Proposed Regulations Relating to Continued Pension Plan Accruals Beyond Normal Retirement Age.

[Editor's Note: At 67 F.R. 76123-76142, Dec. 11, 2002, the IRS published new proposed regs, REG-164464-02, which amend the following proposed regs by revising proposed reg. Sec. 1.411(b)-2 as set out below; however, REG-164464-02 (with regard to age-discrimination rules) was withdrawn in Announcement 2004-57 June 15, 2004.]

CC:EE-184-86 [4830-01]

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the requirement for continued accruals beyond normal retirement age under employee pension benefit plans. Changes to the applicable tax law were made by the Omnibus Budget Reconciliation Act of 1986. These regulations will provide the public with guidance needed to comply with the minimum participation and vesting standards and affect employers maintaining employee retirement plans.

DATES: Written comments and request for a public hearing must be delivered or mailed by April 12, 1988. These amendments generally apply to plan years beginning after December 31, 1987, except as otherwise specified in the Omnibus Budget Reconciliation Act of 1986.

ADDRESS: Send comments and requests for a public hearing to: Commissioner of Internal Revenue, Attention: CC:LR:T (EE-184-86) Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Michael C. Garvey of the Employee Benefits and Exempt Organizations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T) (202-566-6271) (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains proposed amendments to the Income Tax Regulations (26 CFR Part 1) under sections 410 and 411 of the Internal Revenue Code of 1986. These amendments are proposed to conform the regulations to sections 9201 through 9204, Subtitle C (Older Americans Pension Benefits) of Title IX of the Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509) (OBRA 1986) (100 Stat. 1874, 1973).

EXPLANATION OF PROVISIONS

Section 9202(b)(1) of OBRA 1986 added subparagraph (H) to section 411(b)(1) of the Internal Revenue Code (Code) to provide rules for continued benefit accruals under defined benefit plans without regard to the attainment of any age. Section 9202(b)(2) of OBRA 1986 redesignated paragraphs (2) and (3) of Code section 411(b) as paragraphs (3) and (4) and added a new paragraph (2) to Code section 411(b) to provide rules for allocations to the accounts of employees in defined contribution plans without regard to the attainment of any age.

Effective with respect to plan years beginning after December 31, 1987, section 411(b)(1)(H)(i) provides the general rule that a defined benefit plan will not be treated as meeting the minimum vesting standards of section 411 (and, accordingly, will not constitute a qualified plan under section 401(a)) if under the plan an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age. Effective for plan years beginning after December 31, 1987, section 411(b)(2) provides that a defined contribution plan will not be treated as satisfying the minimum vesting standards of section 411 (and, accordingly, will not constitute a qualified plan under section 401(a)) if allocations to an employee's account are ceased, or the rate of allocations to an employee's account is reduced, because of the attainment of any age.

The proposed regulations provide that reductions or cessations of account allocations or benefit accruals that are based on factors other than age will not affect the qualification of the plan under section 411(b)(1)(H) or (b)(2). The proposed regulations also provide that benefits under a defined benefit plan may accrue at different rates without violating section 411(b)(1)(H), provided the difference in the rate of benefit accrual is determined without regard to the attainment of any age.

Section 411(b)(1)(H)(ii) provides that a plan will not be treated as failing to satisfy the general rule in section 411(b)(1)(H)(i) merely because the plan contains a limitation (determined without regard to age) on the maximum number of years of service or participation that are taken into account in determining benefits under the plan or merely because the plan contains a limitation on the amount of benefits an employee will receive under the plan. The proposed regulations provide that these limitations are permitted in both defined benefit plans and defined contribution plans (including target benefit plans).

Section 411(b)(1)(H)(iii) provides that, with respect to a employee who, as of the end of a plan year, has attained normal retirement age under a defined benefit plan, certain adjustments may be made to the benefit accrual for the plan year if the plan distributes benefits to the employee or if the plan adjusts the amount of the benefits payable to take into account delayed payment. The continued benefit accrual rules of section 411(b)(1)(H) operate in conjunction with the suspension of benefit payment rules under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA) and the proposed regulations do not change the rules relating to the suspension of pension benefit payments under section 203(a)(3)(B) of ERISA and the regulations thereunder issued by the Department of Labor. However, the proposed regulations provide rules under which benefit accruals required under section 411(b)(1)(H)(i) may be reduced or offset either by the value of actuarial adjustments in an employee's normal retirement benefit or by the value of benefit distributions made to an employee.

Section 411(b)(1)(H)(iv) provides that a defined benefit plan will not be treated as failing to satisfy the general rule of section 411(b)(1)(H)(i) merely because the subsidized portion of an early retirement benefit provided under the plan (whether provided on a permanent or temporary basis) is disregarded in determining benefit accruals under the plan. The proposed regulations also provide that a plan will not be treated as falling to satisfy the general rule of section 411(b)(1)(H)(i) merely because a social security supplemental benefit or a qualified disability benefit is disregarded in determining benefit accruals under the plan.

The proposed regulations provide that the rate of an employee's benefit accrual under a defined benefit plan or the rate of allocations to an employee's account under a defined contribution plan will be considered to be reduced on account of the attainment of a specified age if optional forms of benefits, ancillary benefits or other benefits, rights or features under a plan that are provided with respect to benefits or allocations prior to such age are not provided (on terms that are at least as favorable to employees) with respect to benefits or allocations after such age. Thus, for example, under the proposed regulations, a plan may not make a lump sum option available only with respect to benefits or allocations attributable to service prior to a specified age. Similarly, a plan may not use actuarial assumptions that are less favorable to employees for determining lump sum benefits payable after a specified age than are used for determining lump sum benefits payable prior to such age. However, the proposed regulations provide that the accrual rate under a defined benefit plan will not be considered to be reduced merely because the subsidized portion of an early retirement benefit, a qualified disability benefit or a social security supplemental benefit provided under the plan ceases to be provided to an employee or is provided on a reduced basis to an employee by a plan on account of the employee's attainment of a specified age.

Section 411(b)(1)(H)(v) and (b)(2)(D) provide that the Secretary shall prescribe regulations coordinating the requirements of section 411(b)(1)(H) and (b)(2) with the requirements of sections 411(a), 404, 410, 415 and the anti-discrimination provisions of subchapter D of Chapter 1 (Code sections 401 through 425). The proposed regulations provide that no allocation to the account of an employee in a defined contribution plan and no benefit accrual on behalf of an employee in a defined benefit plan are required under section 411(b)(1)(H) or (b)(2) if such allocation or benefit accrual would cause the plan to (1) exceed the section 415 limitations on benefits and contributions, or (2) discriminate in favor of highly compensated employees within the meaning of section 401(a)(4).

Section 9203(a)(2) of OBRA 1986 amended Code section 410(a)(2) to provide that a plan will not constitute a qualified plan under section 401(a) if the plan excludes from participation (on the basis of age) an employee who has attained a specified age. The proposed regulations provide that, effective for plan years beginning after December 31, 1987, a plan may not apply a maximum age provision to any employee who has at least one hour of service for the employer on or after January 1, 1988, regardless of when the employee first performed an hour of service for the employer.

In the case of an employee who was ineligible to participate in a plan before the effective date of amended Code section 410(a)(2) because of a maximum age condition and who is eligible to participate in the plan on or after the effective date of such section, hours of service and years of service credited to the employee before the first plan year beginning on or after January 1, 1988, shall be taken into account in accordance with section 411 and the regulations thereunder and in accordance with 29 CFR Part 2530 for purposes of determining the employee's nonforfeitable right to the employee's accrued benefit. However, with respect to an employee described in the preceding sentence, hours of service and years of service credited to the employee before the first plan year beginning on or after January 1, 1988, are not required to be taken into account for purposes of determining the employee's accrued benefit under the plan for plan years beginning on or after January 1, 1988. See, also, section 411(a)(4) and section 1.411(a)-5 for rules relating to service that must be taken into account in determining an employee's nonforfeitable right to the employee's accrued benefit.

Section 9203(b)(2) of OBRA 1986 amended Code section 411(a)(8)(B) to provide rules relating to the determination of a participant's normal retirement age under a defined benefit plan and a defined contribution plan. Because section 203(e) of the pending Technical Corrections Act of 1987 (H.R. 2636) would change the definition of normal retirement age from the definition now set forth in section 411(a)(8)(B) (as amended by OBRA 1986), the proposed regulations do not set forth any rules under section 411(a)(8)(B) (as amended by OBRA 1986).

Section 9202(b) of OBRA 1986 amended Code section 411(b)(2)(C) to require the Secretary to provide by regulations for the application of the continued allocation rules of section 411(b)(2) to target benefit plans. The proposed regulations do not provide detailed special rules applicable to target benefit plans. Target benefit plans are subject to the rules applicable to defined contribution plans. The Commissioner will prescribe such additional rules relating to the continued allocation of contributions and accrual of benefits under target benefit plans as may be necessary or appropriate.

EFFECTIVE DATE

Section 9204(a)(1) of OBRA 1986 provides that the amendments made with regard to section 41l(b)(l)(H) and (b)(2) "shall apply only with respect to plan years beginning on or after January 1, 1988, and only to employees who have 1 hour of service in any plan year to which such amendments apply." The proposed regulations provide that section 41l(b)(l)(H) and (b)(2) does not apply to an employee who does not have at least 1 hour of service for the employer in a plan year beginning on or after January 1, 1988.

However, the proposed regulations provide that section 411(b)(1)(H) and (b)(2) applies with respect to all years of service completed by an employee who has at least 1 hour of service in a plan year beginning on or after January 1, 1988. Accordingly, under section 411(b)(1)(H)(i), the proposed regulations provide that, for plan years beginning on or after January 1, 1988, in determining the benefit payable under a defined benefit plan to a participant who has at least 1 hour of service in a plan year beginning on or after January 1, 1988, the plan does not satisfy section 411(a) if the plan disregards, because of the participant's attainment of any age, any year of service completed by the participant or any compensation earned by the participant after attaining such age, including years of service completed and compensation earned before the first plan year beginning on or after January 1, 1988. Under the proposed regulations, section 411(b)(2) does not require allocations to the accounts of employees under a defined contribution plan for any plan year beginning before January 1, 1988. However, the proposed regulations provide that, for plan years beginning on or after January 1, 1988, in determining the allocation to the account of a participant (who has at least 1 hour of service in a plan year beginning on or after January 1, 1988) under a defined contribution plan that determines allocations under a service related allocation formula, the plan does not satisfy section 411(a) if the plan disregards, because of the participant's attainment of any age, any year of service completed by the participant.

