[Federal Register Volume 79, Number 182 (Friday, September 19, 2014)]
[Proposed Rules]
[Pages 56305-56310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22292]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-111839-13]
RIN 1545-BL62
Transitional Amendments To Satisfy the Market Rate of Return
Rules for Hybrid Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would provide
guidance regarding certain amendments to applicable defined benefit
plans. Applicable defined benefit plans are defined benefit plans that
use a lump sum-based benefit formula, including cash balance plans and
pension equity plans, as well as other hybrid retirement plans that
have a similar effect. These proposed regulations would permit an
applicable defined benefit plan that does not comply with the
requirement that the plan not provide for interest credits (or
equivalent amounts) at an effective rate that is greater than a market
rate of return to comply with that requirement by changing to an
interest crediting rate that is permitted under the final hybrid plan
regulations, without violating the anti-cutback rules of section
411(d)(6). These regulations would affect sponsors, administrators,
participants, and beneficiaries of these plans. This document also
provides a notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by December 18,
2014. Outlines of topics to be discussed at the public hearing
scheduled for January 9, 2015, at 10 a.m. must be received by December
18, 2014.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111839-13), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
111839-13), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-111839-13).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Neil S.
Sandhu or Linda S. F. Marshall at (202) 317-6700; concerning
submissions of comments, the hearing, and/or being placed on the
building access list to attend the hearing, Oluwafunmilayo (Funmi)
Taylor at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 411(b)(5) of the Internal
Revenue Code (Code).
Generally, a defined benefit pension plan must satisfy the
requirements of section 411 in order to be qualified under section
401(a) of the Code. Section 411(b)(5), which modifies the accrual
requirements of section 411(b), was added to the Code by section 701(b)
of the Pension Protection Act of 2006, Public Law 109-280 (120 Stat.
780 (2006)) (PPA '06). Section 411(b)(5) and certain related effective
date provisions were subsequently amended by the Worker, Retiree, and
Employer Recovery Act of 2008, Public Law 110-458 (122 Stat. 5092
(2008)) (WRERA '08).
Under section 411(b)(5)(B)(i), a statutory hybrid plan is treated
as failing to satisfy the requirements of section 411(b)(1)(H) (which
provides that the rate of an employee's benefit accrual must not be
reduced because of the attainment of any age) if the terms of the plan
provide any interest credit (or an equivalent amount) for any plan year
at a rate that is in excess of a market rate of return. Section
411(b)(5)(B)(i) is generally effective for plan years beginning after
December 31, 2007.
Section 411(d)(6) provides generally that a plan does not satisfy
section 411 if an amendment to the plan decreases a participant's
accrued benefit. For this purpose, a plan amendment that has the effect
of eliminating or reducing an early retirement benefit or a retirement-
type subsidy or eliminating an optional form of benefit with respect to
benefits attributable to service before the amendment is treated as
reducing accrued benefits.
Sections 204(b)(5)(B)(i) and 204(g) of the Employee Retirement
Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)),
as amended (ERISA), contain rules that are parallel to sections
411(b)(5)(B)(i) and 411(d)(6), respectively. Under section 101 of
Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the
Treasury has interpretive jurisdiction over the subject matter
addressed in these proposed regulations for purposes of ERISA, as well
as the Code. Thus, these proposed regulations would apply for purposes
of sections 411(b)(5)(B)(i) and 411(d)(6) of the Code, as well as for
purposes of sections 204(b)(5)(B)(i) and 204(g) of ERISA.
Section 1.411(d)-4, A-2(b)(1), of the Income Tax Regulations
provides, in part, that the Commissioner may, consistent with the
provisions of Sec. 1.411(d)-4, provide for the elimination or
reduction of section 411(d)(6) protected benefits that have already
accrued to the extent that such elimination or reduction is necessary
to permit compliance with other requirements of section 401(a). The
Commissioner may exercise this authority only through the publication
[[Page 56306]]
of revenue rulings, notices, and other documents of general
applicability.
