[Federal Register Volume 65, Number 173 (Wednesday, September 6, 2000)]
[Rules and Regulations]
[Pages 53901-53909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22668]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8900]
RIN 1545-AW27


Special Rules Regarding Optional Forms of Benefit Under Qualified 
Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that 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 permit certain transfers between defined 
contribution plans that were not permitted under prior final 
regulations. These regulations affect qualified retirement plan 
sponsors, administrators, and participants.

DATES: These regulations are effective September 6, 2000.

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, 202-622-6090 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains 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

[[Page 53902]]

have the effect of eliminating or reducing an early retirement benefit 
or a retirement-type subsidy. Section 204(g)(2) of the Employee 
Retirement Income Security Act of 1974 (ERISA), Public Law 93-406 (88 
Stat. 829), provides a parallel rule to section 411(d)(6)(B) of the 
Code that applies under Title I of ERISA, and authorizes the Secretary 
of the Treasury to provide exceptions to this parallel ERISA 
requirement. Thus, Treasury regulations issued under section 
411(d)(6)(B) of the Code apply as well for purposes of section 
204(g)(2) of ERISA.
    Final regulations regarding section 411(d)(6)(B) (the 1988 
regulations) were published in the Federal Register on July 8, 1988. 
The 1988 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, these 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) of the 1988 regulations permits a 
plan-to-plan transfer 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 elective transfer rule of 
Sec. 1.411(d)-4, Q&A-3(b) of the 1988 regulations has applied only to 
situations in which a participant's benefits have become distributable, 
its applicability has been 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 issued Notice 98-29 (1998-1 C.B. 1163) to 
request public comment on several ways of providing regulatory relief 
from the requirements of section 411(d)(6)(B) for defined contribution 
plans in view of these considerations. Most of the public comments 
received in response to Notice 98-29 indicated 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. After considering the comments 
received in response to Notice 98-29, the IRS and Treasury issued 
proposed regulations (REG-109101-98), which were published in the 
Federal Register (65 FR 16546) on March 29, 2000, to propose relief 
from the requirements of section 411(d)(6)(B) in a wide range of 
circumstances.
    Seventeen written comments responding to the notice of proposed 
rulemaking were received. No public hearing was requested or held. 
Nearly all of the written comments expressed support for the provisions 
of the proposed regulation that would provide relief from the 
requirements of section 411(d)(6)(B) and requested clarifications or 
extensions of that relief in various ways. After consideration of all 
of the written comments, the IRS and the Treasury Department are 
adopting the proposed regulations as revised by this Treasury Decision 
for the reasons summarized below.
    These final regulations under section 411(d)(6)(B) do 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, and 
those requirements are not affected by these final regulations. 
Similarly, these final regulations do 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

    In order to simplify plan administration, these final regulations 
adopt a modified version of the rule set forth in the proposed 
regulations that significantly expands the permitted changes that may 
be made to alternative forms of payment under a defined contribution 
plan. Under the rule in 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 payment form (such as, 
for example, an annuity distribution), each of which was otherwise 
identical to the eliminated or restricted optional form of benefit. In 
the preamble to the proposed regulations, the IRS and the Treasury 
Department requested comments on whether an extended payment form 
should be required to be preserved as part of such a plan amendment, or 
should be required to be preserved in particular circumstances.
    In general, comments stated that the rule set forth in the proposed 
regulations would simplify plan administration. However, most 
commentators also indicated that requiring the retention of an extended 
payment form would perpetuate administrative burdens that would not be 
justified by any comparative advantage to plan participants. These

[[Page 53903]]

