Bulletin No. 2003–2 January 13, 2003 HIGHLIGHTS OF THIS ISSUE · Announcement 2003–1, page 281....

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

INCOME TAX

Rev. Rul. 2003–2, page 251.Low-income housing credit; satisfactory bond; “bond fac-tor” amounts for the period January through March 2003.This ruling announces the monthly bond factor amounts to beused by taxpayers who dispose of qualified low-income build-ings or interests therein during the period January through March2003.

Rev. Rul. 2003–3, page 252.Accrual of income; state tax refunds. This ruling holds thata state or local income or franchise tax refund is includible in theincome of a taxpayer using the accrual method of accountingwhen the taxpayer receives payment or notice that the refundclaim has been approved, whichever is earlier. Rev. Ruls. 65–190 and 69–372 revoked. Rev. Proc. 2002–9 modified and am-plified.

Rev. Rul. 2003–4, page 253.Mutual life insurance companies; recomputed differen-tial earnings rate. For purposes of section 809 of the Code,the recomputed differential earnings rate for 2000 and the dif-ferential earnings rate for 2001 are set forth for use by mutuallife insurance companies.

Rev. Rul. 2003–5, page 254.Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes ofsections 382, 1274, 1288, and other sections of the Code,tables set forth the rates for January 2003.

Notice 2003–1, page 257.Leave-based donation programs. This notice informs tax-payers that Notice 2001–69, 2001–2 C.B. 491, which pro-vided interim guidance on certain leave-based donation programs,will not be extended to payments made on or after January 1,2003. Notice 2001–69 modified and superseded.

EMPLOYEE PLANS

REG–209500–86;REG–164464–02, page 262.Proposed regulations under sections 401 and 411 of the Codeprovide rules regarding the requirements that accruals or allo-cations under certain retirement plans not cease or be reducedbecause of the attainment of any age. In addition to providing gen-erally applicable rules, the proposed regulations would providespecial rules for cash balance plans, and would provide rules forthe application of certain nondiscrimination requirements to cashbalance plans. A public hearing is scheduled for April 10, 2003.

Notice 2003–2, page 257.Required minimum distributions; section 1.401(a)(9)–6Tof the regulations. This notice identifies issues and invites com-ments under section 1.401(a)(9)–6T of the temporary regula-tions where the Service and Treasury anticipate issuing regulationsthat will provide further guidance on the minimum distribution re-quirements of section 401(a)(9) of the Code.

Notice 2003–3, page 258.This notice provides additional guidance on the methods of re-porting required minimum distributions under section 408 of theCode. Notice 2002–27 clarified.

(Continued on the next page)

Bulletin No. 2003–2January 13, 2003

Actions Relating to Court Decisions is on the page following the Introduction.Finding List begins on page ii.

Rev. Proc. 2003–10, page 259.Minimum distributions; regulations; delayed amendmentdate for defined benefit plans. This procedure postpones un-til the end of the EGTRRA remedial amendment period the timeby which qualified defined benefit plans must be amended to com-ply with final and temporary regulations under section 401(a)(9)of the Code, relating to required minimum distributions. Rev. Proc.2002–29 modified.

Announcement 2003–1, page 281.Mandatory technical advice cases; proposed cash bal-ance regulations; age discrimination. This announcementstates that the Service will not resolve pending mandatory tech-nical advice cases involving cash balance conversion plans un-til regulations that address age discrimination issues are finalized.

January 13, 2003 2003–2 I.R.B.

The IRS Mission

Provide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applyingthe tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument of theCommissioner of Internal Revenue for announcing official rul-ings and procedures of the Internal Revenue Service and for pub-lishing Treasury Decisions, Executive Orders, Tax Conventions,legislation, court decisions, and other items of general inter-est. It is published weekly and may be obtained from the Super-intendent of Documents on a subscription basis. Bulletin contentsare consolidated semiannually into Cumulative Bulletins, whichare sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, modify,or amend any of those previously published in the Bulletin. All pub-lished rulings apply retroactively unless otherwise indicated. Pro-cedures relating solely to matters of internal management arenot published; however, statements of internal practices and pro-cedures that affect the rights and duties of taxpayers are pub-lished.

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

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not be re-lied on, used, or cited as precedents by Service personnel in thedisposition of other cases. In applying published rulings and pro-cedures, the effect of subsequent legislation, regulations, court

decisions, rulings, and procedures must be considered, and Ser-vice personnel and others concerned are cautioned against reach-ing the same conclusions in other cases unless the facts andcircumstances are substantially the same.

The Bulletin is divided into four parts as follows:

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

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

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to these sub-jects are contained in the other Parts and Subparts. Also in-cluded in this part are Bank Secrecy Act Administrative Rulings.Bank Secrecy Act Administrative Rulings are issued by the De-partment of the Treasury’s Office of the Assistant Secretary (En-forcement).

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

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannual pe-riod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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

2003–2 I.R.B. January 13, 2003

Actions Relating to Decisions of the Tax CourtIt is the policy of the Internal Revenue

Service to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued at thediscretion of the Service only on unap-pealed issues decided adverse to the gov-ernment. Generally, an Action on Decisionis issued where its guidance would be help-ful to Service personnel working with thesame or similar issues. Unlike a TreasuryRegulation or a Revenue Ruling, an Ac-tion on Decision is not an affirmative state-ment of Service position. It is not intendedto serve as public guidance and may not becited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action on De-cision was issued. Caution should be ex-ercised in extending the recommendation ofthe Action on Decision to similar caseswhere the facts are different. Moreover, therecommendation in the Action on Deci-sion may be superseded by new legisla-tion, regulations, rulings, cases, or Actionson Decisions.

Prior to 1991, the Service published ac-quiescence or nonacquiescence only in cer-tain regular Tax Court opinions. The Servicehas expanded its acquiescence program toinclude other civil tax cases where guid-ance is determined to be helpful. Accord-ingly, the Service now may acquiesce ornonacquiesce in the holdings of memoran-dum Tax Court opinions, as well as thoseof the United States District Courts, ClaimsCourt, and Circuit Courts of Appeal. Re-gardless of the court deciding the case, therecommendation of any Action on Deci-sion will be published in the Internal Rev-enue Bulletin.

The recommendation in every Action onDecision will be summarized as acquies-cence, acquiescence in result only, or non-acquiescence. Both “acquiescence” and“acquiescence in result only” mean that theService accepts the holding of the court ina case and that the Service will follow itin disposing of cases with the same con-trolling facts. However, “acquiescence” in-dicates neither approval nor disapproval ofthe reasons assigned by the court for itsconclusions; whereas, “acquiescence in re-sult only” indicates disagreement or con-cern with some or all of those reasons.

“Nonacquiescence” signifies that, althoughno further review was sought, the Servicedoes not agree with the holding of the courtand, generally, will not follow the deci-sion in disposing of cases involving othertaxpayers. In reference to an opinion of acircuit court of appeals, a “nonacquies-cence” indicates that the Service will notfollow the holding on a nationwide basis.However, the Service will recognize the pre-cedential impact of the opinion on casesarising within the venue of the deciding cir-cuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear in thefirst Bulletin for July and the CumulativeBulletin for the first half of the year. A semi-annual consolidation also appears in the firstBulletin for the following January and inthe Cumulative Bulletin for the last half ofthe year.

The Commissioner ACQUIESCES in thefollowing decision:

Doyle, Dane, Bernbach, Inc. v.Commissioner,1

79 T.C. 101 (1982)T.C. Dkt. No. 14077–78

1Acquiescence and withdrawal of the action on decision approved on June 27, 1988, relating to whether an accrual method taxpayer must include in its gross income for 1975 amounts representing claimed refunds of

New York State franchise taxes and New York City general corporate taxes paid for 1972 which became refundable by virtue of a net operating loss incurred in 1975 and carried back to 1972.

January 13, 2003 2003–2 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.— Low IncomeHousing Credit

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for the

month of January 2003. See Rev. Rul. 2003–5,

page 254.

Low-income housing credit; satisfac-tory bond; “bond factor” amounts for theperiod January through March 2003.This ruling announces the monthly bondfactor amounts to be used by taxpayers whodispose of qualified low-income build-ings or interests therein during the periodJanuary through March 2003.

Rev. Rul. 2003–2

In Rev. Rul. 90–60, 1990–2 C.B. 3, theInternal Revenue Service provided guid-ance to taxpayers concerning the generalmethodology used by the Treasury Depart-ment in computing the bond factor amountsused in calculating the amount of bond con-sidered satisfactory by the Secretary un-der § 42(j)(6) of the Internal Revenue Code.It further announced that the Secretarywould publish in the Internal Revenue Bul-letin a table of bond factor amounts for dis-positions occurring during each calendarmonth.

Rev. Proc. 99–11, 1999–1 C.B. 275, es-tablished a collateral program as an alter-

native to providing a surety bond fortaxpayers to avoid or defer recapture of thelow-income housing tax credits under§ 42(j)(6). Under this program, taxpayersmay establish a Treasury Direct Accountand pledge certain United States Treasurysecurities to the Internal Revenue Serviceas security.

This revenue ruling provides in Table 1the bond factor amounts for calculating theamount of bond considered satisfactory un-der § 42(j)(6) or the amount of UnitedStates Treasury securities to pledge in aTreasury Direct Account under Rev. Proc.99–11 for dispositions of qualified low-income buildings or interests therein dur-ing the period January through March 2003.

Table 1Rev. Rul. 2003–2

Monthly Bond Factor Amounts for Dispositions ExpressedAs a Percentage of Total Credits

Calendar Year Building Placed in Serviceor, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month ofDisposition

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Jan ’03 17.21 31.84 44.34 55.05 64.12 64.48 65.00 65.64 66.37 67.26 68.18Feb ’03 17.21 31.84 44.34 55.05 64.12 64.31 64.83 65.47 66.20 67.09 68.01Mar ’03 17.21 31.84 44.34 55.05 64.12 64.15 64.67 65.31 66.03 66.92 67.84

Table 1 (cont’d)Rev. Rul. 2003–2

Monthly Bond Factor Amounts for Dispositions ExpressedAs a Percentage of Total Credits

Calendar Year Building Placed in Serviceor, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month ofDisposition

2000 2001 2002 2003

Jan ’03 69.16 70.58 72.28 72.55Feb ’03 68.98 70.39 72.05 72.55Mar ’03 68.82 70.21 71.84 72.55

For a list of bond factor amounts appli-cable to dispositions occurring during other

calendar years, see: Rev. Rul. 98–3, 1998–1C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B.

255; Rev. Rul. 2001–53, 2001–2 C.B. 488;and Rev. Rul. 2002–72, 2002–44 I.R.B. 759.

2003–2 I.R.B. 251 January 13, 2003

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Gregory N. Doran of the Office ofAssociate Chief Counsel (Passthroughs and-Special Industries). For further informa-tion regarding this revenue ruling, con-tact Mr. Doran at (202) 622–3040 (not atoll-free call).

Section 280G.—Golden Para-chute Payments

Federal short-term, mid-term, and long-term rates

are set forth for the month of January 2003. See Rev.

Rul. 2003–5, page 254.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In Losses Fol-lowing Ownership Change

The adjusted applicable federal long-term rate is

set forth for the month of January 2003. See Rev. Rul.

2003–5, page 254.

Section 401.—Qualified Pen-sion, Profit-Sharing, and StockBonus Plans

26 CFR 1.401(a)(9)–1: Minimum distribution re-quirement in general.

A revenue procedure delays the amendment date

for defined benefit pension plans for certain mini-

mum distribution regulations. See Rev. Proc. 2003–

10, page 259.

Section 412.—Minimum Fund-ing Standards

The adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the month

of January 2003. See Rev. Rul. 2003–5, page 254.

Section 451.—General Rulefor Taxable Year of Inclusion26 CFR 1.451–1: General rule for taxable year of in-

clusion.

Accrual of income; state tax refunds.This ruling holds that a state or local in-come or franchise tax refund is includiblein the income of a taxpayer using the ac-crual method of accounting when the tax-payer receives payment or notice that the

refund claim has been approved, which-ever is earlier. Rev. Ruls. 65–190 and 69–372 revoked. Rev. Proc. 2002–9 modifiedand amplified.

Rev. Rul. 2003–3

ISSUE

When is a state or local income or fran-chise tax refund includible in the incomeof a taxpayer using the accrual method ofaccounting under § 451 of the Internal Rev-enue Code?

FACTS

Taxpayer N is a corporation doing busi-ness in the State of New York. N uses anaccrual method of accounting and a calen-dar taxable year. New York permits a netoperating loss deduction for state corpo-rate franchise tax purposes. N.Y. Tax Law§ 208(9)(f) (McKinney 1998). In order toobtain a refund of New York corporate fran-chise taxes arising out of a net operatingloss carryback, a taxpayer must file a claimwith the New York State Department ofTaxation and Finance (N.Y. Department).N.Y. Tax Law § 1087(d) (McKinney 1998).The N.Y. Department has the right to ex-amine any refund claim before determin-ing whether to allow the claim and therefund amount. N incurs a net operating lossfor federal income tax purposes in tax year2001. In 2002, N files a Form 1139 to carryback the net operating loss for federal taxpurposes. Based on the federal tax net op-erating loss carryback, N files a claim forrefund of New York corporate franchisetaxes with the N.Y. Department in 2002. In2003, N receives notice that the N.Y. De-partment has approved N’s refund claim.

LAW AND ANALYSIS

Section 451(a) provides that an item ofincome shall be included in gross incomefor the taxable year it is received by the tax-payer, unless, under the method of account-ing used in computing taxable income, theamount is to be properly accounted for asof a different period.

Section 1.451–1(a) of the Income TaxRegulations provides, in part, that under anaccrual method of accounting, income is in-cludible in gross income when all the eventshave occurred that fix the right to receivethe income and the amount thereof can bedetermined with reasonable accuracy.

Generally, if a requirement that docu-mentation be submitted is ministerial, therequirement does not affect the determina-tion of whether all events that fix the rightto receive income or that establish the factof liability have occurred. See United Statesv. General Dynamics Corp., 481 U.S. 239(1987); United States v. Hughes Proper-ties, 476 U.S. 593 (1986); Continental Tie& Lumber Co. v. United States, 286 U.S.290 (1932); Anderson v. United States, 269U.S. 422 (1926).

Rev. Rul. 65–190, 1965–2 C.B. 150,holds that a refund of New York State cor-porate franchise taxes resulting from a netoperating loss carryback is accruable in thetaxable year of the loss giving rise to therefund, rather than in a later year when thestate authorities approve the refund claim,because the approval process is deemed tobe ministerial.

Rev. Rul. 69–372, 1969–2 C.B. 104, fol-lows Rev. Rul. 65–190 in concluding thata taxpayer must accrue Colorado State in-come tax refunds resulting from net oper-ating loss carrybacks in income in the yearof the loss giving rise to the refund.

In Doyle, Dane, Bernbach, Inc. v. Com-missioner, 79 T.C. 101 (1982), nonacq.,1988–2 C.B. 1, the taxpayer sought a re-fund of its New York City corporate tax andNew York State franchise tax resulting fromnet operating loss carrybacks. The courtnoted that the New York State and NewYork City tax authorities had the right toexamine and deny all or part of a taxpay-er’s refund claim. Therefore, the refund wasnot included in the taxpayer’s federal grossincome until the state or local tax authori-ties determined that the taxpayer had a rightto receive the refund.

In Yapp Corp. v. Commissioner, T.C.Memo. 1992–348, the taxpayer sought a re-fund of Illinois income and replacementtaxes based on net operating loss carry-backs. Pointing out the factual similari-ties to Doyle, the court noted that the stateactively examined refund claims and heldthat the refund was accruable in the tax yearthe state tax department determined that thetaxpayer was entitled to a refund.

The Service has reconsidered the posi-tion taken in Rev. Rul. 65–190 and Rev.Rul. 69–372 and has concluded that ap-proval by state authorities of state incomeand franchise tax refund claims is not min-isterial but involves substantive review. Ac-cordingly, N accrues the refund of its New

January 13, 2003 252 2003–2 I.R.B.

York State corporate franchise taxes attrib-utable to a 2001 net operating loss carry-back in 2003, the year N receives notice thatthe N.Y. Department has approved the re-fund claim.

HOLDING

A state or local income or franchise taxrefund is includible in the income of a tax-payer using the accrual method of account-ing when the taxpayer receives payment ornotice that the refund claim has been ap-proved, whichever is earlier.

AUTOMATIC CHANGE IN METHODOF ACCOUNTING

Any change in the timing of a taxpay-er’s inclusion in income of state or local in-come taxes or franchise tax refunds toconform with this revenue ruling is achange in method of accounting to whichthe provisions of §§ 446 and 481 and theregulations thereunder apply. Therefore, ataxpayer that does not accrue state or lo-cal income or franchise tax refunds in theyear the taxpayer receives payment or no-tification of approval of the refund claim(whichever is earlier), but wants to use thismethod of accounting for taxable years end-ing on or after December 11, 2002, mustfile a Form 3115.

A taxpayer must file this Form 3115 inaccordance with the automatic change inmethod of accounting provisions of Rev.Proc. 2002–9, 2002–3 I.R.B. 327 (or suc-cessor), as modified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, with the followingadditional modifications: (1) the scope limi-tations in section 4.02 of Rev. Proc. 2002–9do not apply to a taxpayer that wants tomake the change for its first taxable yearending on or after December 11, 2002, pro-vided the taxpayer’s method of accruingstate or local income or franchise tax re-funds is not an issue under considerationfor taxable years under examination, withinthe meaning of section 3.09 of Rev. Proc.2002–9, at the time the Form 3115 is filedwith the national office; and (2) when fil-ing the Form 3115, a taxpayer must com-plete all applicable parts of the form and,in lieu of the label required by section6.02(4) of Rev. Proc. 2002–9, must write“Filed under Rev. Rul. 2003–3” at the topof the form.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 65–190 and Rev. Rul. 69–372 are revoked. Rev. Proc. 2002–9 ismodified and amplified to include this au-tomatic change in section 5A of the AP-PENDIX. The non-acquiescence in Doyle,Dane, Bernbach, Inc. v. Commissioner, non-acq., 1988–2 C.B. 1, is withdrawn sepa-rately elsewhere in this issue of the InternalRevenue Bulletin.


The principal author of this revenue rul-ing is Norma Rotunno of the Office of theAssociate Chief Counsel (Income Tax &Accounting). For further information re-garding this revenue ruling, contactMs. Rotunno at (202) 622–7900 (not a toll-free call).

Section 467.—Certain Pay-ments for the Use of Property orServices




Section 468.—Special Rules forMining and Solid Waste Recla-mation and Closing Costs




Section 482.—Allocation of In-come and Deductions AmongTaxpayers



Rul. 2003–5, page 254.

Section 483.—Interest on Cer-tain Deferred Payments




Section 642.—Special Rules forCredits and Deductions



Rul. 2003–5, page 254.

Section 807.—Rules for Cer-tain Reserves




Section 809.—Reduction inCertain Deductions of MutualLife Insurance Companies

26 CFR 1.809–9: Computation of the differential earn-

ings rate and the recomputed differential earnings rate.

Mutual life insurance companies; re-computed differential earnings rate. Therecomputed differential earnings rate for2000 and the differential earnings rate for2001 are set forth for purposes of section809 of the Code for use by mutual life in-surance companies.

Rev. Rul. 2003–4

This revenue ruling contains the differ-ential earnings rate for 2001 and the re-computed differential earnings rate for 2000.Under § 809 of the Internal Revenue Code,mutual life insurance companies use thisrate in computing their federal income taxliability for tax years beginning in 2001.Notice 2002–19, 2002–10 I.R.B. 619, pro-vided that the tentative differential earn-ings rate (DER) for 2001 and recomputeddifferential earnings rate (RDER) for 2000are zero. Subsequently, the Job Creation andWorker Assistance Act of 2002, Pub. L. No.107–147, § 611, amended section 809 of theCode by adding new paragraph (j). Asamended, section 809(j) provides that theDER shall be treated as zero for purposesof computing both the differential earn-ings amount and the recomputed differen-tial earnings amount for a mutual lifeinsurance company’s taxable year begin-ning in 2001, 2002, or 2003. See Notice2002–33, 2002–21 I.R.B. 989. Accord-ingly, for purposes of § 809, the differen-tial earnings rate for 2001 and therecomputed differential earnings rate for2000 are as follows:

2003–2 I.R.B. 253 January 13, 2003

Differential Earnings Rate for 2001...................................................................................... 0Recomputed Differential Earnings Rate for 2000 ................................................................ 0


The principal author of this revenue rul-ing is Katherine A. Hossofsky of theOffice of the Associate Chief Counsel (Fi-nancial Institutions & Products). For fur-ther information regarding this revenueruling, contact Ms. Hossofsky at 202–622–3477 (not a toll-free call).

Section 846.—Discounted Un-paid Losses Defined



of January 2003. See Rev. Rul. 2003–5, on this page.

Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483,

642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 1274, 1288, and other sec-tions of the Code, tables set forth the ratesfor January 2003.

Rev. Rul. 2003–5

This revenue ruling provides various pre-scribed rates for federal income tax pur-poses for January 2003 (the current month).Table 1 contains the short-term, mid-term,and long-term applicable federal rates(AFR) for the current month for purposesof section 1274(d) of the Internal Rev-

enue Code. Table 2 contains the short-term, mid-term, and long-term adjustedapplicable federal rates (adjusted AFR) forthe current month for purposes of section1288(b). Table 3 sets forth the adjusted fed-eral long-term rate and the long-term tax-exempt rate described in section 382(f).Table 4 contains the appropriate percent-ages for determining the low-income hous-ing credit described in section 42(b)(2) forbuildings placed in service during the cur-rent month. Table 5 contains the federal ratefor determining the present value of annu-ity, an interest for life or for a term of years,or a remainder or a reversionary interest forpurposes of section 7520. Finally, Table 6contains the deemed rate of return for trans-fers made during calendar year 2003 topooled income funds described in§ 642(c)(5) that have been in existence forless than 3 taxable years immediately pre-ceding the taxable year in which the trans-fer was made.

