[Federal Register Volume 65, Number 61 (Wednesday, March 29, 2000)]
[Proposed Rules]
[Pages 16546-16553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6694]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109101-98]


Special Rules Regarding Optional Forms of Benefit Under Qualified 
Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that would permit 
qualified defined contribution plans to be amended to eliminate some 
alternative forms in which an account balance can be paid under certain 
circumstances, and would permit certain transfers between defined 
contribution plans that are not permitted under regulations now in 
effect. These proposed regulations affect qualified retirement plan 
sponsors, administrators, and participants. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by June 27, 2000. Requests to 
speak and outlines of oral comments to be discussed at the public 
hearing scheduled for June 27, 2000, at 10 a.m., must be received by 
June 6, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-109101-98), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
109101-98), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option of the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at: http://www.irs.gov/tax--regs/reglist.html. The 
public hearing will be held in room 6718, Internal Revenue Building, 
1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S.F. 
Marshall, 202-622-6030; concerning submissions and the hearing, and/or 
to be placed on the building access list to attend the hearing, LaNita 
VanDyke, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 411(d)(6) of the Internal Revenue Code of 1986 (Code).
    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. Section 
411(d)(6)(B), which was added by the Retirement Equity Act of 1984 
(REA), Public Law 98-397 (98 Stat. 1426), provides that 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. However, section 411(d)(6)(B) authorizes the 
Secretary of the Treasury to provide exceptions to this requirement. 
This authority does not extend to a plan amendment that would have the 
effect of eliminating or reducing an early retirement benefit or a 
retirement-type subsidy.
    Final regulations regarding section 411(d)(6)(B) were published in 
the Federal Register on July 8, 1988. Those final regulations, and 
subsequent amendments to the regulations, define the optional forms of 
benefit that are protected under section 411(d)(6)(B) and provide for 
certain exceptions to the general rule of section 411(d)(6)(B). In 
general, existing regulatory exceptions to the application of section 
411(d)(6)(B) to optional forms of benefit have been developed to 
address certain specific practical problems. For example, 
Sec. 1.411(d)-4, Q&A-3(b) permits a transfer between plans of a 
participant's entire nonforfeitable benefit to be made at the election 
of the participant, without a requirement that the transferee plan 
preserve all section 411(d)(6) protected benefits, but only if the 
participant is eligible to receive an immediate distribution and 
certain other conditions are satisfied. In addition, some regulatory 
exceptions to the application of section 411(d)(6)(B) to optional forms 
of benefit address plan amendments that are related to statutory 
changes. See Q&A-2(b) and Q&A-10 of Sec. 1.411(d)-4.
    The IRS and Treasury recognize that the accumulation of a variety 
of payment choices in a plan may increase the cost and complexity of 
plan operations. For example, an employer that initially adopted a plan 
for which the plan document was prepared by a prototype sponsor may now 
be using a different prototype plan that offers a different array of 
distribution forms. The requirement to preserve virtually all 
preexisting optional forms for benefits accrued up to the date of 
change in the prototype plan may present significant practical problems 
in certain cases.
    Similar issues arise where employers merge with or acquire other 
businesses. These employers often face issues of whether to maintain 
separate plans, terminate one or more of the plans, or merge the plans. 
If the employer chooses to merge the plans, the resulting plan may 
accumulate a wide variety of optional forms, some of which may differ 
in insignificant ways or may entail special administrative costs. 
Because the existing elective transfer rule of Sec. 1.411(d)-4, Q&A-
3(b) applies only to situations in which a

[[Page 16547]]

participant's benefits have become distributable, its applicability is 
limited.
    In recent years, it has become easier for individuals to replicate 
the various payment choices available from qualified plans through 
other means. The Unemployment Compensation Amendments of 1992, Public 
Law 102-318 (106 Stat. 290), substantially expanded participants' 
ability to transfer distributions from qualified plans to individual 
retirement arrangements (IRAs) on a tax-deferred basis. Individuals who 
receive single-sum distributions from qualified plans frequently roll 
those distributions over directly to IRAs, under which distributions 
can be made in a wide variety of payment forms. There are also 
indications that the vast majority of participants in defined 
contribution plans who are given a choice of distribution forms that 
includes a single-sum distribution elect the single-sum distribution.
    The IRS and Treasury have been weighing these considerations as 
they apply to various circumstances and various benefit forms. As a 
result, the IRS and Treasury have been considering the appropriateness 
of exercising the regulatory authority under section 411(d)(6)(B) to 
provide additional exceptions under that provision, in order to allow 
greater flexibility for sponsors to modify alternative forms of payment 
and simplify plan provisions and plan administration.
    Notice 98-29 (1998-1 C.B. 1163) requested public comment on several 
ways of providing regulatory relief from the requirements of section 
411(d)(6)(B) for defined contribution plans. Most of the public 
comments received in response to Notice 98-29 indicate that, 
particularly for defined contribution plans, the section 411(d)(6)(B) 
requirement that a plan continue to offer all existing payment options 
often imposes significant administrative burdens that are 
disproportionate to any corresponding benefit to participants. 
Accordingly, after considering the comments received in response to 
Notice 98-29, the IRS and Treasury are issuing these proposed 
regulations, which would provide relief from the requirements of 
section 411(d)(6)(B) in a wide range of circumstances.
    As anticipated in Notice 98-29, the primary focus of these 
regulations is on defined contribution plans, and the provisions of 
these regulations relating to elimination of alternative forms of 
payment are limited to defined contribution plans. Defined benefit 
plans have special characteristics, including benefit payment 
calculation specifications, early retirement benefits, and other 
retirement-type subsidies (for which section 411(d)(6)(B) does not 
authorize the issuance of regulatory relief). Features such as these 
are not characteristic of defined contribution plans and provide 
important protections to participants. While limited comments relating 
to defined benefit plans were received in response to Notice 98-29, the 
IRS and Treasury remain open to further comment in this area. As 
discussed below, the provisions of these proposed regulations relating 
to elimination of in-kind distributions extend to both defined 
contribution plans and defined benefit plans, and the provisions of 
these proposed regulations relating to transfers between plans apply to 
defined contribution plans and, to some extent, to defined benefit 
plans.
    These proposed regulations would not affect other requirements of 
the Code For example, a money purchase pension plan (or a plan 
otherwise described in section 401(a)(11)(B)) generally must satisfy 
certain requirements relating to qualified joint and survivor annuities 
and qualified preretirement survivor annuities. Similarly, these 
proposed regulations would not affect the requirements of section 
401(a)(31) relating to direct rollovers.