commentators pointed out various administrative burdens associated with 
retaining an extended payment form, such as maintaining a system to 
administer the extended payment form for the few (if any) participants 
who choose that payment form, including descriptions of the extended 
payment form in participant materials, explaining the extended payment 
form in response to participant inquiries, dealing with participant 
requests to accelerate distributions under the extended payment form, 
complying with the minimum required distribution rules of section 
401(a)(9), and handling the problems that result from an increased 
incidence of missing participants. These commentators also pointed out 
the special burdens that maintenance of an extended payment option 
imposes in mergers and acquisitions. These commentators took the 
position that, in light of a participant's ability to roll over 
distributions to one or more IRAs, which commonly offer a far wider 
array of alternative payment forms, and in light of the ability of many 
participants to choose to retain their full vested account balance in 
the qualified plan, there is little or no advantage to the participant 
in rules requiring the plan sponsor to retain an option to receive 
extended payments from a qualified defined contribution plan.
    After considering these comments regarding the desirability of 
requiring the retention of an extended payment form, and in light of 
the ability of participants to replicate any extended payment form that 
a defined contribution plan may offer by rolling over a single-sum 
distribution to an IRA, the IRS and the Treasury Department have 
determined that any advantages of requiring the retention of an 
extended payment form are outweighed by the countervailing 
considerations. Accordingly, these final regulations generally provide 
that 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 to the participant include payment in a 
single-sum distribution form that is otherwise identical to the 
optional form of benefit that is being eliminated or restricted. The 
final regulations adopt the rules set forth in the proposed regulations 
for determining whether a single-sum distribution is otherwise 
identical to an optional form of benefit that is being eliminated or 
restricted.
    However, the final regulations include a provision that protects 
participants taking distributions shortly after the plan is amended, 
who may have planned on the availability of the payment form that is 
being eliminated or restricted. Under this provision, a plan amendment 
that eliminates or restricts the ability of a participant to receive a 
particular optional form of benefit cannot apply to any distribution 
that has an annuity starting date earlier than the 90th day \1\ after 
the date the participant receiving the distribution has been furnished 
a summary that reflects the amendment and that satisfies the 
requirements of the Labor Department regulations at 29 CFR 2520.104b-3 
relating to a summary of material modifications for pension plans (or, 
if earlier, the first day of the second plan year following the plan 
year in which the amendment is adopted).
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    \1\ This 90-day requirement is parallel to the 90-day election 
period applicable to any plan that is subject to the joint and 
survivor annuity requirements of section 417.
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    As noted above, the final regulations do not affect the survivor 
annuity requirements of sections 401(a)(11) and 417 or the direct 
rollover requirements of section 401(a)(31).
    One commentator expressed concern that permitting plan amendments 
that eliminate alternative forms of payment would have the effect of 
permitting the elimination of subsidized early retirement benefits 
(i.e., distribution forms available upon early retirement that have a 
higher actuarial value than the normal retirement benefit that has been 
accrued at the time the distribution begins). These regulations, 
however, permit plan amendments eliminating alternative forms of 
payment only in certain circumstances involving defined contribution 
plans. Under a defined contribution plan, a participant is entitled to 
a distribution, in whatever form may be provided under the plan, only 
to the extent of the participant's individual account, plus earnings 
thereon. Accordingly, no alternative form of payment can be subsidized 
relative to any other payment form available under a defined 
contribution plan. Thus, these regulations do not have the effect of 
permitting the elimination of any early retirement subsidy or any other 
subsidized benefit forms.

B. Voluntary Direct Transfers Between Plans

    Under certain circumstances, the 1988 regulations permitted 
elimination of optional forms of benefit in connection with transfers 
of benefits from one plan to another with a participant's consent. See 
Sec. 1.411(d)-4, Q&A-3(b) (as contained in 26 CFR part 1 revised April 
1, 2000). The proposed regulations contained a number of changes to the 
1988 regulations that would significantly liberalize the application of 
these elective transfer provisions. These final regulations generally 
finalize the provisions of the proposed regulations relating to 
elective transfers, with certain modifications that are described 
below.
    The 1988 regulations permitted an elective transfer from one 
qualified plan to another only if the participant's benefit under the 
transferring plan was immediately distributable (a distributable event 
transfer). This condition precluded use of the elective transfer 
provision in the 1988 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 were not distributable because section 
401(k)(10) was not applicable. In response to Notice 98-29, many 
commentators 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 previously earned 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.
    Section 1.411(d)-4, Q&A-3(c) of these final regulations retains and 
modifies the previously applicable section 411(d)(6) relief for 
distributable event transfers, and Sec. 1.411(d)-4, Q&A-3(b) of these 
final regulations adds new section 411(d)(6) relief for transfers in 
connection with certain corporate mergers and acquisitions or changes 
in the participant's employment status (transaction or employment 
change transfers). As a result, relief from section 411(d)(6) applies 
in each of the following cases:
     Direct rollover. Existing rules provide that if a direct 
rollover is made from one qualified retirement plan to another, as 
described in section 401(a)(31), the receiving plan is not required by 
section 411(d)(6) to offer the same optional forms of benefit as the 
sending plan offered. See Sec. 1.401(a)(31)-1, Q&A-14.
     Distributable event transfer. As discussed further below, 
in any case in

