[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]


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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.

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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