[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Proposed Rules]
[Pages 3916-3920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-132]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109481-99]
RIN 1545-AX34


Special Rules Under Section 417(a)(7) for Written Explanations 
Provided by Qualified Retirement Plans After Annuity Starting Dates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
special rule added by the Small Business Job Protection Act of 1996 
which permits the required written explanations of certain annuity 
benefits to be provided by qualified retirement plans to plan 
participants after the annuity starting date. These regulations affect 
administrators of, participants in, and beneficiaries of qualified 
retirement plans.

DATES: Written and electronic comments and requests for a public 
hearing must be received by April 17, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-109481-99), 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:M&SP:RU (REG-109481-99), 
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 on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.gov/tax__regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Robert M. 
Walsh, (202) 622-6090; concerning submissions and delivery of comments, 
Sonya Cruse (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, 
Washington, DC 20224. Comments on the collection of information should 
be received by March 19, 2001. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec. 1.417(e)-1(b)(3)(iv)(B) and Sec. 1.417(e)-

[[Page 3917]]

1(b)(3)(v)(A). This collection of information is required by the IRS to 
ensure that the participant and the participant's spouse consent to a 
form of distribution from a qualified retirement plan that may result 
in reduced periodic payments. This information will be used by the plan 
administrator to verify that the required consent has been given. The 
collection of information is required to obtain a benefit. The 
respondents are individuals who are entitled to receive certain types 
of distributions from a qualified retirement plan or who are married to 
individuals entitled to receive certain types of distributions from a 
qualified retirement plan.
    Taxpayers provide the information to administrators of qualified 
retirement plans when a distribution with a retroactive annuity 
starting date is elected.
    Estimated total annual reporting burden: 12,500 hours.
    Estimated average annual burden hours per respondent: 0.25 hours.
    Estimated number of respondents: 50,000.
    The estimated annual frequency of responses is on occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR Part 1 under 
section 417(a)(7) of the Internal Revenue Code (Code). Section 
401(a)(11) provides that, subject to certain exceptions, all 
distributions from a qualified plan must be made in the form of a 
qualified joint and survivor annuity (QJSA). One such exception is 
provided in section 417, which allows a participant to elect to waive 
the QJSA in favor of another form of distribution. Section 417(a)(2) 
provides that, for the waiver to be valid, the participant's spouse 
must consent to the waiver. Section 417(a)(3)(A) requires a qualified 
plan to provide to each participant, within a reasonable period of time 
before the annuity starting date, a written explanation (QJSA 
explanation) that describes the QJSA, the right to waive the QJSA and 
the rights of the participant's spouse. Under section 417(d), a 
participant's spouse who has not been married to the participant 
throughout the 1-year period preceding the annuity starting date is not 
required to be treated as the spouse for purposes of entitlement to the 
QJSA. Section 417(a)(2)(B) provides that spousal consent is not 
required to waive the QJSA if it is established to the satisfaction of 
a plan representative that such consent may not be obtained because 
there is no spouse, because the spouse cannot be located, or because of 
such other circumstances as the Secretary may by regulations prescribe.
    Section 417(a)(7), which was added to the Code by section 1451(a) 
of the Small Business Job Protection Act of 1996, Public Law 104-188 
(110 Stat. 1755) (SBJPA), creates an exception to the rules of section 
417(a)(3)(A), effective for plan years beginning after December 31, 
1996. Section 417(a)(7)(A) provides that, notwithstanding any other 
provision of section 417(a), a plan may furnish the QJSA explanation 
after the annuity stating date, as long as the applicable election 
period is extended for at least 30 days after the date on which the 
explanation is furnished. Thus, section 417(a)(7)(A) allows the annuity 
starting date to be a date that is earlier than the date the QJSA 
explanation is provided, thereby allowing the retroactive payment of 
benefits that are attributable to the period before the QJSA 
explanation is provided. Section 417(a)(7)(A)(ii) provides that the 
Secretary may limit the application of the provision permitting the 
selection of a retroactive annuity starting date by regulations, except 
that the regulations may not limit the period of time by which the 
annuity starting date precedes the furnishing of the written 
explanation other than by providing that the retroactive annuity 
starting date may not be earlier than termination of employment.
    Section 205(c)(8) of the Employee Retirement Income Security Act of 
1974, Public Law 93-406 (88 Stat. 829) (ERISA), provides a parallel 
rule to section 417(a)(7) of the Code that applies under Title I of 
ERISA, and authorizes the Secretary of the Treasury to issue 
regulations limiting the application of the general rule. Thus, 
Treasury regulations issued under section 417(a)(7) of the Code apply 
as well for purposes of section 205(c)(8) of ERISA.
    On December 18, 1998, final regulations were published in the 
Federal Register (63 FR 70009) which amended Sec. 1.417(e)-1(b)(3)(ii) 
of the Income Tax Regulations, relating to the timing for the QJSA 
explanation and the participant waiver of a QJSA form of distribution. 
The regulations finalized an earlier set of proposed regulations that 
were issued in 1995. The regulations specified that the QJSA 
explanation must be provided before the annuity starting date, except 
as otherwise provided by section 417(a)(7) for plan years beginning 
after December 31, 1996, but the regulations did not further address 
section 417(a)(7).

