[Federal Register Volume 63, Number 244 (Monday, December 21, 1998)]
[Rules and Regulations]
[Pages 70335-70339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32928]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8794]
RIN 1545-AW58


Increase In Cash-Out Limit Under Sections 411(a)(7), 411(a)(11), 
and 417(e)(1) for Qualified Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
providing guidance relating to the increase from $3,500 to $5,000 of 
the limit on distributions from qualified retirement plans that can be 
made without participant consent. This increase is contained in the 
Taxpayer Relief Act of 1997. In addition, these regulations eliminate, 
for most distributions, the ``lookback rule'' pursuant to which the 
qualified plan benefits of certain participants are deemed to exceed 
this limit on mandatory distributions. The final and temporary 
regulations affect sponsors and administrators of qualified retirement 
plans, and participants in those plans. The final regulations also 
amend the existing final regulations to cross-reference the temporary 
regulations. The text of the temporary regulations also serves, in 
part, as the text of the proposed regulations set forth in the notice 
of proposed rulemaking on this subject in the Proposed Rules section of 
the Federal Register.

DATES: Effective Date: These regulations are effective December 21, 
1998.
    Applicability Date: These final and temporary regulations generally 
apply to distributions made on or after March 22, 1999. However, 
employers are permitted to apply the final regulations and the 
temporary regulations other than Sec. 1.411(a)-11T(c)(3)(i) to plan 
years beginning on or after August 6, 1997.

FOR FURTHER INFORMATION CONTACT: Michael J. Karlan, (202) 622-6030 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations and 
the Employment Tax Regulations (26 CFR parts 1 and 31) under sections 
411(a)(7), 411(a)(11), and 417(e)(1) regarding restrictions on 
involuntary distributions and joint and survivor annuity requirements 
for qualified plans. The final and temporary regulations change the 
existing regulations to take into account amendments made by the 
Taxpayer Relief Act of 1997 (TRA '97), Public Law 105-34, 111 Stat. 788 
(1997).

Explanation of Provisions

A. Restrictions on Mandatory Distributions

    Prior to the enactment of TRA '97, section 411(a)(11)(A) provided 
that if the present value of any nonforfeitable accrued benefit 
exceeded $3,500, a plan met the requirements of section

[[Page 70336]]

411(a)(11) only if such plan provided that such benefit could not be 
immediately distributed without the consent of the participant. TRA '97 
changed this cash-out limit to $5,000, effective for plan years 
beginning after August 5, 1997. For this purpose, both before and after 
the enactment of TRA '97, the present value of a participant's 
nonforfeitable benefit is calculated in accordance with section 
417(e)(3).
    Interpreting the law prior to the enactment of TRA '97, 
Sec. 1.411(a)-11(c)(3) provides that the written consent of a 
participant is required before the commencement of the distribution of 
any portion of the participant's accrued benefit if the present value 
of the nonforfeitable total accrued benefit is greater than $3,500. If 
the present value does not exceed $3,500, the consent requirements are 
deemed satisfied, and the plan may distribute such portion to the 
participant as a single sum. The regulation further provides that, if 
the present value determined at the time of a distribution to the 
participant exceeds $3,500, then the present value at any subsequent 
time is deemed to exceed $3,500; this is commonly referred to as the 
``lookback rule.''
    Consistent with the TRA '97 change, these regulations increase the 
cash-out limit to $5,000. In determining whether a participant's 
nonforfeitable accrued benefit may be distributed without consent 
during plan years beginning on or after August 6, 1997, the new cash-
out limit of $5,000 is permitted to be applied as though it were in 
effect for all plan years, including those beginning before August 6, 
1997. Thus, for example, a calendar year plan may be amended to provide 
for the involuntary distribution after December 31, 1997, of the 
accrued benefit of a participant who terminated employment on or before 
that date, if the present value of the accrued benefit does not exceed 
$5,000 at the time of the distribution (subject to the exception 
described below for optional forms of benefit under which at least one 
scheduled periodic distribution is still payable). This result is the 
same even if the accrued benefit could only have been distributed with 
the participant's or the spouse's consent at termination of employment 
because the present value of the benefit exceeded $3,500 at that time.
    In addition, these temporary regulations eliminate, for many 
distributions, the lookback rule under Sec. 1.411(a)-11(c)(3). Under 
these regulations, a plan may provide that the present value of a 
participant's nonforfeitable accrued benefit generally may be 
distributed without consent if that present value does not exceed the 
cash-out limit as determined at the time of the current distribution 
without regard to the present value of the participant's benefit at the 
time of an earlier distribution. However, under these temporary 
regulations, if a participant has begun to receive distributions 
pursuant to an optional form of benefit under which at least one 
scheduled periodic distribution is still payable, and if the present 
value of the participant's nonforfeitable accrued benefit exceeded the 
$5,000 cash-out limit at the time of the first distribution under that 
optional form of benefit, then the present value of the participant's 
nonforfeitable accrued benefit may not be distributed without consent.

