[Federal Register Volume 65, Number 139 (Wednesday, July 19, 2000)]
[Rules and Regulations]
[Pages 44679-44682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18119]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8891]
RIN 1545-AW59


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 regulations.

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SUMMARY: This document contains final regulations 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 or 
spousal consent. This increase is contained in the Taxpayer Relief Act 
of 1997. In addition, these regulations eliminate the ``lookback rule'' 
pursuant to which certain qualified plan benefits are deemed to exceed 
this limit on involuntary distributions. The final regulations affect 
sponsors and administrators of qualified retirement plans, and 
participants in those plans.

DATES: Effective Date: These regulations are effective October 17, 
2000.
    Applicability Date: These regulations generally apply to 
distributions made on or after October 17, 2000.

FOR FURTHER INFORMATION CONTACT: Robert Walsh, (202) 622-6090 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 21, 1998, a notice of proposed rulemaking (REG-113694-
98) was published in the Federal Register (63 FR 70356) regarding the 
``cash-out limit'' under sections 411(a)(7), 411(a)(11), and 417(e)(1) 
of the Internal Revenue Code. That same day, temporary and final 
regulations (TD 8794) were published in the Federal Register (63 FR 
70335) which amended the Income Tax Regulations and the Employment Tax 
Regulations (26 CFR parts 1 and 31) relating to the increase in the 
cash-out limit enacted by section 1071 of the Taxpayer Relief Act of 
1997, Public Law 105-34, 111 Stat. 788 (1997) (TRA '97). The text of 
the temporary regulations served as a portion of the text of the 
proposed regulations. Very few comments were submitted on the proposed 
regulations; no hearing was requested or held. After consideration of 
the comments, these final regulations adopt the provisions of the 
proposed regulations.

Explanation of Provisions

    The temporary regulations made several changes to the cash-out 
rules under sections 411(a)(7), 411(a)(11), and 417(e)(1). In 
accordance with section 1071 of TRA '97, the temporary regulations 
increased the cash-out limit from $3,500 to $5,000. Thus, a qualified 
plan can generally distribute vested accrued benefits valued at $5,000 
or less without participant or spousal consent. The temporary 
regulations also provided that, for purposes of section 
411(a)(7)(B)(i), an involuntary distribution of an employee's vested 
accrued benefit valued at $5,000 or less could be treated as made due 
to termination of the employee's participation if the distribution 
could have been made at termination of

[[Page 44680]]