Section 1.411(d)-4, A-2(b)(2)(i), provides that a plan may be
amended to eliminate or reduce a section 411(d)(6) protected benefit,
within the meaning of Sec. 1.411(d)-4, A-1, if the following three
requirements are met: the amendment constitutes timely compliance with
a change in law affecting plan qualification; there is an exercise of
section 7805(b) relief by the Commissioner; and the elimination or
reduction of the section 411(d)(6) protected benefit is made only to
the extent necessary to enable the plan to continue to satisfy the
requirements for qualified plans.
Final regulations (TD 9505) (2010 final hybrid plan regulations)
were published by the Treasury Department and the IRS in the Federal
Register on October 19, 2010 (75 FR 64123). The 2010 final hybrid plan
regulations provide for certain interest crediting rates that satisfy
the requirements of section 411(b)(5)(B)(i). The 2010 final hybrid plan
regulations provide, effective for plan years that begin on or after
January 1, 2012, a list of interest crediting rates and combinations of
rates that satisfy the requirement of section 411(b)(5)(B)(i) that the
plan not provide an effective rate of return in excess of a market rate
of return, while not permitting other rates. The provisions that
provide for a list of rates are set forth at Sec. 1.411(b)(5)-
1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i).
Proposed regulations (REG-132554-08) (2010 proposed hybrid plan
regulations) were also published by the Treasury Department and the IRS
in the Federal Register on October 19, 2010 (75 FR 64197). The 2010
proposed hybrid plan regulations provide for additional interest
crediting rates that satisfy the requirements of section
411(b)(5)(B)(i). The preamble to the 2010 proposed hybrid plan
regulations solicited comments with respect to guidance needed to
permit a plan to change its interest crediting rate to comply with the
final hybrid plan regulations.
II. Effective Dates
Notice 2011-85 (2011-44 IRB 605 (October 31, 2011)), (see Sec.
601.601(d)(2)(ii)(b) of this chapter), announced delayed effective/
applicability dates with respect to certain provisions in the hybrid
plan regulations. Notice 2011-85 provided that the Treasury Department
and the IRS intended to amend the hybrid plan regulations to postpone
the effective/applicability date of Sec. 1.411(b)(5)-1(d)(1)(iii),
(d)(1)(vi), and (d)(6)(i), so that these provisions would be effective
at a future date, not earlier than January 1, 2013.
Notice 2011-85 also provided that, when the 2010 proposed
regulations were finalized, it was expected that relief from the
requirements of section 411(d)(6) would be granted for certain plan
amendments that eliminate or reduce a section 411(d)(6) protected
benefit. A plan amendment would be eligible for this relief only if the
plan amendment were adopted by the last day of the first plan year
preceding the plan year for which the 2010 proposed regulations, once
finalized, apply to the plan, and the elimination or reduction was made
only to the extent necessary to enable the plan to meet the
requirements of section 411(b)(5). In addition, Notice 2011-85 extended
the deadline for amending cash balance and other applicable defined
benefit plans, within the meaning of section 411(a)(13)(C), to meet the
requirements of section 411(a)(13) (other than section 411(a)(13)(A))
and section 411(b)(5), relating to vesting and other special rules
applicable to these plans. Under Notice 2011-85, the deadline for these
amendments is the same as the deadline for an amendment that is
eligible for the relief under section 411(d)(6) that is also announced
in the notice.
Notice 2012-61 (2012-42 IRB 479 (October 15, 2012)), (see Sec.
601.601(d)(2)(ii)(b) of this chapter), announced that the regulations
described in Notice 2011-85 would not be effective for plan years
beginning before January 1, 2014.
Final regulations (TD 9693) (2014 final hybrid plan regulations)
that finalize the 2010 proposed hybrid plan regulations are being
issued at the same time as these proposed regulations. The 2014 final
hybrid plan regulations amend the effective/applicability date of Sec.
1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi), and (d)(6)(i), so that these
provisions apply to plan years that begin on or after January 1, 2016.
III. Permissible Interest Crediting Rates
Interest crediting rates can be broadly characterized as either
investment-based rates or rates that are not investment-based rates. An
investment-based rate is a rate of return provided by actual
investments, taking into account the return attributable to any change
in the value of the underlying investments. A rate of return that is
based on the rate of return for an index that measures the change in
the value of investments can also be considered to be an investment-
based rate. Rates that are not investment-based rates include fixed
rates of interest and yields to maturity of bonds.
