applicable pension plan'' to which section 4980F
and section 204(h) apply?
A-3. (a) In general. Section 4980F and section 204(h) apply to an
applicable pension plan. For purposes of section 4980F, an applicable
pension plan means a defined benefit plan qualifying under section
401(a) or 403(a) of the Internal Revenue Code, or an individual account
plan that is subject to the funding standards of section 412 of the
Internal Revenue Code. For purposes of section 204(h), an applicable
pension plan means a defined benefit plan that is subject to part 2 of
subtitle B of title I of ERISA, or an individual account plan that is
subject to such part 2 and to the funding standards of section 412 of
the Internal Revenue Code. Accordingly, individual account plans that
are not subject to the funding standards of section 412 of the Internal
Revenue Code, such as profit-sharing and stock bonus plans, are not
applicable pension plans to which section 4980F or section 204(h)
apply. Similarly, a defined benefit plan that neither qualifies under
section 401(a) or 403(a) of the Internal Revenue Code nor is subject to
part 2 of subtitle B of title I of ERISA is not an applicable pension
plan. Further, neither a governmental plan (within the meaning of
section 414(d) of the Internal Revenue Code), nor a church plan (within
the meaning of section 414(e) of the Internal Revenue Code) with
respect to which no election has been made under section 410(d) of the
Internal Revenue Code is an applicable pension plan.
(b) Section 204(h) notice not required for small plans covering no
employees. Section 204(h) notice is not required for a plan under which
no employees are participants covered under the plan, as described in
Sec. 2510.3-3(b) of the Department of Labor regulations, and which has
fewer than 100 participants.
Q-4. What is ``section 204(h) notice'' and what is a ``section
204(h) amendment''?
A-4. Section 204(h) notice is notice that complies with section
4980F(e), section 204(h)(1), and this section. A section 204(h)
amendment is an amendment for which section 204(h) notice is required
under this section.
Q-5. For which amendments is section 204(h) notice required?
A-5. (a) Significant reduction in the rate of future benefit
accrual. Section 204(h) notice is required for an amendment to an
applicable pension plan that provides for a significant reduction in
the rate of future benefit accrual, including a cessation of benefit
accrual.
(b) Early retirement benefits and retirement-type subsidies.
Section 204(h) notice is required for an amendment to an applicable
pension plan that provides for the significant reduction of an early
retirement benefit or retirement-type subsidy. For purposes of this
section, early retirement benefit and retirement-type subsidy mean
early retirement benefits and retirement-type subsidies within the
meaning of section 411(d)(6)(B)(i).
(c) Elimination or cessation of benefits. For purposes of this
section, the terms reduce or reduction include eliminate or cease or
elimination or cessation.
(d) Delegation of authority to Commissioner. The Commissioner may
provide in revenue rulings, notices, or other guidance published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) that
section 204(h) notice need not be provided for plan amendments
otherwise described in paragraph (a) or (b) of this Q&A-5 that the
Commissioner determines to be necessary or appropriate, as a result of
changes in the law, to maintain compliance with the requirements of the
Internal Revenue Code (including requirements for tax qualification),
ERISA, or other applicable federal law.
Q-6. What is an amendment that reduces the rate of future benefit
accrual or reduces an early retirement benefit or retirement-type
subsidy for purposes of determining whether section 204(h) notice is
required?
A-6. (a) In general. For purposes of determining whether section
204(h) notice is required, an amendment reduces the rate of future
benefit accrual or reduces an early retirement benefit or retirement-
type subsidy only as
[[Page 19720]]
provided in paragraph (b) or (c) of this Q&A-6.
(b) Reduction in rate of future benefit accrual--(1) Defined
benefit plans. For purposes of section 4980F and section 204(h), an
amendment to a defined benefit plan reduces the rate of future benefit
accrual only if it is reasonably expected to reduce the amount of the
future annual benefit commencing at normal retirement age for benefits
accruing for a year. For this purpose, the annual benefit commencing at
normal retirement age is the benefit payable in the form in which the
terms of the plan express the accrued benefit (or, in the case of a
plan in which the accrued benefit is not expressed in the form of an
annual benefit commencing at normal retirement age, the benefit payable
in the form of a single life annuity commencing at normal retirement
age that is the actuarial equivalent of the accrued benefit expressed
under the terms of the plan, as determined in accordance with section
411(c)(3) of the Internal Revenue Code).
(2) Individual account plans. For purposes of section 4980F and
section 204(h), an amendment to an individual account plan reduces the
rate of future benefit accrual only if it is reasonably expected to
reduce the amounts allocated in the future to participants' accounts
for a year. Changes in the investments or investment options under an
individual account plan are not taken into account for this purpose.
(3) Determination of rate of future benefit accrual. The rate of
future benefit accrual for purposes of this paragraph (b) is determined
without regard to optional forms of benefit within the meaning of
Sec. 1.411(d)-4, Q&A-1(b) of this chapter (other than the annual
benefit described in paragraph (b)(1) of this Q&A-6). The rate of
future benefit accrual is also determined without regard to ancillary
benefits and other rights or features as defined in Sec. 1.401(a)(4)-
4(e) of this chapter.
(c) Reduction of early retirement benefits or retirement-type
subsidies. For purposes of section 4980F and section 204(h), an
amendment reduces an early retirement benefit or retirement-type
subsidy only if it is reasonably expected to eliminate or reduce an
early retirement benefit or retirement-type subsidy.
Q-7. What plan provisions are taken into account in determining
whether an amendment is a section 204(h) amendment?
A-7. (a) Plan provisions taken into account. All plan provisions
that may affect the rate of future benefit accrual, early retirement
benefits, or retirement-type subsidies of participants or alternate
payees must be taken into account in determining whether an amendment
is a section 204(h) amendment. For example, plan provisions that may
affect the rate of future benefit accrual include the dollar amount or
percentage of compensation on which benefit accruals are based; the
definition of service or compensation taken into account in determining
an employee's benefit accrual; the method of determining average
compensation for calculating benefit accruals; the definition of normal
retirement age in a defined benefit plan; the exclusion of current
participants from future participation; benefit offset provisions;
minimum benefit provisions; the formula for determining the amount of
contributions and forfeitures allocated to participants' accounts in an
individual account plan; in the case of a plan using permitted
disparity under section 401(l) of the Internal Revenue Code, the amount
of disparity between the excess benefit percentage or excess
contribution percentage and the base benefit percentage or base
contribution percentage (all as defined in section 401(l) of the
Internal Revenue Code); and the actuarial assumptions used to determine
contributions under a target benefit plan (as defined in
Sec. 1.401(a)(4)-8(b)(3)(i) of this chapter). Plan provisions that may
affect early retirement benefits or retirement-type subsidies include
the right to receive payment of benefits after severance from
employment and before normal retirement age and actuarial factors used
in determining optional forms for distribution of retirement benefits.
(b) Plan provisions not taken into account. Plan provisions that do
not affect the rate of future benefit accrual of participants or
alternate payees are not taken into account in determining whether
there has been a reduction in the rate of future benefit accrual.
