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Bulletin No. 1998–2
January 12, 1998
Internal Revenue
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HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 98–2, page 15.
Insurance companies; interest rate tables. Prevailing state
assumed interest rates are provided for the determination of reserves under section 807 of the Code for contracts issued in
1997 and 1998. Rev. Rul 92–19 supplemented in part.
Rev. Rul. 98–3, page 4.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period October through December 1997. This ruling announces the monthly bond factor
amounts to be used by taxpayers who dispose of qualified lowincome buildings or interests therein during the period October
through December 1997. The ruling also corrects errors in the
bond factor amounts for properties placed in service in 1987
and disposed of between January through September 1997.
Rev. Rul. 98–4, page 18.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for January 1998.
EMPLOYEE PLANS
Rev. Rul. 98–1, page 5.
Limitations on benefits and contributions. Questions
and answers on the limitations on benefits and contributions
under section 415 of the Code, as amended by the Uruguay
Round Agreements Act, and taking into account the applicable provisions of the Small Business Job Protection Act of
1996, are set forth.
Rev. Proc. 98–10, page 35.
Minimum funding standards; change in funding
method. This procedure provides approval to change the
funding method used to determine the minimum funding
standard for defined benefit plans for plan years beginning
on or after January 1, 1998, to any one of the specific
methods contained in this procedure.
Notice 98–2, page 22.
Recovery of basis; retirees. This notice provides a simplified method of calculating the recovery of basis based on the
Finding Lists begin on page 40.
Department of the Treasury
Internal Revenue Service
life of more than one annuitant where the retiree made contributions to a tax-qualified pension plan, even if the amount of
the annuity varies by annuitant. The method is described in
section 1403 of the Small Business Job Protection Act of
1996 and section 1075 of the Taxpayer Relief Act of 1997.
Notice 98–4, page 25.
Questions and answers; SIMPLE-IRAs, SIMPLE IRA
plans. This notice pertains to savings incentive match
plans for employees of small employers described in section 408(p) of the Code as added by the Small Business Job
Protection Act of 1996, and modified by the Taxpayer Relief
Act of 1997.
Announcement 98–1, page 38.
The Service is proposing to include in the Internal Revenue
Manual examination guidelines relating to employer deductions to qualified plans under Code section 404 and the minimum funding standards under Code section 412.
EXEMPT ORGANIZATIONS
Announcement 98–3, page 38.
A list is provided of organizations that no longer qualify as
organizations for which contributions are deductible under
section 170 of the Code.
EXCISE TAX
Rev. Rul. 98–5, page 20.
Bows and arrows; taxable and nontaxable articles. A list
of taxable and nontaxable articles is provided for use by manufacturers, producers, and importers in determining their liability for the manufacturers tax on archery equipment imposed by section 4161 of the Code. The list reflects changes
to the tax on archery equipment made by the Taxpayer Relief
Act of 1997. Rev. Rul 75–17 supplemented and superseded.
ADMINISTRATIVE
Announcement 98–2, page 38.
New Form 8023, Election Under Section 338 for
Corporations Making Qualified Stock Purchases, replaces
Form 8023–A, Corporate Qualified Stock Purchases.
Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
2
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
3
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Low-income housing credit; satisfactory bond; “bond factor” amounts for
the period October through December
1997. This ruling announces the monthly
bond factor amounts to be used by taxpayers who dispose of qualified low-income
buildings or interests therein during the
period October through December 1997.
The ruling also corrects errors in the bond
factor amounts for properties placed in
service in 1987 and disposed of between
January through September 1997.
Rev. Rul. 98–3
In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guidance to taxpayers concerning the general
methodology used by the Treasury Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Internal Revenue Bulletin a table of “bond factor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfactory under § 42(j)(6) for dispositions of
qualified low-income buildings or interests therein during the period October
through December 1997. Table 2 provides a summary of the bond factor
amounts for dispositions occurring during
the period January through September
1997. Table 3 provides a summary of
bond factor amounts for dispositions occurring during the period January through
December 1996.
Due to a miscalculation, Rev. Rul.
97–16, 1997–13 I.R.B. 4, Rev. Rul.
97–25, 1997–23 I.R.B. 4, and Rev. Rul.
97–34, 1997–34 I.R.B. 4, are in error regarding the specific bond factor amounts
for buildings placed in service in calendar
year 1987 and disposed of in calendar
year 1997. The present revenue ruling
provides a complete list of the corrected
amounts. Taxpayers who posted bonds
prior to the publication date of this revenue ruling based upon the above mentioned bond factor amounts may continue
to rely on these figures under the authority of § 7805(b).
For a list of bond factor amounts applicable to dispositions occurring during other
calendar years, see the following revenue
rulings: Rev. Rul. 90–60, 1990–2 C.B. 3,
for dispositions occurring during calendar
years 1987, 1988, and 1989;
Rev. Rul. 90–88, 1990–2 C.B. 7, for
dispositions occurring during calendar
year 1990; Rev. Rul. 91–67, 1991–2 C.B.
Table 1
Rev. Rul. 98–3
Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
Calendar Year Building Placed in Service or, if Section 42(f)(1)
Election Was Made, the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Oct ‘97
Nov ‘97
Dec ‘97
79.95
79.95
79.95
79.99
79.78
79.57
82.52
82.30
82.09
85.46
85.23
85.01
88.88
88.65
88.42
92.76
92.52
92.28
96.76
96.51
96.26
100.63
100.38
100.13
104.47
104.22
103.99
108.59
108.38
108.20
112.52
112.52
112.52
Table 2
Rev. Rul. 98–3
Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
Calendar Year Building Placed in Service or, if Section 42(f)(1)
Election Was Made, the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Jan ‘97
Feb ‘97
Mar ‘97
Apr ‘97
May ‘97
Jun ‘97
Jul ‘97
Aug ‘97
Sep ‘97
79.95
79.95
79.95
79.95
79.95
79.95
79.95
79.95
79.95
82.08
81.83
81.59
81.35
81.11
80.88
80.65
80.43
80.21
84.67
84.41
84.15
83.91
83.66
83.42
83.19
82.96
82.74
87.70
87.43
87.16
86.90
86.64
86.40
86.15
85.92
85.68
91.25
90.96
90.67
90.40
90.13
89.87
89.61
89.36
89.12
95.32
95.00
94.69
94.39
94.09
93.81
93.54
93.27
93.01
99.53
99.17
98.83
98.50
98.18
97.88
97.58
97.30
97.03
103.58
103.18
102.81
102.45
102.11
101.79
101.48
101.18
100.90
107.56
107.11
106.69
106.31
105.95
105.61
105.30
105.01
104.73
111.85
111.28
110.79
110.36
109.98
109.64
109.33
109.06
108.81
112.52
112.52
112.52
112.52
112.52
112.52
112.52
112.52
112.52
January 12, 1998
4
1998–2 I.R.B.
Table 3
Rev. Rul. 98–3
Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
Calendar Year Building Placed in Service or, if Section 42(f)(1)
Election Was Made, the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Jan ’96
Feb ’96
Mar ’96
Apr ’96
May ’96
Jun ’96
Jul ’96
Aug ’96
Sep ’96
Oct ’96
Nov ’96
Dec ’96
82.72
82.47
82.22
76.76
76.54
76.32
81.06
80.84
80.61
80.39
80.17
79.96
85.18
84.92
84.66
78.26
78.03
77.81
83.47
83.24
83.01
82.78
82.56
82.35
87.85
87.58
87.31
79.91
79.68
79.46
86.09
85.85
85.62
85.39
85.16
84.95
91.00
90.71
90.43
81.94
81.71
81.48
89.16
88.92
88.68
88.44
88.21
87.99
94.73
94.42
94.11
84.43
84.19
83.95
92.78
92.52
92.28
92.03
91.80
91.57
99.06
98.71
98.38
87.38
87.12
86.86
96.94
96.67
96.41
96.15
95.90
95.67
103.57
103.18
102.80
90.40
90.12
89.85
101.25
100.96
100.68
100.41
100.16
99.92
107.87
107.41
106.98
93.16
92.86
92.58
105.33
105.04
104.76
104.49
104.25
104.02
111.88
111.30
110.81
95.61
95.32
95.06
109.16
108.90
108.66
108.44
108.24
108.06
112.52
112.52
112.52
97.21
97.21
97.21
112.52
112.52
112.52
112.52
112.52
112.52
13, for dispositions occurring during calendar year 1991;
Rev. Rul. 92–101, 1992–2 C.B. 9, for
dispositions occurring during calendar
year 1992; Rev. Rul 93–83, 1993–2 C.B.
6, for dispositions occurring during calendar year 1993;
Rev. Rul. 94–71, 1994–2 C.B. 4, for
dispositions occurring during calendar
year 1994; and Rev. Rul. 95–83, 1995–2
C.B. 8, for dispositions occurring during
calendar year 1995.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Jack Malgeri of the Office of Assistant Chief Counsel (Passthroughs and
Special Industries). For further information regarding this revenue ruling, contact
Mr. Malgeri at (202) 622-3040 (not a tollfree call).
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 1998. See
Rev. Rul. 98–4, page 18.
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted federal long-term rate is set forth
1998–2 I.R.B
for the month of January 1998. See Rev. Rul. 98–4,
page 18.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
A revenue procedure describes certain changes to
the funding method used to determine the minimum
funding standard for defined benefit plans for plan
years beginning on or after January 1, 1998. See
Rev. Proc. 98–10, page 35.
Section 415. — Limitations on
Benefits and Contributions
Under Qualified Plans
(Also § 417.)
Limitations on benefits and contributions. Questions and answers on the
limitations on benefits and contributions
under section 415 of the Code, as
amended by the Uruguay Round Agreements Act, and taking into account the applicable provisions of the Small Business
Job Protection Act of 1996, are set forth.
Rev. Rul. 98-1
This revenue ruling modifies and supersedes Rev. Rul. 95–29, 1995–1 C.B.
81, which provided questions and an-
5
swers on the limitations on benefits and
contributions under § 415 of the Internal
Revenue Code (Code), as amended by the
Uruguay Round Agreements Act, Pub. L.
No. 103–465 (GATT), which includes the
Retirement Protection Act of 1994
(RPA ’94). This revenue ruling takes into
account the applicable provisions of the
Small Business Job Protection Act of
1996, Pub. L. No. 104–188 (SBJPA), after
the technical correction made by the Taxpayer Relief Act of 1997, Pub. L. No.
105–34 (TRA ’97).
Until further guidance is issued, the
guidance provided by these questions and
answers may be relied on to administer
plans. If, and to the extent, future guidance is more restrictive than the guidance
in this revenue ruling, the future guidance
will be applied without retroactive effect.
No inference should be drawn regarding
issues not raised that may be suggested by
a particular question and answer or as to
why certain questions, and not others, are
included.
Background
Section 415 provides that benefits accrued or payable under a qualified defined
benefit plan may not exceed certain specified limitations. In general, annual benefits are limited to the lesser of $90,000, as
adjusted for cost-of-living increases
($130,000 for 1998) and the 10-year
phase-in under § 415(b)(5)(A) (the
January 12, 1998
§ 415(b) dollar limitation), or 100 percent
of the participant’s average compensation
for the participant’s high three consecutive years, as adjusted for the 10-year
phase-in under § 415(b)(5)(B) (the
§ 415(b) compensation limitation).
Section 415(b)(2)(B) provides, with
certain exceptions, that, if a benefit is
payable other than as an annual straight
life annuity, the benefit must be actuarially
adjusted to an equivalent annual straight
life annuity. Sections 415(b)(2)(C) and
(D) require that, if a benefit is payable beginning at an age other than the participant’s social security retirement age
(SSRA), the § 415(b) dollar limitation at
that age equals the annual benefit that is
actuarially equivalent to the § 415(b) dollar limitation at the participant’s SSRA.
Section 415(b)(2)(E) provides rules regarding the actuarial assumptions to be
used in making the adjustments required
under §§ 415(b)(2)(B), (C), and (D).
Section 415(b)(2)(E)(i) generally requires that, for purposes of adjusting any
limitation or benefit under § 415(b)(2)(B)
or (C), the interest rate assumption shall
not be less than the greater of 5 percent or
the rate specified in the plan. Section
415(b)(2)(E)(iii) generally requires that,
for purposes of adjusting any limitation
under § 415(b)(2)(D), the interest rate assumption shall not be greater than the
lesser of 5 percent or the rate specified in
the plan.
Section 417(e)(3) provides rules regarding the actuarial assumptions to be
used to determine the present value of a
participant’s accrued benefit.
