[Federal Register Volume 62, Number 127 (Wednesday, July 2, 1997)]
[Proposed Rules]
[Pages 35752-35755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17218]
[[Page 35752]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-107644-97]
RIN 1545-AV26
Permitted Elimination of Preretirement Optional Forms of Benefit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would permit
an amendment to a qualified plan that eliminates certain preretirement
optional forms of benefit. These regulations affect employers that
maintain qualified plans, plan administrators of qualified plans and
participants in qualified plans. This document provides notice of a
public hearing on these proposed regulations.
DATES: Written comments and outlines of the topics to be discussed at
the public hearing must be received by September 30, 1997. A public
hearing is scheduled for October 28, 1997.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-107644-97), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-107644-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. A public hearing is scheduled to be held in the
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
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 this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC
20224. Comments on the collection of information should be received by
September 2, 1997. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in this proposed regulation is in
Sec. 1.411(d)-4. 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. The collection of information
is voluntary to obtain a benefit. The likely recordkeepers are
businesses or other for-profit organizations and non-profit
institutions.
Estimated total recordkeeping burden: 48,800 hours.
Estimated average burden per recordkeeper: For Master and Prototype
Plan Employers: 10 minutes. For Master and Prototype Plan Sponsors: 30
minutes. For Employers with Individually Designed Plans: 30 minutes.
Estimated number of recordkeepers: 135,000.
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 assigned by the Office of Management and Budget.
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 notice contains proposed amendments to the income tax
regulations (26 CFR Part 1) under section 411(d) of the Internal
Revenue Code of 1986.
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 for 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
[[Page 35753]]
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.
Notice 96-67 (1996-53 I.R.B. 12) provided questions and answers
addressing certain issues relating to the amendment of section
401(a)(9)(C) by the SBJPA and requested comments concerning the extent
to which relief from section 411(d)(6) would be appropriate for plan
amendments that eliminate preretirement distributions after age 70\1/2\
(e.g., by limiting section 411(d)(6) protection to employees above a
certain age).
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 are limited unless the IRS and
Treasury grant relief from section 411(d)(6).
As one choice, in accordance with the guidance in Announcement 97-
24 (1997-11 I.R.B. 24) March 13, 1997, the employer may give employees
the option of commencing distributions at age 70\1/2\ or deferring
commencement until after retirement. As a second alternative, the
employer may 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 choices. In addition, an employer may not have
voluntarily chosen 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, after consideration of the
comments received in response to Notice 96-67 and subject to the
conditions described below, the proposed regulations would provide
relief from section 411(d)(6) for certain plan amendments that
eliminate preretirement distributions commencing at age 70\1/2\.
2. Conditions on the Relief From Section 411(d)(6)
a. Protection for Employees Who Are Near Age 70\1/2\
Under the proposed regulation, an amendment to eliminate a
preretirement age 70\1/2\ distribution option may 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\.
c. Timing of Plan Amendment
An amendment to eliminate a preretirement age 70\1/2\ distribution
option may be adopted no later than the last day of any remedial
amendment period that applies to the plan for changes under the SBJPA.
However, in no event will the deadline for adopting such a plan
amendment be before December 31, 1998. The relief provided is available
only to employers that adopt the amendment within this specified time
period because the relief is being provided 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.
3. Circumstances Under Which No Relief is Required
Many employers do not need relief under section 411(d)(6) inorder
to implement the SBJPA change in the definition of required beginning
date in their plans. The regulation includes 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 proposed in
this regulation is 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.
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
The guidance in these proposed regulations will only be effective
after the date that final regulations are adopted and will only apply
to amendments adopted and effective after that date. In order to
provide employers with ample time to craft the appropriate plan
amendment to implement the relief from section 411(d)(6) that would be
provided when these regulations are finalized, the IRS and the Treasury
intend to finalize these regulations on an expedited schedule after
consideration of the comments received.
Special Analyses
It has been determined that this notice of proposed rulemaking 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
[[Page 35754]]
Act, that the collection of information in these regulations will 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, this notice of proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing has been scheduled for October 28, 1997, at 10
a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Because of access restrictions, visitors
will not be admitted beyond the building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral arguments at the hearing must
submit written comments and an outline of the topics to be discussed
and the time devoted to each topic by September 30, 1997.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
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 in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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. * * *
Sec. 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 provision?
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 A-10, 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 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 optional form. 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 the last day of any
remedial amendment period that applies to the plan for changes under
the Small Business Job Protection Act of 1996 (110 Stat. 1755) (but in
no event will the adoption of the amendment be required before December
31, 1998).
(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 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 section 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
[[Page 35755]]
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 that 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
that the employee attains 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 A-10.
(e) This Q&A-10 applies to amendments adopted and effective after
the publication of final regulations in the Federal Register.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97-17218 Filed 7-1-97; 8:45 am]
BILLING CODE 4830-01-P