SERVICE CLARIFIES GUIDANCE UNDER QUALIFIED PLAN BENEFIT PROTECTION RULE.

Notice 89-92

I. Purpose and Background

On December 13, 1988 the Service issued Notice 88-131, 1988 I.R.B. 52, which provides relief from certain requirements of section 411(d)(6) of the Internal Revenue Code to sponsors of qualified pension, profit-sharing and stock bonus plans under section 401(a) and annuity plans under section 403(a). Section 411(d)(6) provides, in general, that a plan amendment (other than an amendment described in section 412(c)(8)) may not decrease a participant's accrued benefit determined as of the later of the date of adoption or the effective date of the amendment. Although section 1140 of the Tax Reform Act of 1986 and section 401(b) permit an extended period of time for amending plans to comply with the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1986 and the Omnibus Budget Reconciliation Act of 1987 (collectively TRA 86), neither section provides an exception to section 411(d)(6), with respect to plan amendments made to comply with TRA 86 after benefits accrue during the 1989 or 1990 plan year.

Plan sponsors may take advantage of the relief offered in Notice 88-131 by adopting one or more of the model amendments described in the Notice and/or following the requirements of an alternative (Alternative IID) set forth in the Notice. The options described in Notice 88-131, provide certain plan sponsors with additional time in which to review regulations and make decisions about plan changes which might be necessary or desirable as a result of changes in the law made by TRA 86.

Notice 88-131 provides several alternatives with respect to benefit accruals that arise during the 1989 and, in some cases, the 1990 plan year. For example, model amendment 1 provides that for the purpose of calculating a plan participant's accrued benefit, compensation taken into account under the plan shall not exceed $200,000. Model amendment 2 permits a plan sponsor to suspend and, to a limited extent, reduce benefit accruals for highly compensated employees during the 1989 plan year and TRA 86 remedial amendment period.

Model amendment 3 permits a plan sponsor to suspend, and in some cases, reduce benefit accruals for all participants during the 1989 plan year. Model amendment 4 is available for plan sponsors who wish to terminate their plans without having to amend their plans to conform to the requirements of TRA 86 and permits plan sponsors to retroactively reduce the benefits of highly compensated employees that may have accrued on or before the date of termination during the 1989 plan year.

Alternative IID permits benefits to accrue during the 1989 plan year under the terms of the plan without regard to the TRA 86 amendments provided certain requirements are satisfied.

The purpose of this notice is to provide additional guidance and clarification concerning certain issues which were raised in Notice 88-131.

II. Questions and Answers

A. Model Amendment 4 - Terminating Plans

1. Notice 88-131 provides that if a plan sponsor adopts model amendment 4 on or before May 31, 1989, and terminates the plan after the first day of the plan year beginning in 1989 and before June 1, 1989, the plan will be deemed to be in compliance with those qualification requirements of the Code that become effective with respect to the plan as of the first day of the first plan year beginning on or after January 1, 1989 provided the requirements described in Notice 88-131 are satisfied. Will the May 31, 1989 deadline for terminating plans pursuant to model amendment 4 be extended?

Pursuant to this notice, the May 31, 1989 deadline for terminating plans pursuant to model amendment 4 is hereby extended to December 31, 1989 provided that the requirements that apply to model amendment 4 as described in Notice 88-131 and the requirements set forth below are satisfied. Accordingly, a termination date may be inserted in model amendment 4 that is later than May 31, 1989 provided such date is no later than December 31, 1989.

2. Notice 88-131 provides that the adoption of model amendment 4 by a plan sponsor will result in a significant reduction in the rate of future benefit accrual. Accordingly, a plan sponsor who wishes to adopt model amendment 4 must provide the notice required by section 204(h) of Title I of ERISA. When must the 204(h) notice be given if a plan sponsor wishes to terminate its plan pursuant to model amendment 4 and when must the plan's assets be distributed?

Section 204(h) of Title I of ERISA provides that a plan may not be amended so as to provide for a significant reduction in the rate of future benefit accrual, unless, after adoption of the plan amendment and not less than 15 days before the effective date of the plan amendment, the plan administrator provides a written notice to participants and other interested parties. Although Notice 88-131 provides that model amendments 1, 2 and 3 are not subject to the notice requirements of section 204(h) of Title I of ERISA (whether adopted to provide retroactive and prospective or purely prospective suspension of benefits), a 204(h) notice is required with respect to model amendment 4.

