WASHINGTON—A newly proposed Internal Revenue Service regulation will move American Airlines Inc. one step closer to freezing rather than terminating its pension plan covering the airline's current and retired pilots.

The regulation, published in Thursday's Federal Register, would allow employers in bankruptcy to remove lump-sum options as a way for plan participants to receive their accrued benefits. American Airlines parent company AMR Corp. of Fort Worth, Texas, filed for Chapter 11 bankruptcy in November.

While accrued benefits normally cannot be reduced or eliminated, the proposed rule would allow “a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option.”

Earlier, American said that while it wanted to freeze the plan, the lump-sum benefit issue first had to be resolved. The airline was concerned that a high number of pilots would retire early to collect their lump-sum payouts if it froze the plan.

“The departure of a significant number of pilots in a short period of time, incentivized by the availability of lump-sum payouts, would have a severe detrimental impact on our operations and is a risk that the company simply cannot afford to take,” Jeff Brundage, senior vp-human resources, wrote in a letter to airline employees.

Referring to the proposed IRS regulation, “This news puts us in a position to make major progress in that effort” to freeze rather than terminate the plan, AMR Chairman and CEO Tom Horton said in a statement.

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“A top APA priority is preserving the benefits American's pilots deserve. I'm devoted to making that happen and pleased that we're moving one step closer to protecting a very important and valued benefit,” Dave Bates, president of the Allied Pilots Assn., said in a statement.

American's pilots and the federal Pension Benefit Guaranty Corp. would be big winners if American froze rather than terminated the plan.

If the PBGC took over the plan, many pilots would see a big reduction in their pension benefits. That is because the maximum annual benefit—$54,000—that would be guaranteed by the PBGC is significantly less than the benefits many pilots have earned.

For the PBGC, a plan freeze would mean the agency, which last year reported a $26 billion deficit, would be spared another multibillion-dollar loss.

“It is great news that American is continuing to work to preserve its pilot pension plan,” PBGC Director Joshua Gotbaum said in a statement.

The PBGC has not disclosed the funded status of the pilots' plans. But it said earlier in a preliminary estimate that the pilots' plan, along with three other plans that American previously agreed to freeze, have about $8.3 billion in assets and about $18.5 billion in promised benefits. The PBGC said if the plans were to fold, the agency would be liable for about $17 billion in benefits resulting in an $8.7 billion loss to the agency.

The three other plans cover members of the Transport Workers Union, the Assn. of Professional Flights Attendants and other nonunion employees.