B. Immediate Distribution of the Present Value of a QJSA or QPSA

    Prior to the enactment of TRA '97, section 417(e)(1) provided that 
a plan subject to sections 401(a)(11) and 417 could provide that the 
present value of a qualified joint and survivor annuity (``QJSA'') or a 
qualified preretirement survivor annuity (``QPSA'') would be 
immediately distributed if such value did not exceed $3,500. Pursuant 
to section 417(e)(1), no distribution could be made under the preceding 
sentence after the annuity starting date unless the participant and the 
spouse of the participant (or where the participant had died, the 
surviving spouse) consented in writing to such distribution. TRA '97 
changed this dollar limit from $3,500 to the dollar limit under section 
411(a)(11)(A), effective for plan years beginning after August 5, 1997. 
These regulations change only the dollar limit in Sec. 1.417(e)-
1(b)(2)(i) from $3,500 to the dollar limit under section 411(a)(11)(A), 
and do not revise the lookback rule set forth in that section for plans 
subject to sections 401(a)(11) and 417.

C. Proposed Regulations

    The proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of the Federal 
Register completely repeal the lookback rule under Secs. 1.411(a)-
11(c)(3) and 1.417(e)-1(b)(2)(i), i.e., both for plans that are and 
plans that are not subject to sections 401(a)(11) and 417. In 
accordance with section 417(e)(1), the proposed regulations provide 
that, in the case of plans subject to sections 401(a)(11) and 417, 
consent is required after the annuity starting date for the immediate 
distribution of the present value of the accrued benefit being 
distributed in any form, including a qualified joint and survivor 
annuity or a qualified preretirement survivor annuity, regardless of 
the amount of that present value. Where only a portion of an accrued 
benefit is being distributed, this provision applies only to that 
portion (and not to the portion with respect to which no distributions 
are being made).

D. Disregard of Certain Past Service

    Section 411(a)(7)(B)(i) provides that, for purposes of determining 
the employee's accrued benefit under the plan, the plan may disregard 
service performed by the employee with respect to which he has received 
a distribution of the present value of his entire nonforfeitable 
benefit if such distribution was in an amount not more than $3,500 
(prior to the amendment of the cash-out limit under TRA '97), as 
permitted under regulations prescribed by the Secretary. Section 
411(a)(7)(B)(i) applies only if the distribution was made on 
termination of the employee's participation in the plan, and 
Sec. 1.411(a)-7(d)(4)(i)(C) provides that such involuntary 
distributions must have been made due to the termination of the 
employee's participation in the plan. TRA '97 changed this $3,500 limit 
to the dollar limit under section 411(a)(11)(A), effective for plan 
years beginning after August 5, 1997. These temporary regulations 
provide that, for purposes of applying section 411(a)(7)(B)(i), an 
involuntary distribution of an employee's nonforfeitable accrued 
benefit the present value of which does not exceed $5,000 may be 
treated as having occurred due to termination of participation if the 
distribution could have been made due to termination of participation 
but for the fact that the present value exceeded $3,500 at that time.