Sections 1.411(b)(5)-1(d)(3) and (d)(4) set forth permitted rates
that are not investment-based rates, such as the third segment rate
described in section 417(e)(3)(D) or 430(h)(2)(C)(iii), the yield on
30-year Treasury Constant Maturities, and a fixed 6 percent rate of
interest. Section 1.411(b)(5)-1(d)(5) sets forth permitted investment-
based rates, such as the rate of return on certain regulated investment
companies (RICs), as defined in section 851, and the rate of return on
plan assets. As provided in Sec. 1.411(b)(5)-1(d)(6), certain annual
(or more frequent) floors are permitted in combination with the bond-
based rates and cumulative floors (in excess of the cumulative zero
floor required under section 411(b)(5)(i)(II)) are permitted in
combination with either the bond-based rates or the investment-based
rates.
Explanation of Provisions
Prior to the first day of the first plan year that begins on or
after January 1, 2016, a plan that uses an interest crediting rate that
is not permitted under the final hybrid plan regulations must be
amended to change to an interest crediting rate that is permitted under
those regulations. Although a plan is permitted to be amended to change
the interest crediting rate with respect to benefits that have not yet
accrued, an amendment that reduces the interest crediting rate with
respect to benefits that have already accrued would ordinarily be
impermissible under section 411(d)(6).
In order to resolve this conflict between the market rate of return
rules of section 411(b)(5)(B)(i) and the anti-cutback rules of section
411(d)(6), these proposed regulations would permit a plan with a
noncompliant interest crediting rate to be amended with respect to
benefits that have already accrued so that its interest crediting rate
complies with the market rate of return rules. If the applicable
requirements of these regulations are satisfied, such an amendment is
permitted with respect to benefits that have already accrued, but only
with respect to interest credits that are credited for interest
crediting periods that begin on or after the later of the effective
date of the amendment or the date the amendment is adopted (the
applicable amendment date within the meaning of Sec. 1.411(d)-
3(g)(4)). To qualify for this treatment, the amendment would have to be
adopted prior to and effective no later than the first day of the first
plan year that begins on or after January 1, 2016.
These proposed regulations set forth amendments that would be
eligible for
[[Page 56307]]
this treatment by providing a specific correction for each noncompliant
feature of a noncompliant interest crediting rate.\1\ If the
noncompliant interest crediting rate has more than one noncompliant
feature, then each noncompliant feature must be addressed separately in
the prescribed manner. Examples are included to illustrate the
application of these rules.
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\1\ A plan may have been amended to change its interest
crediting rate under the rules of section 1107 of PPA '06. Section
1107 of PPA '06 provided relief from the requirements of section
411(d)(6) for amendments made pursuant to a change in law under PPA
'06, if the amendment was adopted by the last day of the first plan
year that began on or after January 1, 2009 (or 2011, in the case of
a governmental plan as defined in section 414(d)). If an interest
crediting rate adopted under the rules of section 1107 of PPA '06 is
not permitted under the final hybrid plan regulations, then these
proposed regulations would permit a subsequent amendment to change
the rate to a rate permitted under the final hybrid plan
regulations.
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The general approach in the regulations is to permit amendments
that bring the plan into compliance by changing the specific feature
that causes the plan's interest crediting rate to be noncompliant,
while not changing other features of the existing rate. For example, if
a plan uses what would otherwise be a permissible bond-based rate but
provides for an impermissible lookback month to determine interest
credits, then the plan must be amended to correct the lookback month to
a permitted lookback month while retaining the underlying bond-based
rate. The Treasury Department and the IRS believe this general approach
is the most appropriate manner to resolve the conflict between the
market rate of return rules of section 411(b)(5)(B)(i) and the anti-
cutback rules of section 411(d)(6).\2\
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\2\ The standard in these proposed regulations for resolving
this conflict between section 411(d)(6) and section 411(b)(5)(B)(i)
is generally comparable to the standard under the rules of Sec.