participation but for the fact that the benefit was then valued at more 
than $3,500. Finally, the temporary regulations amended Sec. 1.411(a)-
11(c)(3) to eliminate the ``lookback rule'' for distributions other 
than those made pursuant to an optional form of benefit under which at 
least one scheduled periodic distribution remained payable. Prior to 
this amendment, the lookback rule in Sec. 1.411(a)-11(c)(3) provided 
that the present value of a vested accrued benefit was deemed to exceed 
the cash-out limit if it had exceeded the cash-out limit at the time of 
any previous distribution. The temporary regulations did not change the 
parallel lookback rule under Sec. 1.417(e)-1(b)(2)(i).
    The proposed regulations generally included the provisions of the 
temporary regulations, but they also proposed the complete removal (on 
a prospective basis) of the lookback rule under both Secs. 1.411(a)-
11(c)(3) and 1.417(e)-1(b)(2)(i). Thus, under the proposed regulations, 
the lookback rule would be eliminated both for plans subject to the 
spousal-consent provisions of sections 401(a)(11) and 417 and for plans 
not subject to those provisions. Under this removal of the lookback 
rule, a participant's vested accrued benefit valued at $5,000 or less 
could be distributed without consent even if the benefit had been 
valued at more than $5,000 at the time of a previous distribution. 
However, in accordance with section 417(e)(1), the proposed regulations 
also provided that, in the case of plans subject to sections 401(a)(11) 
and 417, consent would be required after the annuity starting date for 
the immediate distribution of the present value of an 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.
    Very few comments were received on the proposed regulations. One 
commentator inquired whether a cash-out could be made of a benefit 
presently valued at $4,500 that had been valued at $4,000 upon 
termination of the employee's employment more than two years earlier. 
As indicated in the preamble to the final and temporary regulations 
published with the proposed regulations, that benefit could be cashed 
out.
    Another commentator indicated support for the content of the 
proposed regulations but expressed concern about the rule, derived from 
section 417(e)(1), prohibiting a cashout after the annuity starting 
date of a benefit being distributed in any form by a plan subject to 
sections 401(a)(11) and 417. The commentator observed that, under 
section 417(f)(2)(A), the annuity starting date for a benefit payable 
upon termination of employment in non-annuity form could be the date of 
termination. The commentator argued that the rule in the proposed 
regulations prohibiting a cashout after the annuity starting date could 
be read to preclude a cashout of a non-annuity benefit payable at 
termination, regardless of the present value of that benefit. To 
address this, the commentator urged the IRS and Treasury to redefine 
``annuity starting date'' such that a cashout would be permitted as 
long as a benefit remains immediately distributable (that is, until the 
later of normal retirement age or age 62).
    The provision in the proposed regulations prohibits a cashout after 
the annuity starting date of a benefit ``being distributed in any 
form.'' The rule does not apply to any benefit that is not yet ``being 
distributed''--that is, to any benefit with respect to which no payment 
has been made. If the present value of a benefit payable on or after 
termination of employment does not exceed the cashout limit, the rule 
of section 417(e)(1), as set forth in the proposed regulations, would 
not prohibit a cashout prior to the date on which a payment is first 
made (disregarding, obviously, the cashout payment itself). Thus, no 
change has been made to the regulations on this point.
    Another commentator objected to the complete elimination of the 
lookback rule under the proposed regulations. The commentator cited 
three reasons for its opposition: first, that an amount distributed in 
a hardship or other type of distribution remains part of a 
participant's benefit; second, that a participant could manipulate a 
distribution in order to evade the spousal-consent requirements; and, 
third, that permitting cash-outs after a hardship or other distribution 
is contrary to the policy of discouraging non-retirement distributions.
    In contrast, a comment received prior to the issuance of the 
proposed regulations noted problems faced by plan administrators due to 
the lookback rule. The commentator noted, for example, that if a plan 
provides for hardship distributions, the plan administrator must review 
its records to determine the value of the participant's benefits at the 
time of any prior distribution. The commentator added that this can be 
particularly difficult and costly where plans sponsored by other 
employers have merged into the plan. The commentator further stated 
that the cash-out provisions are designed to allow plans to reduce 
their administrative costs by making lump sum payments to participants 
with small benefits and that the lookback rule is contrary to that 
design because the rule (1) makes it more costly for administrators to 
determine whether the provisions apply and (2) can prevent a plan from 
relying on the provisions in many cases where the value of the 
participant's current benefit is well below $5,000.
    After consideration of the comments, the IRS and Treasury have 
decided to adopt the regulation eliminating the lookback rule as 
proposed. The IRS and Treasury believe that the statutory cash-out 
provisions represent a balancing of the interests of participants in 
maintaining their benefits in qualified plans with the reasonable 
administrative needs of plan sponsors and administrators. The lookback 
rule prevents plans from cashing out a benefit currently valued below 
the cash-out limit simply because it had been valued above the cash-out 
limit at the time of an earlier distribution. This creates disparity in 
the treatment of benefits of equivalent value and requires plans to 
incur additional recordkeeping and other administrative costs.
    The IRS and Treasury note that removal of the lookback rule is 
unlikely to present significant opportunities for participants to evade 
the spousal-consent rules. In the case of any plan subject to the 
spousal-consent provisions of sections 401(a)(11) and 417, a 
distribution that draws a participant's accrued benefit from a value 
above the cash-out limit to a value at or below the cash-out limit will 
itself require spousal consent. Furthermore, these final regulations 
strengthen the spousal-consent rules by clarifying that a plan subject 
to sections 401(a)(11) and 417 may not distribute a benefit after the 
annuity starting date without consent. This prohibition on cash-outs 
after the annuity starting date, which is statutory in source, applies 
without regard to the value of the benefit at the annuity starting date 
and without regard to the distribution form.
    Finally, the IRS and Treasury note that concerns about non-
retirement distributions of benefits are mitigated by the availability 
of rollovers. In almost all cases, an amount distributed from a 
qualified plan in a cash-out distribution will be an eligible rollover 
distribution that can be paid directly (or indirectly, through a 60-day 
rollover) to another qualified retirement plan or individual retirement 
arrangement.

[[Page 44681]]

Special Analyses

    It has been determined that this Treasury decision 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 AdministrativeProcedure 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 
business.