[[Page 53904]]

which a participant is entitled to a distribution from either a defined 
benefit plan or a defined contribution plan but the participant is not 
eligible to receive an immediate distribution of the participant's 
entire nonforfeitable accrued benefit in a single-sum distribution that 
can be entirely rolled over, these final regulations provide section 
411(d)(6) relief for a voluntary transfer. Thus, these regulations 
modify the distributable event transfer provisions of the 1988 
regulations.
     Transaction or employment change transfer. As discussed 
further below, even if a participant is not entitled to a distribution 
to which the preceding rules would apply, these final regulations, like 
the proposed regulations, allow a voluntary transfer from a defined 
contribution plan to another defined contribution plan of the same type 
if the transfer occurs in connection with a corporate merger or 
acquisition or a change in the participant's employment status. See 
Sec. 1.411(d)-4, Q&A-3(b).
    Under certain circumstances, it may be possible to accomplish a 
voluntary transfer of a participant's benefit from one defined 
contribution plan to another that could be structured as either a 
distributable event transfer or a transaction or employment change 
transfer. In such a situation, the plans would be required to comply 
with the requirements applicable to either one of those sets of rules 
with respect to the transfer.
    1. Expansion of Section 411(d)(6) Relief for Distributable Event 
Transfers 
    Under section 401(a)(31), which was enacted after the issuance of 
the 1988 regulations, 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, including distributions that are directly rolled over 
to another plan under section 401(a)(31). Accordingly, for amounts that 
are distributable in an eligible rollover distribution, the elective 
transfer rules of the 1988 regulations have largely been duplicated by 
the enactment of section 401(a)(31) because the same section 411(d)(6) 
result generally is available through a direct rollover. These final 
regulations generally eliminate this duplication. Under these final 
regulations, for transfers occurring on or after January 1, 2002, the 
distributable event transfer rules are not available if the participant 
is eligible to receive an immediate distribution of the participant's 
entire nonforfeitable accrued benefit in a single-sum distribution that 
would consist entirely of an eligible rollover distribution within the 
meaning of section 401(a)(31)(C). (Instead, the plan must offer a 
section 401(a)(31) direct rollover.) However, in other situations, 
including situations in which a single-sum distribution is not 
available or the participant's benefit includes an amount attributable 
to after-tax employee contributions, the distributable event transfer 
rules will be available.
    Some commentators requested that plans have the ability to 
characterize a transfer that could be accomplished totally or in part 
as a direct rollover under section 401(a)(31) as a direct transfer to 
which section 411(d)(6) relief applies. They point out that this 
procedure is permitted under the 1988 regulations and that this 
procedure would simplify plan administration. These final regulations 
clarify that plans are not required to bifurcate a transaction into a 
partial section 401(a)(31) direct rollover and a partial elective 
transfer to which section 411(d)(6) relief applies, but that plans are 
permitted, as an alternative to bifurcation, to treat such a 
transaction entirely as an elective transfer to which section 411(d)(6) 
relief applies. However, as noted above, for transfers occurring on or 
after January 1, 2002, this section 411(d)(6) relief for distributable 
event transfers does not apply to an elective transfer that occurs at a 
time at which the participant is eligible to receive an immediate 
distribution of the participant's entire nonforfeitable account balance 
in a single-sum distribution that would consist entirely of an eligible 
rollover distribution within the meaning of section 401(a)(31)(C). 
Instead, a similar result could be achieved by means of a direct 
rollover to which section 401(a)(31) applies.
    Under the proposed regulations, the section 411(d)(6) relief for 
transfers of immediately distributable amounts other than eligible 
rollover distributions would only have applied to transfers between 
plans of the same type (i.e., transfers from defined benefit plans to 
defined benefit plans and transfers from defined contribution plans to 
defined contribution plans), notwithstanding that the 1988 regulations 
granted section 411(d)(6) relief to transfers between plans of 
different types (i.e., transfers from defined benefit plans to defined 
contribution plans and vice versa). The preamble specifically requested 
comments on whether section 411(d)(6) relief was needed for 
distributable event transfers between different types of plans, given 
the availability of direct rollovers. Several commentators stated that 
this section 411(d)(6) relief provided under the 1988 regulations was 
still valuable and also requested clarification that the relief applied 
to transfers of amounts that were immediately distributable only in the 
form of periodic payments commencing immediately. These final 
regulations adopt both of these recommendations.
2. Section 411(d)(6) Relief for Transaction or Employment Change 
Transfers
    Section 1.411(d)-4, Q&A-3(b) of these final regulations retains 
and, in some respects, expands provisions of the proposed regulations 
that grant, subject to certain conditions, broad section 411(d)(6) 
relief for many types of elective transfers of a participant's entire 
benefit under a defined contribution plan, whether or not the benefit 
is immediately distributable (and whether or not the participant would 
be eligible for a distribution of the participant's entire benefit in a 
single-sum distribution that would be an eligible rollover 
distribution). In order to ensure that the participant's election 
occurs in connection with an independent event (and is not, in effect, 
a mere waiver), the transfer must be made either in connection with 
certain corporate transactions (such as a merger or acquisition) or in 
connection with a participant's change in employment status (for 
example, the participant's transfer to a different subsidiary or 
division of the employer, without regard to whether the transfer 
constitutes a separation from service) to an employment status with 
respect to which the participant is not entitled to additional 
allocations under the transferor plan, even if the event is not one 
that triggers the right to an immediate distribution. Such elective 
transfers can be made to a plan that is outside the employer's 
controlled group, to another plan of the same employer, or to a plan 
that is maintained by another member of the employer's controlled 
group.
    A transaction or employment change transfer may involve benefits 
that are not fully vested under the transferor plan. However, where a 
participant's benefit that is not fully vested under the transferor 
plan is transferred pursuant to these rules, the vesting schedule 
amendment requirements of section 411(a)(10) must be satisfied.
    A transaction or employment change transfer generally is only 
permitted between defined contribution plans 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