Sections 415(b)(2)(E) and 417(e)(3) of
the Code were amended by § 767 of
RPA ’94. Section 767(a) provided a specific mortality table and changed the applicable interest rate that must be used to
determine the present value of a benefit
subject to § 417(e)(3) (§ 417(e)(3)
changes). Section 767(b) added § 415(b)(2)(E)(v), which requires the mortality
table prescribed by the Secretary to be
used for adjusting any benefit or limitation under § 415(b)(2). Section 767(b)
also revised the interest rates used for adjusting a benefit or limitation in the case
of a form of benefit subject to § 417(e)(3)
by inserting a new § 415(b)(2)(E)(ii),
which required that in such a case the applicable interest rate be substituted for the
5 percent interest rate specified in
January 12, 1998
§ 415(b)(2)(E)(i).
The amendments made by § 767(b) of
RPA ’94 were modified by § 1449 of
SBJPA. The amendments made by
§ 1449 of SBJPA are effective as if included in § 767 of RPA ’94.
In general, § 1449(a) of SBJPA provides that, in the case of plans adopted
and in effect before December 8, 1994,
the provisions of § 767(b) shall not be required to be applied with respect to benefits accrued before the later of the date a
plan amendment applying the amendments made by § 767(b) is adopted or
made effective, but not later than the first
day of the first limitation year beginning
after 1999. Section 1449(a) further provides that determinations under
§ 415(b)(2)(E) before such date are made
with respect to such benefits on the basis
of § 415(b)(2)(E) and the provisions of
the plan as in effect on December 7, 1994,
but only if such provisions of the plan
meet the requirements of § 415 as in effect on December 7, 1994. (Section
1604(b)(3) of TRA ’97 deleted superfluous parenthetical language from this
rule.) Section 1449(d) of SBJPA provides
that if, within one year of the enactment
of SBJPA, an amendment made to conform the plan to the requirements of § 767
of RPA ’94 is repealed, the original
amendment is not taken into account for
purposes of applying § 1449(a).
Section 1449(b) of SBJPA amended
§ 415(b)(2)(E) to provide that in the case
of a form of benefit subject to § 417(e)(3),
the applicable interest rate is substituted
for 5 percent solely for purposes of adjusting the benefit (and not for purposes
of adjusting the § 415(b) dollar limitation). Thus, regardless of the form of
benefit, the interest rate used to reduce the
§ 415(b) dollar limitation for benefits
payable before SSRA is determined under
the rules of § 415(b)(2)(E)(i) (that is, it
cannot be less than the greater of 5 percent or the rate specified in the plan).
Section 415(d)(1)(B) provides that the
§ 415(b) compensation limitation is adjusted annually for cost-of-living increases in the case of participants who
have separated from service. Section 732
of GATT changed the periods used to
compute increases in the cost of living for
purposes of these adjustments.
Rev. Rul. 95–29 provided guidance on
limitations on benefits and contributions
6
under § 415 of the Code, as amended by
GATT, including RPA ’94. This revenue
ruling modifies and supersedes Rev. Rul.
95–29.
Rev. Proc. 97–41, 1997–33 I.R.B. 51,
provides guidance to sponsors of plans
that are qualified under § 401(a) of the
Code with respect to the date by which
they must adopt amendments to comply
with changes in the law made by GATT
and SBJPA.
Questions and Answers
The following terms are used in this
revenue ruling:
§ 415(b) compensation limitation. See
Background.
§ 415(b) dollar limitation. See Background.
§ 415(b)(2)(E) changes. See Q&A–1.
§ 417(e)(3) changes. See Background.
§ 1449(b) revisions. See Q&A–11.
Age-adjusted dollar limit. See
Q&A–7.
Applicable interest rate. See Q&A–4.
Applicable mortality table. See
Q&A–6.
Final implementation date. See
Q&A–12.
Old-law benefits. See Q&A–12.
Old-law limitations. See Q&A–13.
Participant’s freeze date. See Q&A–13.
Plan rate and plan mortality table. See
Q&A–7.
Repealing amendment. See Q&A–16.
RPA ’94 § 415 effective date. See
Q&A–1.
(1) General Rules and Effective Dates
Q–1. When are the changes to § 415(b)(2)(E) made by § 767(b) of RPA ’94
(§ 415(b)(2)(E) changes) effective?
A–1. Under § 767(d)(1) of RPA ’94, the
§ 415(b)(2)(E) changes are generally effective as of the first day of the first limitation year beginning in 1995, except that
an employer may elect to treat the
§ 415(b)(2)(E) changes as being effective
on an earlier date that is on or after December 8, 1994. For purposes of this revenue ruling, the date described in the preceding sentence is the RPA ’94 § 415
effective date.
Plan amendments that apply the
§ 415(b)(2)(E) changes must be effective
as of the RPA ’94 § 415 effective date.
However, § 1449(a) of SBJPA provides a
1998–2 I.R.B.
rule under which the § 415(b)(2)(E)
changes are not required to be applied to
certain benefits even after the RPA ’94
§ 415 effective date. See Q&A–12.
Q–2. What plan benefits are subject to
the interest rate prescribed by § 415(b)(2)(E)(ii)?
A–2. The interest rate prescribed by
§ 415(b)(2)(E)(ii) applies in the case of a
form of benefit subject to § 417(e)(3).
See § 417(e)(3) and the Income Tax Regulations thereunder to determine whether
a form of benefit is subject to § 417(e)(3).
Q–3. Are plans that are not subject to
§ 417(e)(3) subject to the requirements
for assumptions under §§ 415(b)(2)(E)(ii)
and (v)?
A–3. Plans that are not subject to
§ 417(e)(3), such as governmental plans
and certain church plans, are not subject
to the interest rate requirement under
§ 415(b)(2)(E)(ii), but are subject to the
mortality table requirement under
§ 415(b)(2)(E)(v).
Q–4. What is the applicable interest
rate, as defined in § 417(e)(3), as referenced by § 415(b)(2)(E)(ii)?
A–4. The regulations under § 417(e)(3)
(currently § 1.417(e)–1T(d)(3)(i)) provide
that the applicable interest rate under
§ 417(e)(3) is the annual interest rate on
30-year Treasury securities as specified
by the Commissioner.
Q–5. What is the time for determining
the applicable interest rate?
A-5. A plan that has been amended to
reflect the § 417(e)(3) changes must use
the same date for determining the applicable interest rate for purposes of applying
the § 415(b)(2)(E) changes as it uses for
purposes of § 417(e)(3). A plan that has
not yet been amended to reflect the
§ 417(e)(3) changes may use any date for
determining the applicable interest rate
for purposes of applying the § 415(b)(2)(E) changes that is permitted under
§ 417(e)(3) and the regulations thereunder
(currently § 1.417(e)–1T(d)-(4)) for use
in determining the applicable interest rate
for purposes of § 417(e)(3).
Q–6. What mortality table must be
used to make adjustments to benefits and
limitations under § 415(b)(2)(E)?
A–6. Section 415(b)(2)(E)(v), added
by RPA ’94, provides that, for purposes
of adjusting any benefit or limitation
under § 415(b)(2)(B), (C), or (D), the
mortality table used shall be the table
1998–2 I.R.B
prescribed by the Secretary. Rev. Rul.
95-6, 1995–1 C.B. 80, provides the mortality table (applicable mortality table)
which generally must be used for these
purposes. For purposes of adjusting any
limitation under § 415(b)(2)(C) or (D), to
the extent that a forfeiture does not occur
upon death, the mortality decrement may
be ignored prior to age 62 and must be ignored after SSRA. See Q&A G–3 and
Q&A G–4 of Notice 83–10, 1983–1 C.B.
536.
Q–7. How are the § 415(b) limitations
applied to a benefit under a defined benefit plan that is not payable in the form of
an annual straight life annuity within the
meaning of § 415(b)(2)(A) and that is not
subject to § 417(e)(3)?
A–7. The determination as to whether
such a benefit satisfies the § 415(b) limitations generally is made by comparing
the equivalent annual benefit determined
in Step 1 with the lesser of the age-adjusted dollar limit determined in Step 2
and the § 415(b) compensation limitation
determined in Step 3.
Step 1: Under § 415(b)(2)(B), determine
the annual benefit in the form of a straight
life annuity commencing at the same age
that is actuarially equivalent to the plan
benefit. In general, §§ 415(b)(2)(E)(i) and
(v) require that the equivalent annual benefit be the greater of the equivalent annual
benefit computed using the interest rate
and mortality table, or tabular factor, specified in the plan for actuarial equivalence
for the particular form of benefit payable
(plan rate and plan mortality table, or plan
tabular factor, respectively) and the equivalent annual benefit computed using a 5
percent interest rate assumption and the
applicable mortality table. This step does
not apply to a benefit that is not required to
be converted to a straight life annuity pursuant to § 415(b)(2)(B) (for example, a
qualified joint and survivor annuity).
Step 2: Under § 415(b)(2)(C) or (D),
determine the § 415(b) dollar limitation
that applies at the age the benefit is
payable (age-adjusted dollar limit). The
age-adjusted dollar limit is the annual
benefit that is actuarially equivalent to an
annual benefit equal to the § 415(b) dollar
limitation payable at the participant’s
SSRA.
If the age at which the benefit is
payable is 62 or greater, and less than the
participant’s SSRA, the age-adjusted dol-
7
lar limit is determined by reducing the
§ 415(b) dollar limitation at the participant’s SSRA using adjustment factors that
are consistent with the factors used to reduce old-age insurance benefits under the
Social Security Act. Pursuant to Q&A–5
of Notice 87–21, 1987–1 C.B. 458, the
§ 415(b) dollar limitation at the participant’s SSRA is reduced by 5/9 of 1 percent for each of the first 36 months by
which benefits commence before the
month in which the participant’s SSRA is
attained and by 5/12 of 1 percent for each
additional month.
If the age at which the benefit is
payable is less than 62, the age-adjusted
dollar limit is determined by reducing the
age-adjusted dollar limit at age 62 on an
actuarially equivalent basis. In general,
§§ 415(b)(2)(E)(i) and (v) require that the
reduced age-adjusted dollar limit be the
lesser of the equivalent amount computed
using the plan rate and plan mortality
table (or plan tabular factor) used for actuarial equivalence for early retirement
benefits under the plan and the amount
computed using 5 percent interest and the
applicable mortality table (used to the extent described in Q&A–6).
If the age at which the benefit is
payable is greater than the participant’s
SSRA, the age-adjusted dollar limit is determined by increasing the § 415(b) dollar
limitation at the participant’s SSRA on an
actuarially equivalent basis. In general,
§§ 415(b)(2)(E)(i) and (v) require that the
increased age-adjusted dollar limit be the
lesser of the equivalent amount computed
using the plan rate and plan mortality
table (or plan tabular factor) used for actuarial equivalence for late retirement
benefits under the plan and the equivalent
amount computed using 5 percent interest
and the applicable mortality table (used to
the extent described in Q&A–6).
Step 3: Determine the participant’s
§ 415(b) compensation limitation. This
limitation is equal to the participant’s
compensation averaged over the consecutive three-year period producing the highest average, as provided in § 415(b)(3).
The plan does not satisfy the § 415(b)
limitations unless the equivalent annual
benefit determined in Step 1 is no greater
than the lesser of the age-adjusted dollar
limit determined in Step 2 and the
§ 415(b) compensation limitation determined in Step 3.
January 12, 1998
Q–8. How is § 415(b)(2)(B) applied to
a benefit under a defined benefit plan that
is in a form of benefit subject to
§ 417(e)(3)?
A–8. If a defined benefit plan provides
a benefit in a form that is subject to
§ 417(e)(3), the determination of the
equivalent annual benefit is the same as in
Q&A–7, Step 1, except that, under
§ 415(b)(2)(E)(ii), the applicable interest
rate is substituted for the 5 percent interest rate under § 415(b)(2)(E)(i). Thus, the
equivalent annual benefit must be the
greater of the equivalent annual benefit
computed using the plan rate and plan
mortality table (or plan tabular factor) and
the equivalent annual benefit computed
using the applicable interest rate and the
applicable mortality table.
Example: Plan A provides that singlesum distributions are determined as the
actuarial present value of the annual
straight life annuity payable at the actual
retirement date. Plan A provides that a
participant’s single sum is determined as
the greater of the present value using 6
percent interest and the UP-1984 Mortality Table and the present value using the
applicable interest rate and applicable
mortality table. In accordance with
§ 417(e) and the regulations thereunder,
Plan A provides that the single sum is not
less than the actuarial present value of the
normal retirement benefit using the applicable interest rate and the applicable
mortality table. The plan has been
amended to apply the § 415(b)(2)(E)
changes and, in accordance with that
amendment, the § 415(b)(2)(E) changes
are applied to all accrued benefits for all
participants under the plan.
