[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Rules and Regulations]
[Pages 30621-30624]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14875]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8769]
RIN 1545-AV26
Permitted Elimination of Preretirement Optional Forms of Benefit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that permit an
amendment to a qualified plan or other employee pension benefit plan
that eliminates plan provisions for benefit distributions before
retirement but after age 70\1/2\. These regulations affect employers
that maintain qualified plans and other employee pension benefit plans,
plan administrators of these plans and participants in these plans.
EFFECTIVE DATE: These regulations are effective June 5, 1998.
FOR FURTHER INFORMATION CONTACT: Thomas Foley, (202) 622-6050 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under the control number 1545-1545. The collection of
information in these final regulations is in Sec. 1.411(d)-4. Responses
to this collection of information are required in order to obtain a
benefit. Specifically, this information is required for a taxpayer who
wants to amend a qualified plan to eliminate certain preretirement
optional forms of benefit. This information will be used to determine
whether taxpayers have amended a qualified plan.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
The estimated average burden per recordkeeper for master and
prototype plan employers is 10 minutes. The estimated average burden
per recordkeeper for master and prototype plan sponsors is 30 minutes.
The estimated average burden per recordkeeper for employers with
individually designed plans is 30 minutes.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Clearance Officer, T:FS:FP, Washington, D.C.
20224, and to the Office of Management and Budget, Attn: Desk Officer
for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, D.C. 20503.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 411(d) of the Internal Revenue Code of 1986.
The final regulations permit taxpayers to amend qualified plans to
eliminate plan provisions for benefit distributions before retirement
but after age 70\1/2\, if certain conditions are satisfied.
Section 411(d)(6) generally provides that a plan will not be
treated as satisfying the requirements of section 411 if the accrued
benefit of a participant is decreased by a plan amendment. Under
section 411(d)(6)(B), a plan amendment that eliminates an optional form
of benefit will be treated as reducing accrued benefits to the extent
that the amendment applies to benefits accrued as of the later of the
adoption date or the effective date of the amendment. However, section
411(d)(6)(B) also permits the Secretary to provide in regulations that
this rule will not apply to an amendment that eliminates an optional
form of benefit.
Section 401(a)(9) provides that, in order for a plan to be
qualified under section 401(a), distributions from the plan must
commence no later than the ``required beginning date.'' Prior to 1997,
section 401(a)(9)(C) generally provided that the required beginning
date is April 1 following the calendar year in which the employee
attains age 70\1/2\. Consequently, in order to satisfy section
401(a)(9), qualified plans, other than certain church and governmental
plans, have provided for distributions to commence no later than April
1 following the calendar year that an employee attains age 70\1/2\.
These distributions commence without regard to whether the employee has
retired from employment with the employer maintaining the plan.
Section 1404 of the Small Business Job Protection Act of 1996,
Public Law 104-188 (SBJPA), amended the definition of required
beginning date that applies to an employee who is not a 5-percent
owner. Section 401(a)(9)(C)(i), as amended, provides that, in the case
of such an employee, the required beginning date is April 1 of the
calendar year following the later of the calendar year in which the
employee attains age 70\1/2\ or the calendar year in which the employee
retires. Accordingly, except in the case of 5-percent owners, a plan is
no longer required to provide for distributions that commence prior to
retirement in order to satisfy section 401(a)(9).
The right to commence benefit distributions in any form at a
particular time is an optional form of benefit within the meaning of
section 411(d)(6)(B) and Sec. 1.411(d)-4, Q&A-1(b). In enacting section
1404 of the SBJPA, Congress did not alter the application of section
411(d)(6). Thus, except to the extent authorized by regulations, a plan
amendment that eliminates the right to commence preretirement benefit
distributions in a plan after age 70\1/2\ (or restricts the right by
adding an additional condition) violates section 411(d)(6) if the
amendment applies to benefits accrued as of the later of the adoption
or effective date of the amendment.
On July 2, 1997, a notice of proposed rulemaking under section
411(d)(6) was published in the Federal Register (62 FR 35752). The
proposed regulations would allow amendment of qualified plans to
eliminate the right to commence preretirement benefit distributions
after age 70\1/2\, as required under section 401(a)(9) before its
amendment by the SBJPA. On October
[[Page 30622]]
28, 1997, a public hearing was held on the proposed regulations. In
general, most of the comments received with respect to the proposed
regulations did not relate to the proposed amendments to the
regulations under section 411(d)(6), but rather to the other issues
related to the SBJPA amendment to section 401(a)(9). Many of those
issues are addressed in Notice 97-75 (1997-51 I.R.B. 18). Those
comments that addressed the amendments to the proposed regulations
under section 411(d)(6) were generally favorable. Thus, after
consideration of the comments received, the final regulations retain
the structure and substance of the proposed regulations, with the
changes or clarifications discussed below.