In the case of a plan sponsor who terminates a plan using model amendment 4, the last possible date for adopting model amendment 4 and for providing the 204(h) notice is December 16, 1989. The effective date of a plan termination pursuant to model amendment 4 shall be no later than December 31, 1989. The plan's termination under model amendment 4 will be recognized by the Service as long as all events in the termination process, including distribution of plan assets, proceed as soon as administratively feasible.

3. In addition to the requirements set forth in Question and Answer A.2. above, what action must be taken by the plan sponsor of a plan subject to Title IV of ERISA in order to effectuate the plan's termination pursuant to model amendment 4?

The plan sponsor of a defined benefit pension plan subject to Title IV of ERISA who adopts model amendment 4 in connection with the termination of the plan must provide a 60 day notice of intent to terminate to participants and beneficiaries pursuant to section 4041(a)(2) of Title IV of ERISA on or before November 1, 1989.

4. Notice 88-131 provides that a plan sponsor who uses model amendment 4 may not adopt an amendment that increases benefit accruals for highly compensated employees under the plan after December 13, 1988. In addition, Notice 88-131 provides that highly compensated employees may not accrue a benefit during the 1989 plan year. May a plan sponsor who adopts model amendment 4 allocate excess assets in a terminated defined benefit pension plan to all plan participants without violating these requirements?

A plan sponsor who terminates a defined benefit pension plan pursuant to model amendment 4 may not allocate excess assets (other than excess assets attributable to employee contributions) arising from the termination to all participants without violating the requirement that the plan not be amended to increase benefit accruals for highly compensated employees after December 13, 1988 or the prohibition against benefit accruals for highly compensated employees during the 1989 plan year. It is permissible, however, to reduce or eliminate what would otherwise be excess assets that arise as a result of plan termination by amending the plan to increase plan benefits for all participants except highly compensated employees (as determined under section 414(q) and the regulations thereunder as applied to the plan during the 1989 plan year).

B. Benefit Accruals

1. The model amendments described in Notice 88-131 enable plan sponsors to suspend and, in some cases, reduce benefits that accrue in the 1989 and 1990 plan years. What accrued benefits may be suspended and reduced in accordance with the provisions of Notice 88-131?

In general, the rules of section 411 of the Code with respect to benefit accrual apply for purposes of Notice 88-131. Thus, the benefit accrual with respect to a participant in a defined benefit pension plan that is subject to suspension and reduction is any increase in the accrued benefit that arises during the 1989 plan year or TRA 86 remedial amendment period (including any increase due to an increase in compensation or the dollar limit under section 415(b) or any increase due to employee contributions) with the exception of any increases in the pre-1989 accrued benefit attributable to automatic cost of living provisions or investment performance.

For purposes of Notice 88-131, the benefit accrual with respect to a participant in a defined contribution plan that is subject to suspension is any allocation of employer contributions to a participant's account, including elective deferrals, matching contributions and reallocated forfeitures and any allocation of employee contributions. Such allocations must be attributable to the 1989 plan year or TRA 86 remedial amendment period. For purposes of Notice 88-131, allocations of earnings in a defined contribution plan will not be considered an accrual.

Notwithstanding the foregoing, to the extent a plan sponsor has permitted elective deferrals, matching or employee contributions to continue despite timely adoption of model amendment 2, 3 or 4, the benefit accrual subject to suspension does not include elective deferrals, matching contributions or employee contributions.

Because either approach (to suspend or to permit elective deferrals, matching or employee contributions) is permitted under model amendment 2, 3, or 4, a plan sponsor may subsequently select the alternative approach through plan operation provided only one change in operation is effected on or before December 31, 1989, and such change is prospectively effective. Thereafter, any prospective change in the treatment of such contributions must be reflected through a plan amendment.