Further, any benefit that is not a section 411(d)(6) protected benefit
as described in Sec. 1.411(d)-4, Q&A-1(d) of this chapter, or that is a
section 411(d)(6) protected benefit that may be eliminated or reduced
as permitted under Sec. 1.411(d)-4, Q&A-2(a) or (b) of this chapter, is
not taken into account in determining whether an amendment is a section
204(h) amendment. Thus, for example, provisions relating to vesting
schedules or the right to make after-tax contributions or elective
deferrals are not taken into account.
(c) Example. The following example illustrates the rules in this
Q&A-7:
Example. (i) Facts. A defined benefit plan provides a normal
retirement benefit equal to 50% of final average compensation times
a fraction (not in excess of one), the numerator of which equals the
number of years of participation in the plan and the denominator of
which is 20. A plan amendment is adopted that changes the numerator
or denominator of that fraction.
(ii) Conclusion. The plan amendment must be taken into account
in determining whether there has been a reduction in the rate of
future benefit accrual.
Q-8. What is the basic principle used in determining whether a
reduction in the rate of future benefit accrual or a reduction in an
early retirement benefit or retirement-type subsidy is significant for
purposes of section 204(h)?
A-8. (a) General rule. Whether an amendment reducing the rate of
future benefit accrual or reducing an early retirement benefit or
retirement-type subsidy provides for a reduction that is significant
for purposes of section 204(h) is determined based on reasonable
expectations taking into account the relevant facts and circumstances
at the time the amendment is adopted.
(b) Application for determining significant reduction in the rate
of future benefit accrual. For a defined benefit plan, the
determination of whether an amendment provides for a significant
reduction in the rate of future benefit accrual is made by comparing
the amount of the annual benefit commencing at normal retirement age,
as determined under Q&A-6(b)(1) of this section, under the terms of the
plan as amended with the amount of the annual benefit commencing at
normal retirement age, as determined under Q&A-6(b)(1) of this section,
under the terms of the plan prior to amendment. For an individual
account plan, the determination of whether an amendment provides for a
significant reduction in the rate of future benefit accrual is made in
accordance with Q&A-6(b)(2) of this section by comparing the amounts to
be allocated in the future to participants' accounts under the terms of
the plan as amended with the amounts to be allocated in the future to
participants' accounts under the terms of the plan prior to amendment.
(c) Application to certain amendments reducing early retirement
benefits or retirement-type subsidies. Because section 204(h) notice is
required only for reductions that are significant, section 204(h)
notice is not required for an amendment that reduces an early
retirement benefit or retirement-type subsidy if the amendment is
permitted under the third sentence of section 411(d)(6)(B) of the
Internal Revenue Code and regulations thereunder (relating to the
elimination
[[Page 19721]]
or reduction of benefits or subsidies which create significant burdens
or complexities for the plan and plan participants unless the amendment
adversely affects the rights of any participant in a more than de
minimis manner).
Q-9. When must section 204(h) notice be provided?
A-9. (a) 45-day general rule. Except as described in paragraphs (b)
and (c) of this Q&A-9, section 204(h) notice must be provided at least
45 days before the effective date of any section 204(h) amendment. See
paragraph (d) of this Q&A-9 for special rules for amendments permitting
participant choice.
(b) 15-day rule for small plans. Except for amendments described in
paragraph (c)(2) of this Q&A-9, in the case of a small plan, section
204(h) notice must be at least 15 days before the effective date of any
section 204(h) amendment. For purposes of this section, a small plan is
a plan that the plan administrator reasonably expects to have, on the
effective date of the section 204(h) amendment, fewer than 100
participants who have an accrued benefit under the plan.
(c) Special timing rule for business transactions--(1) 15-day rule
for section 204(h) amendment in connection with an acquisition or
disposition. Except for amendments described in paragraph (c)(2) of
this Q&A-9, if a section 204(h) amendment is adopted in connection with
an acquisition or disposition, section 204(h) notice must be provided
at least 15 days before the effective date of the section 204(h)
amendment.
(2) Later notice permitted for section 204(h) amendment
significantly reducing early retirement benefit or retirement-type
subsidies in connection with certain plan transfers, mergers, or
consolidations. If a section 204(h) amendment is adopted with respect
to liabilities that are transferred to another plan in connection with
a transfer, merger, or consolidation of assets or liabilities as
described in section 414(l) of the Internal Revenue Code and
Sec. 1.414(l)-1 of this chapter, the amendment is adopted in connection
with an acquisition or disposition, and the amendment significantly
reduces an early retirement benefit or retirement-type subsidy, but
does not significantly reduce the rate of future benefit accrual, then
section 204(h) notice must be provided no later than 30 days after the
effective date of the section 204(h) amendment.
(3) Definition of acquisition or disposition. For purposes of this
paragraph (c), see Sec. 1.410(b)-2(f) of this chapter for the
definition of acquisition or disposition.
(d) Timing rule for amendments permitting participant choice. In
general, section 204(h) notice of a section 204(h) amendment that
provides applicable individuals with a choice between the old and the
new benefit formulas (as described in Q&A-12 of this section) must be
provided in accordance with the time period applicable under paragraphs
(a) through (c) of this Q&A-9. See Q&A-12 of this section for
additional guidance regarding section 204(h) notice in connection with
participant choice.
Q-10. To whom must section 204(h) notice be provided?
A-10. (a) In general. Section 204(h) notice must be provided to
each applicable individual and to each employee organization
representing participants who are applicable individuals. A special
rule is provided in paragraph (d) of this Q&A-10.
(b) Applicable individual. Applicable individual means each
participant in the plan, and any alternate payee, whose rate of future
benefit accrual under the plan is reasonably be expected to be
significantly reduced, or for whom an early retirement benefit or
retirement-type subsidy under the plan may reasonably be expected to be
significantly reduced, by the section 204(h) amendment.
(c) Alternate payee. Alternate payee means a beneficiary who is an
alternate payee (within the meaning of section 414(p)(8) of the
Internal Revenue Code) under an applicable qualified domestic relations
order (within the meaning of section 414(p)(1)(A) of the Internal
Revenue Code).
(d) Designees. Section 204(h) notice may be provided to a person
designated in writing by an applicable individual or by an employee
organization representing participants who are applicable individuals,
instead of being provided to that applicable individual or employee
organization. Any designation of a representative made through an
electronic method that satisfies standards similar to those of Q&A-
13(c)(1) of this section satisfies the requirement that a designation
be in writing.
(e) Facts and circumstances test. Whether a participant or
alternate payee is an applicable individual is determined based on all
relevant facts and circumstances at the time the section 204(h) notice
must be provided (or is provided, if earlier).
(f) Examples. The following examples illustrate the rules in this
Q&A-10:
Example 1. (i) Facts. A defined benefit plan requires an
individual to complete 1 year of service to become a participant who
can accrue benefits, and participants cease to accrue benefits under
the plan at severance from employment with the employer. There are
no alternate payees and employees are not represented by an employee
organization. The plan is amended effective as of January 1, 2005 to
significantly reduce the rate of future benefit accrual.