Overview
1. Permitted Elimination of Preretirement Distributions After Age 70\1/
2\
The legislative history to section 1404 of the SBJPA indicates that
the reason for amending the definition of required beginning date was
that it is inappropriate to require all participants to commence
distributions by age 70\1/2\ without regard to whether the participant
is still employed by the employer. Because section 1404 did not alter
the application of section 411(d)(6) to plan provisions allowing or
requiring preretirement distributions after age 70\1/2\, an employer's
choices for amending its plan to implement the SBJPA change to the
definition of required beginning date would be limited if the IRS and
Treasury did not grant relief from section 411(d)(6).
Under previously-issued administrative guidance, one approach that
is available to employers is to give employees the option of commencing
distributions at age 70\1/2\ or deferring commencement until after
retirement. See Announcement 97-24 (1997-11 I.R.B. 24) and Revenue
Procedure 97-41 (1997-33 I.R.B. 51). Another alternative available to
employers is to amend the plan to eliminate the right to preretirement
distributions solely with respect to future accruals. However, under
this second approach, each current participant would retain the right
to receive preretirement distributions after age 70\1/2\ with respect
to a portion of his or her accrued benefit.
The IRS and Treasury recognize the potential complexity of
administering plans (particularly defined benefit plans) that adopt
either of these approaches. In addition, an employer may not have
chosen voluntarily to offer preretirement distributions to employees
who have attained age 70\1/2\ but instead may have included these
provisions in its plan solely to comply with section 401(a)(9) prior to
its amendment by the SBJPA. Therefore, the proposed regulations set
forth a proposal to provide relief from section 411(d)(6) for certain
plan amendments that eliminate preretirement distributions commencing
at age 70\1/2\. After consideration of the comments received with
respect to the proposed regulations, the final regulations provide this
relief using the same approach.
2. Conditions on the Relief From Section 411(d)(6)
a. Protection for Employees Who Are Near Age 70\1/2\
Under the regulations, an amendment to eliminate a preretirement
age 70\1/2\ distribution option is permitted to apply only to benefits
with respect to employees who attain age 70\1/2\ in or after a calendar
year, specified in the amendment, that begins after the later of
December 31, 1998, or the adoption date of the amendment. The relief
from section 411(d)(6) is limited to distributions to employees who
attain age 70\1/2\ after calendar year 1998 because employees who were
near age 70\1/2\ at the time of enactment of the SBJPA may have had an
expectation of receiving preretirement distributions in the near future
and may have made plans that took into account these expected
distributions.
b. Optional Forms of Benefit for Participants Retiring After Age 70\1/
2\
A plan using this relief generally may not preclude an employee who
retires after the calendar year in which the employee attains age 70\1/
2\ from receiving an optional form of benefit that would have been
available if the employee had retired in the calendar year in which the
employee attained age 70\1/2\. Two of the commentators on the proposed
regulations requested clarification that this requirement does not
impose special additional restrictions with respect to employees over
age 70\1/2\ that would require plan sponsors to retain all plan options
in effect during the year any employee attained age 70\1/2\. In
response to these comments, the final regulations clarify that no such
special additional restrictions are being imposed. Thus, to the extent
a section 411(d)(6) protected benefit may otherwise be eliminated or
reduced under Sec. 1.411(d)-4, that protected benefit can be reduced or
eliminated for all employees without violating section 411(d)(6), even
if that benefit would have been available to an employee who retired in
the calendar year in which the employee attained age 70\1/2\.
c. Timing of Plan Amendment
An amendment to eliminate a preretirement age 70\1/2\ distribution
option must be adopted no later than the last day of the remedial
amendment period that applies to the plan for changes under the SBJPA.
The relief provided is available only to employers that adopt the
amendment within this specified time period because the relief is
intended to simplify the implementation of section 401(a)(9), as
amended by the SBJPA, for employers that do not voluntarily provide
preretirement distributions for an extended period after the enactment
of the SBJPA.
The IRS and Treasury have determined that it is appropriate to
provide an extension of the period for collectively bargained plans to
implement an amendment permitted by these regulations. This was
suggested by a commentator who noted that it might not be possible to
amend a collectively bargained plan until the expiration of all
applicable collective bargaining agreements that are in effect when the
final regulations are issued. Accordingly, under the final regulations,
Sec. 1.411(d)-4, Q&A-10(b)(3) has been amended so that, in the case of
a plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified before September 3, 1998, the amendment deadline is extended
to the last day of the twelfth month beginning after the date on which
the last of such collective bargaining agreements terminates
(determined without regard to any extensions on or after September 3,
1998), if later than the last day of the remedial amendment period for
the plan for changes under the SBJPA.