Regardless of the approach selected by the plan sponsor, elective deferrals, matching and employee contributions must satisfy the requirements of sections 401(k) and 401(m) and the regulations thereunder. In the case of a plan sponsor who adopts model amendment 4 and permits elective deferrals, matching or employee contributions to continue until plan termination, such contributions must satisfy the requirements of sections 401(k) and 401(m) and the regulations thereunder, as applicable, taking into account only those requirements that apply to 1988 plan years.

The plan operation approach discussed above is illustrated by the following example. Assume the plan sponsor of a 401(k) profit- sharing plan adopts model amendment 3 on or before May 31, 1989. Employer contributions on behalf of all participants (other than elective deferrals and matching contributions) and employee contributions are suspended. Participants are permitted to continue making elective deferrals and the plan sponsor continues to match the elective deferrals. The plan sponsor has decided, through operation of the plan, that the accrued benefit for purposes of model amendment 3 refers to allocations of employer contributions (excluding elective deferrals and matching contributions) and allocations of employee contributions. The plan sponsor may eliminate either or both the elective deferrals or the matching contributions prospectively, through plan operation (provided such change is effected on or before December 31, 1989), but may not eliminate either retroactively.

In addition to the plan sponsor's ability to define benefit accrual through plan operation, a plan sponsor may choose to suspend or reduce benefit accruals on a plan by plan basis. For purposes of Notice 88-131, the definition of plan may be determined in accordance with the principles set forth in 1.410(b)-7(a) through (c) of the proposed Income Tax Regulations. For example, if the plan sponsor maintains a plan that benefits employees who are included in a unit of employees covered by a collective bargaining agreement and employees who are not included in such collective bargaining unit, a suspension and reduction of benefit accrual pursuant to Notice 88-131 may be put into effect with respect to both groups of employees, to the extent otherwise permissible, or only with respect to the employees who are not included in the collective bargaining unit.

2. In a contributory defined benefit pension plan, may a plan sponsor, who has adopted model amendment 2 or 3, permit mandatory employee contributions (mandatory contributions) to continue even though the level of employer contribution established subsequently by the TRA 86 amendments is uncertain?

In general, mandatory contributions constitute benefit accruals that may be suspended or reduced pursuant to Notice 88-131. A plan sponsor may, however, decide to continue mandatory contributions despite the suspension or reduction of employer contributions that are conditioned on mandatory contributions.

3. If a plan sponsor retroactively discontinues mandatory contributions to a defined benefit pension plan pursuant to model amendment 2, 3 or 4, what is the treatment of mandatory contributions contributed to the plan prior to the retroactive discontinuance of such contributions?

Mandatory contributions contributed to the plan prior to their retroactive discontinuance pursuant to model amendment 2, 3 or 4, may be treated as voluntary contributions that are subject to the requirements of section 401(m). Alternatively, mandatory contributions may be returned to affected employees. Mandatory contributions that are returned to employees must satisfy the following requirements.

(1) Amounts that may be returned are limited to mandatory contributions contributed on or after the first day of the 1989 plan year but before the later of the model amendment's date of adoption or effective date.

(2) Mandatory contributions that are returned pursuant to this notice must be returned by the end of the 1989 plan year.

(3) Mandatory contributions that are refunded must be refunded with interest as prescribed by section 411(c)(2)(C).

(4) Interest allocable to mandatory contributions and paid to employees must be reported as income on Form W-2P in the year of distribution.

(5) No forfeiture arises under section 411(a)(3)(D) as a result of the refund of mandatory contributions.

Pursuant to this notice and Notice 88-131, a refund of mandatory contributions shall not be treated as a plan distribution. Accordingly, a refund of mandatory contributions will not violate the rules governing in-service distributions. In addition, refunds of mandatory contributions are not subject to the rules set forth in sections 72, 401(a)(11), 411(a)(11) and 417. A plan sponsor is not required to amend the plan to provide for a refund of mandatory contributions pursuant to this notice.

C. Reduction of Account Balances

1. Assume the plan sponsor of a defined contribution plan adopts model amendment 2, 3 or 4 and makes contributions to the plan during the 1989 plan year before the deadline for adopting the applicable model amendment. The contributions are allocated to participant accounts. What is the treatment of amounts contributed and allocated to the accounts of participants who are not entitled to such allocations under the terms of the applicable model amendment?

