[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) * * *

------------------------------------------------------------------------
                                                             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