(ii) Conclusion. Section 204(h) notice is only required to be
provided to individuals who, on January 1, 2005, have completed at
least 1 year of service and are employed by the employer.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that the sole effect of the plan amendment is to alter the
pre-amendment plan provisions under which benefits payable to an
employee who retires after 20 or more years of service are unreduced
for commencement before normal retirement age. The amendment
requires 30 or more years of service in order for benefits
commencing before normal retirement age to be unreduced, but the
amendment only applies for future benefit accruals.
(ii) Conclusion. Section 204(h) notice is only required to be
provided to individuals who, on January 1, 2005, have completed at
least 1 year of service but less than 30 years of service, are
employed by the employer, have not attained normal retirement age,
and will have completed 20 or more years of service before normal
retirement age if their employment continues to normal retirement
age.
Example 3. (i) Facts. A plan is amended to reduce significantly
the rate of future benefit accrual for all current employees who are
participants. Based on the facts and circumstances, it is reasonable
to expect that the amendment will not reduce the rate of future
benefit accrual of former employees who are currently receiving
benefits or of former employees who are entitled to deferred vested
benefits.
(ii) Conclusion. The plan administrator is not required to
provide section 204(h) notice to any former employees.
Example 4. (i) Facts. The facts are the same as in Example 3,
except that the plan covers two groups of alternate payees. The
alternate payees in the first group are entitled to a certain
percentage or portion of the former spouse's accrued benefit and,
for this purpose, the accrued benefit is determined at the time the
former spouse begins receiving retirement benefits under the plan.
The alternate payees in the second group are entitled to a certain
percentage or portion of the former spouse's accrued benefit and,
for this purpose, the accrued benefit was determined at the time the
qualified domestic relations order was issued by the court.
(ii) Conclusion. It is reasonable to expect that the benefits to
be received by the second group of alternate payees will not be
affected by any reduction in a former spouse's rate of future
benefit accrual. Accordingly, the plan administrator is not required
to provide section 204(h) notice to the alternate payees in the
second group.
Example 5. (i) Facts. A plan covers hourly employees and
salaried employees. The plan provides the same rate of benefit
accrual for both groups. The employer amends the plan to reduce
significantly the rate of future
[[Page 19722]]
benefit accrual of the salaried employees only. At that time, it is
reasonable to expect that only a small percentage of hourly
employees will become salaried in the future.
(ii) Conclusion. The plan administrator is not required to
provide section 204(h) notice to the participants who are currently
hourly employees.
Example 6. (i) Facts. A plan covers employees in Division M and
employees in Division N. The plan provides the same rate of benefit
accrual for both groups. The employer amends the plan to reduce
significantly the rate of future benefit accrual of employees in
Division M. At that time, it is reasonable to expect that in the
future only a small percentage of employees in Division N will be
transferred to Division M.
(ii) Conclusion. The plan administrator is not required to
provide section 204(h) notice to the participants who are employees
in Division N.
Example 7. (i) Facts. The facts are the same facts as in
Example 6, except that at the time the amendment is adopted, it is
expected that thereafter Division N will be merged into Division M
in connection with a corporate reorganization (and the employees in
Division N will become subject to the plan's amended benefit formula
applicable to the employees in Division M).
(ii) Conclusion. In this case, the plan administrator must
provide section 204(h) notice to the participants who are employees
in Division M and to the participants who are employees in Division
N.
Q-11. What information is required to be provided in section 204(h)
notice?
A-11. (a) Explanation of amendment--(1) In general. Section 204(h)
notice must include sufficient information to allow applicable
individuals to understand the effect of the plan amendment, including
the approximate magnitude of the expected reduction. To the extent any
expected reduction is not uniformly applicable to all participants, the
notice must either identify the general classes of participants to whom
the reduction is expected to apply, or by some other method include
sufficient information to allow each applicable individual receiving
the notice to determine which reductions are expected to apply to that
individual. The information must be written in a manner calculated to
be understood by the average plan participant and to apprise the
applicable individual of the significance of the notice. The type and
amount of information necessary to satisfy these standards will vary
depending on the nature of the change resulting from the amendment, as
described further in paragraphs (a)(2) and (3) of this Q&A-11.
(2) Required narrative--(i) Reduction in rate of future benefit
accrual. In the case of an amendment reducing the rate of future
benefit accrual, the notice must include a description of the benefit
or allocation formula prior to the amendment, a description of the
benefit or allocation formula under the plan as amended, and the
effective date of the amendment.
(ii) Reduction in early retirement benefit or retirement-type
subsidy. In the case of an amendment that reduces an early retirement
benefit or retirement-type subsidy (other than as a result of an
amendment reducing the rate of future benefit accrual), the notice must
describe how the early retirement benefit or retirement-type subsidy is
calculated from the accrued benefit before the amendment, how the early
retirement benefit or retirement-type subsidy is calculated from the
accrued benefit after the amendment, and the effective date of the
amendment. For example, if, for a plan with a normal retirement age of
65, the change is from an unreduced normal retirement benefit at age 55
to an unreduced normal retirement benefit at age 60 for benefits
accrued in the future, with an actuarial reduction to apply for
benefits accrued in the future to the extent that the early retirement
benefit begins before age 60, the notice must state that and specify
the factors that apply in calculating the actuarial reduction (e.g., a
5% per year reduction applies for early retirement before age 60).
(3) Additional required information--(i) Standard for additional
information. In cases in which it is not reasonable to expect that the
approximate magnitude of the reduction will be reasonably apparent from
the description provided in accordance with in paragraph (a)(2) of this
Q&A-11, further information is required. This requirement can be
satisfied by furnishing additional narrative information, as described
in paragraph (a)(3)(ii) of this Q&A-11; by furnishing illustrative
examples, as described in paragraph (a)(3)(iii) of this Q&A-11; or
through a combination of these.
(ii) Additional narrative information. Further narrative
explanation of the effect of the difference between the old and new
formulas or benefit calculation may be provided to make the approximate
magnitude of the reduction apparent.
(iii) Illustrative examples--(A) Requirement generally. In cases in
which it is not reasonable to expect that the approximate magnitude of
the reduction will be reasonably apparent from the description provided
in accordance with in paragraph (a)(2) of this Q&A-11 (plus any
additional narrative information provided in accordance with paragraph
(a)(3)(ii) of this Q&A-11), the notice must include one or more
illustrative examples showing the approximate magnitude of the
reduction in the example. Thus, illustrative examples are required for
a change from a traditional defined benefit formula to a cash balance
formula or a change that results in a period of time during which there
are no accruals (or minimal accruals) with regard to normal retirement
benefits or an early retirement subsidy (a wear-away period).