If, as a result of adopting one or more of the model amendments described in Notice 88-131, the plan sponsor rescinded and refunded employee or employer contributions (including elective deferrals and matching contributions) to affected employees or the employer, as applicable, such treatment will not affect the qualified status of the plan provided the rescission and refund occurred on or before August 14, 1989.

A plan sponsor who permitted elective deferrals, matching or employee contributions to be made prior to the date of adoption of the applicable model amendment, may not retroactively reduce, recharacterize or refund such contributions after August 14, 1989 pursuant to the terms of any model amendment or the TRA 86 amendments. As noted in Question and Answer B.1., these contributions must satisfy the applicable requirements of sections 401(k) and 401(m) and the regulations thereunder.

Allocations of employer contributions (other than elective deferrals and matching contributions) made before the deadline for adopting the applicable model amendment must be rescinded and held unallocated in the plan until these amounts are reallocated to participant accounts to the extent there are other benefit accruals under the plan either (1) in accordance with the provisions of any model amendment(s) which may have been adopted by the plan sponsor or (2) in accordance with the provisions of the plan as amended for TRA 86.

Such unallocated amounts will not cause a plan to cease to be a qualified plan provided that after October 13, 1989, no further employer contributions are made to the plan (with the exception of required quarterly contributions, if any) until the unallocated amounts are reallocated to participant accounts in accordance with the terms and conditions of the plan and provided further, that to the extent required, the plan is timely amended to comply with TRA 86. Allocations of employer contributions that are rescinded and reallocated in accordance with the foregoing will not be treated as annual additions with respect to any participant whose account did not receive such an allocation.

Contributions made by an employer to a defined contribution plan are deductible as provided in section 404. Rescinded allocations that are reallocated and that otherwise satisfy the requirements described above will be treated as plan contributions when contributed and thus are subject to the deduction limits set forth in section 404. With respect to defined contribution pension plans, the applicable section 404(a)(1) deduction limitation is determined by taking into account any amendment that is adopted with respect to the plan during the 1989 plan year or that is adopted on or before the date which is two and one-half months after the close of the 1989 plan year. Amounts that remain unallocated as of the last day of the plan year taking into account amendments made within two and one-half months after the close of the 1989 plan year will be subject to the 10% excise tax on nondeductible contributions set forth in section 4972.

D. Scope of Relief

1. Does the section 411(d)(6) relief and the guidance concerning notice requirements under section 204(h) of ERISA provided in Notice 88-131 apply for purposes of Title I of ERISA?

Pursuant to the Service's authority to interpret the participation and vesting standards contained in part 2 of Subtitle B of Title I of ERISA, including section 204(g) (the Title I equivalent of section 411(d)(6)) and section 204(h) of ERISA, the relief provided under Notice 88-131 also applies for purposes of Title I of ERISA.

E. Model Amendments - Optional or Mandatory

1. Is a plan sponsor required to adopt one or more of the model amendments described in Notice 88-131 or use Alternative IID?

A plan sponsor is not required to adopt any of the model amendments described in Notice 88-131 or to use Alternative IID. Although a plan sponsor my chose to adopt one or more of the model amendments or to use Alternative IID, Notice 88-131 does not limit options which may be otherwise available to the plan.

For example, assume a discretionary profit-sharing plan provides for an allocation of employer contributions in an amount equal to 5.7% of compensation in excess of the Social Security taxable wage base. The employer does not contribute to the plan on account of the 1989 plan year. The TRA 86 amendments retroactively conform the provisions of the plan to the requirements set forth in TRA 86 and, in particular, section 401(1). Because no participant accrued a benefit under the provisions of the plan in violation of the requirements of section 401(1) before it was amended to comply with TRA 86, the plan sponsor does not need to use any of the alternative forms of relief provided in Notice 88-131.

2. Is operational compliance with the requirements of section 401(a)(17) sufficient during the 1989 plan year and the TRA 86 remedial amendment period or must a plan sponsor adopt model amendment 1?

Section 401(a)(17) provides that a trust is not a qualified trust unless, under the plan of which it is a part, the annual compensation of, each employee taken into account for any year does not exceed $200,000, as adjusted in accordance with section 415(d). During the 1989 plan year and TRA 86 remedial amendment period, operational compliance with the requirements of section 401(a)(17) is sufficient, provided, however, that the plan is retroactively amended to comply with TRA 86 on or before the last day of the TRA 86 remedial amendment period.