REV. RUL. 2003–5 TABLE 1

Applicable Federal Rates (AFR) for January 2003

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-Term

AFR 1.81% 1.80% 1.80% 1.79%110% AFR 1.99% 1.98% 1.98% 1.97%120% AFR 2.17% 2.16% 2.15% 2.15%130% AFR 2.35% 2.34% 2.33% 2.33%

Mid-TermAFR 3.43% 3.40% 3.39% 3.38%

110% AFR 3.77% 3.74% 3.72% 3.71%120% AFR 4.12% 4.08% 4.06% 4.05%130% AFR 4.47% 4.42% 4.40% 4.38%150% AFR 5.17% 5.10% 5.07% 5.05%175% AFR 6.04% 5.95% 5.91% 5.88%

Long-TermAFR 4.90% 4.84% 4.81% 4.79%

110% AFR 5.39% 5.32% 5.29% 5.26%120% AFR 5.89% 5.81% 5.77% 5.74%130% AFR 6.39% 6.29% 6.24% 6.21%

January 13, 2003 254 2003–2 I.R.B.


Adjusted AFR for January 2003

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 1.69% 1.68% 1.68% 1.67%

Mid-termadjusted AFR 3.07% 3.05% 3.04% 3.03%

Long-termadjusted AFR 4.61% 4.56% 4.53% 4.52%


Rates Under Section 382 for January 2003

Adjusted federal long-term rate for the current month 4.61%

Long-term tax-exempt rate for ownership changes during the current month (the highestof the adjusted federal long-term rates for the current month and the prior two months.)

4.65%


Appropriate Percentages Under Section 42(b)(2) for January 2003

Appropriate percentage for the 70% present value low-income housing credit 7.97%

Appropriate percentage for the 30% present value low-income housing credit 3.41%


Rate Under Section 7520 for January 2003

Applicable federal rate for determining the present value of an annuity, an interest for life or a termof years, or a remainder or reversionary interest 4.2%


Deemed Rate for Transfers to New Pooled Income Funds During 2003

Deemed rate of return for transfers during 2003 to pooled income funds that have beenin existence for less than 3 taxable years 6.6%

2003–2 I.R.B. 255 January 13, 2003

Section 1288.—Treatment ofOriginal Issue Discounts on Tax-Exempt Obligations




Section 7520.—Valuation Tab-les




Section 7872.—Treatment ofLoans With Below-Market Inter-est Rates




January 13, 2003 256 2003–2 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Treatment of Certain AmountsPaid to Section 170(c)Organizations UnderEmployer Leave-BasedDonation Programs

Notice 2003–1

This notice informs taxpayers that No-tice 2001–69, 2001–2 C.B. 491, will not beextended to payments made on or afterJanuary 1, 2003.

Notice 2001–69 provides interim guid-ance regarding the tax treatment of an em-ployer’s payment to an organizationdescribed in § 170(c) of the Internal Rev-enue Code, in exchange for vacation, sick,or personal leave that the employee electsto forgo (“leave-based donation payments”).Notice 2001–69 provides that, for leave-based donation payments an employermakes to a § 170(c) organization beforeJanuary 1, 2003, the Service will not raisecertain issues regarding the treatment of thepayments as gross income or wages to em-ployees, or the treatment of the deductionof the payments by employers.

Notice 2001–69 also requested com-ments on whether the regulations under § 61should be modified to except certain leave-based donation programs from the assign-ment of income doctrine. The Service andTreasury Department have reviewed thecomments received and determined not toamend the regulations under § 61.


Notice 2001–69 is modified and super-seded.


The principal author of this notice isSheldon A. Iskow of the Office of the As-sociate Chief Counsel (Income Tax and Ac-counting). For further information regardingthis notice, please contact Mr. Iskow at(202) 622–4920 (not a toll-free call).

Required MinimumDistributions for DefinedBenefit Plans and AnnuityContracts

Notice 2003–2

PURPOSE

The Internal Revenue Service and Trea-sury Department intend to issue regula-tions that will provide further guidance onthe minimum distribution requirements of§ 401(a)(9) of the Internal Revenue Codefor defined benefit plans and annuity con-tracts. In particular, it is anticipated that theregulations will contain a transition rule per-mitting plans to satisfy certain require-ments set forth in proposed regulationsunder § 401(a)(9) issued prior to 2002 inlieu of complying with the requirements inA–1 of § 1.401(a)(9)–6T of the Tempo-rary Income Tax Regulations. Further, it isanticipated that the regulations will con-tain a transition rule permitting the entireinterest under an annuity contract to be de-termined without taking into account thevalue of certain benefits that would be re-quired to be taken into account under A–12of § 1.401(a)(9)–6T. Finally, it is antici-pated that the regulations will provide thatgovernmental plans must comply with theregulations as of a special effective date de-scribed below and will provide transitionalrelief for the period before the special ef-fective date. The Service and Treasury in-vite comments on these issues beforeregulations are issued.

BACKGROUND

Section 401(a)(9) provides rules for re-quired minimum distributions from retire-ment plans qualified under §§ 401(a) and403(a). These rules are incorporated by ref-erence in § 408(a)(6) and (b)(3) for distri-butions from individual retirementarrangements (“IRAs”) (including RothIRAs with respect to distributions paid fol-lowing the death of the Roth IRA owner),§ 403(b)(10) for distributions from § 403(b)annuity contracts, and § 457(d) for distri-butions from eligible deferred compensa-tion plans.

Final and temporary regulations relat-ing to required minimum distributions un-der Code § 401(a)(9) (§§ 1.401(a)(9)–1

through 1.401(a)(9)–5, § 1.401(a)(9)–6T, and§§ 1.401(a)(9)–7 through 1.401(a)(9)–9)were issued on April 17, 2002 (T.D. 8987,2002–19 I.R.B. 852 [67 FR 18987]). A–2of § 1.401(a)(9)–1 provides that the finaland temporary regulations (including§ 1.401(a)(9)–6T) apply for determining re-quired minimum distributions for calen-dar years beginning on or after January 1,2003. The preamble to those regulationsprovides that, for determining required mini-mum distributions for calendar year 2002,taxpayers may rely on the final and tem-porary regulations, the 2001 proposed regu-lations, or the 1987 proposed regulations.(The 1987 proposed regulations were pub-lished in the Federal Register on July 27,1987 (EE–113–82, 1987–2 C.B. 881 [52 FR28070]) and the 2001 proposed regula-tions were published in the Federal Reg-ister on January 17, 2001 (REG–130477-00; REG–130481-00, 2001–1 C.B. 865 [66FR 3928]).) Notice 2002–27, 2002–18I.R.B. 814, sets forth reporting require-ments with respect to required minimumdistributions from IRAs.

Section 1.401(a)(9)–6T was issued as atemporary and proposed regulation in or-der to allow taxpayers to comment onchanges made to the rules applicable to de-fined benefit plans and annuity contracts.The Service received numerous commentsrelating to the new restrictions on vari-able annuity payments, and certain other in-creasing annuity payments, set forth in A–1of § 1.401(a)(9)–6T. Commentators also re-quested additional guidance in applying therule in A–12 of § 1.401(a)(9)–6T that re-quires the entire interest under an annuitycontract to include the actuarial value ofother benefits (such as minimum survivorbenefits) provided under the contract andthat the rule requiring the inclusion of thesevalues (including inclusion in the requiredreporting to the IRA holder under Notice2002–27) be delayed until the guidance isprovided. Finally, commentators requestedthat special consideration be provided togovernmental plans.

ANTICIPATED REGULATORYPROVISIONS

In order to allow further time for the Ser-vice and Treasury to fully consider the is-sues raised in comments with respect to thenew restrictions on variable annuity pay-

2003–2 I.R.B. 257 January 13, 2003

ments, and certain other increasing annu-ity payments, set forth in A–1 of§ 1.401(a)(9)–6T, and to prevent employ-ers from being required to make changesto their plans until this additional consid-eration is completed, it is expected that fu-ture regulations will provide a transition rulefor annuity payments. This transition ruleis expected to apply at least through the endof the calendar year final regulations arepublished and is expected to provide thatdistributions paid under a defined benefitplan or annuity contract (including an an-nuity described in § 408(b) or § 403(b)) thatsatisfy the requirements of A–1 of§ 1.401(a)(9)–6 of the 2001 proposed regu-lations or F–3 and F–3A of § 1.401(a)(9)–1of the 1987 proposed regulations, will bedeemed to satisfy the requirements of A–1of § 1.401(a)(9)–6T.

In addition, to allow further time for theService and Treasury to fully consider theissues raised in comments with respect tothe rule in A–12 of § 1.401(a)(9)–6T thatrequires the entire interest under an annu-ity contract to include the actuarial valueof other benefits (such as minimum survi-vor benefits) provided under the contractand to prevent employers from being re-quired to make changes to their plans un-til this additional consideration is completed,it is expected that future regulations willprovide a transition rule for the determi-nation of the value of annuity contracts.This transition rule is expected to apply atleast through the end of the calendar yearfinal regulations are published and is ex-pected to provide that, for purposes of A–12of § 1.401(a)(9)–6T, the entire interest un-der an annuity contract (including an an-nuity described in § 408(b) or § 403(b)) ispermitted to be determined as the dollaramount credited to the employee or ben-eficiary under the annuity contract with-out regard to the actuarial value of any otherbenefits (such as minimum survivor ben-efits) that will be provided under the con-tract.

Finally, in order to allow further time forthe Service and Treasury to fully considerthe issues raised in comments with re-spect to whether and to what extent spe-cial consideration should be provided togovernmental plans, it is expected that fu-ture regulations will provide a special ef-fective date for governmental plans for§ 1.401(a)(9)–6T (or any regulation that su-persedes or replaces § 1.401(a)(9)–6T). The

special effective date is not expected to beearlier than the first calendar year begin-ning after the later of (1) the calendar yearin which the final regulations are pub-lished or (2) 90 days after the opening ofthe first legislative session, beginning on orafter the date the final regulations are pub-lished, of the governing body with author-ity to amend the plan, if that body does notmeet continuously. For purposes of thisparagraph, the governing body with au-thority to amend the plan is the legisla-ture, board, commission, council, or othergoverning body with authority to amend theplan. In addition, it is expected that the fu-ture regulations will provide a transitionalrule for the period before the special ef-fective date that will permit a governmen-tal plan to rely on a reasonable good faithinterpretation of § 401(a)(9) as it applies todefined benefit plans and annuity con-tracts. Compliance with § 1.401(a)(9)–6T, the 2001 proposed regulations, or the1987 proposed regulations, as they relate todefined benefit plans and annuity con-tracts, will be deemed to meet this reason-able good faith standard.

RELIANCE

The IRS and Treasury anticipate issu-ing the regulations described in this no-tice in 2003. In the meantime, taxpayersmay rely on the transition rules describedin this notice. Except as described above,taxpayers are required to comply with thefinal and temporary regulations (includ-ing § 1.401(a)(9)–6T) for purposes of de-termining required minimum distributionsfor calendar years beginning on or afterJanuary 1, 2003.

For purposes of determining the amountof the required minimum distribution withrespect to an IRA for purposes of report-ing to the IRA owner under Notice 2002–27, trustees may rely on the transition ruledescribed above for A–12 of § 1.401(a)(9)–6T. Thus, in the case of an annuity con-tract under an IRA from which annuitypayments have not commenced on an ir-revocable basis (except for acceleration), theIRA trustee may determine the entire in-terest under the annuity contract as the dol-lar amount credited to the employee orbeneficiary under the annuity contract with-out regard to the actuarial value of any otherbenefits (such as minimum survivor ben-efits) that will be provided under the con-tract. The relief provided in this paragraph

will continue to be available at least throughthe end of the calendar year in which fi-nal regulations regarding required mini-mum distributions under a defined benefitplan or annuity contract are issued. Oth-erwise, the reporting requirements set forthin Notice 2002–27 continue to apply.

COMMENTS REQUESTED

The Service and Treasury invite com-ments on the issues identified in this no-tice. Comments should be submitted byMarch 1, 2003, in writing, and should ref-erence Notice 2003–2.

Comments may be submitted toCC:ITA:RU (Notice 2003–2), room 5226,Internal Revenue Service, POB 7604 BenFranklin Station, Washington, DC 20044.Comments may be hand delivered betweenthe hours of 8 a.m. and 4 p.m. CC:ITA:RU(Notice 2003–2), Courier’s Desk, Inter-nal Revenue Building, 1111 ConstitutionAvenue NW, Washington, D.C. Alterna-tively, comments may be submitted via theInternet at [email protected]. All comments will be availablefor public inspection and copying.


The principal authors of this notice areRoger Kuehnle of Employee Plans (Tax Ex-empt and Government Entities Division)and Cathy Vohs of the Office of the Divi-sion Counsel/Associate Chief Counsel (TaxExempt and Government Entities). For fur-ther information regarding this notice, pleasecontact the Employee Plans taxpayer as-sistance telephone service (between thehours of 8:00 a.m. and 6:30 p.m. EasternTime, Monday through Friday) at1–877–829–5500 (a toll-free number).Mr. Kuehnle may be reached at202–283–9888 (not a toll-free number)Ms. Vohs may be reached at202–622–6090 (not a toll-free number).

Reporting Required MinimumDistributions From IRAsNotice 2003–3

PURPOSE

This notice clarifies Notice 2002–27,2002–18 I.R.B. 814, which provides guid-ance on the reports that trustees are re-quired to make regarding minimum

January 13, 2003 258 2003–2 I.R.B.

distributions from individual retirement ac-counts and annuities (“IRAs”). Specifi-cally, this notice provides that a trustee cansatisfy the requirement to provide state-ments regarding required minimum distri-butions to the owners of the IRAs for whichit is the trustee by using one of the two al-ternatives provided in Notice 2002–27 forsome IRA owners and the other alterna-tive for other IRA owners. Further, this no-tice provides guidance on how thesestatements can be transmitted electroni-cally.

BACKGROUND AND GENERALINFORMATION

Section 408(i) of the Internal RevenueCode provides that the trustee of an IRAshall make such reports regarding the IRAto the Secretary and to the IRA owner asthe Secretary may require. Form 5498, IRAContribution Information, is a form used tosatisfy part of this reporting requirement.

Section 1.408–8, A–10, of the IncomeTax Regulations provides that the trustee ofan IRA must report information regard-ing required minimum distributions(“RMDs”) from that IRA in accordancewith rules prescribed by the Commissioner.Pursuant to this delegation of authority, theService issued Notice 2002–27. Notice2002–27 provides that, if a minimum dis-tribution is required with respect to an IRAfor a calendar year after 2002, and the IRAowner is alive at the beginning of the year,the trustee that held the IRA as of Decem-ber 31 of the prior year must provide astatement to the IRA owner by January 31of the calendar year regarding the RMD inaccordance with either of two alternatives.Under Alternative one, the trustee must fur-nish the IRA owner a statement indicat-ing the RMD amount for the IRA and thedate by which such amount must be dis-tributed. Under Alternative two, the trusteemust furnish the IRA owner a statementshowing that an RMD is required for thecalendar year and the date by which theRMD must be distributed, and including anoffer to calculate, upon request, the amountof the RMD. The statement required un-der either alternative must be provided byJanuary 31 of each calendar year for whichan RMD is required (thus, the first state-ment must be provided to an IRA owner byJanuary 31 of the calendar year he or sheattains age 701⁄2).

Notice 2003–2, 2003–2 I.R.B. (Janu-ary 13, 2003), provides that until further no-tice, notwithstanding A–12 of § 1.401(a)(9)–6T, in the case of an annuity contract underan IRA from which annuity payments havenot commenced on an irrevocable basis (ex-cept for acceleration), the IRA trustee maydetermine the entire interest under the an-nuity contract as the dollar amount cred-ited to the employee or beneficiary underthe annuity contract without regard to theactuarial value of any other benefits (suchas minimum survivor benefits) that will beprovided under the contract.

Any term used in this notice (such as“trustee”) that is also used in Notice2002–27 has the meaning given such termin Notice 2002–27.

REQUIRED REPORTING TO THE IRAOWNER

Permitted inconsistent use of alterna-tives. Notice 2002–27 is clarified to pro-vide that a trustee is permitted to satisfy therequirement in Notice 2002-27 that it pro-vide statements regarding the required mini-mum distributions to the owners of theIRAs for which it is the trustee by provid-ing statements that satisfy Alternative oneto some IRA owners and statements thatsatisfy Alternative two to the rest of the IRAowners.

Permitted electronic furnishing of state-ments. Pursuant to this notice, a trustee ispermitted to transmit electronically the state-ments that it is required, under Notice2002–27, to provide to IRA owners regard-ing required minimum distributions if thefollowing requirements are satisfied. For2003, the electronic transmission must com-ply with a reasonable and good-faith in-terpretation of applicable law. For calendaryears after 2003, the trustee is permitted totransmit the statements electronically onlyif the procedures that apply to the elec-tronic transmission of Forms W–2, Wageand Tax Statement, are satisfied, includ-ing the consent requirement described inregulations under Code § 6051. Use of theseprocedures is a reasonable, good-faith in-terpretation of applicable law for 2003.


Notice 2002–27 is clarified.


The principal author of this notice is

Roger Kuehnle of the Employee Plans, TaxExempt and Government Entities Divi-sion. For further information regarding thisnotice, please contact Employee Plans’ tax-payer assistance telephone service at1–877–829–5500 (a toll-free number), be-tween the hours of 8:00 a.m. and 6:30 p.m.Eastern Time, Monday through Friday.Mr. Kuehnle can be reached at1–202–283–9888 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters(Also, Part I, §§ 401; 1.401(a)(9)–1.)

Rev. Proc. 2003–10

SECTION 1. PURPOSE

This revenue procedure modifies Rev.Proc. 2002–29, 2002–24 I.R.B. 1176, topostpone until the end of the EGTRRA re-medial amendment period the time bywhich qualified defined benefit plans mustbe amended to comply with final and tem-porary regulations under § 401(a)(9) of theInternal Revenue Code, relating to requiredminimum distributions, which were pub-lished in the Federal Register on April 17,2002, T.D. 8987, 2002–19 I.R.B. 852 [67FR 18987]. The revenue procedure also pro-vides that until further notice determina-tion letters for defined benefit plans will nottake into account the requirements of theseregulations. These changes are being madein conjunction with Notice 2003–2, page257, this bulletin.

SECTION 2. BACKGROUND

.01 Section 401(a)(9) provides rules forrequired minimum distributions from plansqualified under § 401(a) and § 403(a). Therules are incorporated by reference in§§ 408(a)(6) and (b)(3) for distributionsfrom individual retirement accounts (IRAs)(including Roth IRAs with respect to dis-tributions paid following the death of theRoth IRA owner), § 403(b)(10) for distri-butions from § 403(b) annuity contracts, and§ 457(d) for distributions from eligible de-ferred compensation plans.

.02 The regulations under § 401(a)(9)that were published in the Federal Regis-ter on April 17, 2002 (the § 401(a)(9) Fi-nal and Temporary Regulations) provideguidance on the minimum distribution re-quirements under § 401(a)(9) for plansqualified under § 401(a) or 403(a) as well

2003–2 I.R.B. 259 January 13, 2003

as for § 403(b) annuity contracts, § 408IRAs, § 408A Roth IRAs, and § 457 eli-gible deferred compensation plans. See, forexample, § 1.408–8. These regulations arefinal, with the exception of § 1.401(a)(9)–6T, a temporary and proposed regulation onrequired minimum distributions paid un-der a defined benefit plan or an annuitycontract.

.03 A–2 of § 1.401(a)(9)–1 provides thatthe § 401(a)(9) Final and Temporary Regu-lations (including § 1.401(a)(9)–6T) ap-ply for determining required minimumdistributions for calendar years beginningon or after January 1, 2003. The preambleto the § 401(a)(9) Final and TemporaryRegulations provides that, for determin-ing required minimum distributions for cal-endar year 2002, taxpayers may rely on the§ 401(a)(9) Final and Temporary Regula-tions, the § 401(a)(9) 2001 Proposed Regu-lations, or the § 401(a)(9) 1987 ProposedRegulations. (The § 401(a)(9) 1987 Pro-posed Regulations were published in theFederal Register on July 27, 1987 (EE–113–82, 1987–2 C.B. 881 [52 FR 28070])and the § 401(a)(9) 2001 Proposed Regu-lations were published in the Federal Reg-ister on January 17, 2001 (REG–130477–00; REG–130481–00, 2001–1 C.B. 865 [66FR 3928]).)

.04 Rev. Proc. 2002–29 provides thatqualified plans must generally be amendedby the last day of the first plan year be-ginning on or after January 1, 2003, to theextent necessary to comply with the re-quirements of the § 401(a)(9) Final andTemporary Regulations, and it containsmodel plan amendments that may beadopted to satisfy this requirement. Rev.Proc. 2002–29 also provides that pre-approved plans (i.e., master and proto-type plans and volume submitter specimenplans) must be amended by December 31,2003, to comply with the § 401(a)(9) Fi-nal and Temporary Regulations. Finally,Rev. Proc. 2002–29 provides that determi-nation letter applications filed on or afterthe first day of the 2003 plan year, andopinion and advisory letter applications filedon or after January 1, 2003, will be re-viewed with respect to whether the form ofthe plan satisfies the requirements of the§ 401(a)(9) Final and Temporary Regula-tions.

.05 Rev. Proc. 2002–10, 2002–4 I.R.B.401, requires all prototype sponsors withcurrently approved prototype IRAs, SEPs

and SIMPLE IRA plans to amend thesedocuments and submit applications for opin-ion letters on the amended documents byDecember 31, 2002. Among the amend-ments required are amendments to com-ply with the § 401(a)(9) Final andTemporary Regulations.

.06 Section 401(b) and the regulationsthereunder provide a remedial amendmentperiod during which an amendment to a dis-qualifying provision may be made retro-actively effective, under certain circum-stances, to comply with the requirements of§ 401(a). Notice 2001–42, 2001–30 I.R.B.70, provides a remedial amendment pe-riod under § 401(b) ending not prior to thelast day of the first plan year beginning onor after January 1, 2005, in which anyneeded retroactive amendment with re-gard to the Economic Growth and Tax Re-lief Reconciliation Act of 2001, Public Law107–16, (EGTRRA), may be adopted. Thisremedial amendment period is referred toas the “EGTRRA remedial amendment pe-riod.”