Explanation of Provisions

A. Permitted Amendments to Alternative Forms of Payment Under a Defined 
Contribution Plan

    The proposed regulations would simplify plan administration and 
allow greater flexibility by significantly expanding the permitted 
changes that may be made to alternative forms of payment under a 
defined contribution plan. Instead of requiring defined contribution 
plans to continue to maintain nearly all existing alternative forms of 
payment with only limited exceptions, these proposed regulations would 
permit defined contribution plans to be amended to eliminate nearly all 
existing forms of payment if certain specified forms of payment are 
available. Under the proposed regulations, a defined contribution plan 
would not violate the requirements of section 411(d)(6) merely because 
the plan was amended to eliminate or restrict the ability of a 
participant to receive payment of the participant's accrued benefit 
under a particular optional form of benefit if, after the plan 
amendment became effective with respect to the participant, the 
distribution choices available to the participant included both payment 
of the accrued benefit in a single-sum distribution form and payment of 
the accrued benefit in an extended distribution form, each of which is 
otherwise identical to the eliminated or restricted optional form of 
benefit.
    Under the proposed regulations, a distribution form is an otherwise 
identical distribution form with respect to an optional form of benefit 
that is eliminated or restricted only if the distribution form is 
identical in all respects to the eliminated or restricted optional form 
of benefit except with respect to the timing of payments after 
commencement. For example, a single-sum distribution form is not an 
otherwise identical distribution form with respect to a specified 
installment form of benefit if the single-sum distribution form is not 
available for distribution on any date on which the installment form 
would have been available for commencement, is not available in the 
same medium of distribution as the installment form, does not apply to 
the benefit to which the installment form applied, imposes any 
condition of eligibility that did not apply to the installment form, or 
lacks any related election rights that were available with respect to 
the installment form. However, a distribution form does not fail to be 
identical just because it provides greater rights to the participant. 
Further, an otherwise identical distribution form need not retain 
rights or features of the optional form of benefit that is eliminated 
or restricted to the extent that those rights or features are not 
otherwise protected under section 411(d)(6). Moreover, in the case of 
an optional form of benefit that is in the form of an annuity and that 
provides for distribution of an annuity contract, a distribution form 
that is not in the form of an annuity would not fail to be an otherwise 
identical distribution form with respect to that optional form of 
benefit merely because the non-annuity distribution form does not 
provide for distribution of an annuity contract.
    The requirement under the proposed regulations that an extended 
distribution form be retained would be satisfied if the plan provided 
either (1) a life annuity or (2) periodic payments over the 
participant's life expectancy (or, at the election of the participant, 
over the joint life expectancy of the participant and the participant's 
spouse). Thus, a defined contribution plan would not violate section 
411(d)(6) merely because of a plan amendment that replaced an optional 
form of benefit payable under the plan with either of these two 
extended distribution forms, together with a single-sum distribution 
form, provided that the single-sum distribution form and the extended 
distribution form are each otherwise

[[Page 16548]]