Under the proposed regulations, a defined benefit plan and a defined contribution plan will not be treated as impermissibly disregarding, because of the participant's attainment of any age, a year of service completed by the participant before the first plan year beginning before January 1, 1988, merely because the participant was not eligible under the plan to make mandatory or voluntary employee contributions (as well as contributions under a cash or deferred arrangement described in section 401(k)) for such year.

TITLE I OF ERISA AND OBRA 1986

Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has jurisdiction over the subject matter addressed in the OBRA 1986 regulations. Therefore, under section 104 of the Reorganization Plan, these regulations apply when the Secretary of Labor exercises authority under Title I of ERISA (as amended, including the amendments made by Title IX of OBRA 1986 and the amendments by the Tax Reform Act of 1986). Thus, the requirements also apply to employee plans subject to Part 2 of Title I of ERISA.

Under section 9201 of OBRA 1986, these regulations also apply for purposes of applying comparable provisions under section 4(i)(7) of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623) as amended. No inference is intended under the proposed regulations as to the application of the Age Discrimination in Employment Act of 1967, as in effect prior to its amendment by OBRA 1986, to employees who are not credited with at least 1 hour of service in a plan year beginning on or after January 1, 1988.

RELIANCE ON THESE PROPOSED REGULATIONS

Taxpayers may rely on these proposed regulations for guidance pending the issuance of final regulations. Because these regulations are generally effective for plan years beginning after 1987, the Service will apply these proposed regulations in issuing rulings and in examining returns with respect to taxpayers and plans. If future guidance is more restrictive, such guidance will be applied without retroactive effect.

TIME OF PLAN AMENDMENTS

The proposed regulations provide rules relating to the postponement of the deadline for amending plans to comply with the provisions of OBRA 1986. Plan amendments required to conform the plan to the changes contained in OBRA 1986 need not be made until the dates specified in section 1140 of the Tax Reform Act of 1986 (in general, the last day of the first plan year commencing on or after January 1, 1989). This deferred amendment date is available only if: (1) the plan is operated in accordance with the applicable provisions of OBRA 1986 for the period beginning with the effective date of the provision with respect to the plan; (2) the plan amendments adopted are retroactive to such effective date; and (3) the plan amendments adopted are consistent with plan operation during the retroactive effective period.

SPECIAL ANALYSES

The Commissioner of Internal Revenue has determined that this proposed rule is not a major rule as defined in Executive Order 12291 and that a regulatory impact analysis is not required.

Although this document is a notice of proposed rulemaking which solicits public comments, the Internal Revenue Service has concluded that the regulations proposed herein are interpretative and that the notice and public procedure requirements of 5 U.S.C. 553 do not apply. Accordingly, these proposed regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6).

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before adopting these proposed regulations, consideration will be given to any written comments that are submitted (preferably eight copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying. A public hearing will be held upon written request to the Commissioner by any person who has submitted comments. If a public hearing is held, notice of the time and place will be published in the Federal Register.

DRAFTING INFORMATION

The principal author of these proposed regulations is Michael C. Garvey of the Employee Benefits and Exempt Organizations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR 1.401-0 - 1.425-1

Income taxes, Employee benefits plans, Pensions.

PROPOSED AMENDMENTS TO THE REGULATIONS

The proposed amendments to 26 CFR Part 1 are as follows:

INCOME TAX REGULATIONS (26 CFR Part 1)

Paragraph 1. The authority citation for Part 1 is amended by adding the following citation:

Authority: 26 U.S.C. 7805 *** Section 1.411(b)-2 is also issued under 26 U.S.C. 411(b)(1)(H) and 411(b)(2).

Par. 2. A new section 1.410(a)-4A is added immediately after Section 1.410(a)-4 to read as follows:

Section 1.410(a)-4A Maximum age conditions after 1987.

(a) MAXIMUM AGE CONDITIONS. Under section 410(a)(2), a plan is not a qualified plan (and a trust forming a part of such plan is not a qualified trust) if the plan, either directly or indirectly, excludes any employee from participation on the basis of attaining a maximum age.

(b) EFFECTIVE DATE AND TRANSITIONAL RULE. If a plan contains a provision that excludes an employee from participation on the basis of attaining a maximum age, the provision may not be applied in a plan year beginning on or after January 1, 1988, to any employee (regardless of when the employee first performed an hour of service for the employer) who is credited with at least 1 hour of service on or after January 1, 1988. For purposes of determining when such an employee (who is not otherwise ineligible to participate in the plan) must become eligible to participate in the plan under section 410(a)(1)(A)(ii), section 410(a)(1)(B) and the provisions of the plan, hours of service and years of service credited to the employee before the first plan year beginning on or after January 1, 1988, are taken into account in accordance with section 410 and the regulations thereunder and in accordance with 29 CFR Part 2530. Any employee who would be eligible to participate in the plan taking such service into account and whose entry date would be prior to the first day of the first plan year beginning on or after January 1, 1988, must participate in the plan as of the first day of such plan year.

(c) EXAMPLES. The provisions of this section may be illustrated by the following examples:

Section 1.411(a)-1 Minimum vesting standards; general rules.

(a) IN GENERAL. * * *

(3) The plan satisfies the requirements of --

(A) Section 411(a)(2) and section 1.411(a)-3 (relating to vesting in accrued benefit derived from employer contributions),

(B) In the case of a defined benefit plan, section 411(b)(1) and (3) (see sections 1.411(b)-1 and 1.411(b)-2, relating to accrued benefit requirements, separate accounting and accruals and allocations after a specified age), and

(C) In the case of a defined contribution plan, section 411(b)(2) and (3) (see sections 1.411(b)-1(e)(2) and 1.411(b)-2, relating to accruals and allocations after a specified age and separate accounting).

* * * * *

Par. 4. Section 1.411(a)-7 is amended by adding a new subparagraph (b)(8) to read as follows:

Section 1.411(a)-7 Definitions and special rules.

* * * * *

(b) NORMAL RETIREMENT AGE. * * *

(8) EFFECT OF OMNIBUS BUDGET RECONCILIATION ACT OF 1986 (OBRA). [RESERVED]

* * * * *

Par. 5. A new section 1.411(b)-2 is added after section 1.411(b)-1 to read as follows:

[Editor's Note: At 67 F.R. 76123-76142, Dec. 11, 2002, the following proposed regulation was amended by revising new proposed reg. section 1.411(b)-2.]

§1.411(b)-2 Reductions of accruals or allocations because of attainment of any age.

(a) In general -- (1) Overview. Section 411(b)(1)(H) provides that a defined benefit plan does not satisfy the minimum vesting standards of section 411(a) if, under the plan, benefit accruals on behalf of a participant are ceased or the rate of benefit accrual on behalf of a participant is reduced because of the participant's attainment of any age. Section 411(b)(2) provides that a defined contribution plan does not satisfy the minimum vesting standards of section 411(a) if, under the plan, allocations to a participant's account are ceased or the rate of allocation to a participant's account is reduced because of the participant's attainment of any age. Paragraph (b) of this section provides general rules for defined benefit plans. Paragraph (c) of this section provides general rules for defined contribution plans. Paragraph (d) of this section provides rules applying this section to optional forms of benefit, ancillary benefits, and other rights or features under defined benefit and defined contribution plans. Paragraph (e) of this section provides rules coordinating the requirements of this section with certain other qualification requirements. Paragraph (f) of this section contains effective date provisions.

(2) Attainment of any age. For purposes of sections 411(b)(1)(H), 411(b)(2), and this section, a participant's attainment of any age means the participant's growing older. Thus, the rules of sections 411(b)(1)(H), 411(b)(2), and this section apply regardless of whether a participant is younger than, at, or older than normal retirement age.

(b) Defined benefit plans -- (1) In general -- (i) Requirement. A defined benefit plan does not satisfy the requirements of section 411(b)(1)(H) if a participant's rate of benefit accrual is reduced, either directly or indirectly, because of the participant's attainment of any age. A reduction in a participant's rate of benefit accrual includes any discontinuance in the participant's accrual of benefits or cessation of participation in the plan.

(ii) Definition of normal form. For purposes of this paragraph (b), the normal form of benefit (also referred to as the normal form) means the form under which payments to the participant under the plan are expressed under the plan formula, prior to adjustment for form of benefit.

(2) Rate of benefit accrual -- (i) Rate of benefit accrual before normal retirement age. For purposes of this paragraph (b), except as provided in paragraph (b)(2)(iii) of this section, a participant's rate of benefit accrual for any plan year that ends before the participant attains normal retirement age is the excess (if any) of --

(A) The participant's accrued normal retirement benefit at the end of the plan year; over

(B) The participant's accrued normal retirement benefit at the end of the preceding plan year.

(ii) Rate of benefit accrual after normal retirement age. In the case of a plan for which the rate of benefit accrual before normal retirement age is determined under paragraph (b)(2)(i) of this section, except as provided in paragraph (b)(4)(iii)(C) of this section, a participant's rate of benefit accrual for the plan year in which the participant attains normal retirement age or any later plan year (taking into account the provisions of section 411(b)(1)(H)(iii)(II)) is the excess (if any) of --

(A) The annual benefit to which the participant is entitled at the end of the plan year, determined as if payment commences at the end of the plan year in the normal form (or the straight life annuity that is actuarially equivalent to the normal form if the normal form is not an annual benefit that does not decrease during the lifetime of the participant); over

(B) The annual benefit to which the participant was entitled at the end of the preceding plan year, determined as if payment commences at the later of normal retirement age or the end of the preceding plan year in the normal form (or the straight life annuity that is actuarially equivalent to the normal form if the normal form is not an annual benefit that does not decrease during the lifetime of the participant).

(iii) Rate of benefit accrual for eligible cash balance plans -- (A) General rule. For purposes of this paragraph (b), in the case of an eligible cash balance plan, a participant's rate of benefit accrual for a plan year is permitted to be determined as the addition to the participant's hypothetical account for the plan year, except that interest credits added to the hypothetical account for the plan year are disregarded to the extent the participant had accrued the right to those interest credits as of the close of the preceding plan year as described in paragraph (b)(2)(iii)(B)(2) of this section.