E. Conforming Amendments

    Several other provisions of the Treasury Regulations incorporate 
the cash-out limit, and these regulations make conforming amendments to 
those provisions in order to incorporate the new cash-out limit under 
section 411(a)(11). Specifically, conforming amendments are made to the 
following sections: Secs. 1.401(a)-20 Q&A-8(d); 1.401(a)-20 Q&A-24 
1.401(a)(4)-4(b)(2)(ii)(C); 1.401(a)(26)-4(d)(2); 1.401(a)(26)-6(c)(4); 
1.411(a)-11(b); 1.411(a)-11(c)(7); 1.411(d)-4 Q&A-2(b)(2)(v); 1.411(d)-
4 Q&A-4(a); 1.417(e)-1(b)(2)(i); and 31.3121(b)(7)-2(d)(2)(i).

F. Valuation Rules

    Section 417(e)(3) prescribes rules and definitions for determining 
the present

[[Page 70337]]

value of an accrued benefit under a defined benefit plan for purposes 
of sections 417 and 411(a)(11)(A). (In the case of a defined 
contribution plan, the present value of the accrued benefit is the 
value of the account balance.) The present value of a participant's 
accrued benefit for purposes of the cash-out limit is determined in 
accordance with section 417(e)(3) using the interest rate and mortality 
tables in effect under the plan for the annuity starting date. Thus, 
for example, if the present value of the participant's accrued benefit 
using the rate described in section 417(e)(3)(B) (often referred to as 
the ``PBGC rate'') exceeds $5,000, and the plan is subsequently amended 
to reflect the interest rate described in section 417(e)(3)(A)(ii), the 
plan may provide that the present value of the accrued benefit may be 
distributed without the participant's or spouse's consent if the value 
of the accrued benefit does not exceed $5,000, as determined under the 
plan provisions then in effect.

G. Benefits Protected From Reduction or Elimination

    Section 411(d)(6) provides, in general, that a plan shall be 
treated as not satisfying the requirements of section 401(a) if the 
accrued benefit of a participant is decreased, or an optional form of 
benefit is eliminated, by an amendment of the plan. Section 1.411(d)-4, 
paragraph (b)(2)(v) of Q&A-2 provides that a plan may be amended to 
provide for the involuntary distribution of an employee's benefit to 
the extent such distribution is permitted under sections 411(a)(11) and 
417(e). In accordance with that provision, a plan may be amended for 
plan years beginning on or after August 6, 1997, to permit the 
involuntary distribution of an accrued benefit using a cash-out limit 
of $5,000, with respect to benefits accrued before the amendment was 
adopted and effective. Such an amendment is permitted even if the plan, 
prior to amendment, did not permit involuntary distributions (as well 
as if the plan permitted involuntary distributions if the present value 
of the participant's benefit did not exceed the prior cash-out limit of 
$3,500). Such an amendment will not violate the anti-cutback rules of 
section 411(d)(6).

H. Remedial Amendment Period

    Rev. Proc. 98-14 (1998-4 I.R.B. 22) at section 4, provides the 
remedial amendment period for certain plan amendments made pursuant to 
TRA '97. A plan may be amended retroactively to implement the increase 
in the cash-out limit to $5,000 in accordance with section 4 of the 
revenue procedure.

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 
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 Michael J. Karlan, 
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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 31 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry for Sec. 1.411(a)-7T and revising the entry for Sec. 1.411(d)-
4 to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Sec. 1.411(a)-7T also issued under 26 U.S.C. 411(a)(7)(B)(i).
    Sec. 1.411(d)-4 also issued under 26 U.S.C. 411(d)(6). * * *
    Par. 2. Section 1.411(a)-7 is amended by adding a sentence at the 
end of the concluding text of paragraph (d)(4)(i) to read as follows:


Sec. 1.411(a)-7  Definitions and special rules.

* * * * *
    (d) * * *
    (4) Certain cash-outs of accrued benefits. (i) * * *
* * * * *
* * * (For distributions made on or after March 22, 1999, see 
Sec. 1.411(a)-7T.)
* * * * *
    Par. 3. Section 1.411(a)-7T is added to read as follows:


Sec. 1.411(a)-7T  Definitions and special rules (temporary).