Participant M, whose SSRA is age 65,
retires at age 60 from Plan A and elects to
receive a distribution in the form of a single sum. Under the plan formula, and before the application of § 415 under the
plan, the amount of the single sum is
$950,000, which is the present value of
the early retirement benefit based upon 6
percent interest and the UP-1984 mortality table. This benefit must be converted
to an actuarially equivalent straight life
annuity commencing at age 60 in order to
apply § 415 under the plan. Assuming
that the plan’s applicable interest rate
under § 417(e)(3) is 8 percent, the conversion is made as follows:
First, divide $950,000 by an immediate
straight life annuity purchase rate at age
January 12, 1998
60 using the plan rate and plan mortality
table for determining single sums. Based
on 6 percent interest and the UP-1984
Mortality Table, the equivalent annual
benefit is $950,000/10.596, or $89,656.
Second, divide $950,000 by an immediate
straight life annuity purchase rate at age
60 using the applicable interest rate and
the applicable mortality table. Based on 8
percent interest and the applicable mortality table, the equivalent annual benefit is
$950,000/10.098, or $94,078. The equivalent annual benefit for purposes of § 415
is the greater of the two resulting
amounts, or $94,078.
Q–9. How is the age-adjusted dollar
limit determined under § 415(b)(2)(C)
when a benefit is payable before SSRA in
a form subject to § 417(e)(3)?
A–9. If a defined benefit plan provides
a form of benefit subject to § 417(e)(3)
and the benefit is payable before a participant’s SSRA, the age-adjusted dollar limit
is determined in the same manner as in
Q&A–7, Step 2. Thus, the § 415(b) dollar
limitation at the participant’s SSRA is reduced by 5/9 of 1 percent for each of the
first 36 months by which benefits commence before the month in which the participant’s SSRA is attained and by 5/12 of
1 percent for each additional month and,
if the age at which the benefit is payable
is less than 62, is further reduced in accordance with § 415(b)(2)(E)(i) and (v).
Example: Plan A described in Q&A–8
also provides that early retirement annuity
benefits are equal to the normal form of
annuity benefit payable at age 65, reduced
by 4 percent for each year by which the
early retirement age is less than 65. Participant M’s retirement age is age 60, and
Participant M has more than 10 years of
plan participation at age 60. The age-adjusted dollar limit at age 60 is computed
as follows:
The age-adjusted dollar limit at age 62
is determined by reducing the § 415(b)
dollar limitation at SSRA (assumed to be
$125,000) by a factor of 5/9 of 1 percent
for 36 months. This results in an age-adjusted dollar limit of $100,000 at age 62,
which is further reduced as described
below.
First, using the plan tabular factor for
early retirement reductions of 4 percent
per year, the benefit adjustment factor at
age 62 would be 88 percent (100%(4% x 3)). At age 60, the factor would be
80 percent (100%-(4% x 5)). Accord-
8
ingly, the actuarially equivalent benefit at
age 60 reduced in accordance with plan
factors is equal to $100,000 x 80%/88%,
or $90,909.
Second, even though Participant M’s
distribution is in the form of a single sum
which is subject to § 417(e)(3), the ageadjusted dollar limit at age 62 is now reduced using an interest rate of 5 percent
and the applicable mortality table. Assuming no mortality decrement is applied
prior to age 62 (which is permitted because plan benefits are not subject to forfeiture upon death prior to the annuity
starting date), the actuarially equivalent
benefit at age 60 is $86,661.
The age-adjusted dollar limit at age 60
is the lesser of $90,909 and $86,661, or
$86,661. Because the equivalent annual
benefit of $94,078 exceeds the age-adjusted dollar limit at age 60, the singlesum benefit determined in Q&A-8 does
not satisfy the § 415(b) limitations.
Q–10. Does a plan amendment that applies the § 415(b)(2)(E) changes violate
§ 411(d)(6)?
A–10. In general, a plan amendment
that changes the interest rate or mortality
table taken into account in determining a
participant’s accrued benefit is subject to
the anti-cutback rules under § 411(d)(6)
of the Code. However, under § 767(d)(2)
of RPA ’94, a participant’s accrued benefit is not considered to be reduced in violation of § 411(d)(6) merely because the
plan is amended to apply the
§ 415(b)(2)(E) changes. Therefore, a plan
amendment that merely applies the
§ 415(b)(2)(E) changes will not violate
§ 411(d)(6) even if the amendment applies those changes to previously accrued
benefits, including benefits accrued before the RPA ’94 § 415 effective date.
Similarly, a plan amendment that merely
applies the § 415(b)(2)(E) changes will
not violate § 411(d)(6) even if the amendment applies those changes to distributions made on or after the RPA ’94 § 415
effective date and before the amendment.
In addition, an amendment that merely repeals an original § 415(b)(2)(E) amendment, as described in Q&A-16, will be
treated as an amendment to apply the
§ 415(b)(2)(E) changes for purposes of
§ 767(d)(2) and, therefore, will not violate
§ 411(d)(6).
Q–11. How is the relief provided under
§ 767(d)(2) of RPA ’94 affected by the
retroactive amendment to § 415(b)(2)(E)
1998–2 I.R.B.
made by § 1449(b) of SBJPA (the
§ 1449(b) revisions)?
A–11. As described in Q&A-10, the
§ 411(d)(6) relief provided by § 767(d)(2)
applies only to the extent that a reduction
in accrued benefits results from a plan
amendment that merely applies the
§ 415(b)(2)(E) changes. For this purpose,
a plan amendment is considered to apply
the § 415(b)(2)(E) changes only if either
the plan, as amended, reflects the
§ 1449(b) revisions for all distributions
for periods on and after the RPA ’94 § 415
effective date or the plan, as amended, reflects the § 1449(b) revisions for all distributions for periods after August 20, 1996.
Thus, the relief under § 767(d)(2) does
not apply to a plan amendment that fails
to reflect the § 1449(b) revisions for distributions for periods after August 20, 1996. Consequently, a plan that
has been amended to apply the
§ 415(b)(2)(E) changes without regard to
the § 1449(b) revisions must be further
amended, within the remedial amendment
period under § 401(b) for disqualifying
provisions under SBJPA and GATT, to reflect the § 1449(b) revisions (that is, it
must use the greater of 5 percent and the
plan rate in determining the age-adjusted
dollar limit for early retirement) for distributions for periods after August 20, 1996.
As described in Q&A-18, plan operations
must be conformed to the terms of the
plan. Accordingly, distributions for periods on or after the RPA ’94 § 415 effective date may have to be redetermined.
(2) Transition Rules
Q–12. Must the § 415(b)(2)(E) changes
be applied to all benefits under the plan
on and after the RPA ’94 § 415 effective
date?
A–12. The § 415(b)(2)(E) changes generally must be applied to all benefits
under the plan on and after the RPA ’94
§ 415 effective date, or, if later, the date
the plan becomes effective. However,
under § 767(d)(3)(A) of RPA ’94, as
amended by § 1449(a) of SBJPA, a plan
adopted and in effect before December 8,
1994, may provide that the § 415(b)(2)(E)
changes do not apply with respect to benefits accrued before the earlier of (i) the
later of the date a plan amendment applying the § 415(b)(2)(E) changes is adopted
or made effective, or (ii) the first day of
the first limitation year beginning after
1998–2 I.R.B
December 31, 1999. For purposes of this
revenue ruling, the date described in the
preceding sentence (the earlier of the
dates described in (i) and (ii)) is referred
to as the final implementation date, and
the benefits to which the § 415(b)(2)(E)
changes are not applied are referred to as
old-law benefits. For purposes of determining the final implementation date, the
date in (i) above that a plan amendment
applying the § 415(b)(2)(E) changes is
made effective is the earliest date as of
which, under the amendment, the
§ 415(b)(2)(E) changes apply to all benefits accruing for the participants under the
plan.
Any amendment that provides that the
§ 415(b)(2)(E) changes will not apply to
certain benefits must be adopted prior to
the end of the remedial amendment period
under § 401(b) for disqualifying provisions under SBJPA and GATT. In addition, except where an employer makes a
repealing amendment under Q&A–16,
once the final implementation date for a
plan resulting from any plan amendment
implementing the § 415(b)(2)(E) changes
has passed, the extent to which the
§ 415(b)(2)(E) changes are not applied to
certain benefits may not be changed.
Q–13. How is a participant’s old-law
benefit determined?
A–13. A participant’s old-law benefit is
determined as of a date specified in the
plan for the participant (participant’s
freeze date) that is before the final implementation date. The plan may provide
that the freeze date for all participants is
the day before the final implementation
date for the plan. Alternatively, the plan
may specify an earlier date as the freeze
date for some or all participants. The participant’s old-law benefit is determined
for each possible annuity starting date and
optional form of benefit based on the participant’s accrued benefit under the terms
of the plan as of the participant’s freeze
date, after applying § 415 as in effect on
December 7, 1994 (old-law limitations),
including the participation requirements
under § 415(b)(5).
Under the second sentence of
§ 767(d)(3)(A) of RPA ’94 (as amended
by SBJPA), before the final implementation date the old-law limitations are applied using all plan terms that were in effect on December 7, 1994 (that is, without
regard to amendments made after Decem-
9
ber 7, 1994) and that are relevant in determining actuarial equivalence under
§ 415(b)(2)(E). Therefore, except as provided in Q&A-15, in order to determine
the old-law benefit, the § 415(b) limitations must be applied using the plan’s
mortality table as in effect on December
7, 1994 and, except as provided in
§ 415(b)(2)(D), an interest rate that is no
less than the greater of 5 percent or the
plan rate as in effect on December 7, 1994
to determine actuarial equivalence. If, as
of December 7, 1994, the plan rate for a
particular optional form of benefit was a
variable interest rate, the plan rate that
would be compared to 5 percent is the
value of the variable rate at the time the
old-law limitations are applied, not the
value of the variable rate on December 7,
1994.
Except as provided in Q&A–15, plan
amendments that are adopted after the participant’s freeze date are not taken into account in determining the old-law benefit,
and the old-law benefit is determined
without regard to cost-of-living adjustments that become effective under
§ 415(d) after the participant’s freeze date.
Example: Plan B has a calendar plan
year and limitation year. N is currently a
participant in Plan B and has never participated in any other plan. Plan B is
amended on December 1, 1998, to apply
the § 415(b)(2)(E) changes. As amended,
the plan specifies that the § 415(b)(2)(E)
changes will not apply to benefits accrued
as of December 31, 1997 (that is, December 31, 1997, is the freeze date for all participants). Thus, any optional form of
benefit provided under the plan as of the
freeze date (taking into account the oldlaw limitations) is an old-law benefit. As
of December 7, 1994, the plan provides
the normal retirement benefit in the form
of a straight life annuity beginning at age
65. Early retirement benefits are available at any age on or after age 60 with an
actuarial reduction. The plan rate and the
plan mortality table used for the reduction
are 5 percent and the UP-1984 Mortality
Table, respectively.
Under the plan, single-sum distributions are available at any permitted retirement age. Single-sum distributions are
calculated as the actuarial present value of
the straight life annuity benefit payable at
the actual retirement age using the PBGC
immediate interest rate and the UP-1984
January 12, 1998
Mortality Table. In accordance with
§ 417(e) and the regulations thereunder,
the plan further provides that any singlesum distribution must be at least as great
as the actuarial present value of the participant’s accrued normal retirement benefit
computed using the PBGC interest rates
for deferred annuities and the UP–1984
Mortality Table. The plan has not been
amended to change the interest rate or
mortality table used for determining single-sum benefits or early retirement reductions at any time after December 7, 1994.
There is no forfeiture of accrued benefits under the plan on account of death
prior to the annuity starting date. Under
the plan, the § 415(b) limitations are applied only after the otherwise determined
benefit has been adjusted for early retirement and for any optional form of benefit,
and the mortality decrement is ignored
prior to age 62.
Participant N’s SSRA is 65. As of the
freeze date, Participant N has 10 years of
participation in the plan. Under the plan
formula as of N’s freeze date, Participant
N’s accrued benefit payable at normal retirement age (before the application of
§ 415 under the plan) is $110,000.
If Participant N were to retire in 1999 at
age 60 and to elect, with spousal consent,
to receive a distribution in the form of a
single sum, then Participant N’s singlesum distribution at retirement (before the
application of § 415 under the plan)
would equal the single-sum equivalent of
the early retirement annuity benefit under
the terms of the plan. Participant N’s
early retirement benefit accrued as of N’s
freeze date and payable at age 60, determined using the plan rate and plan mortality table, is $75,242. Under the plan, the
single-sum distribution at age 60 (before
the application of § 415 under the plan),
which is based on the immediate annuity
of $75,242, the PBGC immediate rate of 6
percent, and the UP-1984 Mortality
Table, is $797,264.