(B) Eligible cash balance plans. For purposes of this section, a defined benefit plan is an eligible cash balance plan for a plan year if it satisfies each of the following requirements for current accruals under the plan for that plan year --

(1) Plan design. The normal form of benefit is an immediate payment of the balance in a hypothetical account (without regard to whether such an immediate payment is actually available under the plan).

(2) Right to future interest. With respect to a participant's hypothetical account balance, the participant has accrued the right to annual (or more frequent) interest credits to be added to the hypothetical account for all future periods without regard to future service at a reasonable rate of interest that is not reduced, either directly or indirectly, because of the participant's attainment of any age. A plan is treated as not satisfying the requirement of this paragraph (b)(2)(iii)(B)(2) if it provides for any adjustment for benefit distributions described in paragraph (b)(4) of this section.

(3) Plan amendments adopting cash balance formula. In the case of a plan amendment that has been amended to adopt a cash balance formula (as described in paragraphs (b)(2)(iii)(B)(1) and (2) of this section) for a participant, the plan as amended satisfies the requirements of either paragraph (b)(2)(iii)(D) or (E) of this section.

(C) Plans with mixed benefit formulas -- (1) Eligible cash balance formula. If a portion of the plan formula under a defined benefit plan would satisfy the requirements to be an eligible cash balance plan if it were the only formula under the plan, then, for purposes of this section, such portion of the plan formula is referred to as an eligible cash balance formula and the other portion of the plan formula is referred to as a traditional defined benefit formula. If the eligible cash balance formula and the traditional defined benefit formula interact in a manner described in paragraph (b)(2)(iii)(C)(2), (3), or (4) of this section for current and future accruals under the plan, then, for purposes of determining whether the plan satisfies section 411(b)(1)(H), the plan is permitted to be treated as two separate plans, one of which is an eligible cash balance plan and the other of which is not, but only if each such plan would satisfy section 410(a)(2). Thus, such a plan satisfies the requirements of section 411(b)(1)(H) if the eligible cash balance formula satisfies the requirements of paragraph (b)(1) of this section with the participant's rate of benefit accrual determined under paragraph (b)(2)(iii)(A) of this section and the portion of the plan's formula that is a traditional defined benefit formula satisfies the requirements of paragraph (b)(1) of this section with the participant's rate of benefit accrual determined under paragraph (b)(2)(i) or (ii) of this section, as applicable. If the eligible cash balance formula and the traditional defined benefit formula interact in a manner other than as set forth in paragraphs (b)(2)(iii)(C)(2), (3), or (4) of this section, the plan is not treated as an eligible cash balance plan for any portion of the plan formula.

(2) Plans with additive formulas. A plan is described in this paragraph (b)(2)(iii)(C)(2) if the participant's benefit is based on the sum of accruals under two different formulas, one of which is an eligible cash balance formula and the other of which is not.

(3) Plans with greater of formulas. A plan is described in this paragraph (b)(2)(iii)(C)(3) if the plan provides a benefit for a participant equal to the greater of the benefit determined under two or more formulas under the plan for a plan year, one of which is an eligible cash balance formula and another of which is not.

(4) Different formulas for different participants. A plan is described in this paragraph (b)(2)(iii)(C)(4) if some participants are eligible for accruals only under an eligible cash balance formula and the remaining participants are eligible for accruals only under a traditional defined benefit formula or a combination of a traditional defined benefit formula or eligible cash balance formula described in paragraphs (b)(2)(iii)(C)(2) and (3) of this section.

(D) Plan amendment adopting eligible cash balance formula using a sum of formula. A plan satisfies this paragraph (b)(2)(iii)(D) only if for all periods after the amendment becomes effective the plan provides benefits that are not less than the sum of the benefits accrued as of the later of the date the amendment becomes effective or the date the amendment is adopted, plus the benefits provided by the participant's hypothetical account under the eligible cash balance formula.

(E) Plan amendment adopting eligible cash balance formula using an opening account balance -- (1) Calculation of opening account balance. A plan satisfies this paragraph (b)(2)(iii)(E) only if the balance in the participant's hypothetical account, determined immediately after the amendment becomes effective, is not less than the actuarial present value of the participant's accrued benefit payable in the normal form of benefit, determined as of the later of the date the amendment becomes effective or the date the amendment is adopted, with such present value determined using reasonable actuarial assumptions. For this purpose, the actuarial assumptions are not reasonable if they include an interest rate that increases, either directly or indirectly, because of a participant's attainment of any age. The actuarial assumptions do not fail to be reasonable merely because pre- retirement mortality is not taken into account.

(2) Bifurcation for purposes of determining rate of benefit accrual. If a plan satisfies the requirements of paragraph (b)(2)(iii)(E)(1), only the portion of the participant's hypothetical account balance in excess of the actuarial present value of the participant's accrued benefit payable in the normal form of benefit is treated as an addition to the participant's hypothetical account balance for the plan year for purposes of determining the participant's rate of benefit accrual under paragraph (b)(2)(iii)(A) of this section.

(3) Treatment of employees past normal retirement age. In addition, a plan does not satisfy this paragraph (b)(2)(iii)(E) if the opening balance for a participant who has attained normal retirement age is less than the balance that would apply if the participant were at his or her normal retirement age.

(iv) Determination of rate of benefit accrual -- (A) In general. A participant's rate of benefit accrual for a plan year can be determined as a dollar amount. Alternatively, if a plan's formula bases a participant's accruals on current compensation, then a participant's rate of benefit accrual can be determined as a percentage of the participant's current compensation. For example, for an accumulation plan (as defined in §1.401(a)(4)-12), the participant's rate of benefit accrual under paragraph (b)(2)(i) of this section can be determined as the excess of the accrued portion of the participant's normal retirement benefit at the end of the plan year over the accrued portion of the participant's normal retirement benefit at the end of the preceding plan year, divided by compensation taken into account under the plan for the plan year. Likewise, if a plan's formula bases a participant's accruals on average compensation, then a participant's rate of benefit accrual can be determined as a percentage of that measure of the participant's average compensation. For a plan that determines benefits as a percentage of average annual compensation (as defined in §1.401(a)(4)-3(e)(2)), the rate of benefit accrual under paragraph (b)(2)(i) of this section is determined as the excess of the accrued portion of the participant's normal retirement benefit at the end of the plan year divided by average annual compensation taken into account under the plan at the end of the plan year, over the accrued portion of the participant's normal retirement benefit at the end of the preceding plan year divided by average annual compensation taken into account under the plan at the end of such preceding plan year. A plan is permitted to determine the participant's rate of benefit accrual as a percentage of the participant's current or average compensation only if compensation under the plan is determined without regard to attainment of any age.

(B) Benefits included in rate of benefit accrual. For purposes of determining a participant's rate of benefit accrual, only benefits that are included in a participant's accrued benefit are taken into account. Thus, for example, a participant's rate of benefit accrual does not take into account benefits such as the benefits described in paragraph (d)(3) of this section (relating to qualified disability benefits, social security supplements, and early retirement benefits).

(v) Examples. The following examples illustrate the application of this paragraph (b)(2). In each of the examples, normal retirement age is 65. The examples are as follows:

Example 1. Plan L is a defined benefit plan under which the normal form of benefit is a monthly straight life annuity commencing at normal retirement age (or the date of actual retirement, if later) equal to $30 times the participant's years of service. For purposes of this section, a participant's rate of benefit accrual for any plan year is $30.

Example 2. (i) Plan M is a defined benefit plan under which the normal form of benefit is an annual straight life annuity commencing at normal retirement age (or the date of actual retirement, if later) equal to 1% of the average of a participant's highest 3 consecutive years of compensation times the participant's years of service.

(ii) For purposes of this section, a participant's rate of benefit accrual for any plan year can be expressed as a dollar amount. Alternatively, a participant's rate of benefit accrual for a plan year can be expressed as 1% of the participant's highest 3 consecutive years of compensation (determined using the same rules applicable to determining compensation under the plan for purposes of computing the normal form of benefit), provided that the definition of compensation used for this purpose is determined without regard to the attainment of any age. A participant's rate of benefit accrual cannot be determined as a percentage of any other measure of compensation or average compensation.

(iii) If Plan M were to provide that compensation earned after the attainment of age 65 is not taken into account in determining average compensation or were otherwise to determine compensation in a manner that depends on a participant's age, then, for purposes of this section, a participant's rate of benefit accrual would have to be expressed as a dollar amount, and could not be expressed as a percentage of any measure of compensation or average compensation.

Example 3. (i) Plan N is a defined benefit plan under which the normal form of benefit is an immediate payment of the balance in a participant's hypothetical account. A compensation credit equal to 6% of each participant's wages for the year is added to the hypothetical account of a participant who is an employee. At the end of each plan year, the hypothetical account is credited with interest based on the applicable interest rate under section 417(e), as provided under the plan. All participants accrue the right to receive interest credits on their hypothetical account in the future regardless of performance of services in the future, including after normal retirement age.

(ii) Under paragraph (b)(2)(iii)(B) of this section, Plan N satisfies the requirements to be an eligible cash balance plan. Participant A's compensation for a plan year is $40,000. The compensation credit for Participant A allocated to A's hypothetical account for that plan year is $2,400. Because Plan N is an eligible cash balance plan, the rate of benefit accrual for Participant A is permitted to be determined as the addition to Participant A's hypothetical account for the plan year, disregarding interest credits. Therefore, Participant A's rate of benefit accrual is equal to $2,400, or 6% of wages.

Example 4. (i) The facts are the same as in Example 3, except that the cash balance formula under Plan N is the result of a plan amendment. Under the plan, as amended, the benefits equal the sum of --

(1) 1% of the average of the participant's highest 3 consecutive years of base salary times years of service, but disregarding service and salary after the effective date of the amendment, in a normal form of benefit that is a straight life annuity commencing at normal retirement age (or the date of actual retirement, if later); and

(2) the participant's hypothetical account under the same cash balance formula in Example 3 that applies after the effective date of the amendment, in a normal form of benefit expressed as an immediate payment of the balance of the participant's hypothetical account.