Section 412 provides minimum funding standards applicable to pension plans that are or were qualified plans under section 401. Section 1.412(c)(3)-1(d)(1) of the Income Tax Regulations provides that, except as provided by the Commissioner, a reasonable funding method does not anticipate changes in plan benefits that become effective, whether or not retroactively, in a future plan year or that become effective during a plan year but after the first day thereof. For purposes of the minimum funding standards, a plan will be treated as though it was amended to comply with the requirements of section 401(a)(17) effective as of the first day of the 1989 plan year, provided the plan operationally complies with the requirements of section 401(a)(17) and is retroactively amended to comply with TRA 86 on or before the last day of the TRA 86 remedial amendment period. This treatment shall apply for purposes of Title I of ERISA pursuant to the Service's authority to interpret the minimum funding standards set forth in Title I of ERISA.

F. Model Amendment 3

1. Notice 88-131 provides that if a plan sponsor adopts and operates the plan under model amendment 3, the plan must be further amended to conform to the qualification requirements of TRA 86 before the first day of the first plan year which begins after December 31, 1989. What amendments are required to be adopted before the first day of the first plan year beginning after December 31, 1989?

The amendments that must be adopted by the end of the 1989 plan year are those that establish new benefit or allocation levels and any provisions on which the determination of benefits or allocations is based.

2. Model amendment 3 permits a plan sponsor to suspend benefit accruals for all participants with respect to the 1989 plan year provided the plan is amended to comply with TRA 86 by the end of the 1989 plan year. What alternatives are available to a plan sponsor if the plan is not amended to comply with TRA 86 by the last day of the 1989 plan year?

A plan sponsor who wishes to preserve the opportunity to amend the plan in 1990 has several alternatives. First, the plan sponsor may timely adopt model amendment 3 together with model amendment 2, and, if necessary TRA 86 amendments are not adopted by the end of the 1989 plan year, the plan may retain the relief provided by model amendment 2.

Second, if model amendment 2 was not previously adopted, a plan sponsor who timely adopts model amendment 3 may elect to adopt model amendment 2 provided model amendment 2 is adopted by the last day of the 1989 plan year. A plan sponsor who timely adopts model amendment 3 and then adopts model amendment 2 by the last day of the 1989 plan year will receive the same relief that would otherwise be provided had the employer adopted model amendment 2 on or before May 31,1989. This alternative permits the suspension of benefit accruals to continue with respect to highly compensated employees. However, with respect to nonhighly compensated employees, the provisions of model amendment 3 will be treated as null and void. Consequently, nonhighly compensated participants will retroactively accrue benefits under the plan's prior provisions.

Third, if the requirements of model amendment 3 are not satisfied thereby rendering its provisions null and void, the plan sponsor may use Alternative IID provided the requirements of Alternative IID are satisfied.

Alternatively, the plan sponsor may prospectively suspend benefit accruals or the plan sponsor may take no action in which case the plan's prior provisions will continue to apply until such time as the plan is amended to comply with TRA 86. In the latter situation, a plan sponsor may find it necessary to increase benefits or contribution allocations for certain participants to satisfy both the requirements of section 411(d)(6) and the requirements of TRA 86.

Finally, the plan sponsor may terminate the plan pursuant to model amendment 4.

G. Alternative IID

1. Notice 88-131 provides that under Alternative IID benefit accruals arising on or after the first day of the first plan year beginning in 1989 under provisions of a plan that satisfied the requirements for qualification immediately before the 1989 plan year (prior plan provisions) will not cause a plan to fail to meet the requirements of sections 401(a)(4) and 401(a)(26) of the Code for the 1989 plan year provided certain requirements are satisfied. May Alternative IID be used by plan sponsors after the 1989 plan year?