Explanation of Provisions

    In accordance with section 417(a)(7)(A), these proposed regulations 
would provide that the QJSA explanation may be furnished on or after 
the annuity starting date under certain circumstances. The proposed 
regulations refer to the annuity starting date in such cases as the 
``retroactive annuity starting date'', define how payments are made in 
the case of a retroactive annuity starting date, and set conditions for 
the use of retroactive annuity starting dates.
    Under the proposed regulations, a retroactive annuity starting date 
could be used only if the plan provides for it and the participant 
elects to use the retroactive annuity starting date. The election under 
the proposed regulations would place the participant in approximately 
the same situation he or she would have been in had benefit payments 
actually commenced on the retroactive annuity starting date. 
Accordingly, the proposed regulations would provide that future 
periodic payments for a participant who elects a retroactive annuity 
starting date must be the same as the periodic payments that would have 
been paid to the participant had payments actually commenced on the 
retroactive annuity starting date and that the participant must also 
receive a make-up amount to reflect the missed payments (with an 
appropriate adjustment for interest from the date the payments would 
have been made to the date of actual payment).
    In addition, because the purpose of a retroactive annuity starting 
date is to place the participant in approximately the same situation 
that he or she would have been in had benefits commenced on the 
retroactive date, the retroactive benefit payments would be required to 
be based upon the terms of the plan in effect as of the retroactive 
annuity starting date (taking into account plan amendments executed 
after the retroactive annuity starting date, but made effective on or 
before that date). Accordingly, the retroactive annuity starting date 
could not be earlier than the date the participant could have started 
receiving benefits if the payments had commenced at the

[[Page 3918]]