(ii) Under paragraph (b)(2)(iii)(B)(3) of this section, the plan is an eligible cash balance plan if the plan satisfies the requirements of paragraph (b)(2)(iii)(D) or (E) of this section. The plan's formula is described in paragraph (b)(2)(iii)(D) of this section. Accordingly, the portion of the plan formula that provides for compensation credits on a participant's hypothetical account is an eligible cash balance formula under paragraph (b)(2)(iii)(B) of this section. Therefore, a participant's rate of benefit accrual under the eligible cash balance formula is permitted to be determined as the addition to the participant's hypothetical account for the plan year, disregarding interest credits. Participant B's base salary for the year is $50,000. The compensation credit for Participant B credited to B's hypothetical account for the year is $3,000. The rate of benefit accrual under the eligible cash balance formula for Participant B is equal to $3,000, or 6% of base salary.

Example 5. (i) The facts are the same as in Example 3, except that Plan N is a defined benefit plan that is converted to a cash balance plan by the adoption of a plan amendment, effective at the beginning of the next plan year, establishing an opening hypothetical account for each participant with an accrued benefit under the plan prior to conversion. Prior to conversion, Plan N provided a benefit equal to 1% of the average of a participant's highest 3 consecutive years of compensation times years of service. Effective as of the date of the conversion, hypothetical accounts are established equal to the present value of a participant's accrued benefit using section 417(e) interest and reasonable mortality assumptions (except no pre-retirement mortality is used). Under the cash balance portion of the formula, compensation and interest credits are made as described in Example 3.

(ii) Under paragraph (b)(2)(iii)(B)(3) of this section, the plan is an eligible cash balance plan only if the plan satisfies the requirements of paragraph (b)(2)(iii)(D) or (E) of this section. The plan's formula is described in paragraph (b)(2)(iii)(E) of this section. Accordingly, the portion of the plan formula that provides for compensation credits on a participant's hypothetical account is an eligible cash balance formula. The rate of benefit accrual for a participant is therefore permitted to be determined as the addition to the participant's hypothetical account for the plan year, disregarding interest credits. In addition, under paragraph (b)(2)(iii)(E) of this section, because the opening hypothetical account balance is equal to the actuarial present value of the participant's accrued benefit, that balance is not treated as an addition for the plan year. The result would not be different if the opening accounts were established using another interest rate or another mortality assumption if the actuarial assumptions were reasonable. Participant C's wages for the year are $60,000. The compensation credit allocated to C's hypothetical account for the year is $3,600. The rate of accrual under the eligible cash balance formula for C is equal to $3,600, or 6% of compensation.

Example 6. (i) The facts are the same as in Example 5, except that Plan N provides for only new participants and participants who are less than age 55 at the time of the conversion to be eligible for benefits under the cash balance formula. Accordingly, participants who are age 55 or older at the time of the conversion are only eligible for the benefit payable under the plan formula in effect before the conversion (1% of the participant's highest 3 consecutive years of compensation times years of service) taking into account compensation and service after the conversion.

(ii) Because Plan N provides benefits based on a mixed formula under paragraph (b)(2)(iii)(C) of this section, Plan N is permitted under paragraph (b)(2)(iii)(C)(1) of this section to be treated as two separate plans for purposes of section 411(b)(1)(H), one of which is an eligible cash balance plan and the other of which is not, but only if each plan would satisfy section 410(a)(2). No portion of Plan N can be treated as an eligible cash balance plan because the portion of Plan N that would otherwise be an eligible cash balance plan would fail to satisfy section 410(a)(2) as a result of having a maximum age of 55 for individuals who are participants at the time of the conversion.

Example 7. (i) The facts are the same as in Example 5, except that Plan N provides for participants to receive the greater of the benefit payable under the cash balance formula or the benefit payable under the plan formula in effect before the conversion (1% of the participant's highest 3 consecutive years of compensation times years of service) taking into account compensation and service after the conversion.

(ii) Because Plan N provides benefits based on the greater of the amount payable under two different formulas, under paragraph (b)(2)(iii)(C)(4) of this section, Plan N is tested for satisfaction of the requirements of section 411(b)(1)(H) and this paragraph (b) by separately testing the eligible cash balance formula using a rate of benefit accrual equal to compensation credits of 6% of compensation and the traditional defined benefit formulas using a rate of benefit accrual equal to 1% of highest 3 consecutive years of compensation.

(3) Reduction that is directly or indirectly because of a participant's attainment of any age -- (i) Reduction in rate of benefit accrual that is directly because of a participant's attainment of any age. A plan provides for a reduction in the rate of benefit accrual that is directly because of a participant's attainment of any age for any plan year if, under the terms of the plan, any participant's rate of benefit accrual for the plan year would be higher if the participant were younger. Thus, a plan fails to satisfy section 411(b)(1)(H) and this paragraph (b) if, under the terms of the plan, the rate of benefit accrual for any individual who is or could be a participant under the plan would be lower solely as a result of the individual being older.

(ii) Reduction in rate of benefit accrual that is indirectly because of a participant's attainment of any age -- (A) In general. A plan provides for a reduction in the rate of benefit accrual that is indirectly because of a participant's attainment of any age for any plan year if any participant's rate of benefit accrual for the plan year would be higher if the participant were to have a different characteristic which is a proxy for being younger, based on the all of relevant facts and circumstances. Thus, a plan fails to satisfy section 411(b)(1)(H) and this paragraph (b) if the rate of benefit accrual for any individual who is or could be a participant under the plan would be lower solely as a result of such individual having a different characteristic which is a proxy for being older, based on all of the relevant facts and circumstances.

(B) Permissible limitations. A reduction in a participant's rate of benefit accrual is not indirectly because of the attainment of any age in violation of section 411(b)(1)(H) solely because of a positive correlation between attainment of any age and a reduction in the rate of benefit accrual. In addition, a defined benefit plan does not fail to satisfy section 411(b)(1)(H) and this paragraph (b) solely because, on a uniform and consistent basis without regard to a participant's age, the plan limits the amount of benefits a participant may accrue under the plan, limits the number of years of service or years of participation taken into account for purposes of determining the accrual of benefits under the plan (credited service), or provides for a reduced rate of accrual for credited service in excess of a fixed number of years. For this purpose, a limitation that is expressed as a percentage of compensation (whether averaged over a participant's total years of credited service for the employer or over a shorter period) is treated as a permissible limitation on the amount of benefits a participant may accrue under the plan.

(iii) Examples. The provisions of this paragraph (b)(3) may be illustrated by the following examples. In each of the examples, except as specifically indicated, normal retirement age is 65, the plan contains no limitations on the maximum amount of benefits the plan will pay to any participant (other than the limitations imposed by section 415), on the maximum number of years of credited service taken into account under the plan, or on the compensation used for purposes of determining the amount of any participant's accrued benefit (other than the limitation imposed by section 401(a)(17)), and the plan uses the following actuarial assumptions in determining actuarial equivalence: a 7.5% rate of interest and the 83 GAM (male) mortality table. The examples are as follows:

Example 1. (i) Plan M provides an accrued benefit of 1% of a participant's average annual compensation, multiplied by the participant's years of credited service under the plan payable in the normal form of a straight life annuity commencing at normal retirement age or the date of actual retirement if later. Plan M suspends payment of benefits for participants who work past normal retirement age, in accordance with section 411(a)(3)(B) and 29 CFR 2530.203-3 of the regulations of the Department of Labor, and does not provide for an actuarial increase in computing the accrued benefit for participants who commence benefits after normal retirement age.

(ii) The rate of benefit accrual for all participants in Plan M is 1% of average annual compensation. Thus, there could be no participant who would have a rate of benefit accrual that is greater than 1% if the individual were younger. Accordingly, there is no reduction in the rate of benefit accrual because of the individual's attainment of any age under this paragraph (b)(3) and Plan M satisfies the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 2. (i) Assume the same facts as in Example 1, except that Plan M provides that not more than 35 years of credited service are taken into account in determining a participant's accrued benefit under the plan. Participant A became a participant in the plan at age 25 and worked continuously in covered service under Plan M until A retires at age 70.

(ii) The rate of benefit accrual under Plan M is 1% of average annual compensation for participants who have up to 35 years of credited service and zero for participants who have more than 35 years of credited service. Because a reduction from a rate of benefit accrual from 1% of average annual compensation to zero is based on service, and would not be affected if any participant were younger (with the same number of years of service), Plan M does not provide for a reduction in the rate of benefit accrual that is directly because of an individual's attainment of any age as provided in paragraph (b)(3)(i) of this section. Under paragraph (b)(3)(ii) of this section, a uniform limit on the number of years of service taken into account for purposes of determining the accrual of benefits under the plan is not considered to be a reduction in the rate of benefit accrual that is indirectly because of a participant's attainment of any age.

(iii) Upon A's retirement at age 70, A will have an accrued benefit under the plan's benefit formula of 35% of A's average annual compensation at age 70 (1% per year of credited service x 35 years of credited service). Plan M will not fail to satisfy the requirements of section 411(b)(1)(H) and this paragraph (b) merely because the plan provides that the final 10 years of A's service under the plan are not taken into account in determining A's accrued benefit. The result would be the same if Plan M provided that no participant could accrue a benefit in excess of 35% of the participant's average annual compensation.

Example 3. Assume the same facts as in Example 1, except that Plan M provides that a participant's years of service after attainment of social security retirement age are disregarded for purposes of determining a participant's accrued benefit under the plan. Because a participant who is covered under the plan after social security retirement age would have a higher rate of benefit accrual if he or she were younger (and had not attained social security retirement age), that participant's rate of benefit accrual is reduced directly because of the participant's attainment of any age under paragraph (b)(3)(i) of this section. Consequently, Plan M fails to satisfy the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 4. (i) Assume the same facts as in Example 1, except that Plan M provides that a participant's compensation after the attainment of age 62 is not taken into account in determining the participant's accrued benefit under the plan.

(ii) Accordingly, the plan's measure of average compensation cannot be used in determining a participant's rate of benefit accrual because it does not apply to participants in a uniform manner that is independent of age. Because a participant who is or could be covered under Plan M after the attainment of age 62 whose compensation increases after age 62 would have a higher rate of benefit accrual if the participant were younger than age 62, that participant's rate of benefit accrual is reduced directly because of the participant's attainment of any age under paragraph (b)(3)(i) of this section. This reduction occurs whether or not there is any actual participant in Plan M who has attained age 62 or whose average annual compensation has increased after age 62. Consequently, the plan fails to satisfy the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 5. (i) Assume the same facts as in Example 1, except that Plan M is amended to cease all benefit accruals for all participants and is subsequently terminated.