identical to the replaced optional form of benefit. A plan providing 
for periodic payments over life expectancy could provide for the life 
expectancy to be fixed when payments begin or, alternatively, could 
provide for the life expectancy to be redetermined annually as 
described in section 401(a)(9)(D).
    As noted above, the proposed regulations would not affect the 
survivor annuity requirements of sections 401(a)(11) and 417. Thus, for 
example, as required under sections 401(a)(11) and 417, any profit-
sharing plan that provides for payment in the form of a life annuity 
(whether or not the life annuity was added to the plan in lieu of some 
other optional form) would also be required to offer payment in the 
form of a qualified joint and survivor annuity.
    A third extended distribution form would generally be permitted 
under the proposed regulations for a plan amendment that did not 
eliminate any optional form of benefit that is an extended distribution 
form described above. For such an amendment, the requirement to provide 
an extended distribution form would be satisfied if the plan offered a 
distribution in the form of substantially equal periodic payments made 
(not less frequently than annually) over a period at least as long as 
the longest period over which the participant is entitled to receive a 
distribution under the plan before the plan amendment under any of the 
optional forms of benefit that are eliminated by the plan amendment. 
Thus, for example, a defined contribution plan that offers 
distributions in the form of a single-sum distribution, 5-year 
installment payments, 10-year installment payments, 15-year installment 
payments, and 20-year installment payments could be amended to offer 
only a single-sum distribution and 20-year installment payments, each 
of which is otherwise identical to the formerly available 5-year, 10-
year, and 15-year distribution forms.
    The provisions of the proposed regulations permitting payment forms 
to be eliminated if the defined contribution plan retains a single-sum 
distribution form and an extended distribution form are similar to one 
of the proposals outlined in Notice 98-29. In response to Notice 98-29, 
commentators generally stated that implementing this relief would be 
very helpful for plan sponsors, but there was also substantial comment 
urging further relief, so that a defined contribution plan with a 
single-sum distribution option would not also be required to continue 
to offer an extended distribution form. These commentators took the 
position that, in light of a participant's ability to roll over 
distributions to IRAs, which may offer multiple payment forms, there is 
only a marginal advantage to the participant in requiring the retention 
of an option to receive extended payments from a qualified defined 
contribution plan.
    Some of these comments described plans that have been preserving a 
variety of payment options because the regulations require it, even 
though certain of the options have not been selected by a single 
participant for years. Commentators asserted that ultimately, employee 
demand would tend to shape the array of payment options offered by plan 
sponsors, and that plan sponsors generally would feel more free to 
offer or ``test market'' various payment form alternatives to 
participants if the sponsors were not legally prohibited from ever 
removing any option, once offered, even when participants in the plan 
have evidenced little or no interest in the option. Commentators 
observed that participants would in all events continue to have the 
option to leave their account balance in the plan (if above the $5,000 
cashout threshold) until they were ready to begin receiving 
distributions. It was argued that the vast majority of participants are 
not ready to begin drawing lifetime retirement benefits at the time 
their employment with a particular plan sponsor terminates, and that, 
accordingly, a participant's rollover to a single IRA of the 
participant's benefits from a series of employer-sponsored plans over 
the course of the participant's working life is an effective and common 
means of achieving portability, consolidation, and preservation of 
retirement savings.
    Commentators also asserted that the protections of section 
411(d)(6)(B) may have adversely affected participants involved in 
corporate sale transactions. Specifically, some sellers and buyers that 
might otherwise have merged their plans, or transferred benefits under 
the seller's plan to the buyer's plan, instead have terminated the 
seller's plan or made distributions in order to avoid being required to 
preserve all of the distribution forms in the seller's plan.
    Although the comments received in response to Notice 98-29 made a 
strong case that only a single sum distribution should be required to 
be retained, these proposed regulations reflect the view that the 
advantages to participants from retaining an extended distribution form 
may be worth the plan administration costs of retaining this additional 
option. These advantages include the benefits that participants, 
especially less sophisticated participants, can derive from employer 
involvement, which is subject to the fiduciary standards, in selecting 
and monitoring investment options under the plan after retirement 
distributions have begun. The IRS and Treasury are open to further 
comments on whether or not an extended distribution form should be 
required to be preserved, including comments that identify 
circumstances in which it may be acceptable for a plan not to preserve 
an extended distribution form. In particular, comments are requested on 
whether the final regulations should provide any of the following 
further relief:
     Should an extended distribution form be required to be 
retained only for participants who have reached a specified age, such 
as age 55, age 62, or normal retirement age, at the time of the 
distribution?
     Should there be an exception from this requirement for 
small businesses (e.g., employers with fewer than 100 employees or 
fewer than 25 employees)?
     Should a plan be treated as satisfying the requirement 
that it retain an extended distribution form if the plan allows a 
participant to elect to receive distribution by transfer of his or her 
vested account to a defined benefit plan for distribution in an 
extended distribution form?
     Should a plan be treated as satisfying the requirement 
that it retain an extended distribution form if the plan offers 
installment payments over a fixed period, such as 20 years?
     Should there be an exception from the requirement that an 
extended distribution form be retained if a plan with an extended 
distribution form is merged into another plan that does not offer an 
extended distribution form (for example, if the plan without the 
extended distribution form has a larger number of participants) in 
connection with an asset or stock acquisition, merger, or similar 
transaction involving a change in employer of the employees of a trade 
or business?
     If extended distribution forms are permitted to be 
eliminated, should there be additional protections, such as requiring 
that the amendment not go into effect for a specified period (such as 
two, four, or five years) or that the amendment not apply to 
participants who have reached a specified age (such as age 55, age 62, 
or normal retirement age) at the time of the amendment, or both?
    Approaches such as these may be considered either independently of 
each other, as a series of coordinated alternatives, or in combination 
(such as permitting small businesses to limit the

[[Page 16549]]

availability of extended distribution forms to participants who receive 
distributions after attaining a specified age, or such as permitting 
plan amendments that make extended distribution forms available only to 
participants who reach a specified age before a specified date, such as 
five years after the amendment). Commentators are requested to identify 
the burdens in plan administration that may be reduced by any of these 
approaches and the extent to which the approaches involve elimination 
of distribution alternatives that may be important to a participant.