.07 Notice 2003–2 states that the Ser-vice and the Treasury Department intend toissue regulations that will provide furtherguidance on the minimum distribution re-quirements for defined benefit plans and an-nuity contracts. Notice 2003–2 describesthree transition rules that are expected tobe provided in the future regulations andthat taxpayers may rely on in the mean-time. The first transition rule is expected toprovide that required minimum distribu-tions under a defined benefit plan or an an-nuity contract (including an annuitydescribed in § 408(b) or § 403(b)) will bedeemed to satisfy the requirements in A–1of § 1.401(a)(9)–6T, relating to restric-tions on increases in annuity payments, ifthese distributions satisfy certain require-ments set forth in proposed regulations un-der § 401(a)(9) issued prior to 2002. Thesecond transition rule is expected to pro-vide that, for purposes of A–12 of§ 1.401(a)(9)–6T, the entire interest un-der an annuity contract (including an an-nuity described in § 408(b) or § 403(b)) willbe permitted to be determined as the dol-lar amount credited to the employee or ben-eficiary under the annuity contract withoutregard to the actuarial value of any otherbenefits (such as minimum survivor ben-efits) that will be provided under the con-tract. These two transitional rules areexpected to apply at least through the end

of the calendar year in which final regu-lations are published. It is also expected thatfuture regulations will provide a special ef-fective date for governmental plans for com-pliance with § 401(a)(9) as it applies todefined benefit plans and annuity con-tracts and a third transition rule for gov-ernmental plans for the period before thespecial effective date that will permit a gov-ernmental plan to rely on a reasonable goodfaith interpretation of § 401(a)(9) as it ap-plies to defined benefit plans and annuitycontracts.

SECTION 3. POSTPONEMENT OFTIME FOR AMENDING DEFINEDBENEFIT PLANS

.01 The time by which qualified de-fined benefit plans must be amended tocomply with the requirements of the§ 401(a)(9) Final and Temporary Regula-tions is postponed until the end of theEGTRRA remedial amendment period. Therequirement to amend pre-approved de-fined benefit plans by December 31, 2003,is postponed until further notice.

.02 The postponement described in sec-tion 3.01 does not apply to the time foramending defined contribution plans, in-cluding defined contribution plans describedin § 403(a), to comply with the require-ments of the § 401(a)(9) Final and Tem-porary Regulations. Such a postponementis unnecessary because § 1.401(a)(9)–6T ap-plies to a defined contribution plan only ifthe plan distributes benefits by purchas-ing an annuity contract. The expected tran-sition rules described in Notice 2003–2 willapply to purchased annuity contracts usedto distribute participants’ benefits under de-fined contribution plans, including definedcontribution plans that have been amendedto comply with the § 401(a)(9) Final andTemporary Regulations. The postpone-ment described in section 3.01 also does notapply to the time by which IRAs, SEPs andSIMPLE IRA plans must be amended tocomply with the requirements of the§ 401(a)(9) Final and Temporary Regula-tions and submitted for new opinion let-ters. However, the expected transition rulesdescribed in Notice 2003–2 will apply toIRAs, SEPs and SIMPLE IRA plans. Thus,for example, the entire interest under anIRA annuity contract described in § 408(b)will be permitted to be determined as thedollar amount credited to the beneficiary un-der the annuity contract without regard to

January 13, 2003 260 2003–2 I.R.B.

the actuarial value of other benefits pro-vided under the contract, even though theIRA has been amended to provide that theentire interest under the contract includesthe actuarial value of such other benefits.

.03 Until further notice, determinationletters issued for defined benefit plan ap-plications that are submitted on or after thefirst day of the first plan year beginning onor after January 1, 2003, will considerwhether the plan contains the statutory rulesof § 401(a)(9) but will not take into ac-count the requirements of the § 401(a)(9)Final and Temporary Regulations. Like-wise, opinion and advisory letter applica-tions for defined benefit plans that aresubmitted on or after January 1, 2003, willconsider the § 401(a)(9) statutory require-ments but not the § 401(a)(9) Final andTemporary Regulations.

.04 Until the effective date of final regu-lations regarding required minimum dis-tributions under a defined benefit plan orannuity contract, a nongovernmental planmust satisfy in operation the requirements

of the § 401(a)(9) Final and TemporaryRegulations, taking into account the ex-pected transition rules described in No-tice 2003–2, irrespective of whether the planhas been amended to comply with the§ 401(a)(9) Final and Temporary Regula-tions (for example, by adoption of themodel amendment in Rev. Proc. 2002–29). Until the effective date of such finalregulations applicable to governmentalplans, a governmental plan may rely on areasonable good faith interpretation of§ 401(a)(9) as it applies to defined ben-efit plans and annuity contracts, irrespec-tive of whether the plan has been amendedto comply with the § 401(a)(9) Final andTemporary Regulations. As provided in No-tice 2003–2, compliance with § 1.401(a)(9)–6T, the § 401(a)(9) 2001 Proposed Reg-ulations, or the § 401(a)(9) 1987 ProposedRegulations, as they relate to defined ben-efit plans and annuity contracts, will bedeemed to meet this reasonable good faithstandard.

SECTION 4. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–29 is modified.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective Janu-ary 13, 2003.


The principal author of this revenue pro-cedure is James Flannery of EmployeePlans, Tax Exempt and Government Enti-ties Division. For further information re-garding this revenue procedure, pleasecontact the Employee Plans’ taxpayer as-sistance telephone service at 1–877–829–5500 between the hours of 8:00 a.m. and6:30 p.m. Eastern time, Monday throughFriday (a toll-free number). Mr. Flannerymay be reached at 1–202–283–9888 (not atoll-free call).

2003–2 I.R.B. 261 January 13, 2003

Part IV. Items of General Interest

Notice of Proposed Rulemak-ing and Notice of Public Hear-ing

Reductions of Accruals andAllocations Because of theAttainment of Any Age;Application ofNondiscriminationCross-Testing Rules to CashBalance Plans

REG–209500–86,REG–164464–02

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document contains pro-posed regulations that would provide rulesregarding the requirements that accruals orallocations under certain retirement plansnot cease or be reduced because of the at-tainment of any age. In addition, the pro-posed regulations would provide rules forthe application of certain nondiscrimina-tion rules to cash balance plans. These regu-lations would affect retirement plan sponsorsand administrators, and participants in andbeneficiaries of retirement plans. This docu-ment also provides notice of a public hear-ing on these proposed regulations.

DATES: Written comments, requests tospeak and outlines of oral comments to bediscussed at the public hearing scheduledfor April 10, 2003, at 10 a.m., must be re-ceived by March 13, 2003.

ADDRESSES: Send submissions to:CC:ITA:RU (REG–209500–86), room 5226,Internal Revenue Service, POB 7604, BenFranklin Station, Washington, DC 20044.In the alternative, submissions may be handdelivered to: CC:ITA:RU (REG–209500–86), room 5226, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpay-ers may submit comments electronically viathe Internet by submitting comments di-rectly to the IRS Internet site at:www.irs.gov/regs. The public hearing willbe held in room 4718, Internal Revenue

Building, 1111 Constitution Avenue, NW,Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, LindaS. F. Marshall, 202–622–6090, or R. LisaMojiri-Azad, 202–622–6030; concerningsubmissions and the hearing, and/or to beplaced on the building access list to at-tend the hearing, Sonya Cruse, 202–622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR Part 1) under sections 401and 411 of the Internal Revenue Code of1986 (Code). Section 411(b)(1)(H), whichwas added in subtitle C of the OmnibusBudget Reconciliation Act of 1986 (OBRA’86) (100 Stat. 1874), provides that a de-fined benefit plan fails to comply with sec-tion 411(b) if, under the plan, an employee’sbenefit accrual is ceased, or the rate of anemployee’s benefit accrual is reduced, be-cause of the attainment of any age. Un-der section 411(b)(2)(A), added by subtitleC of OBRA ’86, a defined contribution planfails to comply with section 411(b) un-less, under the plan, allocations to the em-ployee’s account are not ceased, and the rateat which amounts are allocated to the em-ployee’s account is not reduced, because ofthe attainment of any age.

Section 411(b)(1)(H)(iii) provides thatany requirement of continued accrual ofbenefits after normal retirement age istreated as satisfied to the extent benefits aredistributed to the participant or the partici-pant’s benefits are actuarially increased toreflect the delay in the distribution of ben-efits after attainment of normal retirementage. Section 411(a) requires a qualified planto meet certain vesting requirements. In thecase of a participant in a defined benefitplan who works after attaining normal re-tirement age, these vesting requirements arenot satisfied unless the plan provides an ac-tuarial increase after normal retirement agefor accrued benefits, distributes benefitswhile the participant is working after nor-mal retirement age, or suspends benefits asdescribed in section 411(a)(3)(B) (and theregulations of the Department of Labor at29 CFR 2530.203–3). Section 401(a)(9)

(C)(iii), added to the Code by the SmallBusiness Job Protection Act of 1996 (110Stat. 1755) (1996), requires that the ac-crued benefit of any employee who re-tires after age 701⁄2 be actuarially increasedto take into account the period after age701⁄2 during which the employee is not re-ceiving benefits.

Section 4(i) of the Age Discriminationin Employment Act (ADEA) and sections204(b)(1)(H) and 204(b)(2) of the Em-ployee Retirement Income Security Act of1974 (ERISA) provide requirements com-parable to those in sections 411(b)(1)(H) and411(b)(2) of the Code. Section 4(i)(4) ofADEA provides that compliance with therequirements of section 4(i) with respect toan employee pension benefit plan consti-tutes compliance with the requirements ofsection 4 of ADEA relating to benefit ac-crual under the plan.

Under section 101 of ReorganizationPlan No. 4 of 1978 (43 FR 47713), the Sec-retary of the Treasury has interpretive ju-risdiction over the subject matter addressedin these regulations for purposes of ERISA,as well as the Code. Therefore, these regu-lations apply for purposes of the parallel re-quirements of sections 204(b)(1)(H) and204(b)(2) of ERISA, as well as for sec-tion 411(b) of the Code.

The Equal Employment OpportunityCommission (EEOC) has jurisdiction oversection 4 of ADEA. Section 9204(d) ofOBRA ’86 requires that the regulations andrulings issued by the Department of La-bor, the Treasury Department, and theEEOC pursuant to the amendments madeby subtitle C of OBRA ’86 each be con-sistent with the others. It further requiresthe Secretary of Labor, the Secretary of theTreasury, and the EEOC to each consultwith the others to the extent necessary tomeet the requirements of the preceding sen-tence. Executive Order 12067 requires allFederal departments and agencies to “ad-vise and offer to consult with the Equal Em-ployment Opportunity Commission duringthe development of any proposed rules,regulations, policies, procedures or or-ders concerning equal employment oppor-tunity.” The IRS and Treasury haveconsulted with the Department of Labor andthe EEOC prior to the issuance of these pro-posed regulations under sections411(b)(1)(H) and 411(b)(2) of the Code.

January 13, 2003 262 2003–2 I.R.B.

The EEOC published proposed regula-tions interpreting section 4(i) of ADEA inthe Federal Register on November 27,1987 (52 FR 45360). Proposed regula-tions REG–209500–86 (formerly EE–184–86, 1988–1 C.B. 881 [53 FR 11876] ) undersections 411(b)(1)(H) and 411(b)(2) werepreviously published by the IRS and Trea-sury in the Federal Register on April 11,1988, as part of a package of regulations(the 1988 proposed regulations) that also in-cluded proposed regulations under sec-tions 410(a), 411(a)(2), 411(a)(8) and 411(c)(relating to maximum age for participa-tion, vesting, normal retirement age, and ac-tuarial adjustments after normal retirementage). The IRS, Treasury, the Department ofLabor, and the EEOC consulted prior to theissuance of both sets of proposed regula-tions.

Notice 88–126, 1988–2 C.B. 538, ad-dressed certain effective date issues for sec-tions 411(b)(1)(H) and 411(b)(2). TheEEOC issued a similar notice addressingthose effective date issues in the FederalRegister on January 9, 1989 (54 FR 604).The United States Supreme Court subse-quently issued an opinion addressing the ef-fective date of section 411(b)(1)(H) inLockheed Corp. v. Spink, 517 U.S. 882(1996), which is discussed below.

On October 20, 1999, the IRS and Trea-sury published a solicitation for commentsin the Federal Register (64 FR 56578) in-viting comments regarding potential is-sues under their jurisdiction with respect tocash balance plans (a type of defined ben-efit plan under which the normal form ofbenefit is an immediate payment of a par-ticipant’s hypothetical account, which is ad-justed periodically to reflect pay credits andinterest credits), conversions of traditionaldefined benefit plans to cash balance plansand associated wear-away or benefit pla-teau effects. Hundreds of comments werereceived from a wide range of parties withinterests in cash balance plans, includingemployees, employers, and their represen-tatives. The most significant issue raised inthe comments relates to the application ofsection 411(b)(1)(H) to cash balance plansand conversions of traditional defined ben-efit plans to cash balance plans.

These proposed regulations are being is-sued after consideration of the comments

on the 1988 proposed regulations, as wellas more recent comments concerning theapplication of sections 411(b)(1)(H) and411(b)(2). These proposed regulations ad-dress the application of section 411(b)(1)(H)to cash balance plans, including conver-sions.

These proposed regulations would alsoamend the provisions of the regulations un-der section 401(a)(4) to provide rules fornondiscrimination testing for certain cashbalance plans.

Explanation of Provisions

Overview

These proposed regulations provide guid-ance on the requirements of section411(b)(1)(H), under which a defined ben-efit plan fails to be a qualified plan if, un-der the plan, benefit accruals on behalf ofa participant are ceased or the rate of ben-efit accrual on behalf of a participant is re-duced because of the participant’sattainment of any age.1 Similarly, these pro-posed regulations provide guidance on therequirements of section 411(b)(2), underwhich a defined contribution plan fails tobe a qualified plan if, under the plan, al-locations to a participant’s account areceased or the rate of allocations to a par-ticipant’s account is reduced because of theparticipant’s attainment of any age.

These proposed regulations follow the1988 proposed regulations in many re-spects. In particular, these proposed regu-lations would adopt many of the positionstaken under the 1988 proposed regula-tions for determining whether a plan ceasesbenefit accruals or allocations because ofthe attainment of any age or provides fora direct or indirect reduction in the rate ofbenefit accrual or allocation because of theattainment of any age.

These proposed regulations also pro-vide guidance on how to determine the rateof benefit accrual or rate of allocation. Inthe case of defined benefit plans, the pro-posed regulations would provide two ba-sic approaches to determining the rate ofbenefit accrual: a general approach appli-cable to all defined benefit plans; and aseparate approach applicable to eligible cashbalance plans, as defined in these pro-posed regulations. These proposed regula-

tions also provide guidance on determiningthe rate of allocation under a defined con-tribution plan.

Finally, these proposed regulations ad-dress other related issues also addressed inthe 1988 proposed regulations, including theapplication of sections 411(b)(1)(H) and411(b)(2) to optional forms of benefits, an-cillary benefits and other rights and fea-tures, the coordination of the requirementsof sections 411(b)(1)(H) and 411(b)(2) withcertain other qualification requirements un-der the Code, such as sections 401(a)(4),411(a), and 415, and the effective date ofsections 411(b)(1)(H) and 411(b)(2).

Applicability Prior to Normal RetirementAge

Sections 411(b)(1)(H) and 411(b)(2) pro-hibit cessation of accruals or allocations, andreduction in the rate of benefit accrual orallocation, because of the attainment of anyage. Under these sections, attainment of anyage means a participant’s growing older.Accordingly, these regulations, like the 1988proposed regulations, would apply regard-less of whether the participant is older than,younger than, or at normal retirement age.

Some commentators have suggested thatonly cessations or reductions after attain-ment of normal retirement age are prohib-ited by these sections. This interpretationis not consistent with the language of thestatute, which does not specify any mini-mum age at which the rule applies, and isnot adopted under these proposed regula-tions.

Reduction in Rate of Benefit AccrualBecause of Attainment of Any Age

Under these proposed regulations, a de-fined benefit plan fails to comply with sec-tion 411(b)(1)(H) if, either directly orindirectly, a participant’s rate of benefit ac-crual is reduced (which includes a cessa-tion of participation in the plan or otherdiscontinuance of benefit accruals) be-cause of the participant’s attainment of anyage. A plan provides for a reduction in therate of benefit accrual that is directly be-cause of the attainment of any age if, dur-ing a plan year, under the terms of the plan,any participant’s rate of benefit accrual forthe plan year would be higher if the par-ticipant were younger. Thus, a plan fails to

1While section 4(i) of the ADEA, section 204(b)(1)(H) of ERISA, and section 411(b)(1)(H) of the Code are worded similarly, the words “attainment of any” are not in section 4(i) of the ADEA. The legislative historystates that no differences among the provisions is intended (OBRA ’86 House Report No. 99–727 at 378–9), and the agencies have concluded that this particular difference in language has no effect.

2003–2 I.R.B. 263 January 13, 2003

comply with section 411(b)(1)(H) if, un-der the terms of the plan, the rate of ben-efit accrual for any individual who is orcould be a participant under the plan wouldbe lower solely as a result of such indi-vidual being older. Whether there is an ac-tual participant at any particular age is notrelevant. Similarly, whether a reduction inthe rate of benefit accrual is because of theattainment of any age does not depend ona comparison of a participant’s rate of ben-efit accrual for a year to that participant’srate of benefit accrual in an earlier year.These proposed regulations include a num-ber of examples (at §1.411(b)–2(b)(3)(iii)of these regulations) which illustrate whethera reduction in the rate of benefit accrual isbecause of the attainment of any age.

A reduction in the rate of benefit ac-crual is indirectly because of a partici-pant’s attainment of any age if anyparticipant’s rate of benefit accrual for theplan year would be higher if the partici-pant were to have a different characteris-tic that is a proxy for being younger, basedon all the relevant facts and circumstances.For example, if a company assigns olderworkers to one division and younger work-ers to another even though they perform thesame work, then assignment to a divisionwould be a proxy for being older oryounger.

Like the 1988 proposed regulations,these proposed regulations provide that areduction in a participant’s rate of benefitaccrual is not indirectly because of the at-tainment of any age in violation of sec-tion 411(b)(1)(H) solely because of apositive correlation between attainment ofany age and a reduction in the rate of ben-efit accrual. In addition, a defined benefitplan does not fail to satisfy section411(b)(1)(H) solely because, on a uniformand consistent basis without regard to a par-ticipant’s age, the plan limits the amountof benefits a participant may accrue un-der the plan or limits the number of yearsof service or participation taken into ac-count for purposes of determining the ac-crual of benefits under the plan, whether theplan reduces or ceases accruals for ser-vice in excess of such limit. A limitation thatis expressed as a percentage of compen-sation (whether averaged over a partici-pant’s total years of credited service for theemployer or over a shorter period) is a per-

missible limitation on the amount of ben-efits a participant may accrue under theplan.

Rate of Benefit Accrual

Neither section 411(b)(1)(H) nor the1988 proposed regulations define the rateof benefit accrual. These proposed regula-tions would provide two basic approachesto determining the rate of benefit accrual,based on the way the benefit is expressedin the plan. One approach may be used byall defined benefit plans. A second ap-proach may be used only by an eligible cashbalance plan, as defined in these proposedregulations.

Under the general rule, the rate of ben-efit accrual for any plan year that ends be-fore the participant attains normal retirementage is the increase in the participant’s ac-crued normal retirement benefit for the year.Because the rate of benefit accrual is de-termined by reference to the increase in theaccrued benefit during the plan year, anysubsidized portion of an early retirementbenefit, any qualified disability benefit, orany social security supplement is disre-garded.

Section 411(b)(1)(H)(iii)(II) provides thata defined benefit plan does not fail to com-ply with section 411(b)(1)(H) for a plan yearto the extent of any adjustment in the ben-efit payable under the plan during such planyear attributable to the delay in the distri-bution of benefits after the attainment ofnormal retirement age. These proposedregulations implement this rule (i.e., per-mit a plan to offset any actuarial adjust-ment during the year against the otherwiserequired accruals under the plan), by pro-viding that the rate of benefit accrual af-ter normal retirement age is equal to theexcess, if any, of the annual benefit to whichthe participant is entitled at the end of theplan year over the annual benefit to whichthe participant would have been entitled atthe end of the preceding plan year. For thispurpose, the annual benefit is determinedassuming that payment commences in thenormal form of benefit under the plan at theend of the applicable year. For purposes ofthese proposed regulations, the normal formof benefit is the form under which pay-ments due to the participant are expressedunder the plan, prior to adjustment for formof benefit.

The methodology of determining a year-by-year rate of accrual, taking into ac-

count any actuarial increases during the planyear, is a departure from the methodol-ogy used in the 1988 proposed regula-tions. As a consequence of the methodologyused in these proposed regulations, the planmay not reduce a participant’s rate of ben-efit accrual in a plan year to take into ac-count the fact that, in the preceding planyear, the actuarial increase was greater thanthe accrual under the plan formula.

While any actuarial adjustment made tothe annual benefit to which the partici-pant would have been entitled at the end ofthe preceding plan year is included in therate of benefit accrual after normal retire-ment age, a defined benefit plan must sepa-rately comply with the requirements ofsection 411(a), which are not addressed inthese proposed regulations. Thus, for ex-ample, a plan that does not provide for sus-pension of benefits in accordance withsection 411(a)(3) must provide for actu-arial adjustments of the amount that wouldotherwise be paid (or distributions of thatamount) that are adequate to satisfy sec-tion 411(a) and 29 CFR 2530.203–3 of theregulations of the Department of Labor. Inaddition, the plan must comply with sec-tion 401(a)(9)(C)(iii) with respect to actu-arial adjustments for participants who retireafter attainment of 701⁄2.

Section 411(b)(1)(H)(iii)(I) provides thata defined benefit plan will not fail to sat-isfy section 411(b)(1)(H) to the extent ofthe actuarial equivalent of in-service dis-tribution of benefits. Under these proposedregulations, the rate of benefit accrual fora participant who has attained normal re-tirement age may be reduced by the actu-arial value of plan benefit distributions madeduring the year. This reduction is theequivalent of the provision described aboveunder which a defined benefit plan may off-set any actuarial adjustment during the yearagainst the otherwise required accruals forthe year. As described immediately be-low, the manner in which distributions madeunder the plan are taken into account fora plan year under these regulations is de-signed so that compliance with section411(b)(1)(H) is not affected by the op-tional form in which the distribution ismade.