The old-law limitations must now be
applied under the plan to determine the
old-law benefit for any optional form of
benefit elected by N. In this case, the plan
rate used to determine single sums is the
PBGC immediate rate of 6 percent and
the plan mortality table is the UP-1984
Mortality Table. The age-adjusted dollar
limit at age 60 determined on the basis of
§ 415(b)(2)(E) as in effect on December
January 12, 1998
7, 1994 (using 5 percent interest and the
UP-1984 Mortality Table) and without
taking into account cost-of-living increases under § 415(d) after the freeze
date is $86,143. Because $75,242 (the
annual benefit payable at age 60 that is
actuarially equivalent to $797,264, determined on the basis of § 415(b)(2)(E) as in
effect on December 7, 1994) does not exceed $86,143, the single-sum old-law
benefit is $797,264.
Alternatively, if N were to elect to receive a distribution in the form of a
straight life annuity commencing at age
60, then the old-law benefit for that optional form would be $75,242 because
that amount does not exceed the age-adjusted dollar limit of $86,143.
Q–14. How are the § 415(b) limitations
applied to a benefit under a defined benefit plan if the § 415(b)(2)(E) changes are
not applied to the old-law benefits?
A–14. If the § 415(b)(2)(E) changes are
not applied to old-law benefits, the plan
can apply the § 415(b) limitations using
one of three methods as outlined below.
The plan must specify which of the three
methods is being used.
Method 1: Under this method, the plan
applies the § 415(b) limitations using the
steps in Q&A–7, and, if applicable,
Q&A–8, except that, if the benefit is not
payable in the form of an annual benefit
within the meaning of § 415(b)(2)(A), the
equivalent annual benefit determined in
Step 1 is computed separately with respect to the old-law benefit (not to exceed
the total plan benefit) and the portion of
the total plan benefit that exceeds the oldlaw benefit. The annual benefit that is
equivalent to the old-law benefit is determined in accordance with § 415(b)(2)(E)
as in effect on December 7, 1994. The
determination of the annual benefit that is
equivalent to the portion of the plan benefit that is in excess of the old-law benefit
must reflect the § 415(b)(2)(E) changes.
The results of these two separate computations are added together to determine
the equivalent annual benefit, which is
then used in the remaining steps in
Q&A–7.
In accordance with § 767(d)(3)(A) as
amended by SBJPA, if the determination
is being made before the final implementation date, then the plan rate and plan
mortality table used to determine the annual benefit that is equivalent to the old-
10
law benefit are based on the plan provisions in effect on December 7, 1994. By
contrast, if the determination is being
made on or after the final implementation
date, then the plan rate and plan mortality
table used to determine the annual benefit
that is equivalent to the old-law benefit
are based on the plan provisions in effect
on the date of determination.
In some cases, the use of the applicable
mortality table in adjusting the § 415(b)
dollar limitation under § 415(b)(2)(C) or
(D) can result in an age-adjusted dollar
limit lower than the age-adjusted dollar
limit used in determining the old-law benefit. A plan using Method 1 may provide
that in any event the participant will receive no less than the old-law benefit,
limited to the extent required under
Q&A–15.
Method 2: Under this method, the plan
applies the § 415(b) limitations, using the
steps in Q&A–7 and, if applicable,
Q&A–8, to the total plan benefit, but provides that in any event the participant will
receive no less than the old-law benefit,
limited to the extent required under
Q&A–15.
Method 3: Under this method, the plan
applies the § 415(b) limitations by limiting a benefit only to the extent needed to
satisfy either Method 1 or Method 2 described above.
The following examples illustrate the
application of Method 1, Method 2, and
Method 3, respectively, of this Q&A–14.
Example 1: The facts with respect to
Plan B and Participant N are as described
in the example under Q&A-13. In addition, before applying § 415 under the
plan, N’s total single-sum benefit payable
at age 60 under Plan B is $950,000. This
amount is the present value of N’s straight
life annuity benefit commencing under
Plan B at age 60 and computed using the
PBGC immediate rate of 6 percent and
UP–1984 Mortality Table. The applicable
interest rate under § 417(e)(3) and Plan B
is 8 percent.
Plan B provides that the § 415(b)(2)(E)
changes will not apply to benefits accrued
through December 31, 1997, in accordance with Method 1. In addition, as allowed by Method 1, Plan B provides that
in any event a participant will receive no
less than the benefits accrued through December 31, 1997, limited to the extent required under Q&A–15.
1998–2 I.R.B.
Under Plan B’s terms, the § 415(b) limitations are applied to N’s benefit using
the steps in Q&A–7 (as modified in accordance with Q&A–8 for distributions
subject to § 417(e)(3)), except that the
equivalent annual benefit determined in
accordance with Step 1 of Q&A–7 is
computed separately with respect to N’s
single-sum old-law benefit and the portion of N’s total single-sum benefit that
exceeds the single-sum old-law benefit,
and these two amounts are added together
to determine N’s total equivalent annual
benefit.
First, the annual benefit payable at age
60 that is actuarially equivalent to N’s single-sum old-law benefit of $797,264 is
determined on the basis of § 415(b)(2)(E)
as in effect on December 7, 1994. If the
determination were before the final implementation date, all plan terms in effect
on December 7, 1994 that are relevant in
determining actuarial equivalence under
§ 415(b)(2)(E) would be used. In this
case, the § 415(b)(2)(E) changes apply to
benefits accruing for all participants
under the plan on and after January 1,
1998. Consequently, the date the plan
amendment applying § 415(b)(2)(E)
changes is made effective (within the
meaning of Q&A–12) is January 1, 1998,
and the final implementation date (based
on the later of the date the plan amendment is adopted or made effective) is December 1, 1998.
Because the determination is being
made in 1999, which is on or after the
final implementation date, actuarial
equivalence is determined taking into account any amendments that affect the plan
rate and plan mortality table that are
adopted or become effective after December 7, 1994. However, in this case there
have been no amendments after December 7, 1994, and the interest rate used for
purposes of this adjustment is the greater
of the plan rate for determining single
sums (6 percent) or 5 percent. The mortality table used is the plan mortality table
for determining single sums (UP–1984
Mortality Table). The equivalent annual
benefit is $75,242.
Next, the annual benefit payable at age
60 that is actuarially equivalent to the portion of N’s total single-sum benefit of
$950,000 that exceeds $797,264, or
$152,736, is determined taking into account the § 415(b)(2)(E) changes. For
1998–2 I.R.B
this purpose, $152,736 is first converted
to an equivalent annual benefit using the
plan rate (6 percent) and the plan mortality table (UP–1984 Mortality Table). On
this basis, the equivalent annual benefit is
$14,415. The additional $152,736 is also
converted to an equivalent annual benefit
using the applicable interest rate (8 percent) and the applicable mortality table.
On this basis, the equivalent annual benefit is $15,125. Under Plan B, the annual
benefit that is equivalent to $152,736 for
purposes of § 415 is the greater of
$14,415 and $15,125, or $15,125. Thus,
the annual benefit that is equivalent to the
total single sum of $950,000 for purposes
of § 415 is $15,125 plus $75,242, or
$90,367.
Next, the age-adjusted dollar limit at
age 60 is determined taking the
§ 415(b)(2)(E) changes into account. Assuming that the § 415(b) dollar limitation
effective for the 1999 calendar year is
$130,000, the age-adjusted dollar limit at
age 60 is the lesser of the benefit that is
actuarially equivalent to the age-adjusted
dollar limit at age 62 ($104,000) computed using the plan rate and the plan
mortality table for making early retirement adjustments (5 percent and
UP–1984 Mortality Table, respectively),
or $89,588, and the benefit computed
using 5 percent and the applicable mortality table, or $90,127. Thus, N’s age-adjusted dollar limit at age 60 under Plan B
is the lesser of $89,588 and $90,127, or
$89,588.
Because N’s total single-sum benefit is
greater than the single-sum old-law benefit and because the equivalent annual benefit ($90,367) exceeds the age-adjusted
dollar limit ($89,588), N’s single-sum
benefit under Plan B must be limited to
$942,130 ($797,264 + ($89,588 $75,242) x 10.098) in order to satisfy the
§ 415(b) limitations.
Example 2: The facts are the same as in
Example 1, except that the plan provides
that the § 415(b)(2)(E) changes will apply
to the total plan benefit, but that in any
event the participant will receive no less
than the old-law benefit, limited to the extent provided in Q&A–15, in accordance
with Method 2.
Under Plan B’s terms, the § 415(b) limitations are applied to N’s benefit using
the steps in Q&A–7 (as modified in accordance with Q&A–8 for distributions
11
subject to § 417(e)(3)). Thus, the
$950,000 single-sum benefit is first converted to an equivalent annual benefit
using the plan rate and plan mortality
table for determining single sums (6 percent and UP–1984 Mortality Table, respectively). On this basis, the equivalent
annual benefit is $89,656. The $950,000
single-sum benefit is then converted to an
equivalent annual benefit using the applicable interest rate (8 percent) and the
applicable mortality table. On this basis,
the equivalent annual benefit is $94,078.
Under Plan B, the annual benefit that is
equivalent to $950,000 for purposes of
§ 415 is the greater of these two amounts,
or $94,078.
As derived in Example 1 above, the
age-adjusted dollar limit at age 60 is
$89,588. Because the equivalent annual
annuity ($94,078) exceeds this amount
and because the total single-sum benefit
exceeds the single-sum old-law benefit,
the total single-sum benefit must be limited to $904,660 ($89,588 x 10.098) in
order to satisfy the § 415(b) limitations.
Example 3: The facts are the same as in
Example 1, except that the plan provides
that, in accordance with Method 3, a benefit is limited only to the extent necessary
to satisfy the § 415(b) limitations using
either Method 1 or Method 2.
In the case of Participant N, the maximum benefit that satisfies the § 415(b)
limitations using Method 1 is $942,130,
and the maximum benefit that satisfies the
§ 415(b) limitations using Method 2 is
$904,660. Thus, the maximum benefit
that satisfies the § 415(b) limitations determined in accordance with Method 3 is
$942,130.
Q–15. Under what circumstances does
a participant’s old-law benefit change
after the participant’s freeze date?
A–15. A participant’s old-law benefit
cannot increase after the participant’s
freeze date. However, for any date after
the participant’s freeze date, the participant’s old-law benefit must be limited if
the old-law limitations as of that later date
are less than the old-law benefit determined as of the participant’s freeze date.
For example, if, after the freeze date, annual additions are credited to a participant’s account in an existing defined contribution plan of the same employer for a
limitation year beginning before
January 1, 2000, increases in that partici-
January 12, 1998
pant’s defined contribution fraction could
result in changes in the defined benefit
fraction that would require a further limitation of the old-law benefit (depending
on the terms of the plans).
Similarly, on or after the final implementation date, the determinations of actuarial equivalence under § 415(b)(2)(E)
that apply with respect to the old-law benefit must take into account any changes in
plan terms that occur after December 7, 1994, that are relevant in applying
the old-law limitations. If the equivalent
annual benefit determined in this manner
exceeds the age-adjusted dollar limit, the
old-law benefit must be limited accordingly.
Finally, the old-law benefit is limited to
the extent that the total plan benefit determined before applying § 415 under the
plan is smaller than the old-law benefit.
This could happen, for example, if the
plan is amended to change the interest
rate generally used to apply § 417(e)(3) in
a way that would reduce a participant’s
total plan benefit, even if the amendment
occurs after the participant’s freeze date.
Example 1: As of December 7, 1994,
Plan C provided that single-sum distributions were determined using the PBGC
interest rates and the UP-1984 Mortality
Table. Plan C also provided that, for purposes of computing the § 415(b) limitations, an interest rate equal to the greater
of 5 percent or the applicable PBGC interest rate would be used with the UP–1984
Mortality Table. Under Plan C, the
§ 415(b) limitations are applied only after
the otherwise determined benefit has been
adjusted for early retirement and for any
optional form of benefit.
In order to reflect the § 417(e)(3)
changes, Plan C is amended on January 1,
1996, effective as of that date, to substitute the applicable interest rate and the applicable mortality table for the original
plan rate and the UP-1984 Mortality
Table, respectively, to compute singlesum benefits under the plan. These new
provisions are applied to all plan benefits
(as determined before applying § 415
under the plan), whether accrued before
or after the amendment date.
Plan C is amended July 1, 1999, to
apply the § 415(b)(2)(E) changes. Plan
C’s terms as amended provide that the
§ 415(b)(2)(E) changes will not apply
to any benefits accrued under the plan as
January 12, 1998
of December 31, 1999. Thus, the freeze
date for all participants in the plan is December 31, 1999, and the final implementation date for Plan C is January 1, 2000.
Because the January 1, 1996 amendment applying the § 417(e)(3) changes is
effective before the freeze date, it will be
taken into account in determining plan
benefits before applying § 415. However,
that amendment will not be taken into account in applying the old-law limitations
to determine the old-law benefit until the
final implementation date. Accordingly,
in order to apply the old-law limitations to
determine the old-law benefit before the
final implementation date, the interest
rate used to convert a single-sum benefit
to an actuarially equivalent straight life
annuity is the greater of 5 percent and the
original plan rate.