B. Voluntary Direct Transfers Between Plans

    The proposed regulations would make a number of changes in the 
existing regulations relating to elective transfers between qualified 
plans. Under certain circumstances, the existing regulations permit 
elimination of optional forms of benefit in connection with plan 
transfers with a participant's consent. The proposed regulations would 
significantly liberalize the application of these elective transfer 
provisions.
    The existing regulations do not permit an elective transfer from 
one qualified plan to another unless the participant's benefit under 
the transferring plan is immediately distributable. This condition has 
precluded use of the elective transfer provision in the existing 
regulations in connection with merger and acquisition transactions 
involving plans with a cash or deferred arrangement under section 
401(k) in cases in which benefits under the cash or deferred 
arrangement are not distributable because section 401(k)(10) is not 
applicable. Many commentators have stated that permitting elective 
transfers from the former employer's section 401(k) plan to the new 
employer's section 401(k) plan under these circumstances would allow 
employers to permit employees to keep their old retirement benefits in 
a qualified plan together with their newly earned retirement benefits, 
particularly in cases where the new employer chooses not to maintain 
the former employer's plan.
    The proposed regulations would grant broad section 411(d)(6) relief 
for many types of elective transfers of a participant's entire benefit, 
without regard to whether the participant's benefit is immediately 
distributable. The elective transfer provision would be available for 
transfers made in connection with certain corporate transactions (such 
as a merger or acquisition), or in connection with the transfer of a 
participant to a different job (for example, to a different subsidiary 
or division of the employer) that is not covered by the transferor 
plan, even if the event is not one that allows a distribution. Insofar 
as the immediately distributable requirement of the existing 
regulations would be eliminated, the proposed regulations would permit 
an elective transfer even if the participant's benefit is not fully 
vested, provided that the requirements of section 411(a)(10) are 
satisfied. The proposed regulations would not restrict the permissible 
types of elective transfers to transfers between plans of the same 
employer. Accordingly, elective transfers could be made to plans that 
are within the employer's controlled group or to plans that are outside 
the employer's controlled group.
    The proposed regulations would provide section 411(d)(6) relief for 
elective transfers involving corporate transactions or employee job 
transfers generally where the defined contribution plans are of the 
same type (e.g., from a qualified cash or deferred arrangement under 
section 401(k) to another qualified cash or deferred arrangement). The 
restrictions on the types of plans between which transfers would be 
permitted would ensure that amounts transferred to the receiving plan 
will be subject to similar legal restrictions with respect to in-
service distributions. See Rev. Rul. 94-76 (1994-2 C.B. 46). In the 
case of transfers from plans that are subject to the survivor annuity 
requirements under sections 401(a)(11) and 417, those survivor annuity 
requirements would apply to the receiving plan with respect to the 
transferred amount in accordance with the transferee plan rules of 
section 401(a)(11)(B)(iii)(III).
    The existing regulations relating to elective transfers were issued 
in 1988. Since then, section 401(a)(31) has been enacted. Under section 
401(a)(31), any eligible rollover distribution may be directly rolled 
over to an IRA or to another eligible retirement plan. The section 
411(d)(6) requirements do not apply to amounts that have been 
distributed, such as distributions that are directly rolled over to 
another plan under section 401(a)(31). Accordingly, the elective 
transfer rules of the existing regulations have largely been duplicated 
by the enactment of section 401(a)(31) because the same result 
generally is available through a direct rollover. The proposed 
regulations would eliminate this duplication by replacing the elective 
transfer rules of the existing regulations that apply to immediately 
distributable amounts, except for certain transfers of amounts that are 
not eligible rollover distributions (such as amounts attributable to 
after-tax employee contributions). Specifically, an elective transfer 
of an immediately distributable amount would be permitted to the extent 
the amount is not an eligible rollover distribution, if the 
participant's entire nonforfeitable accrued benefit is transferred by 
means of a combination of a section 401(a)(31) transfer and the 
elective transfer. This rule would apply to transfers between defined 
benefit plans, as well as transfers between defined contribution plans. 
Comments are requested regarding whether there are other situations 
(where direct rollovers are unavailable) to which the elective transfer 
approach should apply.

C. Rules Regarding In-Kind Distributions

    The proposed regulations clarify and modify the rules regarding the 
application of the protections of section 411(d)(6)(B) to a right to 
receive benefit distributions in kind with respect to defined 
contribution plans and defined benefit plans. Provisions for 
distribution in kind are sometimes found in plans invested in annuity 
contracts or in marketable mutual funds. The right to a particular form 
of investment is not a protected optional form of benefit. However, the 
investments made by a plan generally are subject to fiduciary 
requirements, including the prudence requirement of section 
404(a)(1)(B) of the Employee Retirement Income Security Act of 1974, 
Public Law 93-406 (88 Stat. 829). The existing regulations state that 
the right to a medium of distribution, such as cash or in-kind 
payments, is an optional form of benefit to which section 411(d)(6)(B) 
applies.
    Under the proposed regulations, if a defined benefit plan includes 
an optional form of benefit under which benefits are distributed in the 
medium of an annuity contract, that optional form of benefit could be 
modified by substituting cash for the annuity contract. Thus, a defined 
benefit plan that provides for distribution of an annuity contract 
could be amended to substitute cash payments from the plan that are 
identical in all respects protected by section 411(d)(6) to the 
payments available from the annuity contract except with respect to the 
source of the payments. Comments are requested regarding whether any 
additional section 411(d)(6)(B) relief for non-cash distributions is 
appropriate for defined benefit plans.
    The proposed regulations would permit a defined contribution plan 
to be amended to replace the ability to receive a distribution in the 
form of marketable securities (other than employer securities) with the 
ability to receive a

[[Page 16550]]