(B) Examples must bound the range of reductions. Where an amendment
results in reductions that vary (as would occur for an amendment
converting a traditional defined benefit formula to a cash balance
formula or an amendment that results in a wear-away period) , the
illustrative example(s) provided in accordance with this paragraph
(a)(3)(iii) must show the approximate range of the reductions. However,
any reductions that are likely to occur in only a de minimis number of
cases are not required to be taken into account in determining the
range of the reductions if a narrative statement is included to that
effect and examples are provided that show the approximate range of the
reductions in other cases. Amendments for which the maximum reduction
occurs under identifiable circumstances, with proportionately smaller
reductions in other cases, may be illustrated by one example
illustrating the maximum reduction, with a statement that smaller
reductions also occur. Further, assuming that the reduction varies from
small to large depending on service or other factors, two illustrative
examples may be provided showing the smallest likely reduction and the
largest likely reduction.
(C) Assumptions used in examples. The examples required under this
paragraph (a)(3)(iii) are not required to be based on any particular
form of payment (such as a life annuity or a single sum), but may be
based on whatever form appropriately illustrates the reduction. The
examples generally may be based on any reasonable assumptions (e.g.,
assumptions relating to the representative participant's age, years of
service, and compensation, along with any interest rate and mortality
table used in the illustrations, as well as salary scale assumptions
used in the illustrations for amendments that alter the compensation
taken into account under the plan), but the section 204(h) notice must
identify those assumptions. However, if a plan's benefit provisions
include a factor that varies over time (such as a variable interest
rate), the determination of whether an amendment is reasonably expected
to result in a wear-away period
[[Page 19723]]
must be based on the value of the factor applicable under the plan at a
time that is reasonably close to the date section 204(h) notice is
provided, and any wear-away period that is solely a result of a future
change in the variable factor may be disregarded. For example, to
determine whether a wear-away occurs as a result of a section 204(h)
amendment that converts a defined benefit plan to a cash balance
pension plan that will credit interest based on a variable interest
factor specified in the plan, the future interest credits must be
projected based on the interest rate applicable under the variable
factor at the time section 204(h) notice is provided.
(4) No false or misleading information. A notice that includes
materially false or misleading information (or omits information so as
to cause the information provided to be misleading) does not constitute
section 204(h) notice.
(b) Additional information when reduction not uniform-- (1) In
general. If an amendment by its terms affects different classes of
participants differently (e.g., one new benefit formula will apply to
Division A and another to Division B), then the requirements of
paragraph (a) of this Q&A-11 apply separately with respect to each such
general class of participants. In addition, the notice must include
sufficient information to enable an applicable individual who is a
participant to understand which class he or she is a member of.
(2) Option for different section 204(h) notices. If a section
204(h) amendment affects different classes of applicable individuals
differently, the plan administrator may provide to differently affected
classes of applicable individuals a section 204(h) notice appropriate
to those individuals. Such section 204(h) notice may omit information
that does not apply to the applicable individuals to whom it is
furnished, but must identify the class or classes of applicable
individuals to whom it is provided.
(c) Examples. The following examples illustrate the requirements of
paragraph (a) of this Q&A-11. In each example it is assumed that the
notice is written in a manner calculated to be understood by the
average plan participant and to apprise the applicable individual of
the significance of the notice.
Example 1. (i) Facts. Plan A provides that a participant is
entitled to a normal retirement benefit of 2% of the participant's
average pay over the 3 consecutive years for which the average is
the highest (highest average pay) multiplied by years of service.
Plan A is amended to provide that, effective January 1, 2004, the
normal retirement benefit will be 2% of the participant's highest
average pay multiplied by years of service before the effective
date, plus 1% of the participant's highest average pay multiplied by
years of service after the effective date. The plan administrator
provides notice that states: ``Under the Plan's current benefit
formula, a participant's normal retirement benefit is 2% of the
participant's average pay over the 3 consecutive years for which the
average is the highest multiplied by the participant's years of
service. This formula is being changed by a plan amendment. Under
the Plan as amended, a participant's normal retirement benefit will
be the sum of 2% of the participant's average pay over the 3
consecutive years for which the average is the highest multiplied by
years of service before the effective date, plus 1% of the
participant's average pay over the 3 consecutive years for which the
average is the highest multiplied by the participant's years of
service after the effective date. This change is effective on
January 1, 2004.'' The notice does not contain any additional
information.
(ii) Conclusion. The notice satisfies the requirements of
paragraph (a) of this Q&A-11.
Example 2. (i) Facts. Plan B provides that a participant is
entitled to a normal retirement benefit at age 64 of 2.2% of the
participant's career average pay times years of service. Plan B is
amended to cease all accruals, effective January 1, 2004. The plan
administrator provides notice that includes a description of the old
benefit formula, a statement that after December 31, 2003, no
participant will earn any further accruals, and the effective date
of the amendment.
(ii) Conclusion. The notice satisfies the requirements of
paragraph (a) of this Q&A-11.
Example 3. (i) Facts. Plan C provides that a participant is
entitled to a normal retirement benefit at age 65 of 2% of career
average compensation times years of service. Plan C is amended to
provide that the normal retirement benefit will be 1% of average pay
over the 3 consecutive years for which the average is the highest
times years of service. The amendment only applies to accruals for
years of service after the amendment, so that each employee's
accrued benefit is equal to the sum of the benefit accrued as of the
effective date of the amendment plus the accrued benefit equal to
the new formula applied to years of service beginning on or after
the effective fate. The plan administrator provides notice that
describes the old and new benefit formulas and also explains that
for an individual whose compensation increases over the individual's
career such that the individual's highest 3-year average exceeds the
individual's career average, the reduction will be less or there may
be no reduction.
(ii) Conclusion. The notice satisfies the requirements of
paragraph (a) of this Q&A-11.
Example 4. (i) Facts. (A) Plan D is a defined benefit pension
plan under which each participant accrues a normal retirement
benefit, as a life annuity beginning at the normal retirement age of
65, equal to the participant's number of years of service times 1.5
percent times the participant's average pay over the 3 consecutive
years for which the average is the highest. Plan D provides early
retirement benefits for former employees beginning at or after age
55 in the form of an early retirement annuity that is actuarially
equivalent to the normal retirement benefit, with the reduction for
early commencement based on reasonable actuarial assumptions that
are specified in Plan D. Plan D provides for the suspension of
benefits of participants who continue in employment beyond normal
retirement age, in accordance with section 203(a)(3)(B) of ERISA and
regulations thereunder issued by the Department of Labor. The
pension of a participant who retires after age 65 is calculated
under the same normal retirement benefit formula, but is based on
the participant's service credit and highest 3-year pay at the time
of late retirement with any appropriate actuarial increases.
(B) Plan D is amended, effective July 1, 2005, to change the
formula for all future accruals to a cash balance formula under
which the opening account balance for each participant on July 1,
2005 is zero, hypothetical pay credits equal to 5 percent of pay are
credited to the account thereafter, and hypothetical interest is
credited monthly based on the applicable interest rate under section
417(e)(3) of the Internal Revenue Code at the beginning of the
quarter. Any participant who terminates employment with vested
benefits can receive an actuarially equivalent annuity (based on the
same reasonable actuarial assumptions that are specified in Plan D)
commencing at any time after termination of employment and before
the plan's normal retirement age of 65. The benefit resulting from
the hypothetical account balance is in addition to the benefit
accrued on June 30, 2005 (taking into account only service and
highest 3-year pay before July 30, 2005), so that it is reasonably
expected that no wear-away period will result from the amendment.