Plan amendments made after December 7, 1994, including the January 1, 1996
amendment to use the applicable interest
rate in determining equivalent single
sums for all accrued benefits, must be
taken into account in applying the old-law
limitations on or after the final implementation date. Therefore, on or after the
final implementation date, in determining
the equivalent annual benefit under
§ 415(b)(2)(B), the interest rate used is
the greater of 5 percent and the new plan
rate under the amendment (the applicable
interest rate). If the new plan rate exceeds
the greater of 5 percent and the original
plan rate, the old-law benefit, determined
as of the freeze date, might exceed the
old-law limitations when those limitations
are applied on or after the final implementation date. In such a case, the old-law
benefit must be further limited in order to
ensure that the old-law benefit does not
exceed the old-law limitations.
Example 2: The facts are the same as in
Example 1, except that the freeze date for
a Participant P is December 31, 1994.
Participant P’s benefits are being determined as of December 31, 1996. As a result of the January 1, 1996 amendment,
before applying § 415 under the plan, P’s
total plan benefit as of December 31,
1996 (which includes accruals after the
freeze date) is smaller than P’s old-law
benefit. Therefore, the old-law benefit
must be limited so that it does not exceed
the total plan benefit. Although, as described in Example 1, the January 1, 1996
plan amendment is not taken into account
12
in applying the old-law limitations until
the final implementation date of January 1, 2000, the reduction in the total plan
benefit resulting from the January 1, 1996
amendment is taken into account immediately for purposes of determining old-law
benefits.
Example 3: As of December 7, 1994,
Plan D provided that single-sum benefits
were determined using the lesser of 6 percent and the PBGC interest rate, and the
UP–1984 Mortality Table. Plan D also
provided that for purposes of computing
benefit adjustments under § 415, an interest rate equal to the greater of 5 percent
and the lesser of 6 percent or the PBGC
interest rate would be used with the UP1984 Mortality Table.
In order to reflect the § 417(e)(3)
changes, Plan D is amended on December 1, 1996 to substitute the applicable interest rate and the applicable mortality
table for the PBGC interest rate and the
UP-1984 Mortality Table, respectively,
but only with respect to benefits accruing
after December 31, 1996. Plan D is
amended July 1, 1999 to apply the §
415(b)(2)(E) changes. Plan D’s terms as
amended provide that the § 415(b)(2)(E)
changes will not apply to any benefits accrued under the plan as of December 31,
1994. Thus, the final implementation
date for Plan D is July 1, 1999.
Because the amendment to reflect the
§ 417(e)(3) changes only applies with respect to benefits accruing after
December 1, 1996, it has no effect on the
plan rate and plan mortality table used
with respect to benefits accrued under
Plan D as of the freeze date (December 31,
1994). Thus, even on or after the final implementation date, when the plan rate and
plan mortality table must be determined
taking into account plan amendments
made after December 7, 1994, the plan
rate and plan mortality table that are used
to apply the old-law limitations will be unaffected by the December 1, 1996 amendment to reflect the § 417(e)(3) changes,
and the old-law benefit will not have to be
limited because of that amendment.
(3) Plan Amendments and Operational
Compliance Issues
Q–16. How does an employer apply the
transitional rule of § 1449(d) of SBJPA to
a plan that was amended on or before August 20, 1996, to apply § 767 of RPA ’94?
A–16. Section 1449(d) of SBJPA pro-
1998–2 I.R.B.
vides that, if a plan amendment to apply
the § 415(b)(2)(E) changes (original
amendment) was adopted or made effective on or before August 20, 1996, the employer could adopt another amendment
(repealing amendment) to repeal the original amendment, and the original amendment would not be taken into account in
applying § 767(d)(3)(A) of RPA ’94 as revised by § 1449(a) of SBJPA. Pursuant to
section 7 of Rev. Proc. 97–41, an original
amendment is not taken into account in
applying § 767(d)(3)(A) of RPA ’94 as revised by § 1449(a) of SBJPA if a repealing amendment is adopted on or before
the last day of the plan’s remedial amendment period under § 401(b) for disqualifying provisions under SBJPA and GATT.
Thus, an employer adopting a repealing
amendment to a plan has the same options
for that plan as an employer that has not
made any plan amendments to apply the
§ 415(b)(2)(E) changes.
Q–17. When must qualified plans be
amended to apply the § 415(b)(2)(E)
changes?
A–17. Under section 6 of Rev.
Proc. 97–41, plan amendments to apply
the § 415(b)(2)(E) changes must be
adopted by the last day of the plan’s remedial amendment period under § 401(b) for
disqualifying provisions under SBJPA
and GATT. For plans other than governmental plans, section 6 of Rev. Proc. 9741 extended the remedial amendment period to the last day of the first plan year
beginning on or after January 1, 1999.
For governmental plans, the remedial
amendment period is extended to a later
date.
Under section 9 of Rev. Proc. 97–41, if
a plan terminates prior to the date amendments otherwise must be adopted, the
plan must be amended to conform to the
applicable § 415(b)(2)(E) changes in connection with that termination.
Q–18. Must a plan amendment to apply
the § 415(b)(2)(E) changes conform the
terms of the plan to the plan’s operation
prior to the date the plan is amended?
A–18. No. Except as discussed below,
an employer may amend its plan within
the remedial amendment period described
in Q&A–17 to apply the § 415(b)(2)(E)
changes in any manner permitted under
this revenue ruling (including an amendment to provide that the § 415(b)(2)(E)
changes will not apply to certain bene-
1998–2 I.R.B
fits), regardless of whether the amendment is consistent with the plan’s operation prior to the date the plan is amended.
However, this remedial amendment period is available only if, in accordance
with § 401(b) and the regulations thereunder, all of the provisions of the plan
needed to satisfy the qualification requirements are in effect by the end of the remedial amendment period and have been
made effective for all purposes for the entire period (that is, beginning with the
RPA ’94 § 415 effective date). Thus, plan
operations (including prior distributions
from the plan) must be changed to the extent necessary to conform the operations
retroactively to the terms of the plan as
retroactively amended for the § 415(b)(2)(E) changes, including, for example,
plan terms that implement the § 1449(b)
revisions under Q&A-11.
The following are examples of plan
amendments that apply the § 415(b)(2)(E)
changes and their effects on prior distributions.
Example 1: Employer X maintains Plan
E, a qualified defined benefit plan that
was adopted and effective on January 1,
1985. The plan year and the limitation
year for Plan E are the calendar year. In
making distributions for periods after January 1, 1995, and before August 20, 1996,
Employer X applied the § 415(b)(2)(E)
changes, but did not reduce a participant’s
benefit below the participant’s accrued
benefit as of December 31, 1994.
Plan E is amended on December 1, 1999, effective on January 1, 1995,
to apply the § 415(b)(2)(E) changes. The
amendment further provides that the
§ 415(b)(2)(E) changes do not apply to
any benefits accrued before January 1, 2000, in accordance with Method 2
of Q&A–14. Therefore, the amendment
to apply the § 415(b)(2)(E) changes is
made effective (within the meaning of
Q&A–12) on January 1, 2000, and Plan E
has a final implementation date of January 1, 2000.
Under § 767(d)(3)(A), determinations
under § 415(b)(2)(E) with respect to oldlaw benefits made before January 1, 2000,
are based on § 415(b)(2)(E) and plan
terms as in effect on December 7, 1994.
Plan operations must be retroactively conformed to the terms of the plan as retroactively amended. Therefore, distributions
made from Plan E between January 1,
13
1995 and August 20, 1996 must be redetermined to reflect the freeze date used in
the December 1, 1999 amendment.
Example 2: Employer Y maintains Plan
F, a qualified defined benefit plan that
was adopted and effective on January 1,
1985. The plan year and the limitation
year for Plan F are the calendar year. In
making distributions for periods after January 1, 1995, including distributions for
periods after August 20, 1996, Employer
Y applied the § 415(b)(2)(E) changes
using § 415(b)(2)(E)(ii) as amended by
RPA ’94, but did not take the § 1449(b)
revisions into account.
Plan F is amended on November 1, 1999, effective on January 1, 1995,
to apply the § 415(b)(2)(E) changes. The
amendment provides, that for distributions for periods after January 1, 1995,
and on or before August 20, 1996, in the
case of a form of benefit subject to
§ 417(e)(3), the applicable interest rate is
substituted for 5 percent in determining
the age-adjusted dollar limits. For distributions for periods after August 20, 1996,
the amendment reflects the § 1449(b) revisions. In accordance with Method 2 of
Q&A–14, the amendment further provides that the benefits of any current or
former participant shall not be reduced
below the participant’s accrued benefit as
of December 31, 1994. Therefore, the
amendment adopted November 1, 1999 to
apply the § 415(b)(2)(E) changes is made
effective (within the meaning of
Q&A–12) on January 1, 1995, and Plan F
has a final implementation date of November 1, 1999.
Plan operations (including distributions
made from Plan F on or after the RPA ’94
§ 415 effective date) must be retroactively
conformed to the terms of the plan as
retroactively amended. In this case, distributions from Plan F made before the
amendment conform to the terms of the
plan except to the extent that distributions
for periods after August 20, 1996 did not
reflect the § 1449(b) revisions. Such distributions will have to be redetermined.
Example 3: Employer Z maintains Plan
G, a qualified defined benefit plan that
was adopted and effective on January 1,
1982. The plan year and limitation year
are the calendar year. Plan G is amended
on March 1, 1998, effective on January 1,
1995, to apply the § 415(b)(2)(E)
changes. The amendment provides that in
January 12, 1998
the case of participants who terminate before February 1, 1998, the § 415(b)(2)(E)
changes do not apply to benefits accrued
before January 1, 1995, in accordance
with Method 2 of Q&A–14. The amendment further provides that in the case of
participants who have an hour of service
on or after February 1, 1998, the § 415(b)(2)(E) changes do not apply to benefits
accrued before January 1, 1999, in accordance with Method 1 of Q&A–14. In
making distributions since January 1, 1995, Employer Z applied the
§ 415(b)(2)(E) changes, but did not reduce the participant’s benefit below the
participant’s accrued benefit as of December 31, 1994.
Plan operations (including distributions
made from Plan G on or after the RPA ’94
§ 415 effective date) must be retroactively
conformed to apply the plan terms as
retroactively amended. In the case of
Plan G, distributions made for participants who terminated prior to
February 1, 1998, will conform to the
terms of the plan (except to the extent a
distribution for a period after August 20,
1996 might have reflected § 415(b)(2)(E)(ii), as amended by RPA ’94, but
before amendment by § 1449(b) of
SBJPA).
(4) Plan Funding
Q–19. May the § 415(b)(2)(E) changes
be taken into account for purposes of the
minimum funding standards under § 412
before the plan is amended to reflect these
changes?
A–19. Except as provided under
§ 412(c)(12) or by the Commissioner,
changes in plan benefits that become effective after the first day of the current
plan year may not be anticipated for purposes of § 412. See § 1.412(c)(3)–
1(d)(1).
In the case of a plan that is operated in
accordance with the § 415(b)(2)(E)
changes, the anticipation of a plan amendment applying the § 415(b)(2)(E) changes
is hereby permitted for purposes of § 412
until the final implementation date. For
purposes of the preceding sentence, for
plan years beginning before January 1,
1997, the anticipated plan amendment
need not reflect the amendments made to
§ 415 of the Code or § 767 of RPA ’94 by
§ 1449 of SBJPA. For plan years beginning on or after January 1, 1997, a plan
January 12, 1998
amendment applying the § 415(b)(2)(E)
changes may be anticipated only if the
plan amendment is permitted under this
revenue ruling and only if it is described
in an attachment to a Schedule B of
Form 5500 for the plan year that is filed
on or before the due date (including extensions) for such Schedule B. The attachment must specify the extent to which
the anticipated plan amendment provides
that the § 415(b)(2)(E) changes will not
apply to participants’ old-law benefits (including, if applicable, any freeze date
under Q&A–13 and method under
Q&A–14). Note that if the § 415(b)(2)(E)
changes are retroactively applied to all
benefits under the plan, this must be specified in the attachment. In addition, once
a Schedule B of Form 5500 is filed for a
plan year, the anticipated amendment, if
any, that was used in applying § 412 for
that year cannot be changed (for purposes
of applying § 412 for that year).
If no such attachment is made to
Schedule B of Form 5500 for a plan year,
the employer may not anticipate the
§ 415(b)(2)(E) changes for that plan year
and must determine the minimum funding
standard using the terms of the plan.
Q–20. What are the implications of a
plan being funded on the basis of plan
terms without taking the § 415(b)(2)(E)
changes into account?