In the plan year during which a distri-bution is made, distributions are taken intoaccount to the extent the actuarial value ofthe distribution does not exceed the actu-arial value of distributions that would have

January 13, 2003 264 2003–2 I.R.B.

been made during the plan year had dis-tribution of the participant’s full accruedbenefit at the beginning of the plan yearcommenced at the beginning of the planyear (or, if later, at the participant’s nor-mal retirement age) in the normal form ofbenefit. Distributions in excess of the ac-tuarial value of the distribution that wouldhave been made during the plan year hadthe distribution of the participant’s full ac-crued benefit commenced in the normalform (called accelerated benefit payments)are disregarded for that plan year, but, asdescribed below, are taken into account insubsequent periods. If the participant is re-ceiving a distribution in an optional formof benefit under which the amount pay-able annually is less than the amount pay-able under the normal form of benefit (forexample, a QJSA under which the annualbenefit is less than the amount payable an-nually under a straight life annuity nor-mal form), the participant may be treatedas receiving payments under an actuari-ally equivalent normal form of benefit.

Any accelerated benefit payments aretaken into account in plan years after theplan year in which the distribution wasmade by converting the accelerated ben-efit payments to an actuarially equivalentstream of annual benefit payments under theplan’s normal form of benefit distribu-tions, commencing at the beginning of thenext following plan year. This equivalentstream of annual benefit payments is thendeemed to be paid in plan years after theplan year in which the distribution wasmade, and the calculation of the rate of ben-efit accrual after normal retirement age isadjusted by adding any of these deemedpayments for future plan years to the an-nual benefit to which the participant is en-titled at the end of a plan year. As soadjusted, therefore, the rate of benefit ac-crual is determined as the excess, if any, ofthe sum of the annual benefit to which theparticipant is entitled at the end of the planyear (assuming payment commences in thenormal form at the end of the plan year)plus the annuity equivalent of acceleratedbenefit payments deemed paid in the nextplan year, over the sum of the annual ben-efit to which the participant would havebeen entitled at the end of the precedingplan year (assuming that payment com-mences in the normal form at the later ofnormal retirement age and the end of thepreceding plan year), plus the annuity

equivalent of accelerated benefit paymentsdeemed paid during the plan year. The ef-fect of this adjustment, in the case of asingle sum distribution, is to put the par-ticipant in the same position as if the par-ticipant had received the distribution in thenormal form.

Eligible Cash Balance Plans

The 1988 proposed regulations did notcontain any guidance specific to cash bal-ance plans. A cash balance plan is a typeof defined benefit plan that determines ben-efits by reference to an employee’s hypo-thetical account. Since the 1988 proposedregulations were issued, the number of cashbalance plans has increased. The develop-ment of cash balance plans has raised theissue of whether this design complies withsection 411(b)(1)(H).

Under a cash balance plan, an employ-ee’s hypothetical account balance is cred-ited with hypothetical allocations, oftenreferred to as service credits or pay cred-its, and hypothetical earnings, often re-ferred to as interest credits. Under somecash balance plans, the right to interest cred-its for future periods accrues at the sametime as the pay credit (i.e., the interest creditis not contingent on the performance of ser-vices in the future). Under other cash bal-ance plans, all or some portion of theinterest credit for future periods is contin-gent on the performance of services in thefuture. The benefit under a cash balanceplan is expressed in the plan document (andcommunicated to employees) as the hypo-thetical account balance, although not allcash balance plans provide a single sum dis-tribution.

Under a cash balance plan, the interestcredits for a younger participant will com-pound over a greater number of years un-til normal retirement age than for an olderparticipant. This will result in a larger ac-crual for younger employees, when mea-sured as the increase in the benefit payableat normal retirement age. Accordingly, somecommentators have argued that the basiccash balance plan design violates section411(b)(1)(H). Others have asserted that cashbalance plans do not violate section411(b)(1)(H) if the additions to the hypo-thetical account are not smaller because ofthe attainment of any age. They argue that,because pay credits under a cash balanceplan are comparable to allocations under adefined contribution plan, these pay cred-

its are an appropriate measure for testingwhether a cash balance plan satisfies sec-tion 411(b)(1)(H).

These proposed regulations would pro-vide that the rate of benefit accrual underan eligible cash balance plan, as defined inthese proposed regulations, is permitted tobe determined as the additions to the par-ticipant’s hypothetical account for the planyear, except that previously accrued inter-est credits are not included in the rate ofbenefit accrual. Because the rate of ben-efit accrual is determined based on howbenefits are expressed under the plan, thismethod of determining the rate of benefitaccrual is restricted to eligible cash bal-ance plans, as defined in these proposedregulations.

An eligible cash balance plan is a de-fined benefit plan that satisfies certain re-quirements. First, for accruals in the currentplan year, the normal form of benefit is animmediate payment of the balance in a hy-pothetical account. As long as the normalform of benefit is an immediate paymentof the balance in a hypothetical account, aplan does not fail to be an eligible cash bal-ance plan merely because a single-sum dis-tribution of that amount is not actuallyavailable as a distribution option under theplan.

Second, a plan is an eligible cash bal-ance plan only if the plan provides that, atthe same time that the participant accruesan addition to the hypothetical account, theparticipant accrues the right to future in-terest credits (without regard to future ser-vice) at a reasonable rate of interest thatdoes not decrease because of the attain-ment of any age. Because the rate of ben-efit accrual under an eligible cash balanceplan is generally determined by referenceto additions to the hypothetical account dis-regarding interest credits, these interest cred-its must be provided for all future periods,including after normal retirement age, andan eligible cash balance plan cannot treatinterest credits after normal retirement ageas actuarial increases that are offset againstthe otherwise required accrual. A partici-pant is not treated as having the right to fu-ture interest credits if the plan provides thatadditions to the hypothetical account un-der the plan are reduced for the actuarialequivalent of any in-service distributions be-cause, as discussed above, such a reduc-tion is the equivalent of an offset for anactuarial adjustment. Any additional inter-

2003–2 I.R.B. 265 January 13, 2003

est credits under an eligible cash balanceplan that do not accrue at the same time asthe corresponding addition to the hypo-thetical account are included in determin-ing the rate of benefit accrual in the yearin which those additional interest credits areaccrued.

In addition, a plan that is converted toa cash balance plan is subject to certain re-quirements, discussed below.

There are other hybrid designs thatwould satisfy some, but not all, of the re-quirements for an eligible cash balance plan.For example, there are some designs un-der which the normal form of benefit is theimmediate payment of an account balance,but which do not provide for reasonable in-terest credits on that account balance. Un-der these proposed regulations, the rate ofbenefit accrual under these plans would bedetermined under the general rules appli-cable to traditional defined benefit plans.

Plans With Mixed Formulas

Some defined benefit plans have both atraditional defined benefit formula and acash balance formula, and these proposedregulations provide rules for plans with sucha mixed formula. If a portion of the planformula under a defined benefit plan wouldsatisfy the requirements for an eligible cashbalance plan if that were the only formulaunder the plan, then that portion of the planformula is referred to as an eligible cashbalance formula in these proposed regula-tions. Any other portion of the plan for-mula is referred to as a traditional definedbenefit formula.

The portion that is an eligible cash bal-ance formula (or formulas if the plan hasmultiple eligible cash balance formulas)would be permitted to be tested using therules for eligible cash balance plans, withthe remainder of the plan tested under therules for a traditional defined benefit for-mula (regardless of how many traditionaldefined benefit formulas the plan mayhave). This rule applies only if each suchseparately-treated plan would satisfy themaximum age conditions in section410(a)(2) and the eligible cash balance andtraditional defined benefit formulas inter-act in one of three specific ways for cur-rent and future accruals. The three ways are:

(1) the plan provides that the participant’sbenefit is based on the sum of accruals un-der two different formulas (either sequen-tially where the cash balance formula goesinto effect during the year or simultaneouslywhere the plan provides for a participant toaccrue benefits under both a traditional de-fined benefit formula and a cash balanceformula at the same time with the partici-pant to be entitled to the sum of the two);(2) the plan provides a benefit for a par-ticipant equal to the greater of the benefitdetermined under two or more formulas,one of which is an eligible cash balance for-mula and the other of which is not; or (3)under the plan, some participants are eli-gible for accruals only under an eligiblecash balance formula and the remaining par-ticipants are eligible for accruals only un-der a traditional defined benefit formula orthe other 2 specific methods. If the eli-gible cash balance formula and the tradi-tional defined benefit formula interact in anyother manner, the plan is not treated as aneligible cash balance plan for any portionof the plan formula.

Amendments Establishing an EligibleCash Balance Formula

In many cases, a plan sponsor amendsa traditional defined benefit plan to makeit a cash balance plan. This process is of-ten referred to as a “conversion.” The termsof cash balance conversions vary, but of-ten provide an opening hypothetical ac-count balance for each participant. In somecases, the opening balance may be basedon the participant’s prior accrued benefit un-der the traditional defined benefit plan oron the participant’s prior service with theplan sponsor. In other cases, the openingbalance is set at zero, and each partici-pant is entitled to the sum of the partici-pant’s accrued benefit under the traditionaldefined benefit plan and the cash balanceaccount.

Some commentators have questionedwhether certain cash balance conversionsthat provide for the establishment of anopening account balance satisfy section411(b)(1)(H). These commentators havenoted that, under section 411(d)(6), the par-ticipant can never be denied payment of theprior accrued benefit. They note that, if the

opening account balance and subsequent in-terest credits through normal retirement agegenerate benefits that are not at least aslarge as the prior accrued benefit, the par-ticipant will not accrue net benefits for someperiod after the conversion. This period, of-ten referred to as a “wear-away” period, willcontinue until the participant’s account bal-ance generates benefits that exceed the prioraccrued benefit. These commentators ar-gue that the wear-away period inherentlyproduces a lower rate of accrual for olderparticipants.2

Other commentators have argued that awear-away period does not violate sec-tion 411(b)(1)(H) because the length of thewear-away period is determined not by theparticipant’s age but by the size of the par-ticipant’s prior accrued benefit under the tra-ditional defined benefit plan. Additionally,commentators have pointed out that, be-cause the prior accrued benefit is calcu-lated using an interest rate determined at thetime of the amendment but the interest cred-its under the cash balance plan often fluc-tuate under a variable index, a participantmay move in or out of a wear-away pe-riod after a cash balance conversion solelybecause of future changes in interest rates.

Under these proposed regulations, themere conversion of a traditional definedbenefit plan to a cash balance plan wouldnot cause the plan to fail section411(b)(1)(H). However, a converted planthat otherwise would be treated as an eli-gible cash balance plan must satisfy one oftwo alternative rules. Under the first alter-native, the converted plan must determineeach participant’s benefit as not less thanthe sum of the participant’s benefits ac-crued under the traditional defined ben-efit plan and the cash balance account. Aplan satisfying this first alternative will nothave a wear-away period for benefits ac-crued under the traditional defined ben-efit plan.

Under the second alternative, the con-verted plan must establish each partici-pant’s opening account balance as anamount not less than the actuarial presentvalue of the participant’s prior accrued ben-efit, using reasonable actuarial assump-tions. For this purpose, an interest rateassumption is not treated as reasonable if

2This type of wear-away differs from a wear-away that results from the fact that certain optional forms of benefit may be subsidized under the traditional defined benefit plan but not under the cash balance plan or thatother actuarial factors may produce a larger benefit amount prior to normal retirement age under the traditional defined benefit plan but not under the cash balance plan. This may occur even though the actuarial valueof the accrued benefit under the traditional defined benefit plan is included in the participant’s opening account balance. Although section 411(d)(6) protects optional forms of benefit under the pre-amendment formula,section 411(b)(1)(H)(iv) specifically provides that a reduction because of the attainment of any age does not occur as a result of the subsidized portion of an early retirement benefit.

January 13, 2003 266 2003–2 I.R.B.

it increases, directly or indirectly, becauseof the participant’s attainment of any age(which would result in lower present val-ues for older participants). This alterna-tive does not preclude the possibility of awear-away period for some or all the par-ticipants in the plan, but it ensures that theopening account balance of each partici-pant reflects the actuarial value of the prioraccrued benefit, determined by using rea-sonable assumptions. Any excess in theopening account balance over the presentvalue of a participant’s previously accruedbenefit is included as part of the partici-pant’s rate of benefit accrual for the planyear, and thus is tested under section411(b)(1)(H) along with other pay creditsfor the year. Effectively, this alternative pro-vides that a converted plan will not fail tosatisfy section 411(b)(1)(H) if the benefitformula before the conversion satisfies sec-tion 411(b)(1)(H), the opening account bal-ance is based on actuarial assumptions thatare reasonable (and an interest rate that doesnot increase for older participants), and thebenefit formula after the conversion—including any excess in the opening ac-count balance over the present value of aparticipant’s previously accrued benefit—satisfies section 411(b)(1)(H).

Use of Compensation in CalculatingRate of Benefit Accrual

A participant’s rate of benefit accrual fora plan year can be determined as a dollaramount. Alternatively, if a plan’s formulabases a participant’s accruals on currentcompensation, then a participant’s rate ofbenefit accrual can be determined as a per-centage of the participant’s current com-pensation. Likewise, if a plan’s formulabases a participant’s accruals on averagecompensation, then a participant’s rate ofbenefit accrual can be determined as a per-centage of that measure of the participant’saverage compensation. In order for the par-ticipant’s rate of benefit accrual to be de-termined as a percentage of the participant’scurrent or average compensation, compen-sation must be determined without regardto attainment of any age. The alternative ofusing current or average compensation sim-plifies testing, without changing the re-sult.

Defined Contribution Plans

A defined contribution plan fails to com-ply with section 411(b)(2) if, either di-rectly or indirectly, because of aparticipant’s attainment of any age, the al-location of employer contributions or for-feitures to the account of the participant isdiscontinued or the rate at which the allo-cation of employer contributions or forfei-tures is made to the account of theparticipant is decreased. For determining ifthere is a cessation or reduction in alloca-tions because of attainment of any age, theseproposed regulations would adopt a sub-stantive standard that is similar to the stan-dard that applies under these proposedregulations for defined benefit plans and tothe standard that was proposed in the 1988proposed regulations.

A reduction in the rate of allocation isdirectly because of a participant’s attain-ment of any age for a plan year if under theterms of the plan, any participant’s rate ofallocation during the plan year would behigher if the participant were younger.

A reduction in the rate of allocation isindirectly because of a participant’s attain-ment of any age if any participant’s rate ofallocation during the plan year would behigher if the participant were to have anycharacteristic which is a proxy for beingyounger, based on applicable facts and cir-cumstances. A cessation or reduction in al-locations is not indirectly because of theattainment of any age solely because of apositive correlation between attainment ofany age and a reduction in the allocationsor rate of allocation. Thus, a defined con-tribution plan does not provide for cessa-tion or reduction in allocations solelybecause the plan limits the total amount ofemployer contributions and forfeitures thatmay be allocated to a participant’s ac-count or limits the total number of years ofcredited service that may be taken into ac-count for purposes of determining alloca-tions for the plan year.

Target benefit plans (defined contribu-tion plans under which contributions are de-termined by reference to a targeted benefitdescribed in the plan) are subject to sec-tion 411(b)(2) which applies to defined con-tribution plans. Under these proposedregulations, a target benefit plan would sat-isfy section 411(b)(2) only if the defined

benefit formula used to determine alloca-tions would satisfy section 411(b)(1)(H)without regard to section 411(b)(1)(H)(iii)relating to adjustments for distributions andactuarial increases. A target benefit planwould not fail to satisfy section 411(b)(2)with respect to allocations after normal re-tirement age merely because the alloca-tion for a plan year is reduced to reflect anolder participant’s shorter longevity us-ing a reasonable actuarial assumption re-garding mortality. These proposedregulations also would authorize the Com-missioner to develop additional guidancewith respect to the application of section411(b)(2) to target benefit plans.

Optional Forms of Benefit and OtherRights and Features

These proposed regulations generally re-tain the requirements applicable to op-tional forms of benefit that were in the 1988proposed regulations. Under these rules,with the exceptions noted below, a partici-pant’s rate of benefit accrual under a de-fined benefit plan and a participant’sallocations under a defined contribution planare considered to be reduced because of theparticipant’s attainment of any age if op-tional forms of benefits, ancillary ben-efits, or other rights or features otherwiseprovided to a participant under the plan arenot provided, or are provided on a less fa-vorable basis, with respect to benefits or al-locations attributable to credited servicebecause of the participant’s attainment ofany age. In addition, a plan would not failto satisfy section 411(b)(1)(H) merely dueto variance because of the attainment of anyage with respect to the subsidized portionof an early retirement benefit (whether pro-vided on a temporary or permanent ba-sis), a qualified disability benefit (as definedin § 1.411(a)–7(c)(3)), or a social secu-rity supplement (as defined in § 1.411(a)–7(c)(4)(ii)).3 These proposed regulations alsoclarify that a plan would not fail to sat-isfy section 411(b)(1)(H) merely because theplan makes actuarial adjustments using areasonable assumption regarding mortal-ity to calculate optional forms of benefit orto calculate the cost of providing a quali-fied preretirement survivor annuity, as de-fined in section 417(c).

3The ADEA also includes special rules relating to certain of these benefits. See 29 U.S.C. 623(f)(2) and (l).

2003–2 I.R.B. 267 January 13, 2003

Coordination With Other Provisions

Sections 411(b)(1)(H)(v) and411(b)(2)(C) both provide for the coordi-nation of the requirements of each sec-tion with other applicable qualificationrequirements. Under these proposed regu-lations, a plan will not fail to satisfy sec-tion 411(b)(1)(H) or 411(b)(2) because ofa limit on accruals or allocations neces-sary to comply with the limitations of sec-tion 415 or to prevent discrimination infavor of highly compensated employeeswithin the meaning of section 401(a)(4).Additionally, these proposed regulationswould authorize the Commissioner to pro-vide additional guidance relating to pro-hibited discrimination in favor of highlycompensated employees. These proposedregulations would also provide that no ben-efit accrual or allocation is required un-der section 411(b)(1)(H) or 411(b)(2) for aplan year to the extent such allocation oraccrual would cause the plan to fail to sat-isfy the requirements of section 401(l) (re-lating to permitted disparity) for the planyear, such as if a younger person has asmaller permitted disparity due to havinga later social security retirement age. Fur-ther, under these proposed regulations, aplan would not fail to satisfy section411(b)(1)(H) or 411(b)(2) for a plan yearmerely because of the distribution rightsprovided under section 411(a)(11), includ-ing deferral rights for participants whosebenefits are immediately distributable withinthe meaning of § 1.411(a)–11(c).

Application of Section 401(a)(4) to NewComparability Cash Balance Plans

These proposed regulations also includea proposed amendment to the regulationsunder section 401(a)(4). This amendmentwould provide that a defined benefit planthat determines compliance with section411(b)(1)(H) by using the special defini-tion of rate of accrual for an eligible cashbalance plan is not permitted to demon-strate that the benefits provided under thearrangement do not discriminate in favor ofhighly compensated employees by using aninconsistent method (i.e., an accrual ratebased on the normal retirement benefit), un-less the plan complies with a modified ver-sion of the provisions of the regulationsunder section 401(a)(4) related to cross-testing by a defined contribution plan. Un-der these requirements, an eligible cashbalance plan under which the additions to

the hypothetical account are neither broadlyavailable nor reflect a gradual age and ser-vice schedule, as defined under existingregulations relating to cross-tested definedcontribution plans, may test on the basis ofbenefits only if the plan satisfies a mini-mum allocation gateway.

The minimum allocation gateway gen-erally requires that the hypothetical allo-cation rate for each nonhighly compensatedemployee be at least one-third of the hy-pothetical allocation rate for the highly com-pensated employee with the highesthypothetical allocation rate. However, theminimum allocation gateway is also satis-fied if the hypothetical allocation rate foreach nonhighly compensated employee isno less than 5%, provided the highest hy-pothetical allocation rate for any highlycompensated employee is not in excess of25%. If the highest hypothetical alloca-tion rate is above 25%, the 5% factor is in-creased, up to as much as 7.5%. Thisminimum allocation gateway, which is nor-mally applicable to DB/DC plans (i.e., de-fined benefit plans and defined contributionplans that are combined for nondiscrimi-nation testing), is used for purposes of eli-gible cash balance plans, rather than theminimum allocation gateway normally ap-plicable to defined contribution plans, be-cause hypothetical allocations under a cashbalance plan can be significantly greaterthan allocations under a defined contribu-tion plan.

If the eligible cash balance plan is ag-gregated with other plans that are not cashbalance plans, the regulations would treatthe cash balance plan as a defined contri-bution plan for purposes of applying therules applicable to aggregated plans. For thispurpose, a plan with both an eligible cashbalance formula and a traditional definedbenefit formula is treated as an aggrega-tion of two plans.

Effective Date of Sections 411(b)(1)(H)and 411(b)(2)

The 1988 proposed regulations includedprovisions related to the effective date ofsections 411(b)(1)(H) and 411(b)(2). The ef-fective date provisions in these proposedregulations differ from the 1988 proposedregulations (and Notice 88–126) in order toreflect the decision in Lockheed Corp. v.Spink, 517 U.S. 882 (1996).

In general, sections 411(b)(1)(H) and411(b)(2) are effective for plan years be-

ginning on or after January 1, 1988 with re-spect to a participant who is credited withat least one hour of service in a plan yearbeginning on or after January 1, 1988. Inthe case of a participant who is creditedwith at least one hour of service in a planyear beginning on or after January 1, 1988,section 411(b)(1)(H) is effective with re-spect to all years of service completed bythe participant, except that, in accordancewith Lockheed Corp. v. Spink, plan yearsbeginning before January 1, 1988, are ex-cluded. For purposes of these proposedregulations, an hour of service includes anyhour required to be recognized under theplan by section 410 or 411.

Similarly, section 411(b)(2) does not ap-ply with respect to allocations of employercontributions or forfeitures to the accountsof participants under a defined contribu-tion plan for a plan year beginning be-fore January 1, 1988.

These proposed regulations would alsoprovide a special effective date for a planmaintained pursuant to one or more col-lective bargaining agreements between em-ployee representatives and one or moreemployers, ratified before March 1, 1986.For such plans, sections 411(b)(1)(H) and411(b)(2) are effective for benefits pro-vided under, and employees covered by, anysuch agreement with respect to plan yearsbeginning on or after the later of (i) Janu-ary 1, 1988, or (ii) the earlier of January1, 1990, or the date on which the last ofsuch collective bargaining agreements ter-minates (determined without regard to anyextension of any such agreement occur-ring on or after March 1, 1986). The oth-erwise generally applicable effective daterules would apply to a collectively bar-gained plan, as of the effective date of sec-tion 411(b)(1)(H) or 411(b)(2) applicable tosuch plan.