    (a) through (d)(3) [Reserved]. For further guidance, see 
Sec. 1.411(a)-7(a) through (d)(3).
    (d)(4) Certain cash-outs of accrued benefits--(i) Involuntary cash-
outs. For purposes of determining an employee's right to an accrued 
benefit derived from employer contributions under a plan, the plan may 
disregard service performed by the employee with respect to which--
    (A) The employee receives a distribution of the present value of 
his entire nonforfeitable benefit at the time of the distribution;
    (B) The requirements of section 411(a)(11) are satisfied at the 
time of the distribution;
    (C) The distribution is made due to the termination of the 
employee's participation in the plan; and
    (D) The plan has a repayment provision which satisfies the 
requirements of Sec. 1.411(a)-7(d)(4)(iv) in effect at the time of the 
distribution.
    (d)(4)(ii) through (v) [Reserved]. For further guidance, see 
Sec. 1.411(a)-7(d)(4)(ii) through (v).
    (vi) For purposes of paragraph (d)(4)(i) of this section, a 
distribution shall be deemed to be made due to the termination of an 
employee's participation in the plan if it is made no later than the 
close of the second plan year following the plan year in which such 
termination occurs, or if such distribution would have been made under 
the plan by the close of such second plan year but for the fact that 
the present value of the nonforfeitable accrued benefit then exceeded 
the cash-out limit in effect under Sec. 1.411(a)-11T(c)(3)(ii). For 
purposes of determining the entire nonforfeitable benefit, the plan may 
disregard service after the distribution, as illustrated in 
Sec. 1.411(a)-7(d)(2)(i).
    (vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this section 
apply to distributions made on or after March 22, 1999 through December 
18, 2001. For plan years beginning before March 22, 1999, see 
Sec. 1.411(a)-7(d)(4)(i). However, an employer is permitted to apply 
paragraphs (d)(4)(i) and (vi) of this section to plan years beginning 
on or after August 6, 1997.

[[Page 70338]]

    (d)(5) and (6) [Reserved]. For further guidance, see Sec. 1.411(a)-
7(d)(5) and (6).
    Par. 4. Section 1.411(a)-11 is amended by adding a sentence at the 
end of paragraph (c)(3) to read as follows:


Sec. 1.411(a)-11  Restriction and valuation of distributions.

* * * * *
    (c) * * *
    (3) $3,500. * * * (For distributions made on or after March 22, 
1999, see Sec. 1.411(a)-11T.)
* * * * *
    Par. 5. Section 1.411(a)-11T is added to read as follows:


Sec. 1.411(a)-11T  Restriction and valuation of distributions 
(temporary).