A–20. If an employer has not yet
amended its plan to reflect the § 415(b)(2)(E) changes, funding on the basis of
plan terms could result in a plan being
funded based on benefits that exceed the
§ 415(b) limitations. Because § 404(j)
provides that benefits in excess of the
§ 415(b) limitations may not be taken into
account in determining a deduction under
§ 404, contributions that are made as a result of benefits that are in excess of the
§ 415 limits are nondeductible, regardless
of whether they are required under § 412.
Thus, if an employer has not yet amended
its plan to apply the § 415(b)(2)(E)
changes, the employer could be required
to make nondeductible contributions to
the plan to satisfy the minimum funding
standards, unless (in accordance with
Q&A–19) a plan amendment to apply the
§ 415(b)(2)(E) changes is anticipated.
However, for taxable years relating to
plan years beginning prior to January 1,
1997, the Service will not assert a violation of § 404(j) merely because contribu-
14
tions are made in amounts necessary to
satisfy minimum funding standards calculated based on the terms of the plan, provided that the terms of the plan satisfy
old-law limitations. The preceding sentence will not apply with respect to a plan
year if a Schedule B of Form 5500 has
been filed for that plan year prior to January 12, 1998, for which the minimum
funding standards have been calculated
by anticipating an amendment applying
the § 415(b)(2)(E) changes.
(5) Miscellaneous
Q–21. Are the RPA ’94 § 415 effective
date and the final implementation date for
a plan affected by the date the § 417(e)(3)
changes are made effective for the plan?
A–21. No. The RPA ’94 § 415 effective
date applies regardless of when the
§ 417(e)(3) changes are made effective
for the plan. In addition, the final implementation date for a plan may be different
from the date the § 417(e)(3) changes are
made effective for the plan.
Q–22. Must a plan provide a uniform
freeze date under Q&A–13 and a uniform
method under Q&A–14 for all participants?
A–22. No. A plan may provide different participant freeze dates under
Q&A–13 or different methods under
Q&A–14 for different participants in the
plan. In addition, a plan may provide no
freeze date for some participants (that is,
the § 415(b)(2)(E) changes apply to the
entire accrued benefit of those participants), while providing a freeze date for
other participants. However, the availability of a specific participant freeze date
under Q&A–13 or method described in
Q&A–14 is a benefit, right, or feature,
which must satisfy the nondiscriminatory
availability requirement of § 1.401(a)(4)–4. Furthermore, in accordance with
Q&A–11 of Notice 87–21, if a limitation
under § 415 may be applied in more than
one manner, the plan must specify the
manner in which the limitation is to be applied.
Q–23. Are fully insured plans that meet
the accrued benefit requirements of
§ 411(b) by satisfying the requirements of
§ 411(b)(1)(F) subject to the new requirements under § 415(b)(2)(E) as amended
by RPA ’94 and SBJPA?
A–23. Yes, these plans are subject to all
of the requirements of § 415.
1998–2 I.R.B.
Q–24. How is the § 415(b) compensation limitation adjusted for years beginning after December 31, 1994?
A–24. Section 415(d)(1)(B) provides
that the § 415(b) compensation limitation
is adjusted annually for cost-of-living increases in the case of a participant who
has separated from service. Section
732(b) of GATT changed the base period
for computing the annual adjustments.
For a participant separating from service on or before December 31, 1994, the
§ 415(b) compensation limitation for the
1995 calendar year is computed by multiplying the participant’s compensation
limitation, as adjusted under prior law
through the 1994 calendar year, by
1.0217.
PAPERWORK REDUCTION ACT
The collection of information contained in this revenue ruling has been reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1563.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collection of information in this
revenue ruling is in Q&A–19. This revenue ruling provides guidance on the limitations on benefits and contributions
under § 415 of the Code and § 767 of
RPA ’94 as amended by § 1449 of SBJPA,
including the various options that an employer may elect when implementing the
amendment. This information will be
used in determining benefits taken into
account for purposes of the minimum
funding requirements for the plan. The
collection of information is required to assure compliance with the minimum funding requirements. The likely respondents
are businesses or other for-profit institutions, nonprofit institutions, and small
businesses or organizations.
The estimated total annual reporting
burden is 35,000 hours.
The estimated annual burden per respondent varies from 15 minutes to 45
minutes, depending on individual circumstances, with an estimated average of 30
minutes. The estimated number of respondents is 70,000.
1998–2 I.R.B
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.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Effect On Other Documents
Section 483.—Interest on
Certain Deferred Payments
Rev. Rul. 95–29, 1995–1 C.B. 81, is
modified and superseded.
Drafting Information
The principal authors of this revenue
ruling are John Heil and Martin Pippins of
the Employee Plans Division. For further
information regarding this revenue ruling,
contact the Employee Plans Division’s
taxpayer assistance number at (202) 6226076 (not a toll-free number) between the
hours of 2:30 p.m. and 3:30 p.m., Eastern
Time, Monday through Thursday. Mr.
Heil’s telephone number is (202) 6227383 (also not a toll-free number). Mr.
Pippins’ telephone number is (202) 6226261 (also not a toll-free number).
Section 417.—Definitions and
Special Rules for Purposes of
Minimum Survivor Annuity
Requirements
26 CFR 1.417(e)–1: Restrictions and valuations of
distributions from plans subject to §§ 401(a)(11)
and 417.
Whether the applicable interest rate described in
§ 417(e)(3) of the Code as applied for purposes of §
415(b)(2)(E) is affected by the Small Business Job
Protection Act of 1996, Pub. L. 104–188. See Rev.
Rul. 98–1 page 5.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
15
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 1998. See
Rev. Rul. 98–4, page 18.
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of January 1998. See
Rev. Rul. 98–4, page 18.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Insurance companies; interest rate
tables. Prevailing state assumed interest
rates are provided for the determination of
reserves under section 807 of the Code for
contracts isued in 1997 and 1998. Rev.
Rul. 92–19 supplemented in part.
Rev. Rul. 98–2
For purposes of § 807(d)(4) of the Internal Revenue Code, for taxable years beginning after December 31, 1996, this ruling supplements the schedules of
prevailing state assumed interest rates set
forth in Rev. Rul. 92–19, 1992–1 C.B.
227. This information is to be used by insurance companies in computing their reserves for (1) life insurance and supplementary total and permanent disability
benefits, (2) individual annuities and pure
endowments, and (3) group annuities and
pure endowments. As § 807(d)(2)(B) requires that the interest rate used to compute these reserves be the greater of (1) the
applicable federal interest rate, or (2) the
prevailing state assumed interest rate, the
table of applicable federal interest rates in
Rev. Rul. 92–19 is also supplemented.
Following are supplements to schedules
A, B, C, and D to Part III of Rev. Rul.
January 12, 1998
92–19, providing prevailing state assumed
interest rates for insurance products with
different features issued in 1997 and 1998,
and a supplement to the table in Part IV of
Rev. Rul. 92–19, providing the applicable
federal interest rate under § 807(d) for
1997 and 1998. This ruling does not supplement Parts I and II of Rev. Rul. 92–19.
This is the sixth supplement to the interest rates provided in Rev. Rul. 92–19. Earlier supplements were published in Rev.
Rul. 93–58, 1993–2 C.B. 241 (interest rates
for insurance products issued in 1992 and
1993), Rev. Rul. 94–11, 1994–1 C.B. 196
(1993 and 1994), Rev. Rul. 95– 4, 1995–1
C.B. 141 (1994 and 1995), Rev. Rul. 96–2,
1996–1 C.B. 141 (1995 and 1996), and Rev.
Rul. 97–2, 1997–1 C.B. 8 (1996 and 1997).
Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST RATES BASED ON THE
1980 AMENDMENTS TO THE NAIC STANDARD VALUATION LAW
A. Life insurance valuation:
Guarantee Duration
(years)
Calendar Year of Issue
1998
10 or fewer
More than 10
but not more than 20
More than 20
5.50**
5.25**
4.50**
Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average—Monthly
Average Corporates.
** As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest
rate to be used for this product under § 807 is 6.31 percent.
* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92-19 are those used in the Standard Valuation Law; the terms are defined in Rev. Rul.
92–19.
Part III, Schedule B
STATUTORY VALUATION INTEREST RATES BASED ON THE
1980 AMENDMENTS TO THE NAIC STANDARD VALUATION LAW
B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash settlement options and from guaranteed interest contracts with cash settlement options:
Calendar Year of Issue
Valuation Interest Rate
1997
6.75*
Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average — Monthly
Average Corporates. The terms used in this schedule are those used in the Standard Valuation Law as defined in Rev. Rul. 92–19.
*As this prevailing state assumed interest rate exceeds the applicable federal interest rate for 1997 of 6.33 percent, the prevailing state assumed interest rate of
6.75 percent is to be used for this product under § 807.*
January 12, 1998
16
1998–2 I.R.B.
Part III, Schedule C15 - 1997
STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION
LAW FOR 1997 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS
C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:
Cash
Settlement
Options?
Future
Interest
Guarantee?
Yes
Yes
Yes
No
No
Yes or No
Guarantee Duration
(years)
Valuation Interest Rate
For Plan Type
A
B
C
5 or fewer
More than 5, but not more than 10
More than 10, but not more than 20
More than 20
5 or fewer
More than 5, but not more than 10
More than 10, but not more than 20
More than 20
5 or fewer
More than 5, but not more than 10
6.75
6.50
6.00*
5.25*
7.00
6.75
6.25*
5.25*
6.75
6.50
More than 10, but not more than 20
More than 20
6.00*
5.25*
5.75*
5.75*
5.25*
4.75*
6.00*
6.00*
5.50*
5.00*
5.25*
5.25*
5.25*
4.75*
5.50*
5.50*
5.25*
5.00*
NOT APPLICABLE
Source: Rates calculated from the monthly averages, ending June 30, 1997 of Moody’s Corporate Bond Yield Average—Monthly
Average Corporates.
*As the applicable federal interest rate for 1997 of 6.33 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under §
807 is 6.33 percent.
Part III, Schedule D15—1997
STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD
VALUATION LAW FOR 1997 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS
D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options and
that are valued on a change in fund basis:
Cash
Settlement
Options?
Future
Interest
Guarantee?
Yes
Yes
Yes
No
Guarantee Duration
(years)
5 or fewer
More than 5, but not more than 10
More than 10, but not more than 20
More than 20
5 or fewer
More than 5, but not more than 10
More than 10, but not more than 20
More than 20
Valuation Interest Rate
For Plan Type
A
B
C
7.50
7.25
6.75
5.75*
7.75
7.50
7.00
6.00*
7.00
7.00
6.50
5.75*
7.25
7.25
6.75
6.00*
5.50*
5.50*
5.25*
5.00*
5.75*
5.75*
5.50*
5.25*
Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average—Monthly
Average Corporates.
*As the applicable federal interest rate for 1997 of 6.33 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under §
807 is 6.33 percent.
1998–2 I.R.B
17
January 12, 1998
Part IV. Applicable Federal Interest Rates.
TABLE OF APPLICABLE FEDERAL INTEREST RATES FOR PURPOSES OF § 807
Year
Interest Rate
1997
1998
6.33
6.31
Sources: Rev. Rul. 96–57, 1996–2 C.B. 82 for the 1997 rate and Rev. Rul. 97–50, 1997–49 I.R.B. 5 for the 1998 rate.
term, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, on this page.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 92–19 is supplemented by the
addition to Part III of that ruling of prevailing state assumed interest rates under §
807 for certain insurance products issued
in 1997 and 1998 and is further supplemented by an addition to the table in Part
IV of Rev. Rul. 92–19 listing applicable
federal interest rates. Parts I and II of Rev.
Rul. 92–19 are not affected by this ruling.
DRAFTING INFORMATION
The principal author of this revenue ruling is Ann H. Logan of the Office of Assistant Chief Counsel (Financial Institutions
and Products). For further information regarding this revenue ruling contact her on
(202) 622-3970 (not a toll-free call).
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate. For purposes
of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the
rates for January 1998.
Rev. Rul. 98–4
This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 1998 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable federal rates (AFR) for the current month for
purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the appropriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Table 5
contains the federal rate for determining
the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for
purposes of section 7520. Finally, Table
6 contains the deemed rate of return for
transfers made during calendar year 1998
to pooled income funds described in §
642(c)(5) that have been in existence for
less than 3 taxable years immediately
preceding the taxable year in which the
transfer is made.
REV. RUL. 98–4 TABLE 1
Applicable Federal Rates (AFR) for January 1998
Period for Compounding
Annual
Semiannual
Quarterly
Monthly
Short-Term
AFR
110% AFR
120% AFR
130% AFR
5.70%
6.28%
6.85%
7.44%
5.62%
6.18%
6.74%
7.31%
5.58%
6.13%
6.68%
7.24%
5.56%
6.10%
6.65%
7.20%
Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
5.93%
6.52%
7.13%
7.73%
8.95%
10.48%
5.84%
6.42%
7.01%
7.59%
8.76%
10.22%
5.80%
6.37%
6.95%
7.52%
8.67%
10.09%
5.77%
6.34%
6.91%
7.47%
8.60%
10.01%
January 12, 1998
18
1998–2 I.R.B.