The plan administrator expects that, as a general rule, depending on
future pay increases and future interest rates, the rate of future
benefit accrual after the conversion is higher for participants who
accrue benefits before approximately age 50 and after approximately
age 70, but is lower for participants who accrue benefits between
approximately age 50 and age 70.
(C) The plan administrator of Plan D announces the conversion to
a cash balance formula on May 16, 2005. The announcement is
delivered to all participants and includes a written notice that
describes the old formula, the new formula, and the effective date.
(D) In addition, the notice states that the Plan D formula
before the conversion provided a normal retirement benefit equal to
the product of a participant's number of years of service times 1.5
percent times the participant's average pay over the 3 years for
which the average is the highest (highest 3-year pay). The notice
includes an example showing the normal retirement benefit that will
be accrued after June 30, 2005 for a participant who is age 49 with
10 years of service at the time of the conversion. The
[[Page 19724]]
plan administrator believes that such a participant is
representative of the participants whose rate of future benefit
accrual will be reduced as a result of the amendment. The example
estimates that, if the participant continues employment to age 65,
the participant's normal retirement benefit for service from age 49
to age 65 will be $657 per month for life. The example assumes that
the participant's pay is $50,000 at age 49. The example states that
the estimated $657 monthly pension accrues over the 16-year period
from age 49 to age 65 and that, based on assumed future pay
increases, this amount annually would be 9.1 percent of the
participant's highest 3-year pay at age 65, which over the 16 years
from age 49 to age 65 averages 0.57 percent per year times the
participant's highest 3-year pay. The example also states that the
sum of the monthly annuity accrued before the conversion in the 10-
year period from age 39 to age 49 plus the $657 monthly annuity
estimated to be accrued over the 16-year period from age 49 to age
65 is $1,235 and that, based on assumed future increases in pay,
this would be 17.1 percent of the participant's highest 3-year pay
at age 65, which over the employee's career from age 39 to age 65
averages 0.66 percent per year times the participant's highest 3-
year pay. The notice also includes two other examples with similar
information, one of which is intended to show the circumstances in
which a small reduction may occur and the other of which shows the
largest reduction that the plan administrator thinks is likely to
occur. The notice states that the estimates are based on the
assumption that pay increases annually after June 30, 2005 at a 4
percent rate. The notice also specifies that the applicable interest
rate under section 417(e) for hypothetical interest credits after
June 30, 2005 is assumed to be 6 percent, which is the section
417(e) of the Internal Revenue Code applicable interest rate under
the plan for 2005.
(ii) Conclusion. The information in the notice, as described in
paragraph (i)(C) of this Example 4, satisfies the requirements of
paragraph (a)(2) of this Q&A-11 with respect to applicable
individuals who are participants. The additional requirements of
paragraph (a)(3) of this Q&A-11 are satisfied because, as noted in
paragraph (i)(D) of this Example 4, the notice describes the old
formula and describes the estimated future accruals under the new
formula in terms that can be readily compared to the old formula,
i.e., the notice states that the estimated $657 monthly pension
accrued over the 16-year period from age 49 to age 65 averages 0.57
percent of the participant's highest 3-year pay at age 65. The
requirement that the examples include sufficient information to be
able to determine the approximate magnitude of the reduction would
also be satisfied if the notice instead directly stated the amount
of the monthly pension that would have accrued over the 16-year
period from age 49 to age 65 under the old formula.
Example 5. (i) Facts. The facts are the same as in Example 4,
except that, under the plan as in effect before the amendment, the
early retirement pension for a participant who terminates employment
after age 55 with at least 20 years of service is equal to the
normal retirement benefit without reduction from age 65 to age 62
and reduced by only 5 percent per year for each year before age 62.
As a result, early retirement benefits for such a participant
constitute a retirement-type subsidy. The plan as in effect after
the amendment provides an early retirement benefit equal to the sum
of the early retirement benefit payable under the plan as in effect
before the amendment taking into account only service and highest 3-
year pay before July 1, 2005, plus an early retirement annuity that
is actuarially equivalent to the account balance for service after
June 30, 2005. The notice provided by the plan administrator
describes the old early retirement annuity, the new early retirement
annuity, and the effective date. The notice includes an estimate of
the early retirement annuity payable to the illustrated participant
for service after the conversion if the participant were to retire
at age 59 (which the plan administrator believes is a typical early
retirement age) and elect to begin receiving an immediate early
retirement annuity. The example states that the normal retirement
benefit expected to be payable at age 65 as a result of service from
age 49 to age 59 is $434 per month for life beginning at age 65 and
that the early retirement annuity expected to be payable as a result
of service from age 49 to age 59 is $270 per month for life
beginning at age 59. The example states that the monthly early
retirement annuity of $270 is 38 percent less than the monthly
normal retirement benefit of $434, whereas a 15 percent reduction
would have applied under the plan as in effect before the amendment.
The notice also includes similar information for examples that show
the smallest and largest reduction that the plan administrator
thinks is likely to occur in the early retirement benefit. The
notice also specifies the applicable interest rate, mortality table,
and salary scale used in the example to calculate the early
retirement reductions.
(ii) Conclusion. The information in the notice, as described in
paragraphs (i)(C) and (i)(D) of Example 4 and paragraph (i) of this
Example 5, satisfies the requirements of paragraph (a) of this Q&A-
11 with respect to applicable individuals who are participants. The
requirements of paragraph (a)(3) of this Q&A-11 are satisfied
because, as noted in paragraph (i) of this Example 5, the notice
describes the early retirement subsidy under the old formula and
describes the estimated early retirement pension under the new
formula in terms that can be readily compared to the old formula,
i.e., the notice states that the monthly early retirement pension of
$270 is 38 percent less than the monthly normal retirement benefit
of $434, whereas a 15 percent reduction would have applied under the
plan as in effect before the amendment. The requirements of
paragraph (a)(1) of this Q&A-11 would also be satisfied if the
notice instead directly stated the amount of the monthly early
retirement pension that would be payable at age 59 under the old
formula.
Q-12. What special rules apply if participants can choose between
the old and new benefit formulas?
A-12. In any case in which an applicable individual can choose
between the benefit formula (including any early retirement benefit or
retirement-type subsidy) in effect before the section 204(h) amendment
(old formula) or the benefit formula in effect after the section 204(h)
amendment (new formula), section 204(h) notice has not been provided
unless the applicable individual has been provided the information
required under Q&A-11 of this section, and has also been provided
sufficient information to enable the individual to make an informed
choice between the old and new benefit formulas. The information
required under Q&A-11 of this section must be provided by the date
otherwise required under Q&A-9 of this section. The information
sufficient to enable the individual to make an informed choice must be
provided within a period that is reasonably contemporaneous with the
date by which the individual is required to make his or her choice and
that allows sufficient advance notice to enable the individual to
understand and consider the additional information before making that
choice.
Q-13. How may section 204(h) notice be provided?
