[Federal Register Volume 63, Number 172 (Friday, September 4, 1998)]
[Rules and Regulations]
[Pages 47172-47174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23569]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8781]
RIN 1545-AV95
Center Employee Stock Ownership Plans; Section 411(d)(6)
Protected Benefits (Taxpayer Relief Act of 1997); Qualified Retirement
Plan Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations
providing for changes to the rules regarding qualified retirement plan
benefits that are protected from reduction by plan amendment, that have
been made necessary by the Taxpayer Relief Act of 1997 (TRA '97). The
temporary regulations change the existing regulations to conform with
the TRA '97 rules regarding in-kind distribution requirements for
certain employee stock ownership plans, and specify the time period
during which certain plan amendments for which relief has been granted
by TRA '97 may be made without violating the prohibition against plan
amendments that reduce accrued benefits. These temporary regulations
affect sponsors of qualified retirement plans, employers that maintain
qualified retirement plans, and qualified retirement plan participants.
The final regulations amend the existing final regulations to cross-
reference the temporary regulations. The text of the temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section of this issue of the Federal Register.
DATES: These regulations are effective September 4, 1998.
FOR FURTHER INFORMATION CONTACT: Linda S.F. Marshall, (202) 622-6030
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 411(d)(6). These temporary regulations change
the rules under section 411(d)(6) regarding qualified retirement plan
benefits that are protected from reduction by plan amendment, to take
into account amendments made by the Taxpayer Relief Act of 1997 (TRA
'97), Public Law 105-34, 111 Stat. 788 (1997). Specifically, these
temporary regulations change the existing regulations to conform to the
TRA '97 amendments to section 409 regarding the general requirement
that employee stock ownership plans offer distributions in the form of
employer securities. In addition, these temporary regulations specify
the time period during which certain plan amendments for which relief
has been granted by TRA '97 may be made without violating section
411(d)(6).
Explanation of Provisions
Section 411(d)(6) provides that a plan is not 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 is 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. Sections 1.411(d)-4, Q&A-1(b)(1) and
1.401(a)(4)-4(e) specify that different optional forms of benefit
within the meaning of section 411(d)(6)(B) result from differences in
the medium of a distribution (e.g., cash or in-kind) from a plan.
Section 411(d)(6)(C) provides that any tax credit employee stock
ownership plan or any employee stock ownership plan is not treated as
failing to meet the requirements of section 411(d)(6) merely because it
modifies distribution options in a nondiscriminatory manner.
Special Rules Regarding Medium of Distribution From ESOPs
Section 409(h) contains requirements relating to distributions from
tax credit employee stock ownership plans. Section 4975(e)(7) extends
the requirements of section 409(h) to other employee stock ownership
plans as well, and section 401(a)(23) extends the requirements of
section 409(h) to qualified plans that are stock bonus plans. Under
section 409(h)(1)(A), an employee stock ownership plan or other stock
bonus plan generally is required to make distributions available in the
form of employer securities. Prior to its amendment by TRA '97, section
409(h)(2) provided an exception to this rule in the case of an employer
whose charter or bylaws restrict the ownership of substantially all
outstanding employer securities to employees or to a trust described in
section 401(a).
Under section 1361, certain small business corporations that do not
have more than 75 shareholders are eligible to elect treatment as S
corporations whose tax attributes generally flow through to
shareholders in accordance with the rules of subchapter S of chapter 1
of subtitle A of the Internal Revenue Code. Prior to the Small Business
Job Protection Act of 1996 (SBJPA), Public Law 104-188, 110 Stat. 1755
(1996), an S corporation could not maintain an employee stock ownership
plan because an S corporation could not have a qualified trust
described in section 401(a) as a shareholder. SBJPA amended the
requirements for S corporations, effective for tax years beginning
after December 31, 1996, to permit certain tax-exempt organizations,
including qualified trusts described in section 401(a), to be S
corporation shareholders.
TRA '97 made an additional change to the rules governing qualified
plans holding securities of an S corporation employer, to make it
easier for S corporation employers to facilitate employee ownership of
employer securities through qualified plans. Section 1506 of TRA '97
extends the exception of section 409(h)(2) to cover S corporations,
effective for taxable years beginning after December 31, 1997. Pursuant
to this change, tax credit employee stock ownership plans, employee
stock ownership plans, and other stock bonus plans established and
maintained by S corporation employers are not required to offer
distributions in the form of employer securities.
Section 1.411(d)-4, Q&A-2(d)(2)(ii) provides an exception from the
requirements of section 411(d)(6) for plan amendments that eliminate
optional forms of benefit from a tax credit employee stock ownership
plan, an employee stock ownership plan, or a stock bonus plan, for
certain employers. Section 1.411(d)-4, Q&A-2(d)(2)(ii) applies to
employers that become substantially employee-owned, if the employer
otherwise meets the requirements of section 409(h)(2) with respect to
restrictions on the ownership of outstanding employer stock. These
temporary regulations expand this exception from the requirements of
section 411(d)(6) to apply to S corporations as well, to reflect the
TRA '97 changes to section 409(h).
[[Page 47173]]
Rules for Plan Amendments Pursuant to TRA '97
Section 1541 of TRA '97 contains provisions relating to plan
amendments that are adopted as a result of TRA '97. If section 1541
applies to a plan amendment, section 1541(a) provides that the plan
will be treated as operated in accordance with its terms and will not
fail to satisfy the requirements of section 411(d)(6) by reason of the
amendment. Section 1541 applies to a plan amendment that is made
pursuant to a legislative change in the pension and employee benefit
provisions of TRA '97, provided the following conditions are satisfied.