3. Circumstances Under Which No Relief Is Required
Many employers do not need relief under section 411(d)(6) in order
to implement the SBJPA change in the definition of required beginning
date in their plans. The regulations include an example of such a plan,
a profit-sharing plan that permits an employee to elect distribution
after age 59\1/2\ at any time and in any amount. The example
illustrates that this plan may be amended to implement the SBJPA change
in the definition of required beginning date without violating section
411(d)(6). In this example, the section 411(d)(6) relief in these
regulations is
[[Page 30623]]
not required because the optional forms of benefit in the plan that
reflect the pre-SBJPA mandatory distribution requirements of section
401(a)(9) are encompassed by the optional forms of benefit provided
under the general elective distribution provisions of the plan. The
right to commence distributions at age 70\1/2\ continues to be
available under the plan even after the plan is amended to implement
the SBJPA change in the required beginning date.
Effective Date
These regulations are effective June 5, 1998.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations. Further, it is hereby certified,
pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility
Act, that the collection of information in these regulations does not
have a significant economic impact on a substantial number of small
entities. The burden imposed by the collection of information is the
burden of amending a plan to modify the provisions reflecting section
401(a)(9). The cost of the amendment varies depending upon whether the
small entity involved maintains an individually designed plan or uses a
master or prototype plan. For an individually designed plan, the small
entity maintaining the plan will be responsible for arranging to have
the amendment made. Most small entities with individually designed
plans will have the amendment done by a skilled outside service
provider, such as a consulting firm or law firm. The time required to
make such an amendment is estimated at 30 minutes, which is not a
significant economic impact, even for a very small entity. Moreover,
most very small entities that maintain a qualified plan use a master or
prototype plan. For master and prototype plans, the plan sponsor drafts
a single amendment for all of the employers participating in the plan.
The average time required for the amendment per employer participating
in a master or prototype plan is estimated to be 10 minutes, which
certainly is not a substantial economic impact. Therefore, a regulatory
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Cheryl Press, Office
of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
revising the entry for Sec. 1.411(d)-4 to read as follows:
Authority: 26 U.S.C. 7805. * * *
1.411(d)-4 also issued under 26 U.S.C. 411(d)(6). * * *
Par. 2. Section 1.411(d)-4 is amended by adding Q&A-10 to read as
follows:
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
Q-10. If a plan provides for an age 70\1/2\ distribution option
that commences prior to retirement from employment with the employer
maintaining the plan, to what extent may the plan be amended to
eliminate this distribution option?
A-10. (a) In general. The right to commence benefit distributions
in a particular form and at a particular time prior to retirement from
employment with the employer maintaining the plan is a separate
optional form of benefit within the meaning of section 411(d)(6)(B) and
Q&A-1 of this section, even if the plan provision creating this right
was included in the plan solely to comply with section 401(a)(9), as in
effect for years before January 1, 1997. Therefore, except as otherwise
provided in paragraph (b) of this Q&A-10 or any other Q&A in this
section, a plan amendment violates section 411(d)(6) if it eliminates
an age 70\1/2\ distribution option (within the meaning of paragraph (c)
of this Q&A-10) to the extent that it applies to benefits accrued as of
the later of the adoption date or effective date of the amendment.
(b) Permitted elimination of age 70\1/2\ distribution option. An
amendment of a plan will not violate the requirements of section
411(d)(6) merely because the amendment eliminates an age 70\1/2\
distribution option to the extent that the option provides for
distribution to an employee prior to retirement from employment with
the employer maintaining the plan, provided that--
(1) The amendment eliminating this optional form of benefit applies
only to benefits with respect to employees who attain age 70\1/2\ in or
after a calendar year, specified in the amendment, that begins after
the later of--
(i) December 31, 1998; or
(ii) The adoption date of the amendment;
(2) The plan does not, except to the extent required by section
401(a)(9), preclude an employee who retires after the calendar year in
which the employee attains age 70\1/2\ from receiving benefits in any
of the same optional forms of benefit (except for the difference in the
timing of the commencement of payments) that would have been available
had the employee retired in the calendar year in which the employee
attained age 70\1/2\; and
(3) The amendment is adopted no later than--
(i) The last day of the remedial amendment period that applies to
the plan for changes under the Small Business Job Protection Act of
1996 (110 Stat. 1755); or
(ii) Solely in the case of a plan maintained pursuant to one or
more collective bargaining agreements between employee representatives
and one or more employers ratified before September 3, 1998, the last
day of the twelfth month beginning after the date on which the last of
such collective bargaining agreements terminates (determined without
regard to any extension thereof on or after September 3, 1998), if
later than the date described in paragraph (b)(3)(i) of this Q&A-10.