1.411(d)-4, A-2(b)(1) and (b)(2)(i) with respect to the
Commissioner's exercise of authority to resolve a conflict between
section 411(d)(6) and another qualification requirement under
section 401(a).
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The proposed regulations take a special approach with respect to a
noncompliant composite interest crediting rate that is determined as
the greatest of two or more component rates, because it is not always
readily apparent which specific feature or component rate causes the
composite rate to be noncompliant. Two types of composite rates are
specifically addressed in the proposed regulations, and a comment
request is included to solicit suggestions for appropriate corrective
amendments with respect to a third type of composite rate.
A composite rate that is the greater of an otherwise permissible
variable bond-based rate and a fixed minimum rate in excess of an
annual interest crediting rate of 6 percent (the maximum permitted
fixed rate) could be viewed either as: (1) A noncompliant fixed rate
that must be brought into compliance by reducing the fixed rate and
eliminating the variable bond-based rate component, or (2) a
noncompliant bond-based rate that must be brought into compliance by
reducing the fixed minimum rate to the highest permitted fixed minimum
interest crediting rate that is permitted with the particular variable
bond-based rate (4 or 5 percent, as applicable). As a result, in that
particular case, the proposed regulations would give the plan sponsor
the choice of either: (1) Eliminating the variable rate while changing
to an annual interest crediting rate of 6 percent or (2) retaining the
variable rate while reducing the fixed minimum component to the extent
necessary to bring the plan into compliance. These same options would
apply if the fixed minimum interest crediting rate is greater than the
highest permitted fixed minimum interest crediting rate that is
permitted with the particular variable bond-based rate but is not
greater than the highest permitted fixed rate (6 percent).
In the case of a composite rate that is the greatest of two or more
otherwise permissible variable bond-based rates, it is also difficult
to determine the most appropriate method to bring the plan into
compliance. One reason for this difficulty is because, in most of these
cases, the composite rate will not exceed the rate of interest on long-
term investment grade corporate bonds. As a result, in such a case, the
proposed regulations do not provide for the elimination of any of the
variable bond-based components. Instead, the proposed regulations would
provide that the noncompliant composite rate must be capped at a third
segment rate.\3\
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\3\ Any of the rates that are denominated a third segment rate
pursuant to Sec. 1.411(d)(5)-1(d)(3) can be specified by a plan for
this purpose, as well as for other purposes under these proposed
regulations for which a third segment rate is used.
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The proposed regulations also take a special approach with respect
to a noncompliant interest crediting rate that is an impermissible
investment-based rate. One example of an impermissible investment-based
rate is an investment-based rate that is not equal to the rate of
return on a RIC or the actual rate of return on the aggregate assets of
a plan or a specified subset of plan assets (even if the rate of return
is reasonably expected to be not significantly more volatile than the
broad United States equities market or a similarly broad international
equities market). Another example of an impermissible investment-based
rate is the rate of return on a RIC that has most of its assets
invested in securities of issuers (including other RICs) concentrated
in an industry sector.
If an investment-based rate is noncompliant, the proposed
regulations would require the plan sponsor to amend the plan to credit
interest using a permitted investment-based rate with similar risk and
return characteristics as the noncompliant rate, if possible. If it is
not possible to select a permitted investment-based rate with similar
risk and return characteristics as the noncompliant rate, then the
proposed regulations would require the plan sponsor to amend the plan
to credit interest using a permitted investment-based rate that is
otherwise similar to the noncompliant rate (which would generally
require the use of a rate that is less volatile than the noncompliant
rate but is otherwise similar to the noncompliant rate).
Several commenters suggested that the IRS and the Treasury
Department should permit a change from a noncompliant interest
crediting rate to any of the maximum compliant interest crediting
rates. However, this suggested approach was not taken in these proposed
regulations because this approach would not require a sufficient
connection between the correction and the specific feature that caused
an interest crediting rate to be noncompliant, and would permit a plan
sponsor to reduce the interest crediting rate more than is appropriate.
Proposed Effective/Applicability Dates
These regulations are proposed to apply to amendments adopted on or
after the date regulations that finalize these proposed regulations are
published in the Federal Register. In addition, it is proposed that
taxpayers be permitted, pursuant to section 7805(b)(7), to elect to
apply these regulations, as finalized, to plan amendments that are
adopted during earlier periods.