Proposed Effective Date

The regulations are proposed to be ap-plicable to plan years beginning after thedate final regulations are published in theFederal Register. These proposed regula-tions cannot be relied upon until adoptedin final form. However, until these regu-lations are adopted in final form, the reli-ance provided on the 1988 proposedregulations continues to be available. In ad-dition, the proposed regulations at§§ 1.410(a)–4A, 1.411(a)–3, 1.411(b)–3 and1.411(c)–1(f)(2) (relating to maximum agefor participation, vesting, normal retire-

January 13, 2003 268 2003–2 I.R.B.

ment age, and actuarial adjustments afternormal retirement age), which were pub-lished in the same notice of proposed rule-making as the 1988 proposed regulation andwhich are not republished here, are also ex-pected to be finalized for future plan years.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Ex-ecutive Order 12866. Therefore, a regulatoryassessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations,and because the regulation does not im-pose a collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursu-ant to section 7805(f) of the Code, this no-tice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to written comments (pref-erably a signed original and eight (8) cop-ies) that are submitted timely to the IRS.Alternatively, taxpayers may submit com-ments electronically to the IRS Internet siteat www.irs.gov/regs. All comments will beavailable for public inspection and copy-ing. The IRS and Treasury request com-ments on the clarity of the proposed rulesand how they may be made easier to un-derstand or to implement. Comments arealso requested on the following issues:

•Because these proposed regulations arebased on a year-by-year determination ofthe rate of benefit accrual that does not ac-commodate averaging over a period of ear-lier years, one result would be that, if ahigher accrual is provided for older work-ers in one year, the rates cannot be lev-eled out in subsequent periods in a mannerthat takes the earlier higher accruals intoaccount. This might occur for a changefrom a fractional accrual method to a unitcredit method for all years of service.Comments are requested on whether ratesshould be permitted to be averaged and,if so, under what conditions.

• In the case of a conversion of a tradi-tional defined benefit plan to a cash bal-ance plan, these proposed regulationsgenerally provide for any excess of a par-ticipant’s opening hypothetical account bal-ance over the present value of theparticipant’s prior accrued benefit to betested for age discrimination. Commentsare requested on whether any other por-tion of the hypothetical account balanceshould be disregarded in applying sec-tion 411(b)(1)(H) under other circum-stances, for example, if the openingaccount balance is a reconstructed cashbalance account (i.e., the account bal-ance that each participant would have hadat the time of the conversion if the cashbalance formula had been in effect for theparticipant’s entire period of service). Inaddition, comments are requested on theeffect of these rules on employers, if any,that may have used the extended wear-away transition rule of § 1.401(a)(4)–13(f)(2)(i).

•Because these proposed regulations pro-vide for the rate of benefit accrual undersection 411(b)(1)(H) to be based on the an-nual increase in the accrued benefit un-der the plan, the rate of benefit accrualunder a floor offset plan, as described inRev. Rul. 76–259, 1976–2 C.B. 111, wouldbe determined after taking into account theamount of the offset. Comments are re-quested on whether the rate of benefit ac-crual for a floor offset plan should betested before application of the offset and,if so, under what conditions. For example,should the rate of benefit accrual for afloor offset plan be tested before appli-cation of the offset if the plan provides anactuarial increase after normal retirementage or if the annuity purchase rate used tocalculate the offset is not less favorable af-ter normal retirement age than the annu-ity purchase rate applicable at normalretirement age.

A public hearing has been scheduled forApril 10, 2003, at 10 a.m. in room 4718 ofthe Internal Revenue Building, 1111 Con-stitution Avenue, NW, Washington, DC. Allvisitors must present photo identification toenter the building. Because of access re-strictions, visitors will not be admitted be-yond the immediate entrance area more than30 minutes before the hearing starts at theConstitution Avenue entrance. For infor-mation about having your name placed onthe building access list to attend the hear-

ing, see the “FOR FURTHER INFORMA-TION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written comments and an outline ofthe topics to be discussed and the time tobe devoted to each topic (signed originaland eight (8) copies) by March 13, 2003.A period of 10 minutes will be allotted toeach person for making comments. Anagenda showing the scheduling of thespeakers will be prepared after the dead-line for receiving outlines has passed. Cop-ies of the agenda will be available free ofcharge at the hearing.

Drafting Information

The principal authors of these proposedregulations are Linda S. F. Marshall andR. Lisa Mojiri-Azad of the Office of the Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities).However, other personnel from the IRS andTreasury participated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR Part 1 is proposedto be amended as follows:

PART 1 — INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding the follow-ing citation in numerical order:

Authority: 26 U.S.C. 7805 * * *

Section 1.411(b)–2 is also issued under26 U.S.C. 411(b)(1)(H) and 411(b)(2). * * *

Par. 2. Section 1.401(a)(4)–3 is amendedas follows:

1. A new sentence is added before thelast sentence of paragraph (a)(1).

2. Paragraph (g) is added.The additions and revisions read as

follows:

§ 1.401(a)(4)–3 Nondiscrimination inamount of employer-provided benefitsunder a defined benefit plan.

(a) Introduction—(1) Overview. * * *Paragraph (g) of this section provides ad-ditional rules that apply to a plan that sat-isfies the requirements of section411(b)(1)(H) and § 1.411(b)–2 using the rate

2003–2 I.R.B. 269 January 13, 2003

of benefit accrual determined pursuant tothe rules of § 1.411(b)–2(b)(2)(iii) for eli-gible cash balance plans. * * *

* * * * *(g) Additional rules for eligible cash bal-

ance plans—(1) In general. Notwithstand-ing the provisions of paragraphs (a) through(f) of this section, a plan that satisfies therequirements of section 411(b)(1)(H) and§ 1.411(b)–2 using the rate of benefit ac-crual under the plan or a portion of the plandetermined pursuant to the rules of§ 1.411(b)–2(b)(2)(iii) for eligible cash bal-ance plans is permitted to satisfy the re-quirements of section 401(a)(4) by satisfyingthe requirements of this section (relating tonondiscrimination in amount of employer-provided benefits) only if the plan satis-fies paragraph (g)(2) or (3) of this section,as applicable.

(2) Eligible cash balance plans not ag-gregated with another defined benefit plan.A plan described in paragraph (g)(1) of thissection under which benefits are deter-mined solely in accordance with an eli-gible cash balance formula (as defined in§ 1.411(b)–2(b)(2)(iii)(C)(1)) satisfies thisparagraph (g)(2) only if the plan meets ei-ther of the following conditions—

(i) The plan would satisfy the require-ments of § 1.401(a)(4)–8(b)(1)(iii) or (iv)by treating the additions to the hypotheti-cal account that are included in the rate ofbenefit accrual under the rules of§ 1.411(b)–2(b)(2)(iii)(A) as allocations un-der a defined contribution plan; or

(ii) The plan would satisfy the require-ments of § 1.401(a)(4)–9(b)(2)(v)(D) bytreating the additions to the hypothetical ac-count that are included in the rate of ben-efit accrual under the rules of § 1.411(b)–2(b)(2)(iii)(A) as allocations under a definedcontribution plan for purposes of determin-ing equivalent normal allocation rates(within the meaning of § 1.401(a)(4)–9(b)(2)(ii)).

(3) Eligible cash balance plans aggre-gated with another defined benefit plan. Inthe case of a plan described in paragraph(g)(1) of this section that is not describedin paragraph (g)(2) of this section (for ex-ample, an eligible cash balance plan that isaggregated with another defined benefit planthat is not an eligible cash balance plan ora plan that uses an eligible cash balance for-mula with a traditional defined benefit planformula as described in § 1.411(b)–2(b)(2)(iii)(C)), the plan would satisfy the

requirements of § 1.401(a)(4)–9(b)(2)(v)(D)by treating the additions to the hypotheti-cal account that are included in the rate ofbenefit accrual under the rules of§ 1.411(b)–2(b)(2)(iii)(A) as allocations un-der a defined contribution plan.

Par. 3. Section 1.401(a)(4)–9 is amendedby:

1. Amending paragraph (b)(2)(v) by re-moving the language “For plan years” andadding in its place “Except as provided inparagraph (b)(2)(vi) of this section, for planyears.”

2. Adding paragraph (b)(2)(vi).The addition reads as follows:

§ 1.401(a)(4)–9 Plan aggregation andrestructuring

* * * * *(b) * * *(2) * * *(vi) Special rules for cash balance plans

aggregated with defined contributionplans—(A) In general. In the case of aDB/DC plan where the defined benefit plan(or any portion thereof) satisfies the re-quirements of section 411(b)(1)(H) using therate of benefit accrual determined pursu-ant to the rules of § 1.411(b)–2(b)(iii) foreligible cash balance plans, the DB/DC planis permitted to demonstrate satisfaction ofthe nondiscrimination in amount require-ment of § 1.401(a)(4)–1(b)(2) on the ba-sis of benefits only if—

(1) The plan would satisfy the require-ments of paragraph (b)(2)(v) of this sec-tion if the additions to the hypotheticalaccount that are included in the rate of ben-efit accrual under the rules of § 1.411(b)–2(b)(2)(iii)(A) are treated as allocationsunder a defined contribution plan; or

(2) The plan is described in paragraph(b)(2)(vi)(B) of this section (regarding eli-gible cash balance plans aggregated onlywith defined contribution plans).

(B) Special rule for cash balance plansaggregated with defined contribution plansthat are not aggregated with other de-fined benefit plans. A DB/DC plan is de-scribed in this paragraph (b)(2)(vi)(B) if theDB/DC plan satisfies the followingconditions—

(1) All defined benefit plans that are in-cluded in the DB/DC plan satisfy the re-quirements of section 411(b)(1)(H) using therate of benefit accrual determined pursu-ant to the rules of § 1.411(b)–2(b)(iii) foreligible cash balance plans; and

(2) The DB/DC plan would satisfy therequirements of § 1.401(a)(4)–8(b)(1)(i)(B)(1) or (2) (regarding broadly avail-able allocation rates or certain age-based al-location rates) if the additions to thehypothetical account that are included in therate of benefit accrual under the rules of§ 1.411(b)–2(b)(2)(iii)(A) are treated as al-locations under a defined contribution plan.

Par. 4. Proposed § 1.411(b)-2 publishedat 53 FR 11876 on April 11, 1988, is re-vised to read as follows.

§ 1.411(b)–2 Reductions of accruals orallocations because of attainment of anyage.

(a) In general—(1) Overview. Section411(b)(1)(H) provides that a defined ben-efit plan does not satisfy the minimum vest-ing standards of section 411(a) if, under theplan, benefit accruals on behalf of a par-ticipant are ceased or the rate of benefit ac-crual on behalf of a participant is reducedbecause of the participant’s attainment ofany age. Section 411(b)(2) provides that adefined contribution plan does not satisfythe minimum vesting standards of section411(a) if, under the plan, allocations to aparticipant’s account are ceased or the rateof allocation to a participant’s account isreduced because of the participant’s attain-ment of any age. Paragraph (b) of this sec-tion provides general rules for definedbenefit plans. Paragraph (c) of this sec-tion provides general rules for defined con-tribution plans. Paragraph (d) of this sectionprovides rules applying this section to op-tional forms of benefit, ancillary benefits,and other rights or features under definedbenefit and defined contribution plans. Para-graph (e) of this section provides rules co-ordinating the requirements of this sectionwith certain other qualification require-ments. Paragraph (f) of this section con-tains effective date provisions.

(2) Attainment of any age. For purposesof sections 411(b)(1)(H), 411(b)(2), and thissection, a participant’s attainment of any agemeans the participant’s growing older. Thus,the rules of sections 411(b)(1)(H), 411(b)(2),and this section apply regardless of whethera participant is younger than, at, or olderthan normal retirement age.

(b) Defined benefit plans—(1) Ingeneral—(i) Requirement. A defined ben-efit plan does not satisfy the requirementsof section 411(b)(1)(H) if a participant’s rateof benefit accrual is reduced, either di-rectly or indirectly, because of the partici-

January 13, 2003 270 2003–2 I.R.B.

pant’s attainment of any age. A reductionin a participant’s rate of benefit accrual in-cludes any discontinuance in the partici-pant’s accrual of benefits or cessation ofparticipation in the plan.

(ii) Definition of normal form. For pur-poses of this paragraph (b), the normal formof benefit (also referred to as the normalform) means the form under which pay-ments to the participant under the plan areexpressed under the plan formula, prior toadjustment for form of benefit.

(2) Rate of benefit accrual—(i) Rate ofbenefit accrual before normal retirementage. For purposes of this paragraph (b), ex-cept as provided in paragraph (b)(2)(iii) ofthis section, a participant’s rate of benefitaccrual for any plan year that ends beforethe participant attains normal retirement ageis the excess (if any) of—

(A) The participant’s accrued normal re-tirement benefit at the end of the plan year;over

(B) The participant’s accrued normal re-tirement benefit at the end of the preced-ing plan year.

(ii) Rate of benefit accrual after nor-mal retirement age. In the case of a planfor which the rate of benefit accrual be-fore normal retirement age is determinedunder paragraph (b)(2)(i) of this section, ex-cept as provided in paragraph (b)(4)(iii)(C)of this section, a participant’s rate of ben-efit accrual for the plan year in which theparticipant attains normal retirement age orany later plan year (taking into account theprovisions of section 411(b)(1)(H)(iii)(II))is the excess (if any) of—

(A) The annual benefit to which the par-ticipant is entitled at the end of the planyear, determined as if payment commencesat the end of the plan year in the normalform (or the straight life annuity that is ac-tuarially equivalent to the normal form ifthe normal form is not an annual benefitthat does not decrease during the lifetimeof the participant); over

(B) The annual benefit to which the par-ticipant was entitled at the end of the pre-ceding plan year, determined as if paymentcommences at the later of normal retire-ment age or the end of the preceding planyear in the normal form (or the straight lifeannuity that is actuarially equivalent to thenormal form if the normal form is not anannual benefit that does not decrease dur-ing the lifetime of the participant).

(iii) Rate of benefit accrual for eligiblecash balance plans—(A) General rule. Forpurposes of this paragraph (b), in the caseof an eligible cash balance plan, a partici-pant’s rate of benefit accrual for a plan yearis permitted to be determined as the addi-tion to the participant’s hypothetical ac-count for the plan year, except that interestcredits added to the hypothetical account forthe plan year are disregarded to the ex-tent the participant had accrued the right tothose interest credits as of the close of thepreceding plan year as described in para-graph (b)(2)(iii)(B)(2) of this section.

(B) Eligible cash balance plans. For pur-poses of this section, a defined benefit planis an eligible cash balance plan for a planyear if it satisfies each of the following re-quirements for current accruals under theplan for that plan year—

(1) Plan design. The normal form ofbenefit is an immediate payment of the bal-ance in a hypothetical account (without re-gard to whether such an immediate paymentis actually available under the plan).

(2) Right to future interest. With re-spect to a participant’s hypothetical ac-count balance, the participant has accruedthe right to annual (or more frequent) in-terest credits to be added to the hypotheti-cal account for all future periods withoutregard to future service at a reasonable rateof interest that is not reduced, either di-rectly or indirectly, because of the partici-pant’s attainment of any age. A plan istreated as not satisfying the requirement ofthis paragraph (b)(2)(iii)(B)(2) if it pro-vides for any adjustment for benefit dis-tributions described in paragraph (b)(4) ofthis section.

(3) Plan amendments adopting cash bal-ance formula. In the case of a plan amend-ment that has been amended to adopt a cashbalance formula (as described in paragraphs(b)(2)(iii)(B)(1) and (2) of this section) fora participant, the plan as amended satis-fies 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 por-tion of the plan formula under a definedbenefit plan would satisfy the requirementsto be an eligible cash balance plan if it werethe only formula under the plan, then, forpurposes of this section, such portion of theplan formula is referred to as an eligiblecash balance formula and the other por-tion of the plan formula is referred to as a

traditional defined benefit formula. If theeligible cash balance formula and the tra-ditional defined benefit formula interact ina manner described in paragraph(b)(2)(iii)(C)(2), (3), or (4) of this sectionfor current and future accruals under theplan, then, for purposes of determiningwhether the plan satisfies section411(b)(1)(H), the plan is permitted to betreated as two separate plans, one of whichis an eligible cash balance plan and theother of which is not, but only if each suchplan would satisfy section 410(a)(2). Thus,such a plan satisfies the requirements of sec-tion 411(b)(1)(H) if the eligible cash bal-ance formula satisfies the requirements ofparagraph (b)(1) of this section with the par-ticipant’s rate of benefit accrual deter-mined under paragraph (b)(2)(iii)(A) of thissection and the portion of the plan’s for-mula that is a traditional defined benefit for-mula satisfies the requirements of paragraph(b)(1) of this section with the participant’srate of benefit accrual determined underparagraph (b)(2)(i) or (ii) of this section, asapplicable. If the eligible cash balance for-mula and the traditional defined benefit for-mula interact in a manner other than as setforth in paragraphs (b)(2)(iii)(C)(2), (3), or(4) of this section, the plan is not treatedas an eligible cash balance plan for any por-tion of the plan formula.

(2) Plans with additive formulas. A planis described in this paragraph (b)(2)(iii)(C)(2) if the participant’s benefit is basedon the sum of accruals under two differ-ent formulas, one of which is an eligiblecash balance formula and the other of whichis not.

(3) Plans with greater of formulas. Aplan is described in this paragraph(b)(2)(iii)(C)(3) if the plan provides a ben-efit for a participant equal to the greater ofthe benefit determined under two or moreformulas under the plan for a plan year, oneof which is an eligible cash balance for-mula and another of which is not.

(4) Different formulas for different par-ticipants. A plan is described in this para-graph (b)(2)(iii)(C)(4) if some participantsare eligible for accruals only under an eli-gible cash balance formula and the remain-ing participants are eligible for accruals onlyunder a traditional defined benefit for-mula or a combination of a traditional de-fined benefit formula or eligible cashbalance formula described in paragraphs(b)(2)(iii)(C)(2) and (3) of this section.

2003–2 I.R.B. 271 January 13, 2003

(D) Plan amendment adopting eligiblecash balance formula using a sum of for-mula. A plan satisfies this paragraph(b)(2)(iii)(D) only if for all periods after theamendment becomes effective the plan pro-vides benefits that are not less than the sumof the benefits accrued as of the later of thedate the amendment becomes effective orthe date the amendment is adopted, plus thebenefits provided by the participant’s hy-pothetical account under the eligible cashbalance formula.

(E) Plan amendment adopting eligiblecash balance formula using an opening ac-count balance—(1) Calculation of open-ing account balance. A plan satisfies thisparagraph (b)(2)(iii)(E) only if the bal-ance in the participant’s hypothetical ac-count, determined immediately after theamendment becomes effective, is not lessthan the actuarial present value of the par-ticipant’s accrued benefit payable in the nor-mal form of benefit, determined as of thelater of the date the amendment becomeseffective or the date the amendment isadopted, with such present value deter-mined using reasonable actuarial assump-tions. For this purpose, the actuarialassumptions are not reasonable if they in-clude an interest rate that increases, ei-ther directly or indirectly, because of aparticipant’s attainment of any age. The ac-tuarial assumptions do not fail to be rea-sonable merely because pre-retirementmortality is not taken into account.

(2) Bifurcation for purposes of deter-mining rate of benefit accrual. If a plan sat-isfies the requirements of paragraph(b)(2)(iii)(E)(1), only the portion of the par-ticipant’s hypothetical account balance inexcess of the actuarial present value of theparticipant’s accrued benefit payable in thenormal form of benefit is treated as an ad-dition to the participant’s hypothetical ac-count balance for the plan year for purposesof determining the participant’s rate of ben-efit accrual under paragraph (b)(2)(iii)(A)of this section.

(3) Treatment of employees past nor-mal retirement age. In addition, a plan doesnot satisfy this paragraph (b)(2)(iii)(E) if theopening balance for a participant who hasattained normal retirement age is less thanthe balance that would apply if the partici-pant were at his or her normal retirementage.

(iv) Determination of rate of benefitaccrual—(A) In general. A participant’s rate

of benefit accrual for a plan year can be de-termined as a dollar amount. Alternatively,if a plan’s formula bases a participant’s ac-cruals on current compensation, then a par-ticipant’s rate of benefit accrual can bedetermined as a percentage of the partici-pant’s current compensation. For example,for an accumulation plan (as defined in§ 1.401(a)(4)–12), the participant’s rate ofbenefit accrual under paragraph (b)(2)(i) ofthis section can be determined as the ex-cess of the accrued portion of the partici-pant’s normal retirement benefit at the endof the plan year over the accrued portionof the participant’s normal retirement ben-efit at the end of the preceding plan year,divided by compensation taken into ac-count under the plan for the plan year. Like-wise, if a plan’s formula bases aparticipant’s accruals on average compen-sation, then a participant’s rate of benefitaccrual can be determined as a percent-age of that measure of the participant’s av-erage compensation. For a plan thatdetermines benefits as a percentage of av-erage annual compensation (as defined in§ 1.401(a)(4)–3(e)(2)), the rate of benefit ac-crual under paragraph (b)(2)(i) of this sec-tion is determined as the excess of theaccrued portion of the participant’s nor-mal retirement benefit at the end of the planyear divided by average annual compen-sation taken into account under the plan atthe end of the plan year, over the accruedportion of the participant’s normal retire-ment benefit at the end of the precedingplan year divided by average annual com-pensation taken into account under the planat the end of such preceding plan year. Aplan is permitted to determine the partici-pant’s rate of benefit accrual as a percent-age of the participant’s current or averagecompensation only if compensation un-der the plan is determined without regardto attainment of any age.

(B) Benefits included in rate of benefitaccrual. For purposes of determining a par-ticipant’s rate of benefit accrual, only ben-efits that are included in a participant’saccrued benefit are taken into account. Thus,for example, a participant’s rate of ben-efit accrual does not take into account ben-efits such as the benefits described inparagraph (d)(3) of this section (relating toqualified disability benefits, social secu-rity supplements, and early retirement ben-efits).