    (a) and (b) [Reserved]. For further guidance, see Sec. 1.411(a)-
11(a) and (b).
    (c) Consent, etc. requirements--(1) General rule. [Reserved]. For 
further guidance, see Sec. 1.411(a)-11(c)(1).
    (2) Consent. [Reserved]. For further guidance, see Sec. 1.411(a)-
11(c)(2).
    (3) Cash-out limit. (i) Written consent of the participant is 
required before the commencement of the distribution of any portion of 
an accrued benefit if the present value of the nonforfeitable total 
accrued benefit is greater than the cash-out limit in effect under 
paragraph (c)(3)(ii) of this section on the date the distribution 
commences. The consent requirements are deemed satisfied if such value 
does not exceed the cash-out limit, and the plan may distribute such 
portion to the participant as a single sum. Present value for this 
purpose must be determined in the same manner as under section 417(e); 
see Sec. 1.417(e)-1(d). If a participant has begun to receive 
distributions pursuant to an optional form of benefit under which at 
least one scheduled periodic distribution has not yet been made, and if 
the present value of the participant's nonforfeitable accrued benefit, 
determined at the time of the first distribution under that optional 
form of benefit, exceeded the cash-out limit currently in effect under 
paragraph (c)(3)(ii) of this section, then the present value of the 
participant's nonforfeitable accrued benefit is deemed to continue to 
exceed the cash-out limit. Thus, for example, if the present value of a 
participant's accrued benefit does not exceed the cash-out limit on the 
date of a distribution after termination of employment but did, at the 
time of an earlier in-service hardship withdrawal, exceed the cash-out 
limit in effect on the date of the post-termination distribution, the 
plan is permitted to distribute the present value of the participant's 
accrued benefit on the date of the post-termination distribution 
without the participant's consent. However, if a participant began to 
receive scheduled installment payments under a plan and, at that time, 
the participant's accrued benefit exceeded the cash-out limit currently 
in effect, the present value of the participant's accrued benefit is 
deemed to continue to exceed the cash-out limit and may not be 
distributed without the participant's consent.
    (ii) The cash-out limit in effect for a date is the amount 
described in section 411(a)(11)(A) for the plan year that includes that 
date. The cash-out limit in effect for dates in plan years beginning on 
or after August 6, 1997, is $5,000. The cash-out limit in effect for 
dates in plan years beginning before August 6, 1997, is $3,500.
    (iii) Effective date. Paragraphs (c)(3)(i) and (ii) of this section 
apply to distributions made on or after March 22, 1999 through December 
18, 2001. For plan years beginning before March 22, 1999, see 
Sec. 1.411(a)-11(c)(3). However, an employer is permitted to apply 
paragraph (c)(3)(ii) of this section to plan years beginning on or 
after August 6, 1997.
    (c)(4) through (e) [Reserved]. For further guidance, see 
Sec. 1.411(a)-11(c)(4) through (e).

PARTS 1 AND 31--[AMENDED]

    Par. 6. In the table below, for each section indicated in the left 
column, remove the language in the middle column and add the language 
in the right column:

------------------------------------------------------------------------
            Section                     Remove                 Add
------------------------------------------------------------------------
1.401(a)-20, Q&A-8, paragraph   $3,500................  the cash-out
 (d), first sentence.                                    limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.401(a)-20, Q&A-24, paragraph  $3,500................  the cash-out
 (a)(1), fourth sentence.                                limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.401(a)(4)-4, paragraph        $3,500................  the cash-out
 (b)(2)(ii)(C).                                          limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.401(a)(26)-4, paragraph       $3,500................  the cash-out
 (d)(2), last sentence.                                  limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.401(a)(26)-6, paragraph       $3,500................  the cash-out
 (c)(4), first sentence.                                 limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.411(a)-11, paragraph (b),     $3,500................  the cash-out
 first sentence.                                         limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.411(a)-11, paragraph (c)(7),  $3,500................  the cash-out
 third sentence.                                         limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.411(d)-4, Q&A-2, paragraph    $3,500................  the cash-out
 (b)(2)(v), second, third, and                           limit in effect
 fourth sentences.                                       under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.411(d)-4, Q&A-2, paragraph    $1,750................  $3,500.
 (b)(2)(v), second sentence.
1.411(d)-4, Q&A-4, paragraph    $3,500................  the cash-out
 (a), eighth sentence.                                   limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
1.411(d)-4, Q&A-4, paragraph    Sec.  1.401(a)-4 Q&A-4  Sec.  1.401(a)(4
 (a), last sentence in the                               )-4(b)(2)(ii)(C
 parenthetical.                                          ).
1.417(e)-1, paragraph           $3,500................  the cash-out
 (b)(2)(i), first, fourth, and                           limit in effect
 fifth sentences.                                        under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii).
31.3121(b)(7)-2, paragraph      $3,500................  the cash-out
 (d)(2)(i), last sentence.                               limit in effect
                                                         under Sec.
                                                         1.411(a)-11T(c)
                                                         (3)(ii) of this
                                                         chapter.
------------------------------------------------------------------------


[[Page 70339]]

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: November 18, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-32928 Filed 12-18-98; 8:45 am]
BILLING CODE 4830-01-P