distribution in the form of cash. The right to distributions from a 
defined contribution plan in the form of cash, employer securities or 
other property that is not marketable securities would generally be 
protected. However, the proposed regulations would also permit a 
defined contribution plan that gives a participant the right to an in-
kind distribution (including employer securities and property that is 
not marketable securities) to be amended to limit the types of property 
in which distributions could be made to the participant to specific 
types of property in which the participant's account is invested at the 
time of the amendment (and with respect to which the participant had 
the right to receive an in-kind distribution before the plan 
amendment). In addition, the proposed regulations would permit a 
defined contribution plan giving a participant the right to a 
distribution in a type of property to be amended to specify that the 
participant is permitted to receive a distribution in that type of 
property only to the extent that the plan assets held in the 
participant's account at the time of the distribution include that type 
of property. These provisions of the proposed regulations would not 
permit a plan to be amended in a way that would affect protected 
features of optional forms of benefit other than the medium of 
distribution. Thus, for example, a plan could not be amended to 
eliminate a participant's right to payments over a period of years, 
regardless of the plan's current investments, except as permitted under 
other provisions of the current or proposed regulations (such as the 
provisions described above relating to permitted plan amendments 
affecting alternative forms of payment under defined contribution 
plans).
    Comments are requested on whether section 411(d)(6) protection for 
in-kind distributions of employer securities and property that is not 
marketable securities from defined contribution plans should be 
preserved or eliminated. Commentators are requested to address the 
extent to which these may be important rights for participants. For 
example, in a defined contribution plan that does not give participants 
the right to payment in kind, it is possible that a distribution made 
in cash for a particular asset may be in an amount that is less than 
the value that the participant assigns to the asset. Commentators are 
further requested to address the potential administrative burden if, as 
proposed, plans are prohibited from eliminating these media of 
distribution. Comments are also requested on whether section 
411(d)(6)(B) protection should be retained for any form of in-kind 
distribution from a defined contribution plan other than employer 
securities and property that is not marketable securities.

Proposed Effective Date

    The proposed regulations are proposed to be effective upon 
publication of final regulations in the Federal Register and cannot be 
relied upon before finalization.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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 Code, these proposed 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. In addition to the other requests for comments set forth in this 
document, the IRS and Treasury also request comments on the clarity of 
the proposed rule and how it may be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for June 27, 2000, at 10 a.m., 
in room 6718, Internal Revenue Building, 1111 Constitution Avenue NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the 10th street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit written comments by June 6, 2000, and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by June 6, 2000.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Linda S. F. Marshall 
of the Office of the Associate Chief Counsel (Employee Benefits and 
Exempt Organizations). However, other personnel from the IRS and 
Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:
    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. Section 1.411(d)1-4 is amended as follows:
    1. In Q&A-1, paragraph (b)(1), the last sentence is amended by 
removing the language ``Sec. 1.401(a)(4)-4(d)'' and adding 
``Sec. 1.401(a)(4)-4(e)(1)'' in its place.
    2. Q&A-2 is amended by:
    a. Revising paragraph (b)(2)(iii).
    b. Adding paragraph (e).
    3. Q&A-3 is amended by:
    a. Revising paragraph (a)(3).
    b. Adding paragraph (a)(4).
    c. Revising paragraphs (b), (c), and (d).
    d. Adding paragraph (e).
    The additions and revisions read as follows:


Sec. 1.411(d)-4  Section 411(d)(6) protected benefits.

* * * * *
    A-2: * * *
    (b) * * *
    (2) * * *
    (iii) In-kind distributions--(A) Distributions of annuity contracts 
payable under defined benefit plans. If a defined benefit plan includes 
an

[[Page 16551]]

optional form of benefit under which benefits are distributed in the 
medium of an annuity contract, that optional form of benefit may be 
modified by substituting cash for the annuity contract.
    (B) In-kind distributions payable under defined contribution plans 
in the form of marketable securities other than employer securities. If 
a defined contribution plan includes an optional form of benefit under 
which benefits are distributed in the form of marketable securities, 
other than securities of the employer, that optional form of benefit 
may be modified by substituting cash for the marketable securities. For 
purposes of this paragraph (b)(2)(iii), the term marketable securities 
means marketable securities as defined in section 731(c)(2), and the 
term securities of the employer means securities of the employer as 
defined in section 402(e)(4)(E)(ii).
    (C) Amendments to defined contribution plans to specify medium of 
distribution. If a defined contribution plan includes an optional form 
of benefit under which benefits are distributable to a participant in a 
medium other than cash, the plan may be amended to limit the types of 
property in which distributions may be made to the participant to the 
types of property specified in the amendment. For this purpose, the 
types of property specified in the amendment must include all types of 
property (other than types of property for which the plan may be 
amended to substitute cash under paragraph (b)(2)(iii)(B) of this Q&A-
2) that are held in the participant's account on the effective date of 
the amendment and in which the participant would be able to receive a 
distribution immediately before the effective date of the amendment. In 
addition, a plan amendment may provide that the participant's right to 
receive a distribution in the form of specified types of property is 
limited to the property held in the participant's account at the time 
of distribution that consists of property of those specified types.
    (D) In-kind distributions after plan termination. If a plan 
includes an optional form of benefit under which benefits are 
distributed in specified property, that optional form of benefit may be 
modified for distributions after plan termination by substituting cash 
for the specified property to the extent that, on plan termination, an 
employee has the opportunity to receive the optional form of benefit in 
the form of the specified property. This exception is not available, 
however, if the employer that maintains the terminating plan also 
maintains another plan that provides an optional form of benefit under 
which benefits are distributed in the specified property.
    (E) Examples. The following examples illustrate the application of 
this paragraph (b)(2)(iii):

    Example 1. (i) An employer maintains a profit-sharing plan under 
which participants may direct the investment of their accounts. One 
investment option available to participants is a fund invested in 
common stock of the employer. The plan provides that the participant 
has the right to a distribution in the form of cash upon termination 
of employment. In addition, the plan provides that, to the extent a 
participant's account is invested in the employer stock fund, the 
participant may receive an in-kind distribution of employer stock 
upon termination of employment. On September 1, 2000, the plan is 
amended, effective on January 1, 2001, to remove the fund invested 
in employer common stock as an investment option under the plan and 
to provide for the stock held in the fund to be sold. The amendment 
permits participants to elect how the sale proceeds are to be 
reallocated among the remaining investment options, and provides for 
amounts not so reallocated as of January 1, 2001, to be allocated to 
a specified investment option.
    (ii) The plan does not fail to satisfy section 411(d)(6) solely 
on account of the plan amendment relating to the elimination of the 
employer stock investment option, which is not a section 411(d)(6) 
protected benefit. See paragraph (d)(7) of Q&A-1 of this section. 
Moreover, because the plan did not provide for distributions of 
employer securities except to the extent participants' accounts were 
invested in the employer stock fund, the plan is not required 
operationally to offer distributions of employer securities 
following the amendment. In addition, the plan would not fail to 
satisfy section 411(d)(6) on account of a further plan amendment, 
effective after the plan has ceased to provide for an employer stock 
fund investment option, to eliminate the right to a distribution in 
the form of employer stock. See paragraph (b)(2)(iii)(C) of this 
Q&A-2.