REV. RUL. 98–4 TABLE 1 — (continued)
Applicable Federal Rates (AFR) for January 1998
Period for Compounding
Long-Term
AFR
110% AFR
20% AFR
130% AFR
Annual
Semiannual
Quarterly
Monthly
6.13%
6.75%
7.38%
8.00%
6.04%
6.64%
7.25%
7.85%
6.00%
6.59%
7.19%
7.77%
5.97%
6.55%
7.14%
7.72%
REV. RUL. 98–4 TABLE 2
Adjusted AFR for January 1998
Period for Compounding
Annual
Semiannual
Quarterly
Monthly
Short-term
adjusted AFR
3.86%
3.82%
3.80%
3.79%
Mid-term
adjusted AFR
4.30%
4.25%
4.23%
4.21%
Long-term
adjusted AFR
5.10%
5.04%
5.01%
4.99%
REV. RUL. 98–4 TABLE 3
Rates Under Section 382 for January 1998
Adjusted federal long-term rate for the current month
5.10%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)
5.23%
REV. RUL. 98–4 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 1998
Appropriate percentage for the 70% present value low-income housing credit
8.41%
Appropriate percentage for the 30% present value low-income housing credit
3.61%
REV. RUL. 98–4 TABLE 5
Rate Under Section 7520 for January 1998
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest
7.2%
REV. RUL. 98–4 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds
Deemed rate of return for transfers during 1998 to pooled income funds that have been in existence for
less than 3 taxable years
1998–2 I.R.B
19
7.2%
January 12, 1998
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Section 4161.—Imposition of Tax
26 CFR 48.4161(b)-1: Imposition and rates of tax;
bows and arrows.
Bows and arrows; taxable and nontaxable articles. An illustrative list of taxable and nontaxable articles is provided
for use by manufacturers, producers, and
importers in determining their liability for
the manufacturers tax on archery equipment imposed by section 4161 of the
Code. The list reflects changes to the tax
on archery equipment made by the Taxpayer Relief Act of 1997. Rev. Rul 75–17
supplemented and superseded.
Rev. Rul. 98–5
This revenue ruling updates Rev. Rul.
75–17, 1975–1 C.B. 344, by revising the
illustrative list of taxable and nontaxable
archery articles in that ruling. This revenue ruling provides guidance to manufacturers, producers, and importers in determining their liability for the
manufacturers excise tax on bows and arrows imposed by § 4161(b) of the Internal
Revenue Code.
BACKGROUND
For sales prior to October 1, 1997,
§ 4161(b) imposed an 11 percent tax on the
sale by the manufacturer, producer, or importer of any bow that had a draw weight
of 10 pounds or more, any arrow that measured 18 inches or more in overall length,
or any arrow sold after September 30,
1984, that measured less than 18 inches in
overall length but was suitable for use with
a taxable bow, any part or accessory suitable for inclusion in or attachment to a taxable bow or arrow, and any quiver suitable
for use with taxable arrows.
For sales after September 30, 1997,
§ 4161(b), as amended by § 1433(a) of the
Taxpayer Relief Act of 1997 (TRA-97),
provides for the continued taxation of bows,
bow parts and accessories, and quivers in
the same manner and at the same rate as before amendment. However, § 4161(b), as
amended, replaces the prior tax on arrows
January 12, 1998
and arrow parts and accessories with an excise tax on arrow components. The new tax
is imposed at the rate of 12.4 percent on the
sale by the manufacturer, producer, or importer of arrow components. For this purpose, an arrow component is any shaft,
point, nock, or vane of the type used in the
manufacture of any arrow which after its assembly (A) measures 18 inches or more in
overall length, or (B) measures less than 18
inches in overall length, but is suitable for
use with a taxable bow.
No tax is imposed under the former or
amended § 4161(b) with respect to any article taxable under § 4161(a) as sport fishing equipment, for example, bow fishing
rods and reels.
Section 48.4161(b)–2(a)(1) of the
Manufacturers and Retailers Excise Tax
Regulations defines the term “bows” as
including all articles made of flexible materials that are designed to be equipped
with a string and used for the propelling
of arrows in the sport of archery (target
shooting), or in hunting or fishing.
Section 48.4161(b)–2(a)(2) defines the
term “arrows” as including all articles designed or constructed to be propelled by a
bow in the sport of archery (target shooting), or in hunting or fishing. The overall
length of the arrow is to be measured from
the point of the tip or arrowhead to the end
of the arrow nock. In the case of arrows
sold by the manufacturer without heads,
tips, or nocks, the overall length is to include the length of the shaft plus the length
of the nock and head or tip that is normally
used with the particular type of arrow shaft.
(The following provisions of the regulations do not reflect the amendments
made to § 4161(b) by the TRA–97.)
Section 48.4161(b)–2(b)(1) defines the
term “parts and accessories” for bows and
arrows as including all articles (other than
fishing reels) suitable for inclusion in or
attachment to a taxable bow or arrow. Examples of parts and accessories for bows
are bow handles, bow limbs, bowstrings,
bowstring silencers, bow stabilizers, arrow
rests, bow slings, bow sights, bow levels,
bow tip protectors, brush buttons, camouflaged bow covers, and all other articles
designed to be attached to or included in a
bow to assist in aiming or propelling an
arrow, or to protect the bow while in use.
Examples of parts and accessories for arrows are arrow shafts, nocks, tips, heads,
head adapters, and feathers.
Under the provisions of § 48.4161(b)–
2(b)(2), general purpose materials and arti-
20
cles that are not specifically designed to directly improve the performance or appearance of bows or arrows, or to protect them
while in use, are not considered to be parts
and accessories for bows or arrows, even
though such materials may be intended,
after further processing, to be included in or
attached to bows or arrows. An example of
a nontaxable article that is designed for use
with a bow, but is neither attached to a bow,
nor serves a purpose directly related to the
efficient use of a bow, is a carrying case for
a bow. Examples of nontaxable general
purpose materials or articles are glues and
cements, feathers before they are prepared
for use with arrows, and bowstring thread
before it is processed into bowstrings.
Arrow shaft material is considered to be a
taxable part for an arrow unless the manufacturer, producer, or importer can establish
that the particular material is unsuitable for
use in the manufacture of taxable arrows.
In addition, the term parts and accessories
does not include articles in the nature of expendable supplies, even though such articles are designed to be applied to, or used
with, bows or arrows. Examples of such
supply materials are bowstring wax and
archery powder.
Section 48.4161(b)–2(c) defines the
term “quivers” as including all articles, of
whatever material made, that are designed
to contain, and to provide ready access to,
taxable arrows during the time an archer
is engaged in target shooting, hunting, or
fishing. The term does not include any
article designed solely for storing or
transporting arrows during times when
the arrows are not in use.
ILLUSTRATIVE LISTS
The Internal Revenue Service has determined that the articles listed below are
bows, arrows, arrow components, or parts
or accessories subject to the tax imposed
by § 4161(b). The parts or accessories
subject to the tax include replacement
parts or accessories. A separate list of the
articles that the Service has determined
not to be subject to the tax imposed by
that section is also provided. The lists are
illustrative and not all-inclusive.
ARTICLES SUBJECT TO TAX
Bows
All bows that have a draw weight of 10
pounds or more, including laminated
composite bows; solid glass, wood, steel,
etc., bows; and crossbows.
1998–2 I.R.B.
Arrows
(Prior to October 1, 1997)
All arrows (including bow fishing arrows), regardless of shaft material or the
type of head, that measure 18 inches or
more in overall length (including the tip
or head, and nock), and all arrows sold
after September 30, 1984, that measure
less than 18 inches in overall length but
are suitable for use with a taxable bow.
Arrow Components
(After September 30, 1997)
All shafts, points, nocks, or vanes of
the type used in the manufacture of any
arrow which after its assembly (A) measures 18 inches or more overall in length,
or (B) measures less than 18 inches overall in length, but is suitable for use with a
taxable bow.
Bow and Arrow Sets
Bow and arrow sets that contain any taxable article. When a set also contains nontaxable articles, the tax applies only to that
portion of the combination sale price properly attributable to the taxable articles. See
Rev. Rul. 75–18, 1975–1 C.B. 345, which
provides a method of determining the manufacturer’s tax base and computing the tax
where taxable and nontaxable articles are
sold as a unit at a single price.
Bow Parts and Accessories and Quivers
Arrow holders (all items to be affixed to a
bow to hold an arrow in ready position)
Arrow plates (whether fixed, adjustable,
spring loaded, etc.)
Arrow rests (whether bow shelf or auxiliary type)
Bow handles
Bow handle sections
Bow levels
Bow limbs
Bow saddles (including interchangeable
or replaceable bow grips) Bow sights
and bow sight extensions (including
parts and attachments therefor)
Bow silencing pads
Bow slings
Bow stabilizers (all attachments and
weights for use on bows to affect stabilization, counterbalancing, or modification of weight distribution)
Bowstrings
Bowstring silencers
Bow tip protectors
Brush buttons
Cable guards
Cable guard slides
1998–2 I.R.B
Camouflaged bow covers (slip-over cloth,
self-adhesive tape type, etc.)
Cushion nocks
Draw checks (spring loaded clickers, mirrors, or any other device attached to a
bow or string to insure consistent draw
length)
Draw stops
Finger protectors attached to a bowstring
Grip formers
Kisser buttons (all items attached to a
bowstring to establish a consistent anchor point)
Nocking points (all items attached to a
bowstring to establish arrow positioning)
Quivers designed to provide ready access
to taxable arrows while an archer is engaged in target shooting, hunting, or
fishing, regardless of material from
which constructed (including bow
quivers designed to be attached to a
bow and ground quivers)
Release draw bars
String peeps (all items attached to a bowstring for use in sighting)
Arrow Parts and Accessories
(Prior to October 1, 1997)
Arrow fletching (natural feathers
processed for application to arrows or
synthetic feather substitutes)
Arrow nocks and inserts
Arrow points, tips, heads, adapters, and
inserts
Arrow shafts
Arrow shaft material
Broadhead guide rings
Broadhead rings
Feather tracers
ARTICLES NOT SUBJECT TO TAX
Accessory belts
Archery armguards
Archery powder
Archery shooting finger tabs
Archery shooting gloves
Arrow clips for tackle boxes and display
racks
Arrow cresting machines and replacement
parts therefor
Arrow cut-off and fabricating tools (and
replacement parts therefor)
Arrow fletching jigs and tools
Arrow lubes
Arrow pullers
Arrow shaft dip tanks
Arrow spine meters (and replacement
parts therefor)
Arrow straighteners
21
Arrow tapering tools
Bow and arrow racks designed solely for
the storage of bows and/or arrows
Bow and arrow cases designed for the
transportation or storage of bows, arrows, and related equipment
Bowfishing line
Bow squares
Bow stringers
Bowstring jigs
Bowstring thread
Bowstring wax
Bow supports including ground bow
holders and stands
Broadhead wrenches
Electronic trackers
Feather burners and feather burner kits
(and replacement parts therefor)
Feathers not prepared for use with arrows
Feather waterproofing
Finger slings
Glues and cements
Nocking point tools
Powder pouches
Score card holder
Shirt and blouse protectors
String holders and keepers
String releases
String servers
Targets and target accessories
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 75–17 is supplemented and
superseded.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Theodore N. Margopulos of the
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue ruling contact Mr. Margopulos
on (202) 622-3130 (not a toll-free call).
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
Section 7872.—Treatment of
Loans with Below-Market
Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of January 1998. See Rev. Rul. 98–4, page 18.
January 12, 1998
Part III. Administrative, Procedural, and Miscellaneous
Simplified Exclusion Ratio
Notice 98–2
I. Introduction
This notice replaces Notice 88–118,
1988–2 C.B. 450, to reflect certain
changes to § 72 of the Internal Revenue
Code of 1986 (the Code) made by the
Small Business Job Protection Act of
1996, Pub. L. 104–188 (SBJPA) and by
the Taxpayer Relief Act of 1997, Pub. L.
105-34 (TRA ‘97). Specifically, this notice describes the simplified method provided by § 72(d)(1) for determining the
tax-free and taxable portions of certain
annuity payments made from qualified
plans under § 401(a), employee annuities
under § 403(a), and annuity contracts
under § 403(b).