(v) Examples. The following examplesillustrate the application of this paragraph(b)(2). In each of the examples, normal re-tirement age is 65. The examples are asfollows:

Example 1. Plan L is a defined benefit plan un-der which the normal form of benefit is a monthlystraight life annuity commencing at normal retire-ment age (or the date of actual retirement, if later)equal to $30 times the participant’s years of ser-vice. For purposes of this section, a participant’s rateof benefit accrual for any plan year is $30.

Example 2. (i) Plan M is a defined benefit planunder which the normal form of benefit is an an-nual straight life annuity commencing at normal re-tirement age (or the date of actual retirement, if later)equal to 1% of the average of a participant’s high-est 3 consecutive years of compensation times the par-ticipant’s years of service.

(ii) For purposes of this section, a participant’s rateof benefit accrual for any plan year can be expressedas a dollar amount. Alternatively, a participant’s rateof benefit accrual for a plan year can be expressed as1% of the participant’s highest 3 consecutive years ofcompensation (determined using the same rules ap-plicable to determining compensation under the planfor purposes of computing the normal form of ben-efit), provided that the definition of compensation usedfor this purpose is determined without regard to theattainment of any age. A participant’s rate of ben-efit accrual cannot be determined as a percentage ofany other measure of compensation or average com-pensation.

(iii) If Plan M were to provide that compensa-tion earned after the attainment of age 65 is not takeninto account in determining average compensation orwere otherwise to determine compensation in a man-ner that depends on a participant’s age, then, for pur-poses of this section, a participant’s rate of benefitaccrual would have to be expressed as a dollar amount,and could not be expressed as a percentage of anymeasure of compensation or average compensation.

Example 3. (i) Plan N is a defined benefit plan un-der which the normal form of benefit is an immedi-ate payment of the balance in a participant’shypothetical account. A compensation credit equal to6% of each participant’s wages for the year is addedto the hypothetical account of a participant who is anemployee. At the end of each plan year, the hypo-thetical account is credited with interest based on theapplicable interest rate under section 417(e), as pro-vided under the plan. All participants accrue the rightto receive interest credits on their hypothetical ac-count in the future regardless of performance of ser-vices in the future, including after normal retirementage.

(ii) Under paragraph (b)(2)(iii)(B) of this sec-tion, Plan N satisfies the requirements to be an eli-gible cash balance plan. Participant A’s compensationfor a plan year is $40,000. The compensation creditfor Participant A allocated to A’s hypothetical ac-count for that plan year is $2,400. Because Plan N isan eligible cash balance plan, the rate of benefit ac-crual for Participant A is permitted to be determinedas the addition to Participant A’s hypothetical ac-count for the plan year, disregarding interest cred-its. Therefore, Participant A’s rate of benefit accrualis equal to $2,400, or 6% of wages.

January 13, 2003 272 2003–2 I.R.B.

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

(1) 1% of the average of the participant’s high-est 3 consecutive years of base salary times years ofservice, but disregarding service and salary after theeffective date of the amendment, in a normal form ofbenefit that is a straight life annuity commencing atnormal retirement age (or the date of actual retire-ment, if later); and

(2) the participant’s hypothetical account under thesame cash balance formula in Example 3 that ap-plies after the effective date of the amendment, in anormal form of benefit expressed as an immediate pay-ment of the balance of the participant’s hypotheticalaccount.

(ii) Under paragraph (b)(2)(iii)(B)(3) of this sec-tion, the plan is an eligible cash balance plan if theplan satisfies the requirements of paragraph(b)(2)(iii)(D) or (E) of this section. The plan’s for-mula is described in paragraph (b)(2)(iii)(D) of thissection. Accordingly, the portion of the plan for-mula that provides for compensation credits on a par-ticipant’s hypothetical account is an eligible cashbalance formula under paragraph (b)(2)(iii)(B) of thissection. Therefore, a participant’s rate of benefit ac-crual under the eligible cash balance formula is per-mitted to be determined as the addition to theparticipant’s hypothetical account for the plan year,disregarding interest credits. Participant B’s base sal-ary for the year is $50,000. The compensation creditfor Participant B credited to B’s hypothetical ac-count for the year is $3,000. The rate of benefit ac-crual under the eligible cash balance formula forParticipant B is equal to $3,000, or 6% of base sal-ary.

Example 5. (i) The facts are the same as in Ex-ample 3, except that Plan N is a defined benefit planthat is converted to a cash balance plan by the adop-tion of a plan amendment, effective at the begin-ning of the next plan year, establishing an openinghypothetical account for each participant with an ac-crued benefit under the plan prior to conversion. Priorto conversion, Plan N provided a benefit equal to 1%of the average of a participant’s highest 3 consecu-tive years of compensation times years of service. Ef-fective as of the date of the conversion, hypotheticalaccounts are established equal to the present value ofa participant’s accrued benefit using section 417(e) in-terest and reasonable mortality assumptions (exceptno pre-retirement mortality is used). Under the cashbalance portion of the formula, compensation and in-terest credits are made as described in Example 3.

(ii) Under paragraph (b)(2)(iii)(B)(3) of this sec-tion, the plan is an eligible cash balance plan only ifthe plan satisfies the requirements of paragraph(b)(2)(iii)(D) or (E) of this section. The plan’s for-mula is described in paragraph (b)(2)(iii)(E) of thissection. Accordingly, the portion of the plan for-mula that provides for compensation credits on a par-ticipant’s hypothetical account is an eligible cashbalance formula. The rate of benefit accrual for a par-ticipant is therefore permitted to be determined as theaddition to the participant’s hypothetical account forthe plan year, disregarding interest credits. In addi-tion, under paragraph (b)(2)(iii)(E) of this section, be-cause the opening hypothetical account balance is equalto the actuarial present value of the participant’s ac-crued benefit, that balance is not treated as an addi-

tion for the plan year. The result would not be differentif the opening accounts were established using an-other interest rate or another mortality assumption ifthe actuarial assumptions were reasonable. Partici-pant C’s wages for the year are $60,000. The com-pensation credit allocated to C’s hypothetical accountfor the year is $3,600. The rate of accrual under theeligible cash balance formula for C is equal to $3,600,or 6% of compensation.

Example 6. (i) The facts are the same as in Ex-ample 5, except that Plan N provides for only new par-ticipants and participants who are less than age 55 atthe time of the conversion to be eligible for benefitsunder the cash balance formula. Accordingly, partici-pants who are age 55 or older at the time of the con-version are only eligible for the benefit payable underthe plan formula in effect before the conversion (1%of the participant’s highest 3 consecutive years of com-pensation times years of service) taking into ac-count compensation and service after the conversion.

(ii) Because Plan N provides benefits based on amixed formula under paragraph (b)(2)(iii)(C) of thissection, Plan N is permitted under paragraph(b)(2)(iii)(C)(1) of this section to be treated as twoseparate plans for purposes of section 411(b)(1)(H),one of which is an eligible cash balance plan and theother of which is not, but only if each plan would sat-isfy section 410(a)(2). No portion of Plan N can betreated as an eligible cash balance plan because theportion of Plan N that would otherwise be an eli-gible cash balance plan would fail to satisfy section410(a)(2) as a result of having a maximum age of 55for individuals who are participants at the time of theconversion.

Example 7. (i) The facts are the same as in Ex-ample 5, except that Plan N provides for partici-pants to receive the greater of the benefit payable underthe cash balance formula or the benefit payable un-der the plan formula in effect before the conversion(1% of the participant’s highest 3 consecutive yearsof compensation times years of service) taking intoaccount compensation and service after the conver-sion.

(ii) Because Plan N provides benefits based on thegreater of the amount payable under two different for-mulas, under paragraph (b)(2)(iii)(C)(4) of this sec-tion, Plan N is tested for satisfaction of therequirements of section 411(b)(1)(H) and this para-graph (b) by separately testing the eligible cash bal-ance formula using a rate of benefit accrual equal tocompensation credits of 6% of compensation and thetraditional defined benefit formulas using a rate of ben-efit accrual equal to 1% of highest 3 consecutive yearsof compensation.

(3) Reduction that is directly or indi-rectly because of a participant’s attain-ment of any age—(i) Reduction in rate ofbenefit accrual that is directly because ofa participant’s attainment of any age. Aplan provides for a reduction in the rate ofbenefit accrual that is directly because ofa participant’s attainment of any age for anyplan year if, under the terms of the plan,any participant’s rate of benefit accrual forthe plan year would be higher if the par-ticipant were younger. Thus, a plan fails tosatisfy section 411(b)(1)(H) and this para-

graph (b) if, under the terms of the plan,the rate of benefit accrual for any indi-vidual who is or could be a participant un-der the plan would be lower solely as aresult of the individual being older.

(ii) Reduction in rate of benefit accrualthat is indirectly because of a participant’sattainment of any age—(A) In general. Aplan provides for a reduction in the rate ofbenefit accrual that is indirectly because ofa participant’s attainment of any age for anyplan year if any participant’s rate of ben-efit accrual for the plan year would behigher if the participant were to have a dif-ferent characteristic which is a proxy for be-ing younger, based on the all of relevantfacts and circumstances. Thus, a plan failsto satisfy section 411(b)(1)(H) and this para-graph (b) if the rate of benefit accrual forany individual who is or could be a par-ticipant under the plan would be lowersolely as a result of such individual hav-ing a different characteristic which is aproxy for being older, based on all of therelevant facts and circumstances.

(B) Permissible limitations. A reduc-tion in a participant’s rate of benefit ac-crual is not indirectly because of theattainment of any age in violation of sec-tion 411(b)(1)(H) solely because of a posi-tive correlation between attainment of anyage and a reduction in the rate of benefitaccrual. In addition, a defined benefit plandoes not fail to satisfy section 411(b)(1)(H)and this paragraph (b) solely because, ona uniform and consistent basis without re-gard to a participant’s age, the plan limitsthe amount of benefits a participant may ac-crue under the plan, limits the number ofyears of service or years of participationtaken into account for purposes of deter-mining the accrual of benefits under theplan (credited service), or provides for a re-duced rate of accrual for credited servicein excess of a fixed number of years. Forthis purpose, a limitation that is expressedas a percentage of compensation (whetheraveraged over a participant’s total years ofcredited service for the employer or overa shorter period) is treated as a permis-sible limitation on the amount of benefitsa participant may accrue under the plan.

(iii) Examples. The provisions of thisparagraph (b)(3) may be illustrated by thefollowing examples. In each of the ex-amples, except as specifically indicated, nor-mal retirement age is 65, the plan containsno limitations on the maximum amount of

2003–2 I.R.B. 273 January 13, 2003

benefits the plan will pay to any partici-pant (other than the limitations imposed bysection 415), on the maximum number ofyears of credited service taken into ac-count under the plan, or on the compen-sation used for purposes of determining theamount of any participant’s accrued ben-efit (other than the limitation imposed bysection 401(a)(17)), and the plan uses thefollowing actuarial assumptions in deter-mining actuarial equivalence: a 7.5% rateof interest and the 83 GAM (male) mor-tality table. The examples are as follows:

Example 1. (i) Plan M provides an accrued ben-efit of 1% of a participant’s average annual compen-sation, multiplied by the participant’s years of creditedservice under the plan payable in the normal form ofa straight life annuity commencing at normal retire-ment age or the date of actual retirement if later. PlanM suspends payment of benefits for participants whowork past normal retirement age, in accordance withsection 411(a)(3)(B) and 29 CFR 2530.203-3 of theregulations of the Department of Labor, and does notprovide for an actuarial increase in computing the ac-crued benefit for participants who commence ben-efits after normal retirement age.

(ii) The rate of benefit accrual for all partici-pants in Plan M is 1% of average annual compensa-tion. Thus, there could be no participant who wouldhave a rate of benefit accrual that is greater than 1%if the individual were younger. Accordingly, there isno reduction in the rate of benefit accrual because ofthe individual’s attainment of any age under this para-graph (b)(3) and Plan M satisfies the requirements ofsection 411(b)(1)(H) and this paragraph (b).

Example 2. (i) Assume the same facts as in Ex-ample 1, except that Plan M provides that not morethan 35 years of credited service are taken into ac-count in determining a participant’s accrued benefitunder the plan. Participant A became a participant inthe plan at age 25 and worked continuously in cov-ered 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 whohave up to 35 years of credited service and zero forparticipants who have more than 35 years of cred-ited service. Because a reduction from a rate of ben-efit accrual from 1% of average annual compensationto zero is based on service, and would not be af-fected if any participant were younger (with the samenumber of years of service), Plan M does not pro-vide for a reduction in the rate of benefit accrual thatis directly because of an individual’s attainment of anyage as provided in paragraph (b)(3)(i) of this sec-tion. Under paragraph (b)(3)(ii) of this section, a uni-form limit on the number of years of service taken intoaccount for purposes of determining the accrual of ben-efits under the plan is not considered to be a reduc-tion in the rate of benefit accrual that is indirectlybecause of a participant’s attainment of any age.

(iii) Upon A’s retirement at age 70, A will havean accrued benefit under the plan’s benefit formulaof 35% of A’s average annual compensation at age70 (1% per year of credited service x 35 years of cred-ited service). Plan M will not fail to satisfy the re-quirements of section 411(b)(1)(H) and this paragraph(b) merely because the plan provides that the final 10years of A’s service under the plan are not taken into

account in determining A’s accrued benefit. The re-sult would be the same if Plan M provided that no par-ticipant could accrue a benefit in excess of 35% ofthe participant’s average annual compensation.

Example 3. Assume the same facts as in Example1, except that Plan M provides that a participant’s yearsof service after attainment of social security retire-ment age are disregarded for purposes of determin-ing a participant’s accrued benefit under the plan.Because a participant who is covered under the planafter social security retirement age would have a higherrate of benefit accrual if he or she were younger (andhad not attained social security retirement age), thatparticipant’s rate of benefit accrual is reduced di-rectly because of the participant’s attainment of anyage under paragraph (b)(3)(i) of this section. Conse-quently, Plan M fails to satisfy the requirements of sec-tion 411(b)(1)(H) and this paragraph (b).

Example 4. (i) Assume the same facts as in Ex-ample 1, except that Plan M provides that a partici-pant’s compensation after the attainment of age 62 isnot taken into account in determining the partici-pant’s accrued benefit under the plan.

(ii) Accordingly, the plan’s measure of averagecompensation cannot be used in determining a par-ticipant’s rate of benefit accrual because it does notapply to participants in a uniform manner that is in-dependent of age. Because a participant who is orcould be covered under Plan M after the attainmentof age 62 whose compensation increases after age 62would have a higher rate of benefit accrual if the par-ticipant were younger than age 62, that participant’srate of benefit accrual is reduced directly because ofthe participant’s attainment of any age under para-graph (b)(3)(i) of this section. This reduction occurswhether or not there is any actual participant in PlanM who has attained age 62 or whose average an-nual compensation has increased after age 62. Con-sequently, the plan fails to satisfy the requirements ofsection 411(b)(1)(H) and this paragraph (b).

Example 5. (i) Assume the same facts as in Ex-ample 1, except that Plan M is amended to cease allbenefit accruals for all participants and is subse-quently terminated.

(ii) After all benefit accruals have ceased, the rateof benefit accrual of all participants is zero. Thus, therecould not be any participant who would have a rateof benefit accrual that is greater than zero if the par-ticipant were younger, so that there is no reduction inthe rate of benefit accrual that is because of the in-dividual’s attainment of any age under paragraph (b)(3)of this section. Accordingly, Plan M satisfies the re-quirements of section 411(b)(1)(H) and this para-graph (b).

Example 6. (i) Employer Y maintains Plan O, adefined benefit plan that provides an accrued ben-efit of 1% of a participant’s highest 5 consecutive yearsof compensation, multiplied by the sum of the par-ticipant’s age and years of service, payable in the nor-mal form of a straight life annuity commencing atnormal retirement age or the date of actual retire-ment if later. Plan O provides that a participant’s yearsof service after the sum of a participant’s age and yearsof service reach a total of 55 are disregarded for pur-poses of determining the normal retirement benefit.Participant C is 45 years old and has 10 years of cred-ited 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 (withthe same years of service), C would have a rate of ben-efit accrual of 2% of C’s highest 5 consecutive yearsof compensation. Accordingly, C’s rate of benefit ac-crual is reduced directly because of C’s attainment ofany age as provided in this paragraph (b)(3)(i). Con-sequently, Plan O fails to satisfy the requirements ofsection 411(b)(1)(H) and this paragraph (b).

Example 7. (i) Plan P is a defined benefit plan thatprovides for a normal retirement benefit of 40% of aparticipant’s average compensation for the partici-pant’s highest 3 consecutive years of compensation,payable in the normal form of a straight life annuitycommencing at normal retirement age or the date ofactual retirement if later. If a participant separates fromservice prior to normal retirement age, Plan P pro-vides a benefit equal to an amount that bears the sameratio to 40% of such average compensation as the par-ticipant’s actual number of years of service bears tothe number of years of service the participant wouldhave if the participant’s service continued to normalretirement age. As of the end of a plan year, partici-pant D is 45 years old and has completed 20 years ofservice, and participant E is 41 years old and has com-pleted 1 year of credited service. Thus, D’s rate of ben-efit accrual for the plan year may be determined as1% of compensation for D’s highest 3 consecutiveyears, and E’s rate of benefit accrual for the plan yearmay be determined as 1.6% of compensation for E’shighest 3 consecutive years.

(ii) If D were younger than age 45 (with 20 yearsof service and the same compensation history), D’srate of benefit accrual for the plan year would not begreater than 1% of compensation for D’s highest 3consecutive years. Thus, there is no reduction in therate of benefit accrual for D that is directly becauseof the individual’s attainment of any age as pro-vided in paragraph (b)(3)(i) of this section. In addi-tion, there are no facts and circumstances indicatingthat D’s rate of benefit accrual is reduced indirectlybecause of D’s attainment of any age as provided inparagraph (b)(3)(ii) of this section. Likewise, if E wereyounger than age 41 (with 1 year of service and thesame compensation history), E’s rate of benefit ac-crual 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 ac-crual for E that is directly because of the individu-al’s attainment of any age as provided in paragraph(b)(3)(i) of this section. In addition, there are no factsand circumstances indicating that E’s rate of benefitaccrual is reduced indirectly because of E’s attain-ment of any age under paragraph (b)(3)(ii) of this sec-tion. These same results would apply for any possibleparticipant in Plan P. Accordingly, Plan P satisfies therequirements of section 411(b)(1)(H) and this para-graph (b).

Example 8. (i) Plan A is a defined benefit plan thatprovides for an accrued benefit of 2% of a partici-pant’s average compensation for the participant’s high-est 3 consecutive years of compensation for the first20 years of service, plus 1% of such average com-pensation for years in excess of 20, payable in the nor-mal form of a straight life annuity commencing atnormal retirement age or the date of actual retire-ment if later. However, if a participant separates fromservice prior to normal retirement age, Plan P pro-vides a benefit equal to an amount that bears the sameratio to the total percentage of such average compen-sation that the participant would have if service con-

January 13, 2003 274 2003–2 I.R.B.

tinued to normal retirement age as the participant’sactual number of years of service bears to the num-ber of years of service the participant would have ifthe participant’s service continued to normal retire-ment age. For participants who work past normal re-tirement age, Plan A provides a benefit equal to 2%per year for years of service not in excess of 20, plusthe following rate for years of service in excess of 20:the sum of 40% plus the product of 1% times ser-vice in excess of 20 years, with that sum divided bytotal service to the end of the current plan year. Asof the beginning of the plan year beginning January1, 2008, participant N is 64 years old and has com-pleted 20 years of service, and participant O is 70 yearsold and has completed 20 years of credited service.Thus, N’s rate of benefit accrual for that plan year maybe determined as 1.95% of compensation for N’s high-est 3 consecutive years (2% for 20 years, plus 1% for1 year, with that sum divided by 21 equals 1.95%),and O’s rate of benefit accrual for that plan year alsomay be determined 1.95% of compensation for O’shighest 3 consecutive years (40% for the first 20 years,plus 1% for service to the end of 2008, with that sumdivided by 21 equals 1.95%).

(ii) If O were younger than age 70 (with 20 yearsof service and the same compensation history), O’srate of benefit accrual for the plan year would not begreater than 1.95% of compensation for O’s highest3 consecutive years. The same conclusion applies forany other possible participant. Thus, Plan A satis-fies paragraph (b)(3)(ii) of this section.

(iii) However, if Plan A were instead to providea rate of benefit accrual for service after normal re-tirement age equal to 2% for years of service not inexcess of 20, plus 1% for service in excess of 20, PlanA would fail to satisfy paragraph (b)(3)(ii) of this sec-tion. For example, O’s rate of benefit accrual wouldbe 1% for 2008, whereas N’s rate of benefit accrualwould be 1.95% for 2008, even though the only dif-ference between O and N is that N is younger.

Example 9. (i) The facts are similar to Example8, except that the formula is 1% of a participant’s av-erage compensation for the participant’s highest 3 con-secutive years of compensation for the first 20 years,plus 2% of such average compensation for years inexcess of 20, payable in the normal form of a straightlife annuity commencing at normal retirement age orthe date of actual retirement if later. As in Example8, if a participant separates from service prior to nor-mal retirement age, Plan P provides a benefit equalto an amount that bears the same ratio to the total per-centage of such average compensation that the par-ticipant would have if service continued to normalretirement age as the participant’s actual number ofyears of service bears to the number of years of ser-vice the participant would have if the participant’s ser-vice continued to normal retirement age. Further,similar to the facts in Example 8(iii) of this para-graph (b)(3)(iii), for participants who work past nor-mal retirement age, Plan A provides a benefit equalto 1% per year for years of service not in excess of20, plus 2% per year for years of service in excessof 20. As of the beginning of the plan year begin-ning January 1, 2008, participant K is 45 years oldand has completed 10 years of service, and partici-

pant M is 55 years old and has completed 10 yearsof credited service. Thus, K’s rate of benefit accrualfor the plan year may be determined as 1.33% of com-pensation for K’s highest 3 consecutive years (1% for20 years, plus 2% for 10 more years, with the sumdivided by 30 equals 1.33%), and M’s rate of ben-efit accrual for the plan year may be determined as1% of compensation for O’s highest 3 consecutiveyears (1% for 20 years, with that amount divided by20 equals 1%).