    Example 2. (i) An employer maintains a profit-sharing plan under 
which a participant, upon termination of employment, may elect to 
receive benefits in a single-sum distribution either in cash or in 
kind. The plan's investments are limited to a fund invested in 
employer stock, a fund invested in XYZ mutual funds (which are 
marketable securities), and a fund invested in shares of PQR limited 
partnership (which are not marketable securities).
    (ii) The following alternative plan amendments would not cause 
the plan to fail to satisfy section 411(d)(6):
    (A) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of 
employer stock and shares of PQR limited partnership. See paragraph 
(b)(2)(iii)(B) of this Q&A-2.
    (B) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of 
employer stock and shares of PQR limited partnership, and that also 
lists the participants that hold employer stock in their accounts as 
of the effective date of the amendment and provides that only those 
participants have the right to distributions in the form of employer 
stock, and lists the participants that hold shares of PQR limited 
partnership in their accounts as of the effective date of the 
amendment and provides that only those participants have the right 
to distributions in the form of shares of PQR limited partnership. 
See paragraphs (b)(2)(iii)(B) and (C) of this Q&A-2.
    (C) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of 
employer stock and shares of PQR limited partnership to the extent 
that the participant's account is invested in those assets at the 
time of the distribution. See paragraphs (b)(2)(iii)(B) and (C) of 
this Q&A-2.
    (D) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of 
employer stock and shares of PQR limited partnership, and that lists 
the participants that hold employer stock in their accounts as of 
the effective date of the amendment and provides that only those 
participants have the right to distributions in the form of employer 
stock, and lists the participants that hold shares of PQR limited 
partnership in their accounts as of the effective date of the 
amendment and provides that only those participants have the right 
to distributions in the form of shares of PQR limited partnership, 
and further provides that the distribution of that stock or those 
shares is available only to the extent that the participants' 
accounts are invested in those assets at the time of the 
distribution. See paragraphs (b)(2)(iii)(B) and (C) of this Q&A-2.

    Example 3. (i) An employer maintains a stock bonus plan under 
which a participant, upon termination of employment, may elect to 
receive benefits in a single-sum distribution in employer stock. 
This is the only plan maintained by the employer under which 
distributions in employer stock are available. The employer decides 
to terminate the stock bonus plan.
    (ii) If the plan makes available a single-sum distribution in 
employer stock on plan termination, the plan will not fail to 
satisfy section 411(d)(6) solely because the optional form of 
benefit providing a single-sum distribution in employer stock on 
termination of employment is modified to provide that such 
distribution is available only in cash. See paragraph (b)(2)(iii)(D) 
of this Q&A-2.
* * * * *

    (e) Permitted plan amendments affecting alternative forms of 
payment under defined contribution plans--(1) General rule. A defined 
contribution plan does not violate the requirements of section 
411(d)(6) merely because the plan is amended to eliminate or restrict 
the ability of a participant to receive payment of accrued benefits 
under a particular optional form of benefit if, after the plan 
amendment is effective with respect to the participant, the alternative 
forms of payment available

[[Page 16552]]

to the participant include payment in both a single-sum distribution 
form and an extended distribution form described in paragraph (e)(3) of 
this Q&A-2, each of which is an otherwise identical distribution form 
with respect to the optional form of benefit that is being eliminated 
or restricted.
    (2) Otherwise identical distribution form. For purposes of this 
paragraph (e), a distribution form is an otherwise identical 
distribution form with respect to an optional form of benefit that is 
eliminated or restricted pursuant to paragraph (e)(1) of this Q&A-2 
only if the distribution form is identical in all respects to the 
eliminated or restricted optional form of benefit (or would be 
identical except that it provides greater rights to the participant) 
except with respect to the timing of payments after commencement. For 
example, a single-sum distribution form is not an otherwise identical 
distribution form with respect to a specified installment form of 
benefit if the single-sum distribution form is not available for 
distribution on the date on which the installment form would have been 
available for commencement, is not available in the same medium of 
distribution as the installment form, does not apply to the benefit (or 
any portion of the benefit) to which the installment form applied, 
imposes any condition of eligibility that did not apply to the 
installment form, or lacks any related election rights that were 
available with respect to the installment form. However, the single-sum 
distribution form would not fail to be an otherwise identical 
distribution form with respect to the installment form merely because 
the single-sum distribution form is available for distribution on a 
date on which the installment form would not have been available for 
commencement, is available in media of distribution that the 
installment form was not, applies (if the participant so chooses) to a 
larger portion of the benefit than the installment form, has fewer or 
less stringent conditions of eligibility than the installment form, or 
has election rights that the installment form lacked. In addition, an 
otherwise identical distribution form need not retain rights or 
features of the optional form of benefit that is eliminated or 
restricted to the extent that those rights or features are not 
otherwise protected under section 411(d)(6). Moreover, in the case of 
an optional form of benefit that is in the form of an annuity and that 
provides for distribution of an annuity contract, a distribution form 
that is not in the form of an annuity does not fail to be an otherwise 
identical distribution form with respect to that optional form of 
benefit merely because the non-annuity distribution form does not 
provide for distribution of an annuity contract.
    (3) Extended distribution form--(i) In general. For purposes of 
this paragraph (e), a distribution form is an extended distribution 
form if it is--
    (A) An annuity payable for the life of the participant;
    (B) Substantially equal periodic payments made (not less frequently 
than annually), at the election of the participant, over either the 
life expectancy of the participant or the joint life expectancy of the 
participant and the participant's spouse (with or without 
redetermination of those life expectancies, as described in section 
401(a)(9)(D)); or
    (C) For a plan amendment that does not eliminate any optional form 
of benefit that is an extended distribution form described in paragraph 
(e)(3)(i)(A) or (B) of this Q&A-2, substantially equal periodic 
payments made (not less frequently than annually) over a period at 
least as long as the longest period over which the participant is 
entitled to receive a distribution under the plan before the plan 
amendment under any of the optional forms of benefit that are 
eliminated by the plan amendment.
    (ii) Substantially equal periodic payments. For purposes of this 
paragraph (e)(3), the rules of section 402(c)(4)(A)(ii) and 
Sec. 1.402(c)-2, Q&A-5, apply in determining whether payments are 
substantially equal periodic payments (but without regard to the 10-
year minimum period for payments and without regard to Sec. 1.402(c)-2, 
Q&A-5(b), regarding certain periodic payments that decrease upon a 
participant's attainment of eligibility for social security benefits).
    (4) Examples. The following examples illustrate the application of 
this paragraph (e):