For purposes of this paragraph (b)(3)(ii), the rules of Sec. 1.410(b)-
10(a)(2) apply for purposes of determining whether a plan is maintained
pursuant to one or more collective bargaining agreements, except that
September 3, 1998 is substituted for March 1, 1986, as the date before
which the collective bargaining agreements must be ratified.
(c) Age 70\1/2\ distribution option. For purposes of this Q&A-10,
an age 70\1/2\ distribution option is an optional form of benefit under
which benefits payable in a particular distribution form (including any
modifications that may
[[Page 30624]]
be elected after benefit commencement) commence at a time during the
period that begins on or after January 1 of the calendar year in which
an employee attains age 70\1/2\ and ends April 1 of the immediately
following calendar year.
(d) Examples. The provisions of this Q&A-10 are illustrated by the
following examples:
Example 1. Plan A, a defined benefit plan, provides each
participant with a qualified joint and survivor annuity (QJSA) that
is available at any time after the later of age 65 or retirement.
However, in accordance with section 401(a)(9) as in effect prior to
January 1, 1997, Plan A provides that if an employee does not retire
by the end of the calendar year in which the employee attains age
70\1/2\, then the QJSA commences on the following April 1. On
October 1, 1998, Plan A is amended to provide that, for an employee
who is not a 5-percent owner and who attains age 70\1/2\ after 1998,
benefits may not commence before the employee retires but must
commence no later than the April 1 following the later of the
calendar year in which the employee retires or the calendar year in
which the employee attains age 70\1/2\. This amendment satisfies
this Q&A-10 and does not violate section 411(d)(6).
Example 2. Plan B, a money purchase pension plan, provides each
participant with a choice of a QJSA or a single sum distribution
commencing at any time after the later of age 65 or retirement. In
addition, in accordance with section 401(a)(9) as in effect prior to
January 1, 1997, Plan B provides that benefits will commence in the
form of a QJSA on April 1 following the calendar year in which the
employee attains age 70\1/2\, except that, with spousal consent, a
participant may elect to receive annual installment payments equal
to the minimum amount necessary to satisfy section 401(a)(9)
(calculated in accordance with a method specified in the plan) until
retirement, at which time a participant may choose between a QJSA
and a single sum distribution (with spousal consent). On June 30,
1998, Plan B is amended to provide that, for an employee who is not
a 5-percent owner and who attains age 70\1/2\ after 1998, benefits
may not commence prior to retirement but benefits must commence no
later than April 1 after the later of the calendar year in which the
employee retires or the calendar year in which the employee attains
age 70\1/2\. The amendment further provides that the option
described above to receive annual installment payments prior to
retirement will not be available under the plan to an employee who
is not a 5-percent owner and who attains age 70\1/2\ after 1998.
This amendment satisfies this Q&A-10 and does not violate section
411(d)(6).
Example 3. Plan C, a profit-sharing plan, contains two
distribution provisions. Under the first provision, in any year
after an employee attains age 59\1/2\, the employee may elect a
distribution of any specified amount not exceeding the balance of
the employee's account. In addition, the plan provides a section
401(a)(9) override provision under which, if, during any year
following the year that the employee attains age 70\1/2\, the
employee does not elect an amount at least equal to the minimum
amount necessary to satisfy section 401(a)(9) (calculated in
accordance with a method specified in the plan), Plan C will
distribute the difference by December 31 of that year (or for the
year the employee attains age 70\1/2\, by April 1 of the following
year). On December 31, 1996, Plan C is amended to provide that, for
an employee other than an employee who is a 5-percent owner in the
year the employee attains age 70\1/2\, in applying the section
401(a)(9) override provision, the later of the year of retirement or
year of attainment of age 70\1/2\, is substituted for the year of
attainment of age 70\1/2\. After the amendment, Plan C still permits
each employee to elect to receive the same amount as was available
before the amendment. Because this amendment does not eliminate an
optional form of benefit, the amendment does not violate section
411(d)(6). Accordingly, the amendment is not required to satisfy the
conditions of paragraph (b) of this Q&A-10.
(e) Effective date. This Q&A-10 applies to amendments adopted and
effective after June 5, 1998.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 4. In Sec. 602.101, paragraph (c) is amended by adding an
entry in numerical order to the table to read as follows:
Sec. 602.101 OMB control numbers.
* * * * *
(c) * * *
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Current OMB
CFR part or section where identified and described control No.
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* * * * *
1.411(d)-4................................................. 1545-1545
* * * * *
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Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: May 11, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-14875 Filed 6-4-98; 8:45 am]
BILLING CODE 4830-01-U