[[Page 53905]]

between which transaction or employment change transfers are permitted 
facilitate administration of the qualified plan distribution rules by 
ensuring that amounts transferred to the receiving plan, in a transfer 
that is not itself a distribution, 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 of sections 401(a)(11)(A) 
and 417, those survivor annuity requirements would in any event apply 
to the receiving plan with respect to the transferred amount as a 
result of the transferee plan rule of section 401(a)(11)(B)(iii)(III).
    In response to comments, the final regulations clarify that the 
right to a transaction or employment change transfer is an other right 
or feature for purposes of section 401(a)(4) (unlike a distributable 
event transfer, which is treated as an optional form of benefit for 
purposes of section 401(a)(4)). In applying section 401(a)(4) to a 
transaction or employment change transfer right, the final regulations 
permit certain conditions to be disregarded. Thus, for example, section 
401(a)(4) would be satisfied if, with respect to all participants: (1) 
The plan provides a transfer right in the event that an employee ceases 
to be covered by the plan because of any asset or stock disposition, 
merger or other similar business transaction involving a change of the 
employer; (2) the plan provides a transfer right in the event that an 
employee ceases to be covered by the plan because of an identified 
asset or stock disposition, merger or other similar business 
transaction that involves a change of the employer; or (3) the plan 
provides a transfer right in the event that an employee ceases to be 
covered by the plan because of a transfer of employment to a position 
covered by another plan within the employer's controlled group.
C. Rules Regarding In-Kind Distributions
    The final 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 from defined contribution plans 
and defined benefit plans. Provisions for distribution in kind are 
sometimes found, for example, 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 ERISA. The 1988 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.
    The proposed regulations provided that, if a defined benefit plan 
included an optional form of benefit under which benefits were 
distributed in the medium of an annuity contract, that optional form of 
benefit could be modified by substituting cash for the annuity 
contract. The proposed regulations separately provided a similar rule 
for defined contribution plans that provided an annuity optional form 
of benefit and for distribution of an annuity contract, and that 
substituted a non-annuity optional form of benefit for the annuity 
form. These final regulations combine and simplify these two rules. The 
final regulations clarify that a participant's right to receive a 
particular benefit in the form of cash payments from either a defined 
benefit plan or a defined contribution plan and a participant's right 
to receive that benefit in the form of the distribution of an annuity 
contract that provides for cash payments that are otherwise identical 
in all respects to those cash payments from the plan are not separate 
optional forms of benefit. Therefore, for example, if a plan includes 
an optional form of benefit under which benefits are distributed in the 
medium of an annuity contract that provides for cash payments, that 
optional form of benefit may be modified by a plan amendment that 
substitutes cash payments from the plan for the distribution of the 
annuity contract, where those cash payments from the plan are identical 
to the cash payments payable from the annuity contract in all respects 
except for the source of the payments. Of course, a defined 
contribution plan that continues to offer a life annuity form of 
distribution must purchase an annuity contract from an insurance 
carrier in order to provide that optional form (and the plan may either 
distribute that contract to the participant or hold the contract as a 
plan asset from which it makes the payments for the participant).
    These final regulations 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 distribution in the form of cash. Thus, the right to 
distributions from a defined contribution plan in the form of cash, 
employer securities or other property that is not marketable securities 
is generally protected. The protection for employer securities reflects 
the potential value of the special tax treatment provided to net 
unrealized appreciation (NUA) on employer securities under section 
402(e)(4). The protection for assets that are not marketable securities 
reflects that possibility that a participant may assign a higher value 
to such assets than the plan without the participant having the ability 
to acquire the asset after receiving a cash distribution.
    The proposed regulations would 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 can be made to a participant to specific types of 
property allocated to the participant's account 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 allocated to the participant's account at the time of 
the distribution include that type of property.
    These provisions of the proposed regulations were supported by 
commentators and have been adopted in these final regulations. In 
response to commentator suggestions, the examples from the proposed 
regulations have been modified in these regulations to clarify that a 
plan amendment that limits the right of a distribution in specified 
types of property to certain participants, as permitted by these 
regulations, need not itself contain a list of those participants. 
These provisions of the final regulations do not permit a plan to be 
amended in a way that affects protected features of optional forms of 
benefit other than the medium of distribution.