earliest date permitted under the terms of the plan (e.g., the 
retroactive annuity starting date could not be before the earlier of 
the date of the participant's termination of employment or attainment 
of normal retirement age), and the amount of the benefit must satisfy 
sections 415 and 417 as of the retroactive annuity starting date.
    These proposed regulations would not require plans to provide for a 
retroactive annuity starting date. Instead, plans could continue to 
provide that the QJSA explanation is to be provided before the annuity 
starting date under the rules of section 417(a) without regard to 
section 417(a)(7)(A). Moreover, if a plan is amended to provide for a 
retroactive annuity starting date, the plan could impose additional 
restrictions on availability not imposed under these proposed 
regulations, provided that the additional restrictions did not violate 
any of the rules applicable to qualified plans. For example, plans that 
generally provide benefit options that include annuities and lump sum 
payments could provide that retroactive annuity starting dates are 
available only for participants who elect annuities.
    These proposed regulations make it clear that the notice, consent, 
and election rules of section 417(a)(1), (2), and (3), and the 
regulations thereunder, would apply to the retroactive payment of 
benefits but with several modifications. These modifications generally 
reflect the fact that the existing timing rules relating to notice and 
consent are generally tied to an annuity starting date that is after 
the furnishing of the QJSA explanation.\1\
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    \1\ For example, section 417(a)(1) provides that a participant 
may elect to waive the QJSA within the ``applicable election 
period'' which is defined by section 417(a)(6) as the 90-day period 
ending on the annuity starting date. Similarly, Sec. 1.417(e)-
1(b)(3)(i) provides that the written consent of the plan participant 
and the participant's spouse must be made no more than 90 days 
before the annuity staring date. Also, Sec. 1.417(e)-1(b)(3)(ii) 
provides that the QJSA explanation must generally be provided no 
less than 30 days and no more than 90 days before the annuity 
starting date.
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    Section 417(a)(7)(A) specifically permits the QJSA explanation to 
be made after the annuity starting date and modifies the participant 
election period in these situations. These regulations would make a 
comparable adjustment for the timing rules applicable to spousal 
consent by providing generally that, for retroactive payments under 
section 417(a)(7), the first date of actual payment is substituted for 
the annuity starting date in applying the timing rules for notice and 
consent. These modifications are intended to ensure that the notice and 
election are generally contemporaneous with the commencement of 
benefits, but the modifications recognize the need for flexibility in 
the timing to take into account administrative delays. In furtherance 
of that goal, these proposed regulations would modify the general 
timing rule applicable to the furnishing of notices, and to participant 
elections and spousal consent. The proposed regulations would provide 
that the participant's election to waive the QJSA under section 
417(a)(1)(A)(i) and the spouse's consent under section 417(a)(2) must 
generally be made before the annuity starting date, but permits a later 
election if the distribution commences no more than 90 days after the 
QJSA explanation required by section 417(a)(3)(A) is furnished to the 
participant. This modification would apply without regard to the 
retroactivity of annuity starting dates, but would include an exception 
for reasonable administrative delay in the distribution of benefits.
    Pursuant to the regulatory authority provided in section 
417(a)(7)(A)(ii), these proposed regulations include a special spousal 
consent rule in addition to those rules applicable under section 
417(a). Under this special rule, if the spouse's survivor annuity under 
a QJSA with an annuity starting date after the date the QJSA 
explanation was provided would be greater than the spouse's survivor 
annuity pursuant to the participant's election of a retroactive annuity 
starting date, the participant could not elect a retroactive annuity 
starting date unless the participant's spouse (determined at the time 
distributions actually commence) consents to the distribution. This 
special rule applies even if the form of benefit that the participant 
elects as of the retroactive annuity starting date is a QJSA. Thus, for 
example, where a QJSA that begins after the QJSA explanation is 
furnished would provide $1,000 monthly to the participant with a 
survivor annuity of $500 monthly to the spouse, and a QJSA with a 
retroactive annuity starting date would provide $900 monthly to the 
participant with a survivor annuity of $450 monthly to the spouse, 
together with a $20,000 make-up payment to the participant, the spouse 
would be required to consent in order for the participant to elect the 
retroactive annuity starting date. Spousal consent under this special 
rule would not be required in this example if the spouse's survivor 
annuity under the retroactive annuity starting date election is at 
least $500 per month.
    These proposed regulations would also provide that, pursuant to 
section 417(a)(2)(B), the consent of the participant's spouse as of the 
retroactive annuity starting would not be required if that spouse is 
not the participant's spouse as of the date distributions commence, 
unless otherwise provided in a qualified domestic relations order (as 
defined in section 414(p)).
    The proposed regulations would impose an additional condition on 
the availability of a retroactive annuity starting date, regarding the 
permissible amount of the distribution under sections 417(e)(3) (if 
applicable) and 415. To satisfy this condition, the distribution would 
be required to be adjusted, if necessary, to satisfy the requirements 
of sections 417(e)(3) (if applicable) and 415 if the date the 
distribution commences is substituted for the annuity starting date.

Proposed Effective Date

    These regulations are proposed to be applicable for plan years 
beginning on or after January 1, 2002.