(ii) After all benefit accruals have ceased, the rate of benefit accrual of all participants is zero. Thus, there could not be any participant who would have a rate of benefit accrual that is greater than zero if the participant were younger, so that there is no reduction in the rate of benefit accrual that is because of the individual's attainment of any age under paragraph (b)(3) of this section. Accordingly, Plan M satisfies the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 6. (i) Employer Y maintains Plan O, a defined benefit plan that provides an accrued benefit of 1% of a participant's highest 5 consecutive years of compensation, multiplied by the sum of the participant's age and years of service, payable in the normal form of a straight life annuity commencing at normal retirement age or the date of actual retirement if later. Plan O provides that a participant's years of service after the sum of a participant's age and years of service reach a total of 55 are disregarded for purposes of determining the normal retirement benefit. Participant C is 45 years old and has 10 years of credited service as of the beginning of a plan year. Thus, for that plan year, C's rate of benefit accrual is 1% of C's highest 5 consecutive years of compensation.

(ii) If C were younger, for example age 39 (with the same years of service), C would have a rate of benefit accrual of 2% of C's highest 5 consecutive years of compensation. Accordingly, C's rate of benefit accrual is reduced directly because of C's attainment of any age as provided in this paragraph (b)(3)(i). Consequently, Plan O fails to satisfy the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 7. (i) Plan P is a defined benefit plan that provides for a normal retirement benefit of 40% of a participant's average compensation for the participant's highest 3 consecutive years of compensation, payable in the normal form of a straight life annuity commencing at normal retirement age or the date of actual retirement if later. If a participant separates from service prior to normal retirement age, Plan P provides a benefit equal to an amount that bears the same ratio to 40% of such average compensation as the participant's actual number of years of service bears to the number of years of service the participant would have if the participant's service continued to normal retirement age. As of the end of a plan year, participant D is 45 years old and has completed 20 years of service, and participant E is 41 years old and has completed 1 year of credited service. Thus, D's rate of benefit accrual for the plan year may be determined as 1% of compensation for D's highest 3 consecutive years, and E's rate of benefit accrual for the plan year may be determined as 1.6% of compensation for E's highest 3 consecutive years.

(ii) If D were younger than age 45 (with 20 years of service and the same compensation history), D's rate of benefit accrual for the plan year would not be greater than 1% of compensation for D's highest 3 consecutive years. Thus, there is no reduction in the rate of benefit accrual for D that is directly because of the individual's attainment of any age as provided in paragraph (b)(3)(i) of this section. In addition, there are no facts and circumstances indicating that D's rate of benefit accrual is reduced indirectly because of D's attainment of any age as provided in paragraph (b)(3)(ii) of this section. Likewise, if E were younger than age 41 (with 1 year of service and the same compensation history), E's rate of benefit accrual for the plan year would not be greater than 1.6% of compensation for E's highest 3 consecutive years. Thus, there is no reduction in the rate of benefit accrual for E that is directly because of the individual's attainment of any age as provided in paragraph (b)(3)(i) of this section. In addition, there are no facts and circumstances indicating that E's rate of benefit accrual is reduced indirectly because of E's attainment of any age under paragraph (b)(3)(ii) of this section. These same results would apply for any possible participant in Plan P. Accordingly, Plan P satisfies the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 8. (i) Plan A is a defined benefit plan that provides for an accrued benefit of 2% of a participant's average compensation for the participant's highest 3 consecutive years of compensation for the first 20 years of service, plus 1% of such average compensation for years in excess of 20, payable in the normal form of a straight life annuity commencing at normal retirement age or the date of actual retirement if later. However, if a participant separates from service prior to normal retirement age, Plan P provides a benefit equal to an amount that bears the same ratio to the total percentage of such average compensation that the participant would have if service continued to normal retirement age as the participant's actual number of years of service bears to the number of years of service the participant would have if the participant's service continued to normal retirement age. For participants who work past normal retirement age, Plan A provides a benefit equal to 2% per year for years of service not in excess of 20, plus the following rate for years of service in excess of 20: the sum of 40% plus the product of 1% times service in excess of 20 years, with that sum divided by total service to the end of the current plan year. As of the beginning of the plan year beginning January 1, 2008, participant N is 64 years old and has completed 20 years of service, and participant O is 70 years old and has completed 20 years of credited service. Thus, N's rate of benefit accrual for that plan year may be determined as 1.95% of compensation for N's highest 3 consecutive years (2% for 20 years, plus 1% for 1 year, with that sum divided by 21 equals 1.95%), and O's rate of benefit accrual for that plan year also may be determined 1.95% of compensation for O's highest 3 consecutive years (40% for the first 20 years, plus 1% for service to the end of 2008, with that sum divided by 21 equals 1.95%).

(ii) If O were younger than age 70 (with 20 years of service and the same compensation history), O's rate of benefit accrual for the plan year would not be greater than 1.95% of compensation for O's highest 3 consecutive years. The same conclusion applies for any other possible participant. Thus, Plan A satisfies paragraph (b)(3)(ii) of this section.

(iii) However, if Plan A were instead to provide a rate of benefit accrual for service after normal retirement age equal to 2% for years of service not in excess of 20, plus 1% for service in excess of 20, Plan A would fail to satisfy paragraph (b)(3)(ii) of this section. For example, O's rate of benefit accrual would be 1% for 2008, whereas N's rate of benefit accrual would be 1.95% for 2008, even though the only difference between O and N is that N is younger.

Example 9. (i) The facts are similar to Example 8, except that the formula is 1% of a participant's average compensation for the participant's highest 3 consecutive years of compensation for the first 20 years, plus 2% of such average compensation for years in excess of 20, payable in the normal form of a straight life annuity commencing at normal retirement age or the date of actual retirement if later. As in Example 8, if a participant separates from service prior to normal retirement age, Plan P provides a benefit equal to an amount that bears the same ratio to the total percentage of such average compensation that the participant would have if service continued to normal retirement age as the participant's actual number of years of service bears to the number of years of service the participant would have if the participant's service continued to normal retirement age. Further, similar to the facts in Example 8(iii) of this paragraph (b)(3)(iii), for participants who work past normal retirement age, Plan A provides a benefit equal to 1% per year for years of service not in excess of 20, plus 2% per year for years of service in excess of 20. As of the beginning of the plan year beginning January 1, 2008, participant K is 45 years old and has completed 10 years of service, and participant M is 55 years old and has completed 10 years of credited service. Thus, K's rate of benefit accrual for the plan year may be determined as 1.33% of compensation for K's highest 3 consecutive years (1% for 20 years, plus 2% for 10 more years, with the sum divided by 30 equals 1.33%), and M's rate of benefit accrual for the plan year may be determined as 1% of compensation for O's highest 3 consecutive years (1% for 20 years, with that amount divided by 20 equals 1%).

(ii) If M were younger than age 55 (with 10 years of service and the same compensation history), M's rate of benefit accrual for the plan year would be greater than 1% of compensation for M's highest 3 consecutive years. (Plan A also provides for an impermissible reduction in the rate of benefit accrual for a participant whose service continues after normal retirement age in a manner that is comparable to Example 8(iii) of this paragraph (b)(3)(iii).) Thus, Plan A fails to satisfy paragraph (b)(3)(ii) of this section.

Example 10. (i) Employer Z maintains Plan Q, a defined benefit plan that provides an accrued benefit of $40 per month multiplied by a participant's years of credited service. Participant F attains normal retirement age of 65 and continues in the full time service of Z. At age 65, F has 30 years of credited service under the plan and could receive a normal retirement benefit of $1,200 per month ($40 X 30 years) if F retires. The plan suspends benefits for participants who work past normal retirement age, in accordance with section 411(a)(3)(B) and 29 CFR 2530.203-3 of the regulations of the Department of Labor, and does not provide for any actuarial increase for employment past normal retirement age. Accordingly, the plan does not pay F's accrued benefit while F remains in the full time service of Z and does not provide for an actuarial adjustment of F's accrued benefit because of delayed payment. For example, if F retires at age 67, after completing 2 additional years of credited service for Z, F will receive a benefit of $1,280 per month ($40 x 32 years) commencing at age 67.

(ii) Under Plan Q, the rate of accrual for all participants is $40 per month. Thus, there could not be any participant who would have a rate of benefit accrual that is greater than $40 per month if the participant were younger, so that there is no reduction in the rate of benefit accrual that is because of the individual's attainment of any age under paragraph (b)(3)(i) of this section. Accordingly, Plan Q satisfies the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 11. (i) Assume the same facts as in Example 10, except that the plan provides that the amount of F's benefit at normal retirement age will be actuarially increased for delayed retirement (even though the plan suspends benefits for participants who work past normal retirement age), and this actuarially increased benefit will be paid if it exceeds the plan formula, but no actuarial increase is provided for any amount that is accrued after normal retirement age. The plan takes this actuarial increase into account as part of the rate of benefit accrual in plan years ending after F's attainment of normal retirement age, as provided under paragraph (b)(2)(ii) of this section.

(ii) Under section 411(b)(1)(H) and this paragraph (b), F's employment past normal retirement age cannot cause F's rate of benefit accrual for any year to be less than $40 for the year. Plan Q satisfies this requirement for the first year after normal retirement age because, under the plan, F is entitled to receive, upon retirement at the end of the year when F is age 66, an actuarially increased benefit of $1,344.68 per month, so that the rate of benefit accrual for the year is $144.68 (which is $1,344.68 minus $1,200).

(iii) Further, for the second year past normal retirement age ending when F is age 67, F must be entitled to a rate of benefit accrual of at least $149.50 per month, which is the highest rate of benefit accrual under Plan Q for any younger participant with 32 years of service at the end of the year. (In these facts, all participants have a rate of accrual of $40 until normal retirement age and a participant who is age 66 with 32 years of service at the end of the year would have a rate of benefit accrual of $149.50 due to an actuarial increase on an age 65 benefit of $1,240 per month.) Under the plan, F is entitled to receive, upon retirement at age 67, an actuarially increased benefit of $1,511.39 per month. Plan Q satisfies the requirement that F be entitled to the highest rate of benefit accrual provided to any younger participant because the rate of benefit accrual in that year ($1,511.39 minus $1,344.68 equals $166.71) is not less than what the rate would be for F if F were younger. These same results would apply for any possible participant in Plan Q. Accordingly, Plan Q satisfies the requirements of section 411(b)(1)(H) and this paragraph (b).