Drafting Information

    The principal author of these regulations is Robert M. Walsh, 
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 
removing the entry for Sec. 1.411(a)-7T and by adding a new entry in 
numerical order to read in part as follows:

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

    Sec. 1.411(a)-7 also issued under 26 U.S.C. 411(a)(7)(B)(i). * * 
*


    Par. 2. Section 1.411(a)-7 is amended as follows:
    1. Paragraph (d)(4)(i) is revised;
    2. Paragraphs (d)(4)(vi) and (d)(4)(vii) are added.
    The revision and additions read as follows:


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

* * * * *
    (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 paragraph (d)(4)(iv) of this section in effect at the 
time of the distribution.
* * * * *
    (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)-11(c)(3)(ii). For 
purposes of determining the entire nonforfeitable benefit, the plan may 
disregard service after the distribution, as illustrated in paragraph 
(d)(2)(i) of this section.
    (vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this section 
apply to distributions made on or after March 22, 1999. However, an 
employer is permitted to apply paragraphs (d)(4)(i) and (vi) of this 
section to plan years beginning on or afterAugust 6, 1997. Otherwise, 
for distributions prior to March 22, 1999, Secs. 1.411(a)-7 and 
1.411(a)-7T, in effect prior to October 17, 2000 (as contained in 26 
CFR part 1, revised as of April 1, 2000) apply.
* * * * *


Sec. 1.411(a)-7T  [Removed]

    Par. 3. Section 1.411(a)-7T is removed.
    Par. 4. Section 1.411(a)-11 is amended by revising paragraph (c)(3) 
to read as follows:


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

* * * * *
    (c) * * *
    (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).
    (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 October 17, 2000. However, an 
employer is permitted to apply the $5,000 cash-out limit described in 
paragraph (c)(3)(ii) of this section to plan years beginning on or 
after August 6, 1997. Otherwise, for distributions prior to October 17, 
2000, Secs. 1.411(a)-11 and 1.411(a)-11T in effect prior to October 17, 
2000 (as contained in 26 CFR Part 1 revised as of April 1, 2000) apply.
* * * * *


Sec. 1.411(a)-11T  [Removed]

    Par. 5. Section 1.411(a)-11T is removed.
    Par. 6. Section 1.417(e)-1 is amended by revising the last sentence 
of paragraph (b)(2)(i) and by adding new paragraph (b)(2)(iii) to read 
as follows:


Sec. 1.417(e)-1  Restrictions and valuations of distributions from 
plans subject to sections 401(a)(11) and 417.

* * * * *
    (b) * * *
    (2) * * * (i) * * * After the annuity starting date, consent is 
required 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 such present value.
* * * * *
    (iii) Paragraph (b)(2)(i) of this section applies to distributions 
made on or after October 17, 2000. For distributions prior to October 
17, 2000, Sec. 1.417(e)-1(b)(2)(i) in effect prior to October 17, 2000 
(as

[[Page 44682]]

contained in 26 CFR part 1 revised as of April 1, 2000) applies.
* * * * *

PARTS 1 AND 31--[AMENDED]

    Par. 7. In the table below, for each section indicated in the left 
column, remove the language in the middle column and add the language 
in the right column:

----------------------------------------------------------------------------------------------------------------
             Section                     Remove                                   Add
----------------------------------------------------------------------------------------------------------------
1.401(a)-20, Q&A-8, paragraph     Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (d), first sentence.              c)(3)(ii).
1.401(a)-20, Q&A-24, paragraph    Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (a)(1), fourth sentence.          c)(3)(ii).
1.401(a)(4)-4, paragraph          Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (b)(2)(ii)(C).                    c)(3)(ii).
1.401(a)(26)-4, paragraph         Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (d)(2), last sentence.            c)(3)(ii).
1.401(a)(26)-6, paragraph         Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (c)(4), first sentence.           c)(3)(ii).
1.411(a)-11, paragraph (b),       Sec.  1.411(a)-11T(  paragraph (c)(3)(ii) of this section.
 first sentence.                   c)(3)(ii).
1.411(a)-11, paragraph (c)(7),    Sec.  1.411(a)-11T(  paragraph (c)(3)(ii) of this section.
 third sentence.                   c)(3)(ii).
1.411(d)-4, Q&A-2, paragraph      Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (b)(2)(v), second, third, and     c)(3)(ii).
 fourth sentences.
1.411(d)-4, Q&A-4, paragraph      Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (a), eighth sentence.             c)(3)(ii).
1.417(e)-1, paragraph (b)(2)(i),  Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 first, fourth, and fifth          c)(3)(ii).
 sentences.
31.3121(b)(7)-2, paragraph        Sec.  1.411(a)-11T(  Sec.  1.411(a)-11(c)(3)(ii).
 (d)(2)(i), last sentence.         c)(3)(ii).
----------------------------------------------------------------------------------------------------------------


    Approved: July 10, 2000.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 00-18119 Filed 7-18-00; 8:45 am]
BILLING CODE 4830-01-U