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 is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that the regulations require the collection of plan 
participants' written elections requesting qualified retirement plan 
distributions, and written spousal consent to these distributions, 
under limited circumstances. It is anticipated that most small 
businesses affected by these regulations will be sponsors of qualified 
retirement plans. Since these written participant elections and written 
spousal consents are required to be collected only for certain 
distributions, and since, in the case of a small plan, there will be 
relatively few distributions per year (and even fewer that are subject 
to these requirements), small plans that provide distributions for 
which this collection of information is required will only have to 
collect a small number of participant elections and spousal consents as 
a result of these regulations. Accordingly, a Regulatory Flexibility 
Analysis is not required. Pursuant to section 7805(f) of the Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations,

[[Page 3919]]

consideration will be given to any written comments (a signed original 
and 8 copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Robert M. Walsh and 
Linda S. F. Marshall, Office of 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

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

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

    Par. 2. Section 1.417(e)-1 is amended by:
    1. Revising paragraph (b)(3)(i).
    2. Revising paragraph (b)(3)(ii) introductory text.
    3. Revising paragraph (b)(3)(ii)(C).
    4. Redesignating paragraphs (b)(3)(iii) and (b)(3)(iv) as 
paragraphs (b)(3)(viii) and (b)(3)(ix), respectively.
    5. Adding new paragraphs (b)(3)(iii) through (b)(3)(vii).
    The additions and revisions read as follows:


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

* * * * *
    (b)* * *
    (3)* * *
    (i) Written consent of the participant and the participant's spouse 
to the distribution must be made not more than 90 days before the 
annuity starting date, and, except as otherwise provided in paragraphs 
(b)(3)(iii) and (b)(3)(iv) of this section, no later than the annuity 
starting date.
    (ii) A plan must provide participants with the written explanation 
of the QJSA required by section 417(a)(3) no less than 30 days and no 
more than 90 days before the annuity starting date, except as provided 
in paragraph (b)(3)(iv) of this section regarding retroactive annuity 
starting dates. However, if the participant, after having received the 
written explanation of the QJSA, affirmatively elects a form of 
distribution and the spouse consents to that form of distribution (if 
necessary), a plan will not fail to satisfy the requirements of section 
417(a) merely because the written explanation was provided to the 
participant less than 30 days before the annuity starting date, 
provided that the following conditions are met:
* * * * *
    (C) The annuity starting date is after the date that the 
explanation of the QJSA is provided to the participant.
* * * * *
    (iii) The plan may permit the annuity starting date to be before 
the date that any affirmative distribution election is made by the 
participant (and before the date that distribution is permitted to 
commence under paragraph (b)(3)(ii)(D) of this section), provided that, 
except as otherwise provided in paragraph (b)(3)(vii) of this section 
regarding administrative delay, distributions commence not more than 90 
days after the explanation of the QJSA is provided.
    (iv) Retroactive annuity starting dates. (A) Notwithstanding the 
requirements of paragraphs (b)(3)(i) and (ii) of this section, pursuant 
to section 417(a)(7), a defined benefit plan is permitted to provide 
benefits based on a retroactive annuity starting date if the 
requirements described in paragraph (b)(3)(v) of this section are 
satisfied. A defined benefit plan is not required to provide for 
retroactive annuity starting dates. If a plan does provide for a 
retroactive annuity starting date, it may impose conditions on the 
availability of a retroactive annuity starting date in addition to 
those imposed by paragraph (b)(3)(v) of this section, provided that 
imposition of those additional conditions does not violate any of the 
rules applicable to qualified plans. For example, a plan that includes 
a single sum payment as a benefit option may limit the election of a 
retroactive annuity starting date to those participants who do not 
elect the single sum payment. A defined contribution plan is not 
permitted to have a retroactive annuity starting date.
    (B) For purposes of this section, a ``retroactive annuity starting 
date'' is an annuity starting date affirmatively elected by a 
participant that occurs on or before the date the written explanation 
required by section 417(a)(3) is provided to the participant. In order 
for a plan to treat a participant as having elected a retroactive 
annuity starting date, future periodic payments with respect to a 
participant who elects a retroactive annuity starting date must be the 
same as the future periodic payments, if any, that would have been paid 
with respect to the participant had payments actually commenced on the 
retroactive annuity starting date. The participant must receive a make-
up payment to reflect any missed payment or payments for the period 
from the retroactive annuity starting date to the date of the actual 
make-up payment (with an appropriate adjustment for interest from the 
date the missed payment or payments would have been made to the date of 
the actual make-up payment). Thus, the benefit determined as of the 
retroactive annuity starting date must satisfy the requirements of 
sections 417(e)(3), if applicable, and section 415 with the applicable 
interest rate and applicable mortality table determined as of that 
date. Similarly, a participant is not permitted to elect a retroactive 
annuity starting date that precedes the date upon which the participant 
could have otherwise started receiving benefits (e.g., the earlier of 
the participant's termination of employment or the participant's normal 
retirement age) under the terms of the plan in effect as of the 
retroactive annuity starting date. A plan does not fail to treat a 
participant as having elected a retroactive annuity starting date as 
described in this paragraph (b)(3)(iv)(B) merely because the 
distributions are adjusted to the extent necessary to satisfy the 
requirements of paragraph (b)(3)(v)(B) of this section relating to 
sections 415 and 417(e)(3).
    (C) If the participant's spouse as of the retroactive annuity 
starting date would not be the participant's spouse determined as if 
the date distributions commence were the participant's annuity starting 
date, consent of that former spouse is not needed to waive the QJSA 
with respect to the retroactive annuity starting date, unless otherwise 
provided under a qualified domestic relations order (as defined in 
section 414(p)).
    (D) A distribution payable pursuant to a retroactive annuity 
starting date election is treated as excepted from the present value 
requirements of paragraph (d) of this section under paragraph (d)(6) of 
this section if the distribution form would have been described in 
paragraph (d)(6) of this section had the distribution