First, the plan amendment must be adopted before the first day of the
first plan year beginning on or after January 1, 1999 (2001, in the
case of a governmental plan, as defined in section 414(d)). Second, the
plan must be operated in accordance with the terms of the plan
amendment, beginning on the date the legislative change takes effect,
or, if the amendment is not required by the legislative change, the
effective date of the amendment specified by the plan. Third, the plan
amendment must be made retroactively effective.
The remedial amendment period for adopting plan amendments to which
section 1541 of TRA '97 applies was extended pursuant to the rules of
section 401(b) in Rev. Proc. 98-14 (1998-4 I.R.B. 22). To provide a
uniform time for plan amendment, these temporary regulations extend the
time for the section 411(d)(6) relief provided by section 1541 of TRA
'97 to the end of the remedial amendment period for these plan
amendments.
Other Section 411(d)(6) Issues
In Notice 98-29 (1998-22 I.R.B. 8), the IRS requested public
comment regarding a number of possible methods of providing section
411(d)(6) relief, particularly for defined contribution plans. The IRS
will also consider comments submitted pursuant to Notice 98-29 that
propose other methods of providing section 411(d)(6) relief to address
special concerns of employee stock ownership plans.
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, and because the regulation does
not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information: The principal author of these regulations is
Linda S.F. Marshall, Office of the Associate Chief Counsel (Employee
Benefits and Exempt Organizations). However, other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.411(d)-4T also issued under 26 U.S.C. 411(d)(6). * * *
Par. 2. Section 1.411(d)-4 is amended by:
1. Removing the reference ``Q&A-5'' and adding Q&A-2'' in its place
in the first sentence of Q&A-2(d)(1) introductory text.
2. Adding a sentence at the end of Q&A-2(d)(3) to read as follows:
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
Q-2: * * *
A-2: * * *
(d) * * *
(3) * * * (For taxable years beginning after December 31, 1997, see
Sec. 1.411(d)-4T Q&A-2(d).)
* * * * *
Par. 3. Section 1.411(d)-4T is added to read as follows:
Sec. 1.411(d)-4T Section 411(d)(6) protected benefits (temporary).
Q&A-1: [Reserved]. For further information, see Sec. 1.411(d)-4
Q&A-1.
Q-2: To what extent may section 411(d)(6) protected benefits under
a plan be reduced or eliminated?
A-2: (a) through (c) [Reserved]. For further information, see
Sec. 1.411(d)-4 Q&A-2 (a) through (c).
(d) ESOP and stock bonus plan exception--(1) In general. Subject to
the limitations in paragraph (d)(2) of this Q&A-2, a tax credit
employee stock ownership plan (as defined in section 409(a)), an
employee stock ownership plan (as defined in section 4975(e)(7)), or a
stock bonus plan that is not an employee stock ownership plan will not
be treated as violating the requirements of section 411(d)(6) merely
because of the circumstances described in paragraph (d)(1)(ii) of this
Q&A-2.
(i) [Reserved]. For further information, see Sec. 1.411(d)-4 Q&A-
2(d)(1)(i).
(ii) Employer becomes substantially employee-owned or is an S
corporation. The employer eliminates, or retains the discretion to
eliminate, with respect to all participants, optional forms of benefit
by substituting cash distributions for distributions in the form of
employer stock with respect to benefits subject to section 409(h) in
the circumstances described in paragraph (d)(1)(ii)(A) or (B) of this
Q&A-2, but only if the employer otherwise meets the requirements of
section 409(h)(2)--
(A) The employer becomes substantially employee-owned; or
(B) For taxable years of the employer beginning after December 31,
1997, the employer is an S corporation as defined in section 1361.
(iii) and (iv) [Reserved]. For further information, see
Sec. 1.411(d)-4 Q&A-2(d)(1) (iii) and (iv).
(2) Limitations on ESOP and stock bonus plan exceptions.
[Reserved]. For further information, see Sec. 1.411(d)-4 Q&A-2(d)(2).
(3) Effective date. Paragraph (d) of this Q&A-2 applies for taxable
years beginning after December 31, 1997. For taxable years beginning
prior to January 1, 1998, see Sec. 1.411(d)-4 Q&A-2(d).
(4) [Reserved]. For further information, see Sec. 1.411(d)-4 Q&A-
2(d)(4).
Q&A-3 through Q&A-10 [Reserved]. For further information, see
Sec. 1.411(d)-4 Q&A-3 through Q&A-10.
Q-11: To what extent may a plan amendment that is made pursuant to
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111 Stat.
788) reduce or eliminate section 411(d)(6) protected benefits?
A-11: A plan amendment does not violate the requirements of section
411(d)(6) merely because the plan amendment reduces or eliminates
section 411(d)(6) protected benefits as of the effective date of the
plan amendment, provided that--
(a) The plan amendment is made pursuant to an amendment made by
title XV, or subtitle H of title X, of TRA '97; and
(b) The plan amendment is adopted no later than the last day of any
[[Page 47174]]
remedial amendment period that applies to the plan pursuant to
Secs. 1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.
Approved: July 24, 1998.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-23569 Filed 9-3-98; 8:45 am]
BILLING CODE 4830-01-U