Effective Date and Applicability Date

    These final regulations are effective September 6, 2000. These 
final regulations apply to plan amendments that are adopted and 
effective on or after September 6, 2000, except as provided in 
Sec. 1.411(d)-4, Q&A-2(e)(1)(ii) and Q&A-3(c)(1)(ii).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a

[[Page 53906]]

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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.
    Drafting Information: The principal author of these regulations is 
Linda S. F. Marshall of the Office of the Division Counsel/Associate 
Chief Counsel (Tax Exempt and Government Entities). 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.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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)-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. In paragraph (a)(1), removing the language ``in paragraph (b) of 
this Q&A-2'' and adding the language ``in this section'' in its place.
    b. Adding two sentences at the beginning of paragraph 
(a)(3)(ii)(A).
    c. Revising the second sentence of paragraph (b)(2) introductory 
text.
    d. Revising paragraph (b)(2)(iii).
    e. Amending paragraph (b)(2)(viii) by removing the language `` of 
the employer''.
    f. 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).
    The additions and revisions read as follows:


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

* * * * *
    A-2: * * *
    (a) * * *
    (3) * * *
    (ii) Annuity contracts--(A) General rule. The right of a 
participant to receive a benefit in the form of cash payments from the 
plan and the right of a participant to receive that benefit in the form 
of the distribution of an annuity contract that provides for cash 
payments that are identical in all respects to the cash payments from 
the plan except with respect to the source of the payments are not 
separate optional forms of benefit. Therefore, for example, if a plan 
includes an optional form of benefit under which benefits are 
distributed in the medium of an annuity contract that provides for cash 
payments, that optional form of benefit may be modified by a plan 
amendment that substitutes cash payments from the plan for the annuity 
contract, where those cash payments from the plan are identical to the 
cash payments payable from the annuity contract in all respects except 
with respect to the source of the payments. * * *
* * * * *
    (b) * * *
    (2) * * * The rules with respect to permissible eliminations and 
reductions provided in this paragraph (b)(2) generally are effective 
January 30, 1986; however, the rules of paragraphs (b)(2)(iii) (A) and 
(B) and (b)(2)(viii) of this Q&A-2 are effective for plan amendments 
that are adopted and effective on or after September 6, 2000. * * *
* * * * *
    (iii) In-kind distributions--(A) 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 a plan amendment that 
substitutes cash for the marketable securities as the medium of 
distribution. For purposes of this paragraph (b)(2)(iii)(A) and 
paragraph (b)(2)(iii)(B) of this Q&A-2, 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).
    (B) 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 marketable securities that are not securities of 
the employer) that are allocated to 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 if a distributable event occurred. 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 allocated to the participant's account at the time of 
distribution that consists of property of those specified types.
    (C) 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 as the medium of distribution 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.
    (D) 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 October 18, 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.

