(2) Contributions to provide cost-of-living protection under defined benefit plans (A) In general In the case of a defined benefit plan which maintains a qualified cost-of-living arrangement— (i) any contribution made directly by an employee under such an arrangement shall not be treated as an annual addition for purposes of subsection (c), and (ii) any benefit under such arrangement which is allocable to an employer contribution which was transferred from a defined contribution plan and to which the requirements of subsection (c) were applied shall, for purposes of subsection (b), be treated as a benefit derived from an employee contribution (and subsection (c) shall not again apply to such contribution by reason of such transfer). (B) Qualified cost-of-living arrangement defined For purposes of this paragraph, the term “qualified cost-of-living arrangement” means an arrangement under a defined benefit plan which— (i) provides a cost-of-living adjustment to a benefit provided under such plan or a separate plan subject to the requirements of section 412, and (ii) meets the requirements of subparagraphs (C), (D), (E), and (F) and such other requirements as the Secretary may prescribe. (C) Determination of amount of benefit An arrangement meets the requirement of this subparagraph only if the cost-of-living adjustment of participants is based— (i) on increases in the cost-of-living after the annuity starting date, and (ii) on average cost-of-living increases determined by reference to 1 or more indexes prescribed by the Secretary, except that the arrangement may provide that the increase for any year will not be less than 3 percent of the retirement benefit (determined without regard to such increase). (D) Arrangement elective; time for election An arrangement meets the requirements of this subparagraph only if it is elective, it is available under the same terms to all participants, and it provides that such election may at least be made in the year in which the participant— (i) attains the earliest retirement age under the defined benefit plan (determined without regard to any requirement of separation from service), or (ii) separates from service. (E) Nondiscrimination requirements An arrangement shall not meet the requirements of this subparagraph if the Secretary finds that a pattern of discrimination exists with respect to participation. (F) Special rules for key employees (i) In general An arrangement shall not meet the requirements of this paragraph if any key employee is eligible to participate. (ii) Key employee For purposes of this subparagraph, the term “key employee” has the meaning given such term by section 416(i)(1), except that in the case of a plan other than a top-heavy plan (within the meaning of section 416(g) ), such term shall not include an individual who is a key employee solely by reason of section 416(i)(1)(A)(i).