Special Analyses
It has been determined that these proposed regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to
[[Page 56308]]
section 7805(f) of the Code, these regulations have been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The Treasury Department and the IRS request comments on all
aspects of the proposed rules.
In addition, comments are specifically requested as to the
amendment required to bring a plan into compliance if the plan credits
interest using a composite rate that is an investment-based rate of
return with an impermissible annual (or more frequent) fixed or
variable minimum rate. Some of these plans might currently be applying
a reduction to the investment-based rate of return, in order to take
into account the value provided by the minimum rate. For a plan that
credits interest using an investment-based rate of return with an
impermissible minimum rate:
Should the required amendment eliminate the minimum rate
(and eliminate any reduction to the investment-based rate of return),
so that the required rate after amendment is the unreduced investment-
based rate of return?
Should the required amendment change the interest
crediting rate to another permitted rate that is less volatile than the
unreduced investment-based rate (such as a rate described in Sec.
1.411(b)(5)-1(d)(3) with a fixed minimum rate of 4 percent per year)?
Should the required amendment depend on the level of the
minimum rate and the extent of any reduction to the investment-based
rate of return?
Should the plan sponsor have a choice among alternative
required amendments to bring the plan into compliance?
Comments are also requested as to whether there are statutory
hybrid plans other than those described in the specific request for
comments that use a noncompliant interest crediting rate that is not
addressed in the regulations and for which an amendment is necessary to
bring the plan into compliance with the market rate of return rules. If
so, comments are requested as to the appropriate amendment to bring the
plan into compliance in such a case.
All comments will be available for public inspection and copying at
www.regulations.gov or upon request. A public hearing has been
scheduled for January 9, 2015, beginning at 10 a.m. in the Auditorium,
Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.
Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by December 18, 2014 and submit an outline of
topics to be discussed and the amount of time to be devoted to each
topic (a signed original and eight (8) copies) by December 18, 2014.
A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Neil S. Sandhu and
Linda S. F. Marshall, Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and the Treasury Department participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.411(b)(5)-1 is amended by adding paragraph (e)(3)(vi)
to read as follows:
Sec. 1.411(b)(5)-1 Reduction in rate of benefit accrual under a
defined benefit plan.
* * * * *
(e) * * *
(3) * * *
(vi) Transitional amendments needed to satisfy the market rate of
return rules--(A) In general. Notwithstanding the requirements of
section 411(d)(6), if the requirements set forth in this paragraph
(e)(3)(vi) are satisfied, a plan may be amended to change its interest
crediting rate with respect to benefits that have already accrued in
order to comply with the requirements of section 411(b)(5)(B)(i) and
paragraph (d) of this section. A plan amendment is eligible for the
treatment provided under this paragraph (e)(3)(vi)(A) to the extent
that the amendment modifies an interest crediting rate that does not
satisfy the requirements of section 411(b)(5)(B)(i) and paragraph (d)
of this section in the manner specified in paragraph (e)(3)(vi)(C) of
this section.
(B) Rules of application--(1) Multiple noncompliant features. If a
plan's interest crediting rate has more than one noncompliant feature
as described in paragraph (e)(3)(vi)(C) of this section, then each
noncompliant feature must be addressed separately in the manner
specified in paragraph (e)(3)(vi)(C) of this section.
(2) Definition of investment-based rate. The application of the
rules of paragraph (e)(3)(vi)(C) of this section to an interest
crediting rate depends on whether the interest crediting rate is an
investment-based rate. For purposes of this paragraph (e)(3)(vi), an
investment-based rate is either a rate of return provided by actual
investments (taking into account the return attributable to any change
in the value of the underlying investments) or a rate that is based on
the rate of return for an index that measures the change in the value
of investments.
(3) Timing rules for permitted amendments. The rules under this
paragraph (e)(3)(vi) apply only to a plan amendment that is adopted
prior to and effective no later than the first day of the first plan
year described in paragraph (f)(2)(i)(B) of this section. In addition,
the rules under this paragraph (e)(3)(vi) apply to a plan amendment
only with respect to interest credits that are credited for interest
crediting periods that begin after the applicable amendment date
(within the meaning of Sec. 1.411(d)-3(g)(4)).