[[Page 53907]]

    (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 (and participants' accounts have ceased to be 
invested in employer securities), to eliminate the right to a 
distribution in the form of employer stock. See paragraph 
(b)(2)(iii)(B) 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)(A) 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 
provides that only participants with employer stock allocated to 
their accounts as of the effective date of the amendment have the 
right to distributions in the form of employer stock, and that only 
participants with shares of PQR limited partnership allocated to 
their accounts as of the effective date of the amendment have the 
right to distributions in the form of shares of PQR limited 
partnership. To comply with the plan amendment, the plan 
administrator retains a list of participants with employer stock 
allocated to their accounts as of the effective date of the 
amendment, and a list of participants with shares of PQR limited 
partnership allocated to their accounts as of the effective date of 
the amendment. See paragraphs (b)(2)(iii) (A) and (B) 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 those assets are allocated to the participant's account at the 
time of the distribution. See paragraphs (b)(2)(iii) (A) and (B) 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 
provides that only participants with employer stock allocated to 
their accounts as of the effective date of the amendment have the 
right to distributions in the form of employer stock, and that only 
participants with shares of PQR limited partnership allocated to 
their accounts as of the effective date of the amendment have the 
right to distributions in the form of shares of PQR limited 
partnership, and that further provides that the distribution of that 
stock or those shares is available only to the extent that those 
assets are allocated to those participants' accounts at the time of 
the distribution. To comply with the plan amendment, the plan 
administrator retains a list of participants with employer stock 
allocated to their accounts as of the effective date of the 
amendment, and a list of participants with shares of PQR limited 
partnership allocated to their accounts as of the effective date of 
the amendment. See paragraphs (b)(2)(iii) (A) and (B) 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)(C) 
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--
    (i) After the plan amendment is effective with respect to the 
participant, the alternative forms of payment available to the 
participant include payment in a single-sum distribution form that is 
otherwise identical to the optional form of benefit that is being 
eliminated or restricted; and
    (ii) The amendment does not apply to the participant with respect 
to any distribution with an annuity starting date that is earlier than 
the earlier of--
    (A) The 90th day after the date the participant has been furnished 
a summary that reflects the amendment and that satisfies the 
requirements of 29 CFR 2520.104b-3 (relating to a summary of material 
modifications) for pension plans; or
    (B) The first day of the second plan year following the plan year 
in which the amendment is adopted.
    (2) Otherwise identical single-sum distribution. For purposes of 
this paragraph (e), a single-sum distribution form is otherwise 
identical to an optional form of benefit that is eliminated or 
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the 
single-sum 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 otherwise identical 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, 
or imposes any condition of eligibility that did not apply to the 
installment form. However, 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 
would not be protected from elimination or restriction under section 
411(d)(6) or this section.
    (3) 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 with a calendar plan year 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). On May 15, 2001, 
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

[[Page 53908]]