Example 12. (i) Employer Z maintains Plan R, a defined benefit plan that provides an accrued benefit of 2% of the average of a participant's high 3 consecutive years of compensation multiplied by the participant's years of credited service under the plan. Participant G, who has attained normal retirement age (age 65) under the plan, continues in the full time service of Z. At normal retirement age, G has average compensation of $40,000 for G's high 3 consecutive years and has 10 years of credited service under the plan. Thus, at normal retirement age, G is entitled to receive an annual normal retirement benefit of $8,000 ($40,000 X .02 X 10 years). Payment of G's retirement benefit is not suspended, and the plan provides that retirement benefits that commence after a participant's normal retirement age are actuarially increased for late retirement. Under the plan provision relating to actuarial increase, the actuarial increase for the plan year is made to the benefit that would have been paid had the participant retired as of the end of the preceding plan year. The plan then provides the greater of this actuarially increased benefit and benefits under the plan formula based on continued service, thereby including the actuarial increase in the rate of benefit accrual in plan years ending after G's attainment of normal retirement age, as provided in paragraph (b)(2)(ii) of this section. The foregoing is illustrated in the following table with respect to certain years of credited service performed by G after attaining normal retirement age 65. (Certain numbers may not total due to rounding.)

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Example 13. (i) The facts are the same as in Example 10, except that, under the plan provisions relating to retirement after normal retirement age, a participant's benefit is equal to the sum of the benefit that would have been paid had the participant retired as of the end of the preceding plan year and the greater of the actuarial increase for the plan year on that amount or the otherwise applicable accrual for the plan year under the plan formula. The foregoing is illustrated in the following table with respect to certain years of credited service performed by G after attaining normal retirement age 65.

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(iii) The decrease in G's rate of benefit accrual from 2.16% to 2% from age 68 to age 69 is not an impermissible reduction because of age. Under paragraph (b)(3) of this section, the determination of whether an impermissible reduction occurs because of age is made by comparing any potential participant's rate of benefit accrual to what the rate would be if the participant were younger (but with the same years of service, compensation history, and any other relevant factors taken into account under the plan), not by comparing a participant's rate in one year to that participant's rate in an earlier year. As indicated in paragraph (ii) of this Example 13, the rate of benefit accrual for a participant who is age 69 with 14 years of service at the beginning of the year is compared with the rate for all younger participants with the same service and compensation history. Similarly, the 2.16% rate for a participant who is age 68 with 13 years of service at the beginning of the year is compared with the rate for all younger participants with the same service and compensation history. Thus, for example, if G were age 67 with the same 13 years credited service and high 3 years of compensation equal to $60,000 that G has at age 68, G would have a rate of benefit accrual equal to 2.08% of average high 3 consecutive years of compensation.

(4) Certain adjustments for benefit distributions -- (i) In general. Under section 411(b)(1)(H)(iii)(I), a defined benefit plan may provide that the requirement for continued benefit accrual under section 411(b)(1)(H)(i) and this paragraph (b) for a plan year is treated as satisfied to the extent of the actuarial equivalent of benefits distributed, as provided in this paragraph (b)(4). Distributions made before the participant attains normal retirement age or during a period that is not "section 203(a)(3)(B) service," as defined in 29 CFR 2530.203-3(c) of the regulations of the Department of Labor, may not be taken into account under this paragraph (b)(4).

(ii) Amount of the adjustment for benefits distributed. A defined benefit plan does not violate paragraph (b) of this section for a plan year merely because the rate of benefit accrual is reduced (but not below zero) to the extent of the actuarial equivalent of plan benefit distributions made to the participant during the plan year. For this purpose, distributions made during the plan year generally are disregarded for that year to the extent the actuarial value of the distributions exceeds the actuarial value of distributions that would have been made during the plan year had distribution of the participant's accrued benefit commenced at the beginning of the plan year (or, if later, at the participant's normal retirement age) in the normal form of benefit. (But see paragraph (b)(4)(iii) of this section for rules taking this excess into account at the end of the current year and in future years.) In addition, in any case in which the participant's benefits are being distributed in an optional form of benefit under which the amount payable annually is less than the amount payable under the plan's normal form of benefit (for example, a QJSA under which the annual benefit is less than the amount payable annually under a straight life annuity normal form), the plan may treat the participant as receiving payments under an actuarially equivalent normal form of benefit for the plan year and all future plan years.

(iii) Treatment of accelerated benefit payments -- (A) Accelerated benefit payments. This paragraph (b)(4)(iii) applies if the actuarial value of the distributions made to the participant during a plan year exceeds the actuarial value of the distributions that would have been made during the plan year had distributions commenced at the beginning of the plan year (or, if later, at the participant's normal retirement age) in the normal form of benefit. In such a case, the excess payments (referred to as accelerated benefit payments) are converted to an actuarially equivalent stream of annual benefit payments under the plan's normal form of benefit, commencing at the beginning of the next plan year. This conversion must be based on the same actuarial assumptions used under the plan to determine the distributions made to the participant during the plan year. For purposes of this paragraph (b)(4)(iii), the actuarially equivalent stream of annual benefit payments is referred to as the annuity equivalent of accelerated benefit payments.

(B) Credit for annuity equivalent of accelerated benefit payments. For purposes of applying paragraphs (b)(4)(ii) and (iii)(C) of this section, the annuity equivalent of accelerated benefit payments is deemed to be paid to the participant in each plan year that begins after the plan year during which any accelerated benefit payment under paragraph (b)(4)(iii)(A) of this section is made.

(C) Effect of accelerated benefit payments on rate of benefit accrual. If any accelerated benefit payments under paragraph (b)(4)(iii)(A) of this section have been made to a participant, then, in lieu of determining the participant's rate of benefit accrual under paragraph (b)(2)(ii) of this section, the participant's rate of benefit accrual for a plan year is determined as the excess (if any) of --

(1) The sum of the annual benefit to which the participant is entitled at the end of the current plan year, assuming payment commences in the normal form at the end of the current plan year, plus the amount deemed paid in the next plan year under the annuity equivalent of accelerated benefit payments; over

(2) The sum of the annual benefit to which the participant was entitled at the end of the preceding plan year, assuming that payment commences in the normal form at the later of normal retirement age and the end of the preceding plan year, plus the amount deemed paid during the current plan year under the annuity equivalent of accelerated benefit payments.

(iv) Examples. The provisions of this paragraph (b)(4) may be illustrated by the following examples. In each of the examples, except as otherwise indicated, normal retirement age is 65 and the birthday of each participant is assumed to be January 1. In addition, except as otherwise indicated, the plan contains no limitations on the maximum amount of benefits the plan will pay to any participant (other than the limitations imposed by section 415), on the maximum number of years of credited service taken into account under the plan, or on the compensation used for purposes of determining the amount of any participant's normal retirement benefit (other than the limitation imposed by section 401(a)(17)) and the plan uses the following actuarial assumptions for purposes of determining the amount of any participant's accrued benefit (other than the limitation imposed by section 401(a)(17)), and the plan uses the following actuarial assumptions in determining actuarial equivalence: a 7.5% rate of interest and the 83 GAM (male) mortality table. The examples are as follows:

Example 1. (i) Facts relating to the year in which participant attains age 65. Employer Z maintains Plan Q, a defined benefit plan that provides an accrued benefit of $40 per month multiplied by the participant's years of credited service. Participant F attains normal retirement age of 65 on January 1 and continues in the full time service of Z. At the end of the year in which F attains age 65, F has 30 years of credited service under the plan and could receive an accrued benefit of $1,200 per month ($40 x 30 years) if F retires. Plan Q does not suspend payment of benefits for participants who work past normal retirement age and F commences benefit payments at normal retirement age. (These are the same facts as in Example 10 of paragraph (b)(3)(iii) of this section, except that the Plan Q does not provide for the suspension of normal retirement benefit payments.) The plan offsets the value of the benefit distributions against benefit accruals in plan years ending after the participant's attainment of normal retirement age, as permitted by paragraph (b)(4)(ii) of this section. Participant F (who remains in the full time service of Y) receives 12 monthly benefit payments after attainment of age 65 and prior to attainment of age 66. The total monthly benefit payments of $14,400 ($1,200 x 12 payments) have an actuarial value at the end of the year in which F turns 65 of $15,118 (reflecting interest and mortality) which would produce a monthly life annuity benefit of $145 commencing at age 66. The rate of benefit accrual otherwise applicable under the plan formula for the year of credited service F completes after attaining normal retirement age is $40 per month.

(ii) Conclusions relating to the year in which F attains age 65. Because the actuarial value (determined as a monthly benefit of $145) of the benefit payments made during the first year after F's attainment of normal retirement age exceeds the benefit accrual otherwise applicable for the first year after F's attainment of normal retirement age, the plan is not required to accrue benefits on behalf of F for the one year of credited service after F's attainment of normal retirement age and the plan is not required to increase F's monthly benefit payment of $1,200 during the year in which F attains age 65.

(iii) Facts relating to the year in which F attains age 66. Assume F receives 12 additional monthly benefit payments the next year prior to F's retirement at the end of the next year when F attains age 66. The total monthly benefit payments of $14,400 ($1,200 x 12 payments) have an actuarial value at the end of that year of $15,135 (reflecting interest and mortality) which would produce a monthly benefit payment of $149 commencing at age 67. The rate of benefit accrual otherwise applicable under the plan formula for the additional year of credited service F completed that year is $40 per month.

(iv) Conclusions relating to the year in which F attains age 66. Because the actuarial value (determined as a monthly benefit of $149) of the benefit payments made during that year exceeds the benefit accrual otherwise applicable for the additional year of credited service, the plan is not required to accrue benefits on behalf of F for the second year of credited service F completed after attaining normal retirement age and the plan is not required to increase F's monthly benefit payment of $1,200.