(C) Noncompliant feature and amendment to bring plan into
compliance--(1) Timing rules not satisfied. If a plan does not satisfy
the timing rules relating to how interest credits are determined and
credited (as
[[Page 56309]]
set forth in paragraph (d)(1)(iv) of this section), then the plan must
be amended to correct the aspect of the plan's interest crediting rate
that fails to comply with those rules with respect to its underlying
interest crediting rate.
(2) Fixed rate in excess of 6 percent. If a plan credits interest
using a fixed rate in excess of the rate described in paragraph
(d)(4)(v) of this section, then the plan must be amended to reduce the
interest crediting rate to an annual interest crediting rate of 6
percent.
(3) Bond-based rate with margin exceeding maximum permitted margin.
If a plan credits interest using a rate that would be described in
paragraph (d)(3) or (d)(4) of this section except that the plan applies
a margin that exceeds the maximum permitted margin under paragraph
(d)(3) or (d)(4) of this section, then the plan must be amended to
reduce the margin to the maximum permitted margin for the underlying
rate used by the plan.
(4) Bond-based rate with fixed minimum rate exceeding maximum
permitted fixed minimum rate. If a plan credits interest using a
variable rate described in paragraph (d)(3) or (d)(4) of this section
in combination with a fixed minimum rate in excess of the highest
permitted fixed minimum rate under paragraph (d)(6)(ii)(A)(2) or (B)(2)
of this section (as applicable), then the plan must be amended either--
(i) To reduce the fixed minimum rate to the highest permitted fixed
minimum rate that can be used in combination with the plan's variable
rate; or
(ii) To credit interest using an annual interest crediting rate of
6 percent.
(5) Greatest of two or more variable bond-based rates. If a plan
credits interest using a composite rate that is the greatest of two or
more variable rates described in paragraph (d)(3) or (d)(4) of this
section, then the plan must be amended to credit interest using the
lesser of the composite rate and a rate described in paragraph (d)(3)
of this section.
(6) Impermissible bond-based rate. If a plan credits interest using
a variable rate that is not an investment-based rate of return and is
not described in paragraph (d)(3) or (d)(4) of this section (after
application of the rule of paragraph (e)(3)(vi)(C)(3) of this section,
if applicable), then--
(i) If a variable rate described in paragraph (d)(3) or (d)(4) of
this section that has similar duration and quality characteristics as
the plan's variable rate can be selected, then the plan must be amended
to credit interest based on such a rate; or
(ii) If a variable rate described in paragraph (d)(3) or (d)(4) of
this section that has similar duration and quality characteristics as
the plan's variable rate cannot be selected, then the plan must be
amended to provide that the plan credits interest using the lesser of
the plan's variable rate and a rate described in paragraph (d)(3) of
this section.
(7) Impermissible investment-based rate. If a plan credits interest
using an investment-based rate of return that is not described in
paragraph (d)(5) of this section, then--
(i) If a permitted investment-based rate described in paragraph
(d)(5)(ii)(A), (d)(5)(ii)(B), or (d)(5)(iv) of this section that has
similar risk and return characteristics as the plan's impermissible
investment-based rate can be selected, then the plan must be amended to
credit interest based on such a permitted investment-based rate; or
(ii) If a permitted investment-based rate described in paragraph
(d)(5)(ii)(A) (d)(5)(ii)(B), or (d)(5)(iv) of this section that has
similar risk and return characteristics as the plan's impermissible
investment-based rate cannot be selected, then the plan must be amended
to credit interest based on a rate of return described in paragraph
(d)(5)(ii)(A), (d)(5)(ii)(B), or (d)(5)(iv) of this section that is
otherwise similar to the plan's impermissible investment-based rate
(generally requiring the use of a rate that is less volatile than the
plan's impermissible investment-based rate but is otherwise similar to
that rate).