    Example 1. (i) P is a participant in Plan M, a qualified profit-
sharing plan that is invested in mutual funds. The distribution 
forms available to P under Plan M include a distribution of P's 
vested account balance under Plan M in the form of distribution of 
various annuity contract forms (including a single life annuity and 
a joint and survivor annuity). The annuity payments under the 
annuity contract forms begin as of the first day of the month 
following P's termination of employment (or as of the first day of 
any subsequent month, subject to the requirements of section 
401(a)(9)). P has not previously elected payment of benefits in the 
form of a life annuity, and Plan M is not a direct or indirect 
transferee of any plan that is a defined benefit plan or a defined 
contribution plan that is subject to section 412. Plan M provides 
that distributions on the death of a participant are made in 
accordance with section 401(a)(11)(B)(iii)(I). Plan M is amended so 
that, after the amendment is effective, P is no longer entitled to 
any distribution in the form of the distribution of an annuity 
contract. However, after the amendment is effective, P is entitled 
to receive a single-sum cash distribution of P's vested account 
balance under Plan M payable as of the first day of the month 
following P's termination of employment (or as of the first day of 
any subsequent month, except as required by section 401(a)(9)). In 
addition, P is entitled to receive P's vested account balance under 
Plan M payable in substantially equal monthly payments made, at P's 
election, over either P's life expectancy or the joint life 
expectancies of P and P's spouse, beginning as of the first day of 
the month following P's termination of employment (or as of the 
first day of any subsequent month, except as required by section 
401(a)(9)).
    (ii) Plan M does not violate the requirements of section 
411(d)(6) (or section 401(a)(11)) merely because the plan amendment 
has eliminated P's option to receive a distribution in any of the 
various annuity contract forms previously available.

    Example 2. (i) P is a participant in Plan M, a qualified profit-
sharing plan to which section 401(a)(11)(A) does not apply. Upon 
termination of employment, P is entitled to receive cash 
distributions from Plan M, payable as of the first day of the month 
following P's termination of employment (or as of the first day of 
any subsequent month, subject to the requirements of section 
401(a)(9)), in the form of a single-sum distribution, or in 
substantially equal monthly installment payments over either 5, 10, 
15, or 20 years. Plan M is amended so that, after the amendment is 
effective, P is no longer entitled to receive a distribution in the 
form of substantially equal monthly installment payments over 5, 10, 
or 15 years. However, after the amendment is effective, P continues 
to be entitled to receive cash distributions from Plan M, payable as 
of the first day of the month following P's termination of 
employment (or as of the first day of any subsequent month, except 
as required by section 401(a)(9)), in the form of a single-sum 
distribution or in substantially equal monthly installment payments 
over 20 years.
    (ii) Plan M does not violate the requirements of section 
411(d)(6) merely because the plan amendment has eliminated P's 
option to receive a distribution in the form of substantially equal 
monthly installment payments over 5, 10, or 15 years.

    (5) Effective date. This paragraph (e) applies to plan amendments 
that are adopted and made effective after the date of publication of 
final regulations in the Federal Register.
* * * * *
    A-3. (a) * * *
    (3) Waiver prohibition. In general, except as provided in paragraph 
(b) of this Q&A-3, a participant may not elect to waive section 
411(d)(6) protected benefits. Thus, for example, the