(ii) If M were younger than age 55 (with 10 yearsof service and the same compensation history), M’srate of benefit accrual for the plan year would begreater than 1% of compensation for M’s highest 3consecutive years. (Plan A also provides for an im-permissible reduction in the rate of benefit accrual fora participant whose service continues after normal re-tirement age in a manner that is comparable to Ex-ample 8(iii) of this paragraph (b)(3)(iii).) Thus, PlanA fails to satisfy paragraph (b)(3)(ii) of this section.

Example 10. (i) Employer Z maintains Plan Q, adefined benefit plan that provides an accrued ben-efit of $40 per month multiplied by a participant’syears of credited service. Participant F attains nor-mal retirement age of 65 and continues in the full timeservice of Z. At age 65, F has 30 years of credited ser-vice under the plan and could receive a normal re-tirement benefit of $1,200 per month ($40 X 30 years)if F retires. The plan suspends benefits for partici-pants who work past normal retirement age, in ac-cordance with section 411(a)(3)(B) and 29 CFR2530.203–3 of the regulations of the Department ofLabor, and does not provide for any actuarial in-crease for employment past normal retirement age. Ac-cordingly, the plan does not pay F’s accrued benefitwhile F remains in the full time service of Z and doesnot provide for an actuarial adjustment of F’s ac-crued benefit because of delayed payment. For ex-ample, if F retires at age 67, after completing 2additional years of credited service for Z, F will re-ceive 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 par-ticipants is $40 per month. Thus, there could not beany participant who would have a rate of benefit ac-crual that is greater than $40 per month if the par-ticipant were younger, so that there is no reduction inthe rate of benefit accrual that is because of the in-dividual’s attainment of any age under paragraph(b)(3)(i) of this section. Accordingly, Plan Q satis-fies the requirements of section 411(b)(1)(H) and thisparagraph (b).

Example 11. (i) Assume the same facts as in Ex-ample 10, except that the plan provides that the amountof F’s benefit at normal retirement age will be actu-arially increased for delayed retirement (even thoughthe plan suspends benefits for participants who workpast normal retirement age), and this actuarially in-creased benefit will be paid if it exceeds the plan for-mula, but no actuarial increase is provided for anyamount that is accrued after normal retirement age.The plan takes this actuarial increase into account aspart of the rate of benefit accrual in plan years end-ing after F’s attainment of normal retirement age, asprovided under paragraph (b)(2)(ii) of this section.

(ii) Under section 411(b)(1)(H) and this para-graph (b), F’s employment past normal retirement agecannot cause F’s rate of benefit accrual for any yearto be less than $40 for the year. Plan Q satisfies thisrequirement for the first year after normal retire-ment age because, under the plan, F is entitled to re-ceive, upon retirement at the end of the year when Fis age 66, an actuarially increased benefit of $1,344.68per month, so that the rate of benefit accrual for theyear is $144.68 (which is $1,344.68 minus $1,200).

(iii) Further, for the second year past normal re-tirement age ending when F is age 67, F must be en-titled to a rate of benefit accrual of at least $149.50per month, which is the highest rate of benefit ac-crual under Plan Q for any younger participant with32 years of service at the end of the year. (In thesefacts, all participants have a rate of accrual of $40 un-til normal retirement age and a participant who is age66 with 32 years of service at the end of the yearwould have a rate of benefit accrual of $149.50 dueto an actuarial increase on an age 65 benefit of $1,240per month.) Under the plan, F is entitled to receive,upon retirement at age 67, an actuarially increased ben-efit of $1,511.39 per month. Plan Q satisfies the re-quirement that F be entitled to the highest rate ofbenefit accrual provided to any younger participant be-cause the rate of benefit accrual in that year ($1,511.39minus $1,344.68 equals $166.71) is not less than whatthe rate would be for F if F were younger. These sameresults would apply for any possible participant in PlanQ. Accordingly, Plan Q satisfies the requirements ofsection 411(b)(1)(H) and this paragraph (b).

Example 12. (i) Employer Z maintains Plan R, adefined benefit plan that provides an accrued ben-efit of 2% of the average of a participant’s high 3 con-secutive years of compensation multiplied by theparticipant’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 ser-vice of Z. At normal retirement age, G has averagecompensation of $40,000 for G’s high 3 consecu-tive years and has 10 years of credited service un-der the plan. Thus, at normal retirement age, G isentitled to receive an annual normal retirement ben-efit of $8,000 ($40,000 X .02 X 10 years). Paymentof G’s retirement benefit is not suspended, and the planprovides that retirement benefits that commence af-ter a participant’s normal retirement age are actuari-ally increased for late retirement. Under the planprovision relating to actuarial increase, the actuarialincrease for the plan year is made to the benefit thatwould have been paid had the participant retired asof the end of the preceding plan year. The plan thenprovides the greater of this actuarially increased ben-efit and benefits under the plan formula based on con-tinued service, thereby including the actuarial increasein the rate of benefit accrual in plan years ending af-ter G’s attainment of normal retirement age, as pro-vided in paragraph (b)(2)(ii) of this section. Theforegoing is illustrated in the following table with re-spect to certain years of credited service performedby G after attaining normal retirement age 65. (Cer-tain numbers may not total due to rounding.)

2003–2 I.R.B. 275 January 13, 2003

Age atstartofplanyear

Years ofservice atstart ofplan year

Average payfor high 3consecutiveyears at startof plan year

Plan formulaat start ofplan year(.02 timescolumn 2times column3)

Additionalaccruals forthe plan yearunder planformula (col-umn 4 minuscolumn 4 forprior year)

Annual ben-efit, as actu-ariallyincreased(column 8from prioryearactuariallyincreased)

Actuarialincreaseon thebenefit atprior age(column 6minuscolumn 8for prioryear)

Annualbenefit towhich Cis entitledat start ofyear(greaterof column4 or col-umn 6)

Annualbenefit aspercent ofaveragepay col-umn 8 ÷column 3)

Rate ofbenefitaccrual(column 9less col-umn 9 forprioryear)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)65 10 $40,000 $ 8,000 n/a n/a n/a $ 8,000 20% 2%66 11 $42,000 $ 9,240 $1,240 $ 8,964 $ 964 $ 9,240 22% 2%67 12 $58,000 $13,920 $4,680 $10,386 $1,142 $13,920 24% 2%68 13 $60,000 $15,600 $1,680 $15,697 $1,777 $15,697 26.16% 2.16%69 14 $66,000 $18,480 $2,880 $17,762 $2,065 $18,480 28% 1.84%70 15 $68,000 $20,400 $1,920 $20,989 $2,509 $20,989 30.87% 2.87%

(ii) In the year G is 69 at the beginning of the year, G’s rate of benefit accrual (1.84% of the average high 3 consecutive years of compensation) is lower thanthe rate of benefit accrual that would apply to a younger participant because a participant who is younger than age 65 with the same number of years of creditedservice and compensation history would have a rate equal to 2% of average high 3 consecutive years of compensation. Accordingly, Plan R fails to satisfy the re-quirements of section 411(b)(1)(H) and this paragraph (b).

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 partici-pant’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 theactuarial 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 thefollowing table with respect to certain years of credited service performed by G after attaining normal retirement age 65.

Age atstartofplanyear

Years ofservice atstart ofplan year


Plan formulaat start ofplan year(.02 timescolumn 2times column3)

Additionalaccruals forthe plan yearunder planformula (col-umn 4 minuscolumn 4 forprior year)

Annual ben-efit, as actu-ariallyincreased(column 8from prioryear actuari-ally in-creased)

Actuarialincreaseon thebenefit atprior age(column 6minuscolumn 8for prioryear)

Annualbenefit towhich Cis entitledat start ofyear (col-umn 8 atprior ageplus thegreater ofcolumn 5and col-umn 7)

Annualbenefit aspercent ofaveragepay col-umn 8 ÷column 3)

Rate ofbenefitaccrual(column 9less col-umn 9 forprioryear)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)65 10 $40,000 $ 8,000 n/a n/a n/a $ 8,000 20% 2%66 11 $42,000 $ 9,240 $1,240 $ 8,964 $ 964 $ 9,240 22% 2%67 12 $58,000 $13,920 $4,680 $10,386 $1,142 $13,920 24% 2%68 13 $60,000 $15,600 $1,680 $15,697 $1,777 $15,697 26.16% 2.16%69 14 $66,000 $18,480 $2,880 $17,762 $2,065 $18,577 28.1% 2%70 15 $68,000 $20,400 $1,920 $21,098 $2,521 $21,098 31.03% 2.93%

(ii) In the year G is 69 at the beginning of the year,G’s rate of benefit accrual (2% of the average high3 consecutive years of compensation) is not lower thanthe rate that would apply to G if G were younger. Forexample, if G were age 68 with the same 14 years ofcredited service and compensation history that G hasat age 69, G would have a rate of benefit accrual equalto 2% of average high 3 consecutive years of com-pensation (in contrast to Example 12 in which the rate

is 1.84% for an employee who is age 69 with 14 yearsof service, but would be 2% for younger employeeswith the same service and compensation history). Simi-lar results would apply for any other potential youngerparticipant in Plan R. Accordingly, Plan R satisfies therequirements of section 411(b)(1)(H) and this para-graph (b).

(iii) The decrease in G’s rate of benefit accrualfrom 2.16% to 2% from age 68 to age 69 is not an

impermissible reduction because of age. Under para-graph (b)(3) of this section, the determination ofwhether an impermissible reduction occurs becauseof age is made by comparing any potential partici-pant’s rate of benefit accrual to what the rate wouldbe if the participant were younger (but with the sameyears of service, compensation history, and any otherrelevant factors taken into account under the plan), notby comparing a participant’s rate in one year to that

January 13, 2003 276 2003–2 I.R.B.

participant’s rate in an earlier year. As indicated inparagraph (ii) of this Example 13, the rate of ben-efit accrual for a participant who is age 69 with 14years of service at the beginning of the year is com-pared with the rate for all younger participants withthe same service and compensation history. Simi-larly, the 2.16% rate for a participant who is age 68with 13 years of service at the beginning of the yearis compared with the rate for all younger partici-pants with the same service and compensation his-tory. Thus, for example, if G were age 67 with thesame 13 years credited service and high 3 years ofcompensation 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 compensa-tion.

(4) Certain adjustments for benefitdistributions—(i) In general. Under sec-tion 411(b)(1)(H)(iii)(I), a defined benefitplan may provide that the requirement forcontinued benefit accrual under section411(b)(1)(H)(i) and this paragraph (b) fora plan year is treated as satisfied to the ex-tent of the actuarial equivalent of benefitsdistributed, as provided in this paragraph(b)(4). Distributions made before the par-ticipant attains normal retirement age or dur-ing 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 Departmentof Labor, may not be taken into account un-der this paragraph (b)(4).

(ii) Amount of the adjustment for ben-efits distributed. A defined benefit plan doesnot violate paragraph (b) of this section fora plan year merely because the rate of ben-efit accrual is reduced (but not below zero)to the extent of the actuarial equivalent ofplan benefit distributions made to the par-ticipant during the plan year. For this pur-pose, distributions made during the planyear generally are disregarded for that yearto the extent the actuarial value of the dis-tributions exceeds the actuarial value of dis-tributions that would have been made duringthe plan year had distribution of the par-ticipant’s accrued benefit commenced at thebeginning of the plan year (or, if later, atthe participant’s normal retirement age) inthe normal form of benefit. (But see para-graph (b)(4)(iii) of this section for rules tak-ing this excess into account at the end ofthe current year and in future years.) In ad-dition, in any case in which the partici-pant’s benefits are being distributed in anoptional form of benefit under which theamount payable annually is less than theamount payable under the plan’s normalform of benefit (for example, a QJSA un-der which the annual benefit is less than theamount payable annually under a straight

life annuity normal form), the plan maytreat the participant as receiving paymentsunder an actuarially equivalent normal formof benefit for the plan year and all futureplan years.

(iii) Treatment of accelerated benefitpayments—(A) Accelerated benefit pay-ments. This paragraph (b)(4)(iii) applies ifthe actuarial value of the distributions madeto the participant during a plan year ex-ceeds the actuarial value of the distribu-tions that would have been made during theplan year had distributions commenced atthe beginning of the plan year (or, if later,at the participant’s normal retirement age)in the normal form of benefit. In such acase, the excess payments (referred to as ac-celerated benefit payments) are convertedto an actuarially equivalent stream of an-nual benefit payments under the plan’s nor-mal form of benefit, commencing at thebeginning of the next plan year. This con-version must be based on the same actu-arial assumptions used under the plan todetermine the distributions made to the par-ticipant during the plan year. For purposesof this paragraph (b)(4)(iii), the actuari-ally equivalent stream of annual benefit pay-ments is referred to as the annuityequivalent of accelerated benefit payments.

(B) Credit for annuity equivalent of ac-celerated benefit payments. For purposes ofapplying paragraphs (b)(4)(ii) and (iii)(C)of this section, the annuity equivalent of ac-celerated benefit payments is deemed to bepaid to the participant in each plan year thatbegins after the plan year during which anyaccelerated benefit payment under para-graph (b)(4)(iii)(A) of this section is made.

(C) Effect of accelerated benefit pay-ments on rate of benefit accrual. If any ac-celerated benefit payments under paragraph(b)(4)(iii)(A) of this section have been madeto a participant, then, in lieu of determin-ing the participant’s rate of benefit ac-crual under paragraph (b)(2)(ii) of thissection, the participant’s rate of benefit ac-crual for a plan year is determined as theexcess (if any) of—

(1) The sum of the annual benefit towhich the participant is entitled at the endof the current plan year, assuming pay-ment commences in the normal form at theend of the current plan year, plus theamount deemed paid in the next plan yearunder the annuity equivalent of acceler-ated benefit payments; over

(2) The sum of the annual benefit towhich the participant was entitled at the endof the preceding plan year, assuming thatpayment commences in the normal form atthe later of normal retirement age and theend of the preceding plan year, plus theamount deemed paid during the current planyear under the annuity equivalent of ac-celerated benefit payments.

(iv) Examples. The provisions of thisparagraph (b)(4) may be illustrated by thefollowing examples. In each of the ex-amples, except as otherwise indicated, nor-mal retirement age is 65 and the birthdayof each participant is assumed to be Janu-ary 1. In addition, except as otherwise in-dicated, the plan contains no limitations onthe maximum amount of benefits the planwill pay to any participant (other than thelimitations imposed by section 415), on themaximum number of years of credited ser-vice taken into account under the plan, oron the compensation used for purposes ofdetermining the amount of any partici-pant’s normal retirement benefit (other thanthe limitation imposed by section401(a)(17)) and the plan uses the follow-ing actuarial assumptions for purposes ofdetermining the amount of any partici-pant’s accrued benefit (other than the limi-tation imposed by section 401(a)(17)), andthe plan uses the following actuarial as-sumptions in determining actuarialequivalence: a 7.5% rate of interest and the83 GAM (male) mortality table. The ex-amples are as follows:

Example 1. (i) Facts relating to the year in whichparticipant attains age 65. Employer Z maintains PlanQ, a defined benefit plan that provides an accrued ben-efit of $40 per month multiplied by the participant’syears of credited service. Participant F attains nor-mal retirement age of 65 on January 1 and contin-ues in the full time service of Z. At the end of the yearin which F attains age 65, F has 30 years of cred-ited service under the plan and could receive an ac-crued benefit of $1,200 per month ($40 x 30 years)if F retires. Plan Q does not suspend payment of ben-efits for participants who work past normal retire-ment age and F commences benefit payments atnormal retirement age. (These are the same facts asin Example 10 of paragraph (b)(3)(iii) of this sec-tion, except that the Plan Q does not provide for thesuspension of normal retirement benefit payments.) Theplan offsets the value of the benefit distributions againstbenefit accruals in plan years ending after the par-ticipant’s attainment of normal retirement age, as per-mitted by paragraph (b)(4)(ii) of this section. ParticipantF (who remains in the full time service of Y) re-ceives 12 monthly benefit payments after attain-ment of age 65 and prior to attainment of age 66. Thetotal monthly benefit payments of $14,400 ($1,200 x12 payments) have an actuarial value at the end of theyear in which F turns 65 of $15,118 (reflecting in-

2003–2 I.R.B. 277 January 13, 2003

terest and mortality) which would produce a monthlylife annuity benefit of $145 commencing at age 66.The rate of benefit accrual otherwise applicable un-der the plan formula for the year of credited serviceF completes after attaining normal retirement age is$40 per month.

(ii) Conclusions relating to the year in which Fattains age 65. Because the actuarial value (deter-mined as a monthly benefit of $145) of the benefit pay-ments made during the first year after F’s attainmentof normal retirement age exceeds the benefit ac-crual otherwise applicable for the first year after F’sattainment of normal retirement age, the plan is notrequired to accrue benefits on behalf of F for the oneyear of credited service after F’s attainment of nor-mal retirement age and the plan is not required to in-crease F’s monthly benefit payment of $1,200 duringthe year in which F attains age 65.

(iii) Facts relating to the year in which F at-tains age 66. Assume F receives 12 additional monthlybenefit payments the next year prior to F’s retire-ment at the end of the next year when F attains age66. The total monthly benefit payments of $14,400($1,200 x 12 payments) have an actuarial value at theend of that year of $15,135 (reflecting interest and mor-tality) which would produce a monthly benefit pay-ment of $149 commencing at age 67. The rate ofbenefit accrual otherwise applicable under the plan for-mula for the additional year of credited service F com-pleted that year is $40 per month.

(iv) Conclusions relating to the year in which Fattains age 66. Because the actuarial value (deter-

mined as a monthly benefit of $149) of the benefit pay-ments made during that year exceeds the benefitaccrual otherwise applicable for the additional year ofcredited service, the plan is not required to accrue ben-efits on behalf of F for the second year of credited ser-vice F completed after attaining normal retirement ageand the plan is not required to increase F’s monthlybenefit payment of $1,200.

Example 2. (i) Facts. Employer Z maintains PlanR, a defined benefit plan that provides an accrued ben-efit of 2% of the average of a participant’s high 3 con-secutive years of compensation multiplied by theparticipant’s years of credited service under the plan.Payment of a participant’s retirement benefit is not sus-pended, and the plan provides that retirement ben-efits that commence after a participant’s normalretirement age are actuarially increased for late re-tirement. Under the plan provision relating to actu-arial increase, the actuarial increase for the plan yearis made to the benefit that would have been paid hadthe participant retired as of the end of the precedingplan year. The plan then provides the greater of thisactuarially increased benefit and benefits under the planformula based on continued service, thereby includ-ing the actuarial increase in the rate of benefit ac-crual in plan years ending after attainment of normalretirement age, as provided in paragraph (b)(2)(ii) ofthis section. Participant G, who has attained normalretirement age (age 65) under the plan, continues inthe full time service of Z. At normal retirement age,G has average compensation of $40,000 for G’s high3 consecutive years and has 10 years of credited ser-

vice under the plan. Thus, at normal retirement age,G is entitled to receive an annual normal retirementbenefit of $8,000 ($40,000 x .02 x 10 years). G con-tinues working after normal retirement age, with G’saverage compensation increasing to $68,000 at age 70.(The facts in this Example 2 are the same as Ex-ample 13 of paragraph (b)(3)(ii) of this section, ex-cept that the employee does not retire at age 70, butcontinues in the full time service of Z.) Upon G’s at-tainment of age 70, the plan commences benefit pay-ments to G. The annual benefit paid to G in the firstplan year is $21,098. In determining the annual ben-efit payable to G in each subsequent plan year, the planoffsets the value of benefit distributions made to theparticipant by the close of the prior plan year againstbenefit accruals otherwise applicable in plan years dur-ing which such distributions were made, as permit-ted by paragraph (b)(4)(ii)(B) of this section.

(ii) Conclusion. Accordingly, for each subse-quent plan year, G is entitled under the plan to re-ceive benefit payments based on G’s benefit at theclose of the prior plan year, plus the excess (if any)of the benefit for the plan year determined under theplan formula otherwise applicable over the value oftotal benefit distributions made to G during the planyear. The foregoing is illustrated in the following tablewith respect to certain years of credited service per-formed by G while benefits were being distributed toG.

Age atstart ofplan year

Years of ser-vice at start ofplan year


Plan formulaat start of planyear (.02 timescolumn 2times column3)

Additionalaccruals forthe plan yearunder planformula (col-umn 4minus column4 for prioryear)

Benefitdistributionsmadeduring theprior year

Annual benefitthat is actu-arial equiva-lent of column6

Annual benefitto which G isentitled at endof the year(column 8 forprior year, plusthe excess, ifany of column5 for the cur-rent year, overcolumn 7 forcurrent year)

(1) (2) (3) (4) (5) (6) (7) (8)70 15 $ 68,000 $20,400 $1,920 none none $21,09871 16 $ 70,000 $22,400 $2,000 $21,098 $2,799 $21,09872 17 $ 90,000 $30,600 $8,200 $21,098 $2,891 $26,40773 18 $100,000 $36,000 $5,400 $26,407 $3,743 $28,065

Example 3. (i) Facts relating to the year in whicha participant attains age 65. Plan X provides an ac-crued benefit equal to 1% of the average of a par-ticipant’s highest 3 consecutive years of compensationtimes the participant’s years of service, payable in thenormal form of a straight life annuity commencing atnormal retirement age or at the date of actual retire-ment if later. Plan X permits a participant who is anemployee to commence distributions after attain-ment of normal retirement age (age 65) and pro-vides for benefits otherwise accrued after normalretirement age to be offset by the actuarial equiva-lent of any benefit distributions made to the partici-

pant. Plan X provides for a participant who does notcommence distributions to receive an actuarial in-crease for the year from the amount payable at the endof the preceding year (if greater than the amount oth-erwise accrued for H during the year under X’s for-mula). Participant H attains age 65 on the first day ofa plan year when Participant H’s average highest 3consecutive years of compensation is $60,000 and Hhas 20 years of service. Accordingly, Participant H’saccrued benefit at the beginning of the year is equalto a straight life annuity of $1,000 per month (20%times $60,000 divided by 12) commencing at the be-ginning of the year. Participant H elects to receive a

single-sum distribution of $130,389 at the begin-ning of the year, which is equal to the present valueof H’s accrued benefit under section 417(e) at thattime. Participant H continues to work through the endof the plan year and at the end of the year has aver-age compensation of $60,000 for the year. Plan X usesthe actuarial assumptions specified in section 417(e)for purposes of determining actuarial equivalence. Forpurposes of this Example 3, the applicable interest rateunder section 417(e) is assumed to be 6%, and the ap-plicable mortality table under section 417(e) is the mor-tality table in effect on January 1, 2003.