Example 2. (i) Facts. Employer Z maintains Plan R, a defined benefit plan that provides an accrued benefit of 2% of the average of a participant's high 3 consecutive years of compensation multiplied by the participant's years of credited service under the plan. Payment of a participant's retirement benefit is not suspended, and the plan provides that retirement benefits that commence after a participant's normal retirement age are actuarially increased for late retirement. Under the plan provision relating to actuarial increase, the actuarial increase for the plan year is made to the benefit that would have been paid had the participant retired as of the end of the preceding plan year. The plan then provides the greater of this actuarially increased benefit and benefits under the plan formula based on continued service, thereby including the actuarial increase in the rate of benefit accrual in plan years ending after attainment of normal retirement age, as provided in paragraph (b)(2)(ii) of this section. Participant G, who has attained normal retirement age (age 65) under the plan, continues in the full time service of Z. At normal retirement age, G has average compensation of $40,000 for G's high 3 consecutive years and has 10 years of credited service under the plan. Thus, at normal retirement age, G is entitled to receive an annual normal retirement benefit of $8,000 ($40,000 x .02 x 10 years). G continues working after normal retirement age, with G's average compensation increasing to $68,000 at age 70. (The facts in this Example 2 are the same as Example 13 of paragraph (b)(3)(ii) of this section, except that the employee does not retire at age 70, but continues in the full time service of Z.) Upon G's attainment of age 70, the plan commences benefit payments to G. The annual benefit paid to G in the first plan year is $21,098. In determining the annual benefit payable to G in each subsequent plan year, the plan offsets the value of benefit distributions made to the participant by the close of the prior plan year against benefit accruals otherwise applicable in plan years during which such distributions were made, as permitted by paragraph (b)(4)(ii)(B) of this section.

(ii) Conclusion. Accordingly, for each subsequent plan year, G is entitled under the plan to receive benefit payments based on G's benefit at the close of the prior plan year, plus the excess (if any) of the benefit for the plan year determined under the plan formula otherwise applicable over the value of total benefit distributions made to G during the plan year. The foregoing is illustrated in the following table with respect to certain years of credited service performed by G while benefits were being distributed to G.

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(ii) Conclusion relating to effect of distributions made in the year H attains age 65. Under this paragraph (b)(4), H would otherwise accrue an additional monthly benefit of $50 for the additional year of service under the plan's formula (21% times $60,000 minus 20% times $60,000, divided by 12). The plan is permitted under section 411(b)(1)(H)(iii)(I) to offset additional accruals otherwise applicable after normal retirement age by the actuarial value of distributions made during the year. However, under paragraph (b)(4)(ii) of this section, distributions made during a plan year are disregarded to the extent that the actuarial value of the distributions exceeds the actuarial value of distributions that would have been made during the plan year had distribution of the participant's accrued benefit commenced at the beginning of the plan year under the plan's normal form.

(iii) Conclusion relating to calculations for distribution made in the year H attains age 65. At the end of the year, the actuarial value of the distribution made to H ($130,389 plus interest and mortality for the year equals $139,812) is greater than the year end actuarial value of distributions that would have been made during the plan year had distribution of the participant's accrued benefit at the beginning of the plan year commenced in the normal form at the beginning of the plan year (which is $12,470, based on the plan's actuarial assumptions). Accordingly, the $127,342 excess (referred to as an accelerated benefit payment) is disregarded in the current year. (However, as described below, the annuity equivalent of the $127,342 is deemed to be paid to H commencing at the beginning of the first plan year after the plan year during which the accelerated benefit payment is made.)

(iv) Conclusion relating to rate of benefit accrual for the year H attains age 65. To determine the rate of benefit accrual for the year in which H attains age 65, the annuity equivalent of accelerated benefit payments is calculated and, under paragraph (b)(4)(iii)(C) of this section, this amount is treated as part of the benefit payable at the end of the year in calculating the rate of benefit accrual for the year. In this Example 3, the annuity equivalent of the $127,342 accelerated benefit payment equals a straight life annuity of $1,000 per month commencing at the beginning of the next plan year. Thus, for purposes of applying paragraph (b)(4)(iii) of this section to determine the rate of benefit accrual for the plan year in which H attains age 65, paragraph (b)(4)(iii)(C)(1) of this section is an annual straight life annuity commencing at end of the year equal to $1,000 (the sum of the annual benefit to which the H is entitled at the end of the plan year, which is zero in this case, plus the amount deemed paid in the next plan year under the annuity equivalent of accelerated benefit payments, which is $1,000 in this case) and the amount in paragraph (b)(4)(iii)(C)(2) of this section is an annual straight life annuity commencing at end of the preceding plan year equal to $1,000. Thus, H's rate of benefit accrual for the year is zero.

(v) Conclusion relating to whether rate of benefit accrual for year H attains age 65 satisfies section 411(b)(1)(H). Under paragraph (b)(4)(ii) of this section, a plan may reduce the rate of benefit accrual otherwise applicable to the extent of distributions made during the year. The actuarial equivalent of $12,470 (the actuarial value of the 12 $1,000 monthly payments deemed paid to H during the plan year under paragraph (b)(4)(ii) of this section) is a straight life annuity commencing at the end of the plan year equal to $98 per month. Thus, the otherwise applicable accrual for the year may be reduced (but not below zero) by $98 per month. The highest rate of benefit accrual for any participant with H's service and compensation history who is younger is an annual straight life annuity of $50 per month. Because the permissible reduction of $98 per month is not less than the otherwise applicable accrual of $50 per month, Plan X is not required by this paragraph (b) for the year and section 411(b)(1)(H) to provide H with any additional accruals for the year.

(vi) Conclusion relating to rate of benefit accrual for year H attains age 65 if no distribution were made. If Participant H had not elected to receive any distribution during the plan year, then H's accrued benefit at the end of the year would be a straight life annuity of $1,098 per month commencing at the end of the year (which is actuarially equivalent to a straight life annuity of $1,000 per month commencing at the beginning of the year). Thus, H's rate of benefit accrual for that year would be $98 (but no adjustments for any distribution would apply).

(vii) Facts relating to next year in which H attains age 66. Participant H works another year and H's average compensation becomes $70,000. Under this paragraph (b)(4), H would otherwise accrue an additional monthly benefit of $233 for the additional year of service under the plan's formula (22% times $70,000, minus 21% times $60,000, divided by 12). However, the plan is permitted under section 411(b)(1)(H)(iii)(I) to offset additional accruals after normal retirement age by the actuarial value of distributions made during the year. Under paragraph (b)(4)(iii)(B) of this section, the $1,000 annuity equivalent of accelerated benefit payments is deemed to be paid to H during this second year when H attains age 66. These deemed payments are actuarially equivalent to an accrual of $100 per month payable at the end of that year. Accordingly, the plan reduces the otherwise applicable accrual of $233 to the extent of the accrual of $100 per month payable at the end of the year in which H attains age 66. Thus, the $233 accrual during the year in which H becomes 66 is reduced by $100 to $133. Under the plan X, H's accrued benefit at the end of the year is $133 per month.

(viii) Conclusion relating to rate of benefit accrual for year H attains age 66. To determine the rate of benefit accrual for the second year when H attains age 66, the annuity equivalent of accelerated benefit payments is calculated and, under paragraph (b)(4)(iii)(C) of this section, this amount is treated as part of the benefit payable at the end of the year in calculating the rate of benefit accrual for the second year. In this Example 3, the annuity equivalent of the $127,342 accelerated benefit payment that was made in the year in which H attained age 65 equals a straight life annuity of $1,000 per month commencing at the beginning of the next plan year. Thus, for purposes of applying paragraph (b)(4)(iii) of this section to determine the rate of benefit accrual for the second plan year, the amount in paragraph (b)(4)(iii)(C)(1) of this section is an annual straight life annuity commencing at end of the year equal to $1,133 (the sum of the annual benefit to which the H is entitled at the end of the plan year, which is $133 in this case, plus the amount deemed paid in the next plan year under the annuity equivalent of accelerated benefit payments, which is $1,000 in this case) and the amount in paragraph (b)(4)(iii)(C)(2) of this section is an annual straight life annuity commencing at end of the preceding plan year equal to $1,000. Thus, H's rate of benefit accrual for the year in which H becomes age 66 is $133.

(ix) Conclusion relating to whether rate of benefit accrual for year H becomes 66 satisfies section 411(b)(1)(H). Under paragraph (b)(4))(ii) of this section, a plan may reduce the rate of benefit accrual to the extent of distributions made during the year. The actuarial equivalent of $12,480 (the actuarial value of the 12 $1,000 monthly payments deemed made to H during the plan year) is a straight life annuity commencing at the end of the plan year equal to $100 per month. Thus, the otherwise applicable accrual for the year may be reduced (but not below zero) by $100 per month. The highest rate of benefit accrual for any participant with H's service and compensation history who is younger is an annual straight life annuity of $233 per month. Thus, because the sum of $133 and $100 is not less than the otherwise applicable accrual of $233 per month, Plan X satisfies this paragraph (b) and section 411(b)(1)(H) for the year.

(c) Defined contribution plans -- (1) In general. A defined contribution plan (including a target benefit plan described in §1.410(a)-4(a)(1)) does not satisfy the requirements of section 411(b)(2) if the rate of allocation made to the account of a participant is reduced, either directly or indirectly, because of the participant's attainment of any age. A reduction in the rate of allocation includes any discontinuance in the allocation of employer contributions or forfeitures to the account of the participant or cessation of participation in the plan.

(2) Rate of allocation -- (i) Aggregate allocations. For purposes of this paragraph (c), a participant's rate of allocation for any plan year is the aggregate allocations taken into account for the plan year under §1.401(a)(4)-2(c)(2).

(ii) Determination of rate of allocation. A participant's rate of allocation for a plan year can be determined as a dollar amount. Alternatively, if a plan's formula bases a participant's allocations solely on compensation for the plan year and compensation is determined without regard to attainment of any age, then a participant's rate of allocation can be determined as a percentage of the participant's compensation for the plan year.

(3) Reduction that is directly or indirectly because of a participant's attainment of any age -- (i) Reduction in rate of allocation that is directly because of a participant's attainment of any age. A plan provides for a reduction in the rate of allocation that is directly because of a participant's attainment of any age for any plan year if, under the terms of the plan, any participant's rate of allocation for the plan year would be higher if the participant were younger. Thus, a plan fails to satisfy section 411(b)(2) and this paragraph (c) if, under the terms of the plan, the rate of allocation for any individual who is or could be a participant under the plan would be lower solely as a result of such individual being older.