A-13. (a) A plan administrator (including a person acting on behalf
of the plan administrator, such as the employer or plan trustee) must
provide section 204(h) notice through a method that results in actual
receipt of the notice or the plan administrator must take appropriate
and necessary measures reasonably calculated to ensure that the method
for providing section 204(h) notice results in actual receipt of the
notice. Section 204(h) notice must be provided either in the form of a
paper document or in an electronic form that satisfies the requirements
of paragraph (c) of this Q&A-13. First class mail to the last known
address of the party is an acceptable delivery method. Likewise, hand
delivery is acceptable. However, the posting of notice is not
considered provision of section 204(h) notice. Section 204(h) notice
may be enclosed with or combined with other notice provided by the
employer or plan administrator (for example, a notice of intent to
terminate under title IV of ERISA). Except as provided in paragraph (c)
of this Q&A-13, a section 204(h) notice is deemed to have been provided
on a date if it has been provided by the end of that day. When notice
is delivered by first class mail, the notice is considered provided as
of the date of the United States postmark stamped on the cover in which
the document is mailed.
[[Page 19725]]
(b) Example. The following example illustrates the provisions of
paragraph (a) of this Q&A-13:
Example. (i) Facts. Plan A is amended to reduce significantly
the rate of future benefit accrual effective January 1, 2005. Under
Q&A-9 of this section, section 204(h) notice is required to be
provided at least 45 days before the effective date of the
amendment. The plan administrator causes section 204(h) notice to be
mailed to all affected participants. The mailing is postmarked
November 16, 2004.
(ii) Conclusion. Because section 204(h) notice is given 45 days
before the effective date of the plan amendment, it satisfies the
timing requirement of Q&A-9 of this section.
(c) New technologies--(1)General rule. A section 204(h) notice may
be provided to an applicable individual through an electronic method
(other than an oral communication or a recording of an oral
communication), provided that all of the following requirements are
satisfied:
(i) Either the notice is actually received by the applicable
individual or the plan administrator takes appropriate and necessary
measures reasonably calculated to ensure that the method for providing
section 204(h) notice results in actual receipt of the notice by the
applicable individual.
(ii) The plan administrator provides the applicable individual with
a clear and conspicuous statement, in electronic or non-electronic
form, that the applicable individual has a right to request and obtain
a paper version of the section 204(h) notice without charge and, if
such request is made, the applicable individual is furnished with the
paper version without charge.
(iii) The requirements of this section must otherwise be satisfied.
Thus, for example, a section 204(h) notice provided through an
electronic method must be delivered on or before the date required
under Q&A-9 of this section and must satisfy the requirements set forth
in Q&A-11 of this section, including the content requirements and the
requirements that it be written in a manner calculated to be understood
by the average plan participant and to apprise the applicable
individual of the significance of the notice. Accordingly, when it is
not otherwise reasonably evident, the recipient should be apprised
(either in electronic or non-electronic form), at the time the notice
is furnished electronically, of the significance of the notice.
(2) Examples. The following examples illustrate the requirement in
paragraph (c)(1)(i) of this Q&A-13. In these examples, it is assumed
that the notice satisfies the requirements in paragraph (c)(1)(ii) and
(iii) of this section. The examples are as follows:
Example 1. (i) Facts. On July 1, 2003, M, a plan administrator
of Company N's plan, sends notice intended to satisfy section 204(h)
of ERISA to A, an employee of Company N and a participant in the
plan. The notice is sent through e-mail to A's e-mail address on
Company N's electronic information system. Accessing Company N's
electronic information system is not an integral part of A's duties.
M sends the e-mail with a request for a computer-generated
notification that the message was received and opened. M receives
notification indicating that the e-mail was received and opened by A
on July 9, 2003.
(ii) Conclusion. With respect to A, although M has failed to
take appropriate and necessary measures reasonably calculated to
ensure that the method for providing section 204(h) notice results
in actual receipt of the notice, M satisfies the requirement of
paragraph (c)(1)(i) of this Q&A-13 on July 9, 2003, which is when A
actually receives the notice.
Example 2. (i) Facts. On August 1, 2003, O, a plan administrator
of Company P's plan, sends a notice intended to satisfy section
204(h) of ERISA to B, who is an employee of Company P and a
participant in Company P's plan. The notice is sent through e-mail
to B's e-mail address on Company P's electronic information system.
B has the ability to effectively access electronic documents from
B's e-mail address on Company P's electronic information system and
accessing the system is an integral part of B's duties.
(ii) Conclusion. Because access to the system is an integral
part of B's duties, O has taken appropriate and necessary measures
reasonably calculated to ensure that the method for providing
section 204(h) notice results in actual receipt of the notice. Thus,
regardless of whether B actually accesses B's email on that date, O
satisfies the requirement of paragraph (c)(1)(i) of this Q&A-13 on
August 1, 2003, with respect to B.
(3) Safe harbor in case of consent. The requirement of paragraph
(c)(1)(i) of this Q&A-13 is deemed to be satisfied with respect to an
applicable individual if the section 204(h) notice is provided
electronically to an applicable individual, and--
(i) The applicable individual has affirmatively consented
electronically, or confirmed consent electronically, in a manner that
reasonably demonstrates the applicable individual's ability to access
the information in the electronic form in which the notice will be
provided, to receiving section 204(h) notice electronically and has not
withdrawn such consent;
(ii) The applicable individual has provided, if applicable, in
electronic or non-electronic form, an address for the receipt of
electronically furnished documents;
(iii) Prior to consenting, the applicable individual has been
provided, in electronic or non-electronic form, a clear and conspicuous
statement indicating--
(A) That the consent can be withdrawn at any time without charge;
(B) The procedures for withdrawing consent and for updating the
address or other information needed to contact the applicable
individual;
(C) Any hardware and software requirements for accessing and
retaining the documents; and
(D) The information required by paragraph (c)(1)(ii) of this Q&A-
13; and
(iv) After consenting, if a change in hardware or software
requirements needed to access or retain electronic records creates a
material risk that the applicable individual will be unable to access
or retain the section 204(h) notice--
(A) The applicable individual is provided with a statement of the
revised hardware and software requirements for access to and retention
of the section 204(h) notice and is given the right to withdraw consent
without the imposition of any fees for such withdrawal and without the
imposition of any condition or consequence that was not disclosed at
the time of the initial consent; and
(B) The requirement of paragraph (c)(3)(i) of this Q&A-13 is again
complied with.
Q-14. What are the consequences if a plan administrator fails to
provide section 204(h) notice?
A-14. (a) Egregious failures-- (1) Effect of egregious failure to
provide section 204(h) notice. Section 204(h)(6)(A) of ERISA provides
that, in the case of any egregious failure to meet the notice
requirements with respect to any plan amendment, the plan provisions
are applied so that all applicable individuals are entitled to the
greater of the benefit to which they would have been entitled without
regard to the amendment, or the benefit under the plan with regard to
the amendment. For a special rule applicable in the case of a plan
termination, see Q&A-17(b) of this section.