[[Page 3920]]

actually commenced on the retroactive annuity starting date.
    (v) Requirements applicable to retroactive annuity starting dates. 
A distribution is permitted to have a retroactive annuity starting date 
with respect to a participant's benefit only if the following 
requirements are met:
    (A) The participant's spouse (including an alternate payee who is 
treated as the spouse under a qualified domestic relations order 
(QDRO), as defined in section 414(p)), determined as if the date 
distributions commence were the participant's annuity starting date, 
consents to the distribution in a manner that would satisfy the 
requirements of section 417(a)(2). The spousal consent requirement of 
this paragraph (b)(3)(v)(A) is satisfied if such spouse consents to the 
distribution under paragraph (b)(2)(i) of this section. The spousal 
consent requirement of this paragraph (b)(3)(v)(A) does not apply if 
the amount of such spouse's survivor annuity payments under the 
retroactive annuity starting date election is no less than the amount 
that the payments to such spouse would have been under a QJSA with an 
annuity starting date after the date that the explanation was provided.
    (B) The distribution (including appropriate interest adjustments) 
provided based on the retroactive annuity starting date would satisfy 
the requirements of sections 417(e)(3), if applicable, and section 415 
if the date the distribution commences is substituted for the annuity 
starting date for all purposes, including for purposes of determining 
the applicable interest rate and the applicable mortality table.
    (vi) Timing of notice and consent requirements in the case of 
retroactive annuity starting dates. In the case of a retroactive 
annuity starting date, the date of the first actual payment of benefits 
based on the retroactive annuity starting date is substituted for the 
annuity starting date for purposes of satisfying the timing 
requirements for giving consent and providing an explanation of the 
QJSA provided in paragraphs (b)(3)(i) and (ii) of this section, except 
that the substitution does not apply for purposes of paragraph 
(b)(3)(iii) of this section. Thus, the written explanation required by 
section 417(a)(3)(A) must generally be provided no less than 30 days 
and no more than 90 days before the date of the first payment of 
benefits and the election to receive the distribution must be made 
after the written explanation is provided and on or before the date of 
the first payment. Similarly, the written explanation may also be 
provided less than 30 days prior to the first payment of benefits if 
the requirements of paragraph (b)(3)(ii) of this section would be 
satisfied if the date of the first payment is substituted for the 
annuity starting date.
    (vii) Administrative delay. A plan will not fail to satisfy the 90-
day timing requirements of paragraphs (b)(3)(iii) and (vi) of this 
section merely because, due solely to administrative delay, a 
distribution commences more than 90 days after the written explanation 
of the QJSA is provided to the participant.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-132 Filed 1-16-01; 8:45 am]
BILLING CODE 4830-01-U