[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Rules and Regulations]
[Pages 1125-1127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-152]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8806]
RIN 1545-AV94
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
final regulations change the existing final 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 final regulations affect
sponsors of qualified retirement plans, employers that maintain
qualified retirement plans, and qualified retirement plan participants.
The amendments to the temporary regulations remove previously issued
temporary regulations on the same subject.
DATES: These regulations are effective January 8, 1999.
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 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). On September 4, 1998,
temporary regulations (TD 8781) under section 411(d)(6) were published
in the Federal Register (63 FR 47172). A notice of proposed rulemaking
(REG-101363-98), cross-referencing the temporary regulations, was
published in the Federal Register (63 FR 47214) on the same day. The
temporary regulations conform the regulations 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, the 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).
One written comment responding to the notice of proposed rulemaking
was received. No public hearing was requested or held. The proposed
regulations under section 411(d)(6) are adopted by this Treasury
decision, and the corresponding temporary regulations are removed.
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.
[[Page 1126]]
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
regulations retain the provision in the temporary regulations to expand
the exception of Sec. 1.411(d)-4, Q&A-2(d)(2)(ii) 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).
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 regulations add a new
Sec. 1.411(d)-4, Q&A-11 to retain the rule of Sec. 1.411(d)-4T, Q&A-11
of the temporary regulations extending 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.
The sole commentator raised a concern regarding whether this
extension of the time period for section 411(d)(6) relief originally
provided under section 1541 of TRA '97 restricts the time during which
any plan amendment can be made to eliminate in-kind distributions of
employer securities from employee stock ownership plans of S
corporations. The extension of the time period for this section 1541
statutory relief pursuant to Sec. 1.411(d)-4, Q&A-11 does not restrict
the time period during which a plan amendment can be made to eliminate
these in-kind distributions as permitted under Sec. 1.411(d)-4, Q&A-
2(d)(2)(ii); to the contrary, the Sec. 1.411(d)-4, Q&A-11 extension of
this statutory relief period provides an additional time period for the
adoption of certain plan amendments to eliminate these in-kind
distributions after these in-kind distributions have been eliminated in
operation. Under the ongoing rule of Sec. 1.411(d)-4, Q&A-2(d)(2)(ii),
a plan amendment to eliminate these in-kind distributions that is
effective with respect to distributions payable after the date the
amendment is adopted can be made at any time during taxable years of
the employer beginning after December 31, 1997.
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, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on its impact on small
businesses.
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. Revising Q&A-2(d)(2)(ii).
2. Removing the last sentence of Q&A-2(d)(3).
3. Adding Q&A-11.
The additions and revisions read as follows:
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
Q-2: * * *
A-2: * * *
(d) * * *
(2) * * *
(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.
* * * * *
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 1127]]
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.
Sec. 1.411(d)-4T [Removed]
Par. 3. Section 1.411(d)-4T is removed.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 14, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-152 Filed 1-7-99; 8:45 am]
BILLING CODE 4830-01-U