(2) Definition of egregious failure. For purposes of section 204(h)
of ERISA and this Q&A-14, there is an egregious failure to meet the
notice requirements if a failure to provide required notice is within
the control of the plan sponsor and is either an intentional failure or
a failure, whether or not intentional, to provide most of the
individuals with most of the information they are entitled to receive.
For this purpose, an intentional failure includes any failure to
promptly provide the required notice or information after the plan
administrator discovers an
[[Page 19726]]
unintentional failure to meet the requirements. A failure to give
section 204(h) notice is deemed not to be egregious if the plan
administrator reasonably determines, taking into account section 204(h)
of ERISA, section 4980F of the Internal Revenue Code, these
regulations, other administrative pronouncements, and relevant facts
and circumstances, that the reduction in the rate of future benefit
accrual resulting from an amendment is not significant (as described in
Q&A-8 of this section), or that an amendment does not significantly
reduce an early retirement benefit or retirement-type subsidy.
(3) Example. The following example illustrates the provisions of
this paragraph (a):
Example. (i) Facts. Plan A is amended to reduce significantly
the rate of future benefit accrual effective January 1, 2003.
Section 204(h) notice is required to be provided 45 days before
January 1, 2003. Timely section 204(h) notice is provided to all
applicable individuals (and to each employee organization
representing participants who are applicable individuals), except
that the employer intentionally fails to provide section 204(h)
notice to certain participants until May 16, 2003.
(ii) Conclusion. The failure to provide section 204(h) notice is
egregious. Accordingly, for the period from January 1, 2003 through
June 30, 2003 (which is the date that is 45 days after May 16,
2003), all participants and alternate payees are entitled to the
greater of the benefit to which they would have been entitled under
Plan A as in effect before the amendment or the benefit under the
plan as amended.
(b) Effect of non-egregious failure to provide section 204(h)
notice. If an egregious failure has not occurred, the amendment with
respect to which section 204(h) notice is required may become effective
with respect to all applicable individuals. However, see section 502 of
ERISA for civil enforcement remedies. Thus, where there is a failure,
whether or not egregious, to provide section 204(h) notice in
accordance with this section, individuals may have recourse under
section 502 of ERISA.
(c) Excise taxes. See section 4980F of the Internal Revenue Code
and Q&A-15 of this section for excise taxes that may apply to a failure
to notify applicable individuals of a pension plan amendment that
provides for a significant reduction in the rate of future benefit
accrual or eliminates or significantly reduces an early retirement
benefit or retirement-type subsidy, regardless of whether or not the
failure is egregious.
Q-15. What are some of the rules that apply with respect to the
excise tax under section 4980F?
A-15. (a) Person responsible for excise tax. In the case of a plan
other than a multiemployer plan, the employer is responsible for
reporting and paying the excise tax. In the case of a multiemployer
plan, the plan is responsible for reporting and paying the excise tax.
(b) Excise tax inapplicable in certain cases. Under section
4980F(c)(1) of the Internal Revenue Code, no excise tax is imposed on a
failure for any period during which it is established to the
satisfaction of the Commissioner that the employer (or other person
responsible for the tax) exercised reasonable diligence, but did not
know that the failure existed. Under section 4980F(c)(2) of the
Internal Revenue Code, no excise tax applies to a failure to provide
section 204(h) notice if the employer (or other person responsible for
the tax) exercised reasonable diligence and corrects the failure within
30 days after the employer (or other person responsible for the tax)
first knew, or exercising reasonable diligence would have known, that
such failure existed. For purposes of section 4980F(c)(1) of the
Internal Revenue Code, a person has exercised reasonable diligence, but
did not know that the failure existed if and only if--
(1) The person exercised reasonable diligence in attempting to
deliver section 204(h) notice to applicable individuals by the latest
date permitted under this section; and
(2) At the latest date permitted for delivery of section 204(h)
notice, the person reasonably believes that section 204(h) notice was
actually delivered to each applicable individual by that date.
(c) Example. The following example illustrates the provisions of
paragraph (b) of this Q&A-15:
Example. (i) Facts. Plan A is amended to reduce significantly
the rate of future benefit accrual. The employer sends out a section
204(h) notice to all affected participants and other applicable
individuals and to any employee organization representing applicable
individuals, including actual delivery by hand to employees at
worksites. However, although the employer exercises reasonable
diligence in seeking to deliver the notice, the notice is not
delivered to any participants at one worksite due to a failure of an
overnight delivery service to provide the notice to appropriate
personnel at that site for them to timely hand deliver the notice to
affected employees. The error is discovered when the employer
subsequently calls to confirm delivery. Appropriate section 204(h)
notice is then promptly delivered to all affected participants at
the worksite.
(ii) Conclusion. Because the employer exercised reasonable
diligence, but did not know that a failure existed, no excise tax
applies, assuming that participants at the worksite receive section
204(h) notice within 30 days after the employer first knew, or
exercising reasonable diligence would have known, that the failure
occurred.
Q-16. How do section 4980F and section 204(h) apply when a business
is sold?
A-16. (a) Generally. Whether section 204(h) notice is required in
connection with the sale of a business depends on whether a plan
amendment is adopted that significantly reduces the rate of future
benefit accrual or significantly reduces an early retirement benefit or
retirement-type subsidy.
(b) Examples. The following examples illustrate the rules of this
Q&A-16:
Example 1. (i) Facts. Corporation Q maintains Plan A, a defined
benefit plan that covers all employees of Corporation Q, including
employees in its Division M. Plan A provides that participating
employees cease to accrue benefits when they cease to be employees
of Corporation Q. On January 1, 2006, Corporation Q sells all of the
assets of Division M to Corporation R. Corporation R maintains Plan
B, which covers all of the employees of Corporation R. Under the
sale agreement, employees of Division M become employees of
Corporation R on the date of the sale (and cease to be employees of
Corporation Q), Corporation Q continues to maintain Plan A following
the sale, and the employees of Division M become participants in
Plan B.
(ii) Conclusion. No section 204(h) notice is required because no
plan amendment was adopted that reduced the rate of future benefit
accrual. The employees of Division M who become employees of
Corporation R ceased to accrue benefits under Plan A because their
employment with Corporation Q terminated.
Example 2. (i) Facts. Subsidiary Y is a wholly owned subsidiary
of Corporation S. Subsidiary Y maintains Plan C, a defined benefit
plan that covers employees of Subsidiary Y. Corporation S sells all
of the stock of Subsidiary Y to Corporation T. At the effective date
of the sale of the stock of Subsidiary Y, in accordance with the
sale agreement between Corporation S and Corporation T, Subsidiary Y
amends Plan C so that all benefit accruals cease.
(ii) Conclusion. Section 204(h) notice is required to be
provided because Subsidiary Y adopted a plan amendment that
significantly reduced the rate of future benefit accrual in Plan C.
Example 3. (i) Facts. As a result of an acquisition, Corporation
U maintains two plans: Plan D covers employees of Division N and
Plan E covers the rest of the employees of Corporation U. Plan E
provides a significantly lower rate of future benefit accrual than
Plan D. Plan D is merged with Plan E, and all of the employees of
Corporation U will accrue benefits under the merged plan in
accordance with the benefit formula of former Plan E.