Pursuant to this notice, Alternative IID may be used by plan sponsors until the end of the TRA 86 remedial amendment period. Thus, benefits may continue to accrue under the plan's prior provisions until the end of the TRA 86 remedial amendment period. To use Alternative IID after the 1989 plan year, the Alternative IID requirements set forth in Notice 88-131 must continue to be satisfied. In addition, a plan participant who is a highly compensated employee described in section 414(q)(1)(A) or (B) (super highly compensated employee) for the 1989 plan year must be treated as a super highly compensated employee for purposes of Alternative IID to the extent Alternative IID is used during the 1990 plan year. A plan participant who is a super highly compensated employee for the 1990 plan year but who was not a super highly compensated employee for the 1989 plan year will be treated as super highly compensated for purposes of Alternative IID for the 1990 plan year but not for the 1989 plan year.

2. How does Alternative IID affect benefit accruals of plan participants in the 1989 plan year?

Alternative IID provides that participants who are not super highly compensated employees shall be entitled to the greater of the benefit accrued under prior plan provisions or the benefit accrued under the plan as amended to comply with TRA 86. If a participant accrues a benefit under the plan's prior provisions, the participant may not accrue additional benefits until such time as his accrued benefit, determined without regard to the TRA 86 amendment, no longer exceeds the accrued benefit to which the participant is entitled under the plan as amended to comply with TRA 86.

Alternative IID works similarly for super highly compensated employees except that any distribution of benefits to any such employee shall not include benefits accruing after the 1988 plan year until such time as the employee's accrued benefit, determined in accordance with the provisions of Notice 88-131, no longer exceeds the accrued benefit to which the employee is entitled under the plan as amended to comply with TRA 86. The application of Alternative IID to an employee who is not super highly compensated is illustrated by the following example.

Assume employee A is a participant in a defined benefit pension plan during the 1989 plan year. The plan year is the calendar year. A is eligible to participate in the plan on January 1, 1989. The plan sponsor uses Alternative IID with respect to the 1989 plan year but not the 1990 plan year. If the plan provisions which were in effect in 1988 were not changed, A would accrue a benefit of $100 during the 1989 plan year. Under the provisions of a plan amendment to comply with TRA 86 adopted on December 29, 1989 and effective January 1, 1989, A would accrue a benefit of $50 during the 1989 plan year. A would also accrue a benefit of $50 during the 1990 plan year pursuant to the provisions of the amended plan.

Pursuant to Notice 88-131, A must accrue a benefit of $100 during the 1989 plan year. A will accrue an additional benefit in the 1990 plan year only if the benefit accrued in 1989 and 1990 under the plan as amended for TRA 86 exceeds the benefit accrued in 1989 under the plan's prior provisions. Because A's accrued benefit for 1989 and 1990 under the amended plan does not exceed his accrued benefit for 1989 under the plan's prior provisions, A will not accrue an additional benefit during the 1990 plan year. During the 1991 plan year, however, A will accrue additional benefits because his accrued benefit through the 1989 plan year under the plan's prior provisions no longer exceeds the amount of his accrued benefit under the plan as amended to comply with TRA 86 through the 1990 plan year.

3. In order to use Alternative IID a plan sponsor may not adopt a plan amendment that has the effect of (1) decreasing benefit accruals of nonhighly compensated employees without correspondingly affecting benefit accruals of highly compensated employees or (2) increasing benefit accruals under the plan. Do these restrictions apply to the TRA 86 amendments or subsequent plan amendments?

No, these restrictions do not apply to any amendment that meets the requirements of TRA 86. For example, the plan sponsor may amend the plan to provide for a uniform minimum benefit accrual or allocation of employer contributions for all participants without violating the prohibition against increases in benefit accruals under Alternative IID.

4. To what extent is relief provided from the requirements of sections 401(a)(26) and 410(b) if a plan sponsor uses Alternative IID?

In general, Alternative IID does not provide relief from the basic requirements of sections 401(a)(26) or 410(b) of the Code. Alternative IID provides relief from the requirements of section 401(a)(26), however, to the extent the requirements of Alternative IID are satisfied and to the extent the plan's separate benefit structures either were in existence on the last day of the 1988 plan year or arise solely because of the interaction between the use of Alternative IID and the plan's TRA 86 amendments. Thus, it is not necessary that separate benefit structures arising with respect to benefits accrued during the 1989 or 1990 plan year under Alternative IID benefit the lesser of 50 employees of the employer or 40% of all employees of the employer. Separate benefit structures under the plan as amended retroactive to the first day of the 1989 plan year on account of TRA 86, however, must satisfy the requirements of section 401(a)(26).