(ii) Reduction in rate of allocation that is indirectly because of a participant's attainment of any age -- (A) In general. A plan provides for a reduction in the rate of allocation that is indirectly because of a participant's attainment of any age for any plan year if any participant's rate of allocation for the plan year would be higher if the participant were to have a characteristic that is a proxy for being younger, based on all of the relevant facts and circumstances. Thus, a plan fails to satisfy section 411(b)(2) and this paragraph (c) if the rate of allocation for any individual who is or could be a participant under the plan would be lower solely as a result of such individual having a different characteristic which is a proxy for being older, based on applicable facts and circumstances.

(B) Treatment of limitations. A reduction in a participant's rate of allocation is not indirectly because of the attainment of any age in violation of section 411(b)(2) solely because of a positive correlation between attainment of any age and a reduction in the rate of allocation. Thus, a defined contribution plan (including a target benefit plan described in §1.410(a)- 4(a)(1)) does not fail to satisfy the minimum vesting standards of section 411(a) solely because the plan limits the total amount of employer contributions and forfeitures that may be allocated to a participant's account (for a particular plan year or for the participant's total years of credited service under the plan), solely because the plan limits the total number of years of credited service for which a participant's account may receive allocations of employer contributions and forfeitures, or solely because the plan limits the number of years of credited service that may be taken into account for purposes of determining the amount of, or the rate at which, employer contributions and forfeitures are allocated to a participant's account for a particular plan year.

(iii) Special rule for target benefit plans. A defined contribution plan that is a target benefit plan, as defined in §1.410(a)-4(a)(1), satisfies section 411(b)(2) only if the defined benefit formula used to determine allocations would satisfy section 411(b)(1)(H) without regard to section 411(b)(1)(H)(iii). Such a target benefit plan does not fail to satisfy this paragraph (c) with respect to allocations after normal retirement age merely because the allocation for a plan year is reduced to reflect shorter longevity using a reasonable actuarial assumption regarding mortality.

(iv) Additional rules. The Commissioner may prescribe additional guidance, published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), with respect to the application of section 411(b)(2) and this section to target benefit plans.

(d) Benefits and forms of benefits subject to requirements -- (1) General rule. Except as provided in paragraph (d)(2) or (3) of this section, sections 411(b)(1)(H) and 411(b)(2) and paragraphs (b) and (c) of this section apply to all benefits (and forms of benefits) provided under the plan, including accrued benefits, benefits described in section 411(d)(6), ancillary benefits, and other rights and features provided under the plan. Accordingly, except as provided in paragraph (d)(2) or (3) of this section, a participant's rate of benefit accrual under a defined benefit plan and a participant's allocations under a defined contribution plan are considered to be reduced because of the participant's attainment of any age if optional forms of benefits, ancillary benefits, or other rights or features under the plan provided with respect to benefits or allocations attributable to credited service prior to the attainment of the participant's age are not provided on at least as favorable a basis with respect to benefits or allocations attributable to credited service after attainment of the participant's age. Thus, for example, a plan may not provide a single-sum payment only with respect to benefits attributable to years of credited service before the attainment of a specified age. Similarly, except as provided in paragraph (d)(2) or (3) of this section, if an optional form of benefit is available under the plan at a specified age, the availability of that form of benefit, or the method for determining the manner in which that form of benefit is paid, may not, directly or indirectly, be denied or provided on terms less favorable to participants because of the attainment of any age. Similarly, if the method for determining the amount or the rate of the subsidized portion of a joint and survivor annuity or the subsidized portion of a preretirement survivor annuity is less favorable with respect to participants who have attained a specified age than with respect to participants who have not attained such age, benefit accruals or account allocations under the plan will be considered to be reduced because of the attainment of such age.

(2) Special rule for actuarial assumptions regarding mortality. A plan does not fail to satisfy section 411(b)(1)(H) or this paragraph (d) merely because the plan makes actuarial adjustments using a reasonable assumption regarding mortality to calculate optional forms of benefit or to calculate the cost of providing a qualified preretirement survivor annuity, as defined in section 417(c).

(3) Special rule for certain benefits. A plan does not fail to satisfy section 411(b)(1)(H) or this paragraph (d) merely because the following benefits, or the manner in which such benefits are provided under the plan, vary because of the attainment of any higher age --

(i) The subsidized portion of an early retirement benefit (whether provided on a temporary or permanent basis);

(ii) A qualified disability benefit (as defined in §1.411(a)-7(c)(3)); or

(iii) A social security supplement (as defined in §1.411(a)- 7(c)(4)(ii)).

(e) Coordination with certain provisions. Notwithstanding section 411(b)(1)(H), section 411(b)(2), and paragraphs (a) through (d) of this section, the following rules apply --

(1) Section 415 limitations. No benefit accrual with respect to a participant in a defined benefit plan is required for a plan year by section 411(b)(1)(H)(i) and no allocation to the account of a participant in a defined contribution plan (including a target benefit plan described in §1.410(a)-4(a)(1)) is required for a plan year by section 411(b)(2) to the extent that the allocation or accrual would cause the plan to exceed the limitations of section 415.

(2) Prohibited discrimination -- (i) No benefit accrual on behalf of a highly compensated employee in a defined benefit plan is required for a plan year by section 411(b)(1)(H)(i) to the extent such benefit accrual would cause the plan to discriminate in favor of highly compensated employees within the meaning of section 401(a)(4).

(ii) No allocation to the account of a highly compensated employee in a defined contribution plan (including a target benefit plan) is required for a plan year by section 411(b)(2) to the extent the allocation would cause the plan to discriminate in favor of highly compensated employees within the meaning of section 401(a)(4).

(iii) The Commissioner may provide additional guidance, published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), relating to prohibited discrimination in favor of highly compensated employees.

(3) Permitted disparity. A defined benefit plan does not fail to satisfy section 411(b)(1)(H) for a plan year and a defined contribution plan does not fail to satisfy 411(b)(2) for a plan year merely because accruals or allocations under the plan are reduced to satisfy the uniformity requirements of §1.401(l)-2(c) or 1.401(l)-3(c) for the plan year.

(4) Distribution rights under section 411. A defined benefit plan does not fail to satisfy section 411(b)(1)(H) for a plan year and a defined contribution plan does not fail to satisfy 411(b)(2) for a plan year merely because of the right to defer distributions provided under section 411(a)(11) or a plan provision consistent with section 411(a)(11).

(f) Effective dates -- (1) Effective date of sections 411(b)(1)(H) and 411(b)(2) for noncollectively bargained plans -- (i) In general. Except as otherwise provided in paragraph (f)(2) of this section, sections 411(b)(1)(H) and 411(b)(2) are applicable for plan years beginning on or after January 1, 1988, with respect to a participant who is credited with at least 1 hour of service in a plan year beginning on or after January 1, 1988. Neither section 411(b)(1)(H) nor section 411(b)(2) is applicable with respect to a participant who is not credited with at least 1 hour of service in a plan year beginning on or after January 1, 1988.

(ii) Defined benefit plans. In the case of a participant who is credited with at least 1 hour of service in a plan year beginning on or after January 1, 1988, section 411(b)(1)(H) is applicable with respect to all years of service completed by the participant other than plan years beginning before January 1, 1988.

(iii) Defined contribution plans. Section 411(b)(2) does not apply with respect to allocations of employer contributions or forfeitures to the accounts of participants under a defined contribution plan for a plan year beginning before January 1, 1988.

(iv) Hour of service. For purposes of this paragraph (f)(1), 1 hour of service means 1 hour of service recognized under the plan or required to be recognized under the plan by section 410 (relating to minimum participation standards) or section 411 (relating to minimum vesting standards). In the case of a plan that does not determine service on the basis of hours of service, 1 hour of service means any service recognized under the plan or required to be recognized under the plan by section 410 (relating to minimum participation standards) or section 411 (relating to minimum vesting standards).

(2) Effective date of sections 411(b)(1)(H) and 411(b)(2) for collectively bargained plans -- (i) In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers, ratified before March 1, 1986, sections 411(b)(1)(H) and 411(b)(2) are applicable for benefits provided under, and employees covered by, any such agreement with respect to plan years beginning on or after the later of --

(A) January 1, 1988; or

(B) The earlier of January 1, 1990, or the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension of any such agreement occurring on or after March 1, 1986).

(ii) The applicability date provisions of paragraph (f)(1) of this section shall apply in the same manner to plans described in paragraph (f)(2)(i) of this section, except that the applicable date determined under paragraph (f)(2)(i) of this section shall be substituted for the effective date determined under paragraph (f)(1) of this section.

(iii) In accordance with the provisions of paragraph (f)(2)(i) of this section, a plan described therein may be subject to different applicability dates under sections 411(b)(1)(H) and 411(b)(2) for employees who are covered by a collective bargaining agreement and employees who are not covered by a collective bargaining agreement.

(iv) For purposes of paragraph (f)(2)(i) of this section, the service crediting rules of paragraph (f)(1) of this section shall apply to a plan described in paragraph (f)(2)(i) of this section, except that in applying such rules the applicability date determined under paragraph (f)(2)(i) of this section shall be substituted for the applicability date determined under paragraph (f)(1) of this section. See paragraph (f)(1)(iv) of this section for rules relating to the recognition of an hour of service.

(3) Regulatory effective date. Paragraphs (a) through (e) of this section are applicable with respect to plan years beginning on or after the date of publication of final regulations in the Federal Register.

Par. 6. Section 1.411(c)-1 is amended by revising paragraph (f)(2) to read as follows:

Section 1.411(c)-1 Allocation of accrued benefits between employer and employee contributions.

* * * * *

(f) SUSPENSION OF BENEFITS, ETC. * * *

(2) EMPLOYMENT AFTER RETIREMENT. Except as permitted by paragraph (f)(1) of this section, a defined benefit plan must make an actuarial adjustment to an accrued benefit the payment of which is deferred past normal retirement age. See, also, section 411(b)(1)(H) (relating to continued accruals after normal retirement age) and section 1.411(b)-2.