[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:
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Section Remove Add
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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.
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[[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