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)). The amendment does not apply to P if P elects to 
have annuity payments begin before the earlier of January 1, 2003, 
or 90 days after the date on which the plan administrator of Plan M 
furnishes P with a summary that reflects the amendment and that 
satisfies the requirements of 29 CFR 2520.104b-3. On December 14, 
2001, the plan administrator of Plan M furnishes P with a summary 
plan description that reflects the amendment and that satisfies the 
requirements of 29 CFR 2520.104b-3.
    (ii) Plan M does not violate the requirements of section 
411(d)(6) (or section 401(a)(11)) merely because, as of March 14, 
2002, 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. On May 15, 2001, 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, 15, or 20 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, subject to the requirements of section 
401(a)(9)), in the form of a single-sum distribution. The amendment 
does not apply to P if P elects to have annuity payments begin 
before January 1, 2002. On September 20, 2001, the plan 
administrator of Plan M furnishes P with a summary of material 
modifications that reflects the amendment and that satisfies the 
requirements of 29 CFR 2520.104b-3.
    (ii) Plan M does not violate the requirements of section 
411(d)(6) merely because, as of January 1, 2002, the plan amendment 
has eliminated P's option to receive a distribution in the form of 
substantially equal monthly installment payments over 5, 10, 15, or 
20 years.
    (4) Effective date. This paragraph (e) applies to plan amendments 
that are adopted on or after September 6, 2000.
* * * * *
    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 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 any direct 
rollover described in Q&A-3 of Sec. 1.401(a)(31)-1) 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 either 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 change in employment status to an employment 
status with respect to which the participant is not entitled to 
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) and, thus, must satisfy the requirements 
of section 414(l). In addition, this paragraph (b) only provides relief 
under section 411(d)(6); a transfer described in this paragraph must 
satisfy 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 411(a)(10) with respect to the 
amounts transferred.
    (3) Status of elective transfer as other right or feature. A right 
to a transfer of benefits from a plan pursuant to the elective transfer 
rules of this paragraph (b) is an other right or feature within the 
meaning of Sec. 1.401(a)(4)-4(e)(3), the availability of which is 
subject to the nondiscrimination requirements of section 401(a)(4) and 
Sec. 1.401(a)(4)-4. However, for purposes of applying the rules of 
Sec. 1.401(a)(4)-4, the following conditions are to be disregarded in 
determining the employees to whom the other right or feature is 
available--
    (i) A condition restricting the availability of the transfer to 
benefits of participants who are transferred to a different employer in 
connection with a specified asset or stock disposition, merger, or 
other similar transaction involving a change in employer of the 
employees of a trade or business (i.e., a disposition within the 
meaning of Sec. 1.410(b)-2(f)), or in connection with any such 
disposition, merger, or other similar transaction.

[[Page 53909]]

    (ii) A condition restricting the availability of the transfer to 
benefits of participants who have a change in employment status to an 
employment status with respect to which the participant is not entitled 
to additional allocations under the transferor plan.
    (c) Elective transfers of certain distributable benefits between 
qualified plans--(1) In general. A transfer of a participant's benefits 
between qualified plans that results in the elimination or reduction of 
section 411(d)(6) protected benefits does not violate section 411(d)(6) 
if--
    (i) The transfer occurs at a time at which the participant's 
benefits are distributable (within the meaning of paragraph (c)(3) of 
this Q&A-3);
    (ii) For a transfer that occurs on or after January 1, 2002, the 
transfer occurs at a time at which the participant is not eligible to 
receive an immediate distribution of the participant's entire 
nonforfeitable accrued benefit in a single-sum distribution that would 
consist entirely of an eligible rollover distribution within the 
meaning of section 401(a)(31)(C);
    (iii) The voluntary election requirements of paragraph (b)(1)(i) of 
this Q&A-3 are met;
    (iv) The participant is fully vested in the transferred benefit in 
the transferee plan;
    (v) In the case of a transfer from a defined contribution plan to a 
defined benefit plan, the defined benefit plan provides a minimum 
benefit, for each participant whose benefits are transferred, equal to 
the benefit, expressed as an annuity payable at normal retirement age, 
that is derived solely on the basis of the amount transferred with 
respect to such participant; and
    (vi) The amount of the benefit transferred, together with the 
amount of any contemporaneous section 401(a)(31) direct rollover to the 
transferee plan, equals the entire nonforfeitable accrued benefit under 
the transferor 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--(i) In general. A 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. A transfer pursuant to the 
elective transfer rules of this paragraph (c) is not treated as a 
distribution for purposes of the minimum distribution requirements of 
section 401(a)(9).
    (ii) Status of elective transfer as optional form of benefit. A 
right to a transfer of benefits from a plan pursuant to the elective 
transfer rules of this paragraph (c) is an optional form of benefit 
under section 411(d)(6), the availability of which is subject to the 
nondiscrimination requirements of section 401(a)(4) and 
Sec. 1.401(a)(4)-4.
    (3) Distributable benefits. For purposes of paragraph (c)(1)(i) of 
this Q&A-3, 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 (e.g., in the form of an 
immediately commencing annuity) from that plan under provisions of the 
plan not inconsistent with section 401(a).
    (d) Effective date. This Q&A-3 is applicable for transfers made on 
or after September 6. 20000.
* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

    Approved: August 28, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-22668 Filed 8-31-00; 2:25 pm]
BILLING CODE 4830-01-U