January 13, 2003 278 2003–2 I.R.B.

(ii) Conclusion relating to effect of distributionsmade in the year H attains age 65. Under this para-graph (b)(4), H would otherwise accrue an addi-tional monthly benefit of $50 for the additional yearof 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 af-ter normal retirement age by the actuarial value of dis-tributions made during the year. However, underparagraph (b)(4)(ii) of this section, distributions madeduring a plan year are disregarded to the extent thatthe actuarial value of the distributions exceeds the ac-tuarial value of distributions that would have beenmade during the plan year had distribution of the par-ticipant’s accrued benefit commenced at the begin-ning of the plan year under the plan’s normal form.

(iii) Conclusion relating to calculations for dis-tribution made in the year H attains age 65. At theend of the year, the actuarial value of the distribu-tion made to H ($130,389 plus interest and mortal-ity for the year equals $139,812) is greater than theyear end actuarial value of distributions that wouldhave been made during the plan year had distribu-tion of the participant’s accrued benefit at the begin-ning of the plan year commenced in the normal format the beginning of the plan year (which is $12,470,based on the plan’s actuarial assumptions). Accord-ingly, the $127,342 excess (referred to as an accel-erated benefit payment) is disregarded in the currentyear. (However, as described below, the annuity equiva-lent of the $127,342 is deemed to be paid to H com-mencing at the beginning of the first plan year afterthe plan year during which the accelerated benefit pay-ment is made.)

(iv) Conclusion relating to rate of benefit ac-crual for the year H attains age 65. To determine therate of benefit accrual for the year in which H at-tains age 65, the annuity equivalent of accelerated ben-efit payments is calculated and, under paragraph(b)(4)(iii)(C) of this section, this amount is treated aspart of the benefit payable at the end of the year incalculating the rate of benefit accrual for the year. Inthis Example 3, the annuity equivalent of the $127,342accelerated benefit payment equals a straight life an-nuity of $1,000 per month commencing at the begin-ning of the next plan year. Thus, for purposes ofapplying paragraph (b)(4)(iii) of this section to de-termine the rate of benefit accrual for the plan yearin which H attains age 65, paragraph (b)(4)(iii)(C)(1)of this section is an annual straight life annuity com-mencing at end of the year equal to $1,000 (the sumof the annual benefit to which the H is entitled at theend of the plan year, which is zero in this case, plusthe amount deemed paid in the next plan year underthe annuity equivalent of accelerated benefit pay-ments, which is $1,000 in this case) and the amountin paragraph (b)(4)(iii)(C)(2) of this section is an an-nual straight life annuity commencing at end of thepreceding plan year equal to $1,000. Thus, H’s rateof benefit accrual for the year is zero.

(v) Conclusion relating to whether rate of ben-efit accrual for year H attains age 65 satisfies sec-tion 411(b)(1)(H). Under paragraph (b)(4)(ii) of thissection, a plan may reduce the rate of benefit ac-crual otherwise applicable to the extent of distribu-tions made during the year. The actuarial equivalentof $12,470 (the actuarial value of the 12 $1,000monthly payments deemed paid to H during the planyear under paragraph (b)(4)(ii) of this section) is a

straight life annuity commencing at the end of the planyear equal to $98 per month. Thus, the otherwise ap-plicable accrual for the year may be reduced (but notbelow zero) by $98 per month. The highest rate of ben-efit accrual for any participant with H’s service andcompensation history who is younger is an annualstraight life annuity of $50 per month. Because thepermissible reduction of $98 per month is not less thanthe otherwise applicable accrual of $50 per month, PlanX is not required by this paragraph (b) for the yearand section 411(b)(1)(H) to provide H with any ad-ditional accruals for the year.

(vi) Conclusion relating to rate of benefit ac-crual for year H attains age 65 if no distribution weremade. If Participant H had not elected to receive anydistribution during the plan year, then H’s accrued ben-efit at the end of the year would be a straight life an-nuity of $1,098 per month commencing at the end ofthe year (which is actuarially equivalent to a straightlife annuity of $1,000 per month commencing at thebeginning of the year). Thus, H’s rate of benefit ac-crual for that year would be $98 (but no adjustmentsfor any distribution would apply).

(vii) Facts relating to next year in which H at-tains age 66. Participant H works another year andH’s average compensation becomes $70,000. Underthis paragraph (b)(4), H would otherwise accrue anadditional monthly benefit of $233 for the addi-tional year of service under the plan’s formula (22%times $70,000, minus 21% times $60,000, divided by12). However, the plan is permitted under section411(b)(1)(H)(iii)(I) to offset additional accruals af-ter normal retirement age by the actuarial value of dis-tributions made during the year. Under paragraph(b)(4)(iii)(B) of this section, the $1,000 annuity equiva-lent of accelerated benefit payments is deemed to bepaid to H during this second year when H attains age66. These deemed payments are actuarially equiva-lent to an accrual of $100 per month payable at theend of that year. Accordingly, the plan reduces the oth-erwise applicable accrual of $233 to the extent of theaccrual of $100 per month payable at the end of theyear in which H attains age 66. Thus, the $233 ac-crual during the year in which H becomes 66 is re-duced by $100 to $133. Under the plan X, H’s accruedbenefit at the end of the year is $133 per month.

(viii) Conclusion relating to rate of benefit ac-crual for year H attains age 66. To determine the rateof benefit accrual for the second year when H at-tains age 66, the annuity equivalent of accelerated ben-efit payments is calculated and, under paragraph(b)(4)(iii)(C) of this section, this amount is treated aspart of the benefit payable at the end of the year incalculating the rate of benefit accrual for the secondyear. In this Example 3, the annuity equivalent of the$127,342 accelerated benefit payment that was madein the year in which H attained age 65 equals a straightlife annuity of $1,000 per month commencing at thebeginning of the next plan year. Thus, for purposesof applying paragraph (b)(4)(iii) of this section to de-termine the rate of benefit accrual for the second planyear, the amount in paragraph (b)(4)(iii)(C)(1) of thissection is an annual straight life annuity commenc-ing at end of the year equal to $1,133 (the sum of theannual benefit to which the H is entitled at the endof the plan year, which is $133 in this case, plus theamount deemed paid in the next plan year under theannuity equivalent of accelerated benefit payments,which is $1,000 in this case) and the amount in para-graph (b)(4)(iii)(C)(2) of this section is an annual

straight life annuity commencing at end of the pre-ceding plan year equal to $1,000. Thus, H’s rate ofbenefit accrual for the year in which H becomes age66 is $133.

(ix) Conclusion relating to whether rate of ben-efit accrual for year H becomes 66 satisfies section411(b)(1)(H). Under paragraph (b)(4))(ii) of this sec-tion, a plan may reduce the rate of benefit accrual tothe extent of distributions made during the year. Theactuarial equivalent of $12,480 (the actuarial value ofthe 12 $1,000 monthly payments deemed made to Hduring the plan year) is a straight life annuity com-mencing at the end of the plan year equal to $100 permonth. Thus, the otherwise applicable accrual for theyear may be reduced (but not below zero) by $100per month. The highest rate of benefit accrual for anyparticipant with H’s service and compensation his-tory who is younger is an annual straight life annu-ity of $233 per month. Thus, because the sum of $133and $100 is not less than the otherwise applicable ac-crual of $233 per month, Plan X satisfies this para-graph (b) and section 411(b)(1)(H) for the year.

(c) Defined contribution plans—(1) Ingeneral. A defined contribution plan (in-cluding a target benefit plan described in§ 1.410(a)–4(a)(1)) does not satisfy the re-quirements of section 411(b)(2) if the rateof allocation made to the account of a par-ticipant is reduced, either directly or indi-rectly, because of the participant’sattainment of any age. A reduction in therate of allocation includes any discontinu-ance in the allocation of employer contri-butions or forfeitures to the account of theparticipant or cessation of participation inthe plan.

(2) Rate of allocation—(i) Aggregate al-locations. For purposes of this paragraph (c),a participant’s rate of allocation for any planyear is the aggregate allocations taken intoaccount for the plan year under§ 1.401(a)(4)–2(c)(2).

(ii) Determination of rate of alloca-tion. A participant’s rate of allocation fora plan year can be determined as a dollaramount. Alternatively, if a plan’s formulabases a participant’s allocations solely oncompensation for the plan year and com-pensation is determined without regard toattainment of any age, then a participant’srate of allocation can be determined as apercentage of the participant’s compensa-tion for the plan year.

(3) Reduction that is directly or indi-rectly because of a participant’s attain-ment of any age—(i) Reduction in rate ofallocation that is directly because of a par-ticipant’s attainment of any age. A plan pro-vides for a reduction in the rate of allocationthat is directly because of a participant’s at-tainment of any age for any plan year if,under the terms of the plan, any partici-

2003–2 I.R.B. 279 January 13, 2003

pant’s rate of allocation for the plan yearwould be higher if the participant wereyounger. Thus, a plan fails to satisfy sec-tion 411(b)(2) and this paragraph (c) if, un-der the terms of the plan, the rate ofallocation for any individual who is or couldbe a participant under the plan would belower solely as a result of such individualbeing older.

(ii) Reduction in rate of allocation thatis indirectly because of a participant’s at-tainment of any age—(A) In general. A planprovides for a reduction in the rate of al-location that is indirectly because of a par-ticipant’s attainment of any age for any planyear if any participant’s rate of allocationfor the plan year would be higher if the par-ticipant were to have a characteristic thatis a proxy for being younger, based on allof the relevant facts and circumstances.Thus, a plan fails to satisfy section 411(b)(2)and this paragraph (c) if the rate of allo-cation for any individual who is or couldbe a participant under the plan would belower solely as a result of such individualhaving a different characteristic which is aproxy for being older, based on applicablefacts and circumstances.

(B) Treatment of limitations. A reduc-tion in a participant’s rate of allocation isnot indirectly because of the attainment ofany age in violation of section 411(b)(2)solely because of a positive correlation be-tween attainment of any age and a reduc-tion in the rate of allocation. Thus, a definedcontribution plan (including a target ben-efit plan described in § 1.410(a)–4(a)(1))does not fail to satisfy the minimum vest-ing standards of section 411(a) solely be-cause the plan limits the total amount ofemployer contributions and forfeitures thatmay be allocated to a participant’s ac-count (for a particular plan year or for theparticipant’s total years of credited ser-vice under the plan), solely because the planlimits the total number of years of cred-ited service for which a participant’s ac-count may receive allocations of employercontributions and forfeitures, or solely be-cause the plan limits the number of yearsof credited service that may be taken intoaccount for purposes of determining theamount of, or the rate at which, employercontributions and forfeitures are allocatedto a participant’s account for a particularplan year.

(iii) Special rule for target benefit plans.A defined contribution plan that is a tar-

get benefit plan, as defined in § 1.410(a)–4(a)(1), satisfies section 411(b)(2) only ifthe defined benefit formula used to deter-mine allocations would satisfy section411(b)(1)(H) without regard to section411(b)(1)(H)(iii). Such a target benefit plandoes not fail to satisfy this paragraph (c)with respect to allocations after normal re-tirement age merely because the alloca-tion for a plan year is reduced to reflectshorter longevity using a reasonable actu-arial assumption regarding mortality.

(iv) Additional rules. The Commissionermay prescribe additional guidance, pub-lished in the Internal Revenue Bulletin (see§ 601.601(d)(2)(ii)(b) of this chapter), withrespect to the application of section411(b)(2) and this section to target ben-efit plans.

(d) Benefits and forms of benefits sub-ject to requirements—(1) General rule. Ex-cept as provided in paragraph (d)(2) or (3)of this section, sections 411(b)(1)(H) and411(b)(2) and paragraphs (b) and (c) of thissection apply to all benefits (and forms ofbenefits) provided under the plan, includ-ing accrued benefits, benefits described insection 411(d)(6), ancillary benefits, andother rights and features provided under theplan. Accordingly, except as provided inparagraph (d)(2) or (3) of this section, a par-ticipant’s rate of benefit accrual under a de-fined benefit plan and a participant’sallocations under a defined contribution planare considered to be reduced because of theparticipant’s attainment of any age if op-tional forms of benefits, ancillary ben-efits, or other rights or features under theplan provided with respect to benefits or al-locations attributable to credited serviceprior to the attainment of the participant’sage are not provided on at least as favor-able a basis with respect to benefits or al-locations attributable to credited service afterattainment of the participant’s age. Thus,for example, a plan may not provide asingle-sum payment only with respect tobenefits attributable to years of credited ser-vice before the attainment of a specifiedage. Similarly, except as provided in para-graph (d)(2) or (3) of this section, if an op-tional form of benefit is available under theplan at a specified age, the availability ofthat form of benefit, or the method for de-termining the manner in which that formof benefit is paid, may not, directly or in-directly, be denied or provided on terms lessfavorable to participants because of the at-

tainment of any age. Similarly, if themethod for determining the amount or therate of the subsidized portion of a joint andsurvivor annuity or the subsidized por-tion of a preretirement survivor annuity isless favorable with respect to participantswho have attained a specified age than withrespect to participants who have not at-tained such age, benefit accruals or ac-count allocations under the plan will beconsidered to be reduced because of the at-tainment of such age.

(2) Special rule for actuarial assump-tions regarding mortality. A plan does notfail to satisfy section 411(b)(1)(H) or thisparagraph (d) merely because the planmakes actuarial adjustments using a rea-sonable assumption regarding mortality tocalculate optional forms of benefit or to cal-culate the cost of providing a qualified pre-retirement survivor annuity, as defined insection 417(c).

(3) Special rule for certain benefits. Aplan does not fail to satisfy section411(b)(1)(H) or this paragraph (d) merelybecause the following benefits, or the man-ner in which such benefits are provided un-der the plan, vary because of the attainmentof any higher age—

(i) The subsidized portion of an early re-tirement benefit (whether provided on atemporary or permanent basis);

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

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

(e) Coordination with certain provi-sions. Notwithstanding section 411(b)(1)(H),section 411(b)(2), and paragraphs (a)through (d) of this section, the followingrules apply—

(1) Section 415 limitations. No benefitaccrual with respect to a participant in a de-fined benefit plan is required for a plan yearby section 411(b)(1)(H)(i) and no alloca-tion to the account of a participant in a de-fined contribution plan (including a targetbenefit plan described in § 1.410(a)–4(a)(1))is required for a plan year by section411(b)(2) to the extent that the allocationor accrual would cause the plan to ex-ceed the limitations of section 415.

(2) Prohibited discrimination—(i) Nobenefit accrual on behalf of a highly com-pensated employee in a defined benefit planis required for a plan year by section

January 13, 2003 280 2003–2 I.R.B.

411(b)(1)(H)(i) to the extent such benefitaccrual would cause the plan to discrimi-nate in favor of highly compensated em-ployees within the meaning of section401(a)(4).

(ii) No allocation to the account of ahighly compensated employee in a de-fined contribution plan (including a tar-get benefit plan) is required for a plan yearby section 411(b)(2) to the extent the al-location would cause the plan to discrimi-nate in favor of highly compensatedemployees within the meaning of section401(a)(4).

(iii) The Commissioner may provide ad-ditional guidance, published in the Inter-nal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter), relating to pro-hibited discrimination in favor of highlycompensated employees.

(3) Permitted disparity. A defined ben-efit plan does not fail to satisfy section411(b)(1)(H) for a plan year and a definedcontribution plan does not fail to satisfy411(b)(2) for a plan year merely becauseaccruals or allocations under the plan arereduced to satisfy the uniformity require-ments 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 sat-isfy section 411(b)(1)(H) for a plan year anda defined contribution plan does not fail tosatisfy 411(b)(2) for a plan year merely be-cause of the right to defer distributions pro-vided under section 411(a)(11) or a planprovision consistent with section 411(a)(11).

(f) Effective dates—(1) Effective date ofsections 411(b)(1)(H) and 411(b)(2) for non-collectively bargained plans—(i) In gen-eral. Except as otherwise provided inparagraph (f)(2) of this section, sections411(b)(1)(H) and 411(b)(2) are applicablefor plan years beginning on or after Janu-ary 1, 1988, with respect to a participantwho is credited with at least 1 hour of ser-vice in a plan year beginning on or afterJanuary 1, 1988. Neither section411(b)(1)(H) nor section 411(b)(2) is ap-plicable with respect to a participant whois not credited with at least 1 hour of ser-vice in a plan year beginning on or afterJanuary 1, 1988.

(ii) Defined benefit plans. In the case ofa participant who is credited with at least1 hour of service in a plan year begin-ning on or after January 1, 1988, section411(b)(1)(H) is applicable with respect to

all years of service completed by the par-ticipant other than plan years beginning be-fore January 1, 1988.

(iii) Defined contribution plans. Sec-tion 411(b)(2) does not apply with respectto allocations of employer contributions orforfeitures to the accounts of participantsunder a defined contribution plan for a planyear beginning before January 1, 1988.

(iv) Hour of service. For purposes of thisparagraph (f)(1), 1 hour of service means1 hour of service recognized under the planor required to be recognized under the planby section 410 (relating to minimum par-ticipation standards) or section 411 (relat-ing to minimum vesting standards). In thecase of a plan that does not determine ser-vice on the basis of hours of service, 1 hourof service means any service recognized un-der the plan or required to be recognizedunder the plan by section 410 (relating tominimum participation standards) or sec-tion 411 (relating to minimum vesting stan-dards).

(2) Effective date of sections 411(b)(1)(H)and 411(b)(2) for collectively bargainedplans—(i) In the case of a plan maintainedpursuant to 1 or more collective bargain-ing agreements between employee repre-sentatives and 1 or more employers, ratifiedbefore March 1, 1986, sections 411(b)(1)(H)and 411(b)(2) are applicable for benefitsprovided under, and employees covered by,any such agreement with respect to planyears 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 collectivebargaining agreements terminates (deter-mined without regard to any extension ofany such agreement occurring on or afterMarch 1, 1986).

(ii) The applicability date provisions ofparagraph (f)(1) of this section shall ap-ply in the same manner to plans describedin paragraph (f)(2)(i) of this section, ex-cept that the applicable date determined un-der paragraph (f)(2)(i) of this section shallbe substituted for the effective date deter-mined under paragraph (f)(1) of this sec-tion.

(iii) In accordance with the provisionsof paragraph (f)(2)(i) of this section, a plandescribed therein may be subject to differ-ent applicability dates under sections411(b)(1)(H) and 411(b)(2) for employ-ees who are covered by a collective bar-

gaining agreement and employees who arenot covered by a collective bargainingagreement.

(iv) For purposes of paragraph (f)(2)(i)of this section, the service crediting rulesof paragraph (f)(1) of this section shall ap-ply to a plan described in paragraph (f)(2)(i)of this section, except that in applying suchrules the applicability date determined un-der paragraph (f)(2)(i) of this section shallbe substituted for the applicability date de-termined under paragraph (f)(1) of this sec-tion. See paragraph (f)(1)(iv) of this sectionfor rules relating to the recognition of anhour of service.

(3) Regulatory effective date. Paragraphs(a) through (e) of this section are appli-cable with respect to plan years begin-ning on or after the date of publication offinal regulations in the Federal Register.

David A. Mader,Assistant Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on December 10,2002, 8:45 a.m., and published in the issue of the Federal Reg-ister for December 11, 2002, 67 F.R. 76123)

Cash Balance ConversionPlans Awaiting TechnicalAdvice

Announcement 2003–1

A notice of proposed rulemaking and no-tice of public hearing (REG–209500–86,2003–2 I.R.B. 251) relating to age dis-crimination requirements applicable to cer-tain retirement plans under §§ 411(b)(1)(H)and 411(b)(2) of the Internal Revenue Codeof 1986 were published in the December11, 2002, issue of the Federal Register. Theproposed regulation provides rules regard-ing the age discrimination requirements ap-plicable to certain retirement plans underwhich accruals and allocations cannot beceased or reduced because of the attain-ment of any age. When finalized, theseregulations would affect retirement plansponsors and administrators, and partici-pants in and beneficiaries of retirementplans.

Beginning September 15, 1999, cases inwhich an application for a determination let-ter or a plan under examination involvedan amendment to change a traditional de-fined benefit plan to become a cash bal-ance plan (cash balance conversions) were

2003–2 I.R.B. 281 January 13, 2003

required to be submitted to the Washing-ton, D.C. office of the Internal Revenue Ser-vice for technical advice on the conversion’seffect on the plan’s qualified status. Manysuch cases were submitted and are stillpending. These cases have not been pro-cessed because certain age discriminationissues under § 411(b)(1)(H) have contin-ued to be the subject of discussions be-tween Treasury and other agencies. Whilethe regulations issued on December 11,2002, address the age discrimination is-sues of § 411(b)(1)(H), they are subject topublic comments and possible revision be-fore finalization. The technical advice caseson cash balance conversions will not be pro-cessed until the regulation addressing theage discrimination issues is finalized. Thefinalization of the regulation is a high pri-ority for the Service.

January 13, 2003 282 2003–2 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as“rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over aperiod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this case,the previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.

PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

2003–2 I.R.B. i January 13, 2003

Numerical Finding List1

Bulletin 2003–1

Revenue Procedures:

2003–1, 2003–1, I.R.B. 12003–2, 2003–1, I.R.B. 762003–3, 2003–1, I.R.B. 1132003–4, 2003–1, I.R.B. 1232003–5, 2003–1, I.R.B. 1632003–6, 2003–1, I.R.B. 1912003–7, 2003–1, I.R.B. 2332003–8, 2003–1, I.R.B. 236

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2002–26 through 2002–52 is

in Internal Revenue Bulletin 2003–1, dated January 6, 2003.

January 13, 2003 ii 2003–2 I.R.B.

Finding List of Current Actionson Previously Published Items2

Bulletin 2003–1

Notices:

97–19Modified byRev. Proc. 2003–1, 2003–1 I.R.B. 1

Revenue Procedures:


2002–1Superseded byRev. Proc. 2003–1, 2003–1 I.R.B. 1











2 A cumulative list of current actions on previously

published items in Internal Revenue Bulletins

2002–26 through 2002–52 is in Internal Revenue

Bulletin 2003–1, dated January 6, 2003.

2003–2 I.R.B. iii January 13, 2003�� 3�496-919/60065

Bulletin No. 2003–2 January 13, 2003 HIGHLIGHTS OF THIS ISSUE · Announcement 2003–1, page 281....

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