[[Page 16553]]

elimination of the defined benefit feature of a participant's benefit 
under a defined benefit plan by reason of a transfer of such benefits 
to a defined contribution plan pursuant to a participant election, at a 
time when the benefit is not distributable to the participant, violates 
section 411(d)(6).
    (4) Direct rollovers. A direct rollover described in Q&A-3 of 
Sec. 1.401(a)(31)-1 that is paid to a qualified plan is not a transfer 
of assets and liabilities that must satisfy the requirements of section 
414(l), and is not a transfer of benefits for purposes of applying the 
requirements under section 411(d)(6) and paragraph (a)(1) of this Q&A-
3. Therefore, for example, if such a direct rollover is made to another 
qualified plan, the receiving plan is not required to provide, with 
respect to amounts paid to it in a direct rollover, the same optional 
forms of benefit that were provided under the plan that made the direct 
rollover. See Sec. 1.401(a)(31)-1, Q&A-14.
    (b) Elective transfers of benefits between defined contribution 
plans--(1) General rule. A transfer of a participant's entire benefit 
between qualified defined contribution plans (other than a direct 
transfer described in section 401(a)(31)) that results in the 
elimination or reduction of section 411(d)(6) protected benefits does 
not violate section 411(d)(6) if the following requirements are met:
    (i) Voluntary election. The plan from which the benefits are 
transferred must provide that the transfer is conditioned upon a 
voluntary, fully-informed election by the participant to transfer the 
participant's entire benefit to the other qualified defined 
contribution plan. As an alternative to the transfer, the participant 
must be offered the opportunity to retain the participant's section 
411(d)(6) protected benefits under the plan (or, if the plan is 
terminating, to receive any optional form of benefit for which the 
participant is eligible under the plan as required by section 
411(d)(6)).
    (ii) Types of plans to which transfers may be made. To the extent 
the benefits are transferred from a money purchase pension plan, the 
transferee plan must be a money purchase pension plan. To the extent 
the benefits being transferred are part of a qualified cash or deferred 
arrangement under section 401(k), the benefits must be transferred to a 
qualified cash or deferred arrangement under section 401(k). To the 
extent the benefits being transferred are part of an employee stock 
ownership plan as defined in section 4975(e)(7), the benefits must be 
transferred to another employee stock ownership plan. Benefits 
transferred from a profit-sharing plan other than from a qualified cash 
or deferred arrangement, or from a stock bonus plan other than an 
employee stock ownership plan, may be transferred to any type of 
defined contribution plan.
    (iii) Circumstances under which transfers may be made. The transfer 
must be made in connection with an asset or stock acquisition, merger, 
or other similar transaction involving a change in employer of the 
employees of a trade or business (i.e., an acquisition or disposition 
within the meaning of Sec. 1.410(b)-2(f)) or in connection with the 
participant's transfer of employment to a different job for which 
service does not result in additional allocations under the transferor 
plan.
    (2) Applicable qualification requirements. A transfer described in 
this paragraph (b) is a transfer of assets or liabilities within the 
meaning of section 414(l)(1) that must meet the requirements of section 
414(l) and all other applicable qualification requirements. Thus, for 
example, if the survivor annuity requirements of sections 401(a)(11) 
and 417 apply to the plan from which the benefits are transferred, as 
described in this paragraph (b), but do not otherwise apply to the 
receiving plan, the requirements of sections 401(a)(11) and 417 must be 
met with respect to the transferred benefits under the receiving plan. 
In addition, the vesting provisions under the receiving plan must 
satisfy the requirements of section 401(a)(10) with respect to the 
amounts transferred.
    (c) Elective transfers of certain distributable benefits between 
defined benefit plans or between defined contribution plans--(1) In 
general. A transfer of a participant's benefits that are distributable 
between qualified defined benefit plans, or between defined 
contribution plans (other than the portion of such a transfer that is a 
direct transfer described in section 401(a)(31)), that results in the 
elimination or reduction of section 411(d)(6) protected benefits does 
not violate section 411(d)(6) if--
    (i) The voluntary election requirement of paragraph (b)(1)(i) of 
this Q&A-3 is met; and
    (ii) The amount of the benefit transferred, together with the 
amount of a contemporaneous section 401(a)(31) transfer to the 
transferee plan, equals the entire nonforfeitable accrued benefit under 
the plan of the participant whose benefit is being transferred, 
calculated to be at least the greater of the single-sum distribution 
provided for under the plan for which the participant is eligible (if 
any) or the present value of the participant's accrued benefit payable 
at normal retirement age (calculated by using interest and mortality 
assumptions that satisfy the requirements of section 417(e) and subject 
to the limitations imposed by section 415).
    (2) Treatment of transfer. The transfer of benefits pursuant to 
this paragraph (c) generally is treated as a distribution for purposes 
of section 401(a). For example, the transfer is subject to the cash-out 
rules of section 411(a)(7), the early termination requirements of 
section 411(d)(2), and the survivor annuity requirements of sections 
401(a)(11) and 417. However, the transfer is not treated as a 
distribution for purposes of the minimum distribution requirements of 
section 401(a)(9).
    (3) Distributable benefits. For purposes of this paragraph (c), a 
participant's benefits are distributable on a particular date if, on 
that date, the participant is eligible, under the terms of the plan 
from which the benefits are transferred, to receive an immediate 
distribution of these benefits from that plan under provisions of the 
plan not inconsistent with section 401(a).
    (d) Status of elective transfer as optional form of benefit. A 
right to a transfer of benefits pursuant to the elective transfer rules 
of paragraph (b) or (c) of this Q&A-3 is an optional form of benefit 
under section 411(d)(6). The availability of such optional form is 
subject to the nondiscrimination requirements of section 401(a)(4). 
However, a plan will not be treated as failing to satisfy 
Sec. 1.401(a)(4)-4 merely because it restricts the transfer option to 
benefits that exceed the dollar limits on mandatory distributions that 
can be made without the consent of the participant under section 
411(a)(11).
    (e) Effective date. This Q&A-3 is applicable for transfers made 
after the date of publication of final regulations in the Federal 
Register.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-6694 Filed 3-28-00; 8:45 am]
BILLING CODE 4830-01-P