(ii) Conclusion. Section 204(h) notice is required.
Example 4. (i) Facts. The facts are the same as in Example 3,
except that the rate of future
[[Page 19727]]
benefit accrual in Plan E is not significantly lower. In addition,
Plan D has a retirement-type subsidy that Plan E does not have and
the Plan D employees' rights to the subsidy under the merged plan
are limited to benefits accrued before the merger.
(ii) Conclusion. Section 204(h) notice is required for any
participants or beneficiaries for whom the reduction in the
retirement-type subsidy is significant (and for any employee
organization representing such participants).
Example 5. (i) Facts. Corporation V maintains several plans,
including Plan F, which covers employees of Division P. Plan F
provides that participating employees cease to accrue further
benefits under the plan when they cease to be employees of
Corporation V. Corporation V sells all of the assets of Division P
to Corporation W, which maintains Plan G for its employees. Plan G
provides a significantly lower rate of future benefit accrual than
Plan F. Plan F is merged with Plan G as part of the sale, and
employees of Division P who become employees of Corporation W will
accrue benefits under the merged plan in accordance with the benefit
formula of former Plan G.
(ii) Conclusion. No section 204(h) notice is required because no
plan amendment was adopted that reduces the rate of future benefit
accrual or eliminates or significantly reduces an early retirement
benefit or retirement-type subsidy. Under the terms of Plan F as in
effect prior to the merger, employees of Division P cease to accrue
any further benefits (including benefits with respect to early
retirement benefits and any retirement-type subsidy) under Plan F
after the date of the sale because their employment with Corporation
V terminated.
Q-17. How are amendments to cease accruals and terminate a plan
treated under section 4980F of the Internal Revenue Code and section
204(h) of ERISA?
A-17. (a) General rule--(1) Rule. An amendment providing for the
cessation of benefit accruals on a specified future date and for the
termination of a plan is subject to section 4980F of the Internal
Revenue Code and section 204(h) of ERISA.
(2) Example. The following example illustrates the rule of
paragraph (a)(1) of this Q&A-17:
Example. (i) Facts. An employer adopts an amendment that
provides for the cessation of benefit accruals under a defined
benefit plan on December 31, 2003, and for the termination of the
plan pursuant to title IV of ERISA as of a proposed termination date
that is also December 31, 2003. As part of the notice of intent to
terminate required under title IV in order to terminate the plan,
the plan administrator gives section 204(h) notice of the amendment
ceasing accruals, which states that benefit accruals will cease ``on
December 31, 2003.'' However, because all the requirements of title
IV for a plan termination are not satisfied, the plan cannot be
terminated until a date that is later than December 31, 2003.
(ii) Conclusion. Nonetheless, because section 204(h) notice was
given stating that the plan was amended to cease accruals on
December 31, 2003, section 204(h) does not prevent the amendment to
cease accruals from being effective on December 31, 2003. The result
would be the same had the section 204(h) notice informed the
participants that the plan was amended to provide for a proposed
termination date of December 31, 2003 and to provide that ``benefit
accruals will cease on the proposed termination date whether or not
the plan is terminated on that date.'' However, neither section
4980F of the Internal Revenue Code nor section 204(h) of ERISA would
be satisfied with respect to the December 31, 2003 effective date if
the section 204(h) notice had merely stated that benefit accruals
would cease ``on the termination date'' or ``on the proposed
termination date.''
(3) Additional requirements under title IV of ERISA. See 29 CFR
4041.23(b)(4) and 4041.43(b)(5) for special rules applicable to plans
terminating under title IV of ERISA.
(b) Terminations in accordance with title IV of ERISA. A plan that
is terminated in accordance with title IV of ERISA is deemed to have
satisfied section 4980F of the Internal Revenue Code and section 204(h)
of ERISA not later than the termination date (or date of termination,
as applicable) established under section 4048 of ERISA. Accordingly,
neither section 4980F of the Internal Revenue Code nor section 204(h)
of ERISA would in any event require that any additional benefits accrue
after the effective date of the termination.
(c) Amendment effective before termination date of a plan subject
to title IV of ERISA. To the extent that an amendment providing for a
significant reduction in the rate of future benefit accrual or a
significant reduction in an early retirement benefit or retirement-type
subsidy has an effective date that is earlier than the termination date
(or date of termination, as applicable) established under section 4048
of ERISA, that amendment is subject to section 4980F of the Internal
Revenue Code and section 204(h) of ERISA. Accordingly, the plan
administrator must provide section 204(h) notice (either separately,
with, or as part of the notice of intent to terminate) with respect to
such an amendment.
Q-18. What is the effective date of section 4980F of the Internal
Revenue Code, section 204(h) of ERISA, as amended by EGTRRA, and these
regulations?
A-18. (a) Statutory effective date--(1) General rule. Section 4980F
of the Internal Revenue Code and section 204(h) of ERISA, as amended by
EGTRRA, apply to plan amendments taking effect on or after June 7, 2001
(statutory effective date), which is the date of enactment of EGTRRA.
(2) Transition rule. For amendments applying after the statutory
effective date in paragraph (a)(1) of this Q&A-18 and prior to the
regulatory effective date in paragraph (c) of this Q&A-18, the
requirements of section 4980F(e)(2) and (3) of the Internal Revenue
Code and section 204(h) of ERISA, as amended by EGTRRA, are treated as
satisfied if the plan administrator makes a reasonable, good faith
effort to comply with those requirements.
(3) Special notice rule--(i) In general. Notwithstanding Q&A-9 of
this section, section 204(h) notice is not required by section 4980F(e)
of the Internal Revenue Code or section 204(h) of ERISA, as amended by
EGTRRA, to be provided prior to September 7, 2001 (the date that is
three months after the date of enactment of EGTRRA).
(ii) Reasonable notice. The requirements of section 4980F of the
Internal Revenue Code and section 204(h) of ERISA, as amended by
EGTRRA, do not apply to any plan amendment that takes effect on or
after June 7, 2001 if, before April 25, 2001, notice was provided to
participants and beneficiaries adversely affected by the plan amendment
(and their representatives) which was reasonably expected to notify
them of the nature and effective date of the plan amendment. For
purposes of this paragraph (a)(3)(ii), notice that complies with
Sec. 1.411(d)-6 of this chapter, as it appeared in the April 1, 2001
edition of 26 CFR part 1, is deemed to be notice which was reasonably
expected to notify participants and beneficiaries adversely affected by
the plan amendment (and their representatives) of the nature and
effective date of the plan amendment.
(b) Amendments taking effect prior to June 7, 2001. For rules
applicable to amendments taking effect prior to June 7, 2001, see
Sec. 1.411(d)-6 of this chapter, as it appeared in the April 1, 2001
edition of 26 CFR part 1.
(c) Regulatory effective date. Q&A-1 through Q&A-18 of this section
apply to amendments taking effect on or after the date that is 120 days
after publication of final regulations under this section (regulatory
effective date).
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-9529 Filed 4-22-02; 8:45 am]
BILLING CODE 4830-01-P