[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

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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

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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