(D) Examples. The following examples illustrate the application of
the rules of this paragraph (e)(3)(vi). Each plan has a plan year that
is the calendar year, and all amendments are adopted on October 1, 2015
and become effective for interest crediting periods beginning on or
after January 1, 2016.
Example 1. (i) Facts. A plan determines interest credits for a
plan year using the average yield on 30-year Treasury Constant
Maturities for the last week of the preceding plan year (which is an
impermissible period for this purpose pursuant to paragraph
(d)(1)(iv)(B) of this section because it is not a month).
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this
section, the plan must be amended to determine interest credits for
a plan year using the average yield on 30-year Treasury Constant
Maturities for a period that complies with the requirements of
paragraph (d)(1)(iv)(B) of this section.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that the plan's interest crediting rate is determined as the
average yield on 30-year Treasury Constant Maturities for the
period, plus 50 basis points.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(B)(1) of this
section, the plan must be amended to correct both the impermissible
lookback period and the excess margin. Accordingly, pursuant to
paragraph (e)(3)(vi)(C)(1) and (3) of this section, the plan must be
amended to determine interest credits for a plan year using the
average yield on 30-year Treasury Constant Maturities (with no
margin) for a period that complies with the requirements of
paragraph (d)(1)(iv)(B) of this section.
Example 3. (i) Facts. A plan credits interest for a plan year
using the rate of return on plan assets for the preceding plan year.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this
section, the plan must be amended to determine interest credits for
each plan year using the rate of return on plan assets for that plan
year.
Example 4. (i) Facts. A plan credits interest using the average
yield on 30-year Treasury Constant Maturities for December of the
preceding plan year with a minimum rate of 5.5 percent per year.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(4) of this
section, the plan must be amended to change the plan's interest
crediting rate. The new interest crediting rate under the plan must
be either the average yield on 30-year Treasury Constant Maturities
for December of the preceding plan year with a minimum rate of 5
percent per year or an annual interest crediting rate of 6 percent.
Example 5. (i) Facts. A plan credits interest using the greater
of the unadjusted yield on 30-year Treasury Constant Maturities and
the yield on 1-year Treasury Constant Maturities plus 100 basis
points.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(5) of this
section, the plan must be amended to credit interest using the
lesser of a third segment rate described in paragraph (d)(3) of this
section and the composite rate used under the plan before the
amendment (the greater of the unadjusted yield on 30-year Treasury
Constant Maturities and the yield on 1-year Treasury Constant
Maturities plus 100 basis points).
Example 6. (i) Facts. A plan credits interest using a broad-
based index that measures the yield to maturity on a group of long-
term investment grade corporate bonds.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(i) of
this section, the plan must be amended to credit interest using a
third segment rate described in paragraph (d)(3) of this section.
Example 7. (i) Facts. A plan credits interest using the rate of
return for a broad-based index that measures the yield to maturity
on a group of short-term non-investment grade corporate bonds.
(ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(ii) of
this section, the plan must be amended to credit interest at the
lesser of the rate of return for the index used under the plan
before the amendment date and a third segment rate described in
paragraph (d)(3) of this section.
Example 8. (i) Facts. A plan credits interest using the rate of
return for the S&P 500 index. To bring the plan into compliance with
the market rate of return rules, the plan sponsor amends the plan to
credit interest based on the rate of return on a RIC that is
designed to track the rate of return on the S&P 500 index.
[[Page 56310]]
(ii) Conclusion. The amendment satisfies the rule of paragraph
(e)(3)(vi)(C)(7)(i) of this section.
Example 9. (i) Facts. A plan credits interest based on the rate
of return on a collective trust that holds a balanced portfolio of
equity and fixed income investments, which provides a rate of return
that is reasonably expected to be not significantly more volatile
than the broad U.S. equities market or a similarly broad
international equities market. To bring the plan into compliance
with the market rate of return rules, the plan sponsor amends the
plan to credit interest based on the actual rate of return on the
assets within a specified subset of the plan's assets that is
invested in the collective trust.
(ii) Conclusion. The amendment satisfies the rule of paragraph
(e)(3)(vi)(C)(7)(i) of this section.
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-22292 Filed 9-18-14; 8:45 am]
BILLING CODE 4830-01-P