For example, assume that Employee A is a participant in a calendar year plan that uses Alternative IID only with respect to the 1989 plan year. Under the plan's prior provisions, participants accrue a benefit of $100 for each year of service. The plan's TRA 86 amendments, which are retroactively effective to January 1, 1989, expand coverage under the plan and provide a benefit of $50 for each year of service. As a result of the TRA 86 amendment, Employee B becomes a plan participant as of January 1, 1989. Under Alternative IID, Employee A will accrue benefits at the rate of $100 per year of service in the 1989 plan year. Employee B, however, will accrue benefits in 1989 at the rate of $50 per year of service. To the extent these multiple benefit structures arise solely because of the interaction between the use of Alternative IID and the plan's TRA 86 amendments, they are not subject to the requirements of section 401(a)(26). The plan as amended to comply with TRA 86, however, must satisfy the requirements of section 401(a)(26) and the regulations thereunder.

Notice 88-131 does not provide relief from the requirements of section 410(b) in the case of a plan sponsor who uses Alternative IID. If a plan sponsor uses Alternative IID during the 1989 or 1990 plan year and the plan does not otherwise satisfy the requirements of section 410(b) for such plan years, when the plan is subsequently amended to comply with TRA 86 the requirements of section 410(b) will have to be satisfied retroactively. That is, additional participants may need to be covered retroactively under the plan or benefit levels for certain participants may need to be increased retroactively.

Participants who accrue benefits during the 1989 or 1990 plan year under a plan that uses Alternative IID may not be removed retroactively from the plan to satisfy the requirements of section 410(b). On the other hand, participants whose benefits are suspended or reduced in accordance with the provisions of model amendments 2 or 3, may be removed retroactively from a plan to satisfy the requirements of section 410(b).

H. Fiscal Year Plans

1. May a plan sponsor that maintains a plan with a plan year other than the calendar year ("fiscal year plan") adopt model amendments 2 or 3?

The relief from section 411(d)(6) of the Code provided in Notice 88-131 to employers maintaining plans under which benefits have already accrued in the 1989 plan year is only generally available if model amendments 2 and 3 are adopted by the appropriate date specified in Notice 88-131. Thus, only plans that have plan years beginning before June 1, 1989 may take advantage of the section 411(d)(6) relief provided in Notice 88-131. If benefits had not accrued in the 1989 plan year or if the 1989 plan year had not begun by May 31, 1989, there was no need for 411(d)(6) relief although the model amendments may be adopted to prospectively suspend benefit accruals.

I. Elapsed Time Plans

1. If the plan sponsor of a plan that credits service under the elapsed time method wishes to adopt model amendment 3, Notice 88-131 provides that model amendment 3 must be adopted on or before March 31, 1989. What is an elapsed time plan for purposes of Notice 88-131?

For purposes of Notice 88-131, an elapsed time plan is one that uses the elapsed time method for purposes of benefit accrual.

J. Plan Distributions

1. With respect to participants in a plan using model amendment 2 or 3 who terminate their employment with the employer during the 1989 and 1990 plan year, when may the plan sponsor determine whether the present value of a participant's nonforfeitable accrued benefit exceeds $3,500?

Because a participant's total 1989 accrued benefit may not be known until after model amendment 2 or 3 is adopted and the plan is amended for TRA 86, the initial determination of the participant's accrued benefit after the model amendment is adopted is used to determine whether the present value of such participant's nonforfeitable accrued benefit exceeds $3,500. The initial determination may be used even if additional accruals as a result of subsequent plan amendments cause the present value of the participant's nonforfeitable accrued benefit retroactively to exceed $3,500. The additional accruals may be cashed out if the present value of the accruals is equal to or less than $3,500.

III. Administrative Pronouncement

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

IV. Drafting Information

The principal author of this notice is Nancy Surdoval of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service or Ms. Surdoval between the hours of 1:30 and 4 p.m. Eastern time, Monday through Thursday on (202) 566-6783/6784 or (202) 343- 0729, respectively. Neither telephone number is a toll-free number.