In general, this new method applies to
an annuity if the annuity starting date is
after November 18, 1996. However, see
Section V below for a transition rule for
annuities with annuity starting dates after
November 18, 1996 and before January 1,
1997. Unlike the safe-harbor method in
Notice 88–118, the simplified method is
required by the Code (rather than optional) and distributees must use this
method in order to comply with § 72(d) of
the Code as amended by SBJPA and TRA
‘97. Payors must also use this method to
report the taxable portion of the annuity
payments on Form 1099-R. The new
method does not apply if the annuity starting date is on or before November 18,
1996.
II. Background
Section 402(a)(1) provides that the
amount actually distributed to any distributee by an employees’ trust described in
§ 401(a) which is exempt from tax under
§ 501(a) shall be taxable to the distributee, in the year in which distributed, under
§ 72 (relating to annuities). Similarly,
amounts distributed from employee annuity contracts under § 403(a) and annuity
contracts under § 403(b) are taxable to the
distributee (in the year in which distributed) under § 72.
Section 72(b) provides that a portion of
the annuity payments received in a taxable year may be excluded from gross in-
January 12, 1998
come as a return of the distributee’s investment according to an exclusion ratio
determined at the annuity starting date.
The numerator of this ratio is the employee’s investment in the contract, and
the denominator is the expected return.
Section 72(e) provides rules relating to
the taxability of amounts not received as
annuities. Section 1.72–11(f) of the Income Tax Regulations provides rules for
the treatment of a single-sum withdrawal
received on or after the annuity starting
date.
Notice 88–118 provided a simplified
safe harbor method for determining the
tax-free portion and taxable portion of
certain annuity payments made from
qualified plans under § 401(a), employee
annuities under § 403(a), and annuity
contracts under § 403(b). Under the safe
harbor method of Notice 88-118, the exclusion ratio was determined by dividing
the distributee’s investment in the contract by an expected number of payments
based upon the distributee’s age. The result represented the tax-free portion of
each payment. This safe harbor method
could be elected only if the distributee received monthly payments and did not
apply to installment payments that were
not life contingent.
Section 1403 of SBJPA amended
§ 72(d) of the Code to require the use of a
simplified method of recovering the investment in the contract for most annuity
distributions from qualified plans under
§ 401(a), employee annuities under
§ 403(a), and § 403(b) annuity contracts.
The simplified method of § 72(d) is similar to, but not the same as, the safe-harbor
method that was provided in Notice 88–
118. Section 1403 of SBJPA also provided a special rule where a single sum is
received in connection with the commencement of annuity payments. In such
a case, the single- sum payment is treated
as if received before the annuity starting
date. Generally, the SBJPA changes to
§ 72(d) of the Code apply to distributions
with annuity starting dates after November 18, 1996.
Section 1075 of TRA ‘97 amended the
simplified method of recovering the investment in the contract in § 72(d)(1)(B)
of the Code to prescribe a different table
22
if the annuity is payable based on the lives
of more than one individual. This new
table applies to distributions with annuity
starting dates after December 31, 1997.
For annuities payable based on the life of
only one individual, § 1075 of TRA ‘97
made no changes in the applicable table
under the simplified method described by
SBJPA.
III. Simplified Method
A. General
The simplified method provided in
§ 72(d) of the Code and this notice must
be used by distributees to comply with
§ 72, and by payors to report the taxable
portion of annuity distributions on Form
1099-R. If payments are made on a nonmonthly basis, the simplified method applies with appropriate adjustments. However, this method does not apply if the
annuitant is over age 75 and there are five
or more years of guaranteed payments
under the annuity.
B. Excluded Amount
Under the simplified method, the distributee recovers his or her investment in
the contract in level amounts over the expected number of monthly payments determined from the tables below. The portion of each annuity payment that is
excluded from gross income by a distributee for income tax purposes is a level dollar amount determined by dividing the investment in the contract by the set number
of annuity payments from the tables
below.
Investment
= Tax free portion of
Expected
monthly annuity
Number of Monthly
Payments
C. Expected Number of Monthly Payments
(1) Annuity Starting Dates After November 18, 1996 and Before January 1, 1998
Under the simplified method, for annuity starting dates beginning after November 18, 1996 but before January 1, 1998,
the total number of monthly annuity payments expected to be received is based on
the primary annuitant’s age at the annuity
1998–2 I.R.B.
starting date. The same expected number
of payments applies to an annuitant
whether he or she is receiving a single life
annuity or a joint and survivor annuity.
The expected number of payments is set
forth in the table below.
Age of Primary
Annuitant
Expected
Number of Payments
55 and under
56–60
61–65
66–70
71 and over
360
310
260
210
160
(2) Annuity Starting Dates After December 31, 1997
For annuity starting dates beginning
after December 31, 1997, the table used to
determine the expected number of payments depends on whether the payments
are based on the life of more than one individual. In the case of an annuity
payable based on the life of only one individual, the total number of monthly annuity payments expected to be received is
based on the annuitant’s age at the annuity
starting date. An annuity which is
payable over the life of one annuitant with
a term certain feature is an annuity based
on the life of that individual. Similarly,
an annuity which is payable over the life
of one annuitant with a temporary annuity
payable to the annuitant’s child until the
child reaches an age specified in the plan
(not more than age 25) is an annuity based
on the life of that individual. The expected number of payments for an annuity
based on the life of one individual is set
forth in the table below.
Age of Annuitant
Expected
Number of Payments
55 and under
56–60
61–65
66–70
71 and over
360
310
260
210
160
In the case of an annuity payable based
on the life of more than one individual,
the total number of monthly annuity payments expected to be received is based on
the combined ages of the annuitants at the
annuity starting date. If the annuity is
payable to a primary annuitant and more
than one survivor annuitant, the combined
ages of the annuitants is the sum of the
1998–2 I.R.B
age of the primary annuitant and the
youngest survivor annuitant. If the annuity is payable to more than one survivor
annuitant but there is no primary annuitant, the combined ages of the annuitants
is the sum of the age of the oldest survivor
annuitant and the youngest survivor annuitant. In addition, any survivor annuitant
whose entitlement to payments is contingent on an event other than the death of
the primary annuitant is disregarded. The
expected number of payments is set forth
in the table below.
Combined Ages
of Annuitants
110 and under
111–120
121–130
131–140
141 and over
Expected
Number of Payments
410
360
310
260
210
(3) Term Certain Annuities Without
Life Contingencies
In the case of an annuity that does not
depend in whole or in part on the life expectancy of one or more individuals, the
expected number of payments is the number of monthly annuity payments under
the contract.
D. Investment in the Contract
The investment in the contract is defined under § 72(c)(1) as the aggregate
premiums or other consideration paid
(generally, the aggregate amount of aftertax contributions made to the plan), reduced by amounts received before the annuity starting date that were excluded
from gross income. In addition,
§ 72(c)(2) provides that the investment in
the contract must be adjusted to reflect the
value of any refund feature. Under
§ 72(d)(1)(C), as amended by SBJPA, for
purposes of the simplified method, the investment in the contract is determined
without regard to the adjustment for any
refund feature as described in § 72(c)(2).
In certain cases, the investment in the
contract could be increased by any death
benefit exclusion that is allowed under
§ 101(b) if the employee death benefits
are paid to a survivor in the form of an annuity, other than as a joint and survivor
annuity. Section 101(b) was repealed by
§ 1402 of SBJPA effective with respect to
decedents dying after August 20, 1996.
23
Accordingly, in the case of decedents
dying after August 20, 1996, surviving
beneficiaries no longer are permitted to
increase the investment in the contract by
the death benefit exclusion.
E. Application of Excluded Amount
The dollar amount determined above,
as of the annuity starting date, will be excluded from each monthly annuity payment, even where the amount of the annuity payments change. For example, the
amount to be excluded from each annuity
payment determined at the annuity starting date remains constant, even if the
amount of the annuity payments increases
due to cost of living increases, or decreases in the case of a reduced survivor
annuity after death of one of the annuitants.
If the amount to be excluded from each
payment is greater than the amount of the
annuity payment (e.g., because of decreased survivor payments), then each annuity payment will be completely excluded from gross income until the entire
investment is recovered. For those distributees with annuity starting dates after
December 31, 1986, annuity payments received after the investment is recovered
(generally, after the expected number of
payments has been received) are fully includible in gross income. If annuity payments cease by reason of death, a deduction for the unrecovered investment in the
contract, if any, is allowed on the distributee’s last income tax return.
Where two or more annuitants are receiving payments at the same time, each
annuitant will exclude from each annuity
payment a pro-rata portion of this amount
determined according to a ratio, the numerator of which is the amount of the
beneficiary’s annuity payment, and the
denominator of which is the total amount
of the monthly annuity payments to all
beneficiaries.
F. Adjustments for Non-Monthly
Payments
In the case where annuity payments are
not made on a monthly basis, under
§ 72(d)(1)(F) of the Code, an adjustment
must be made to take into account the period on the basis of which such payments
are made. One way to make this adjustment is to determine the number of ex-
January 12, 1998
pected payments by dividing the applicable expected number of months in the applicable table above by the number of
months in each period. Another way (the
result of which is equivalent to the first
way) is to determine the tax-free portion
of a monthly payment using the applicable expected number of months from the
applicable table above and then multiply
the resulting dollar amount per month by
the number of months in each period.
G. Examples
The application of the simplified
method is illustrated by the following examples. In all examples, the investment
in the contract is stated as the employee’s
after-tax contributions and with no adjustment for the refund feature.
(i) Example 1
Upon retirement, Employee A, age 65,
begins receiving retirement benefits in the
form of a joint and 50 percent survivor annuity to be paid for the joint lives of A and
A’s spouse, age 64. A’s annuity starting
date is January 1, 1997. A made $26,000
$42,000 investment
210 monthly payments
of after-tax contributions to the plan and
has received no distributions prior to the
annuity starting date. A will receive a
monthly retirement benefit of $1,000, and
A’s spouse will receive a monthly survivor
benefit of $500 upon A’s death.
A’s investment in the contract is
$26,000. Because the annuity starting
date is prior to January 1, 1998, the expected number of monthly payments for
a distributee who is age 65 is 260. The
tax-free portion of each $1,000 monthly
annuity payment to A is $100, determined by dividing A’s investment
($26,000) by the expected number of
payments (260).
$26,000 investment
260 monthly payments
=
$100 return of
investment per month
Upon A’s death, if A has not recovered
the full $26,000 investment, A’s spouse
will also exclude $100 from each $500
monthly annuity payment.
Any annuity payments received after
the 260 monthly payments have been
made will be fully includible in gross in-
January 12, 1998
come. If A and A’s spouse die before 260
monthly payments have been made, a deduction is allowed for the last income tax
return in the amount of the unrecovered
investment.
(ii) Example 2
Upon retirement, Employee B, age 65,
begins receiving retirement benefits in
the form of a joint and 50 percent survivor annuity to be paid for the joint lives
of B and B’s spouse, age 64. B’s annuity
starting date is January 1, 1998. B contributed $26,000 to the plan, and has received no distributions prior to the annuity starting date. B will receive a
monthly retirement benefit of $1,000 per
month, and B’s spouse will receive a
monthly survivor benefit of $500 upon
B’s death.
B’s investment in the contract is
$26,000. The expected number of
monthly payments is 310 for two distributees whose combined ages are 129. The
tax-free portion of each $1,000 monthly
annuity payment to B is $83.87, determined by dividing B’s investment
3
3 months
per quarter
=
($26,000) by the expected number of payments (310).
$26,000 investment
=
310 monthly payments
$83.87 return of
investment per month
Upon B’s death, if B has not recovered
the full $26,000 investment, B’s spouse
will also exclude $83.87 from each $500
monthly annuity payment.
Any annuity payments received after the
310 monthly payments have been made
will be fully includible in gross income. If
B and B’s spouse die before 310 monthly
payments have been made, a deduction is
allowed for the last income tax return in
the amount of the unrecovered investment.
(iii) Example 3.
Upon retirement, Employee C, age 66,
begins receiving retirement benefits in the
form of a joint and 50 percent survivor
annuity to be paid for the joint lives of C
and C’s spouse, age 65. C’s annuity starting date is January 1, 1997. C contributed
$42,000 to the plan, and has received no
distributions prior to the annuity starting
24
date. C will receive a quarterly retirement
benefit of $6,000, and C’s spouse will receive a quarterly survivor benefit of
$3,000 upon C’s death.
C’s investment in the contract is
$42,000. Because the annuity starting
date is prior to January 1, 1998, the expected number of monthly payments for a
distributee who is age 66 is 210. Because
C’s annuity is paid quarterly, the appropriate adjustment is to divide the expected
number of payments (210) by the number
of months in the period (3), which equals
70. Thus, the tax-free portion of each
$6,000 quarterly annuity payment to C is
$600, determined by dividing C’s investment ($42,000) by the expected number
of quarterly payments (70).
$42,000 investment
=
70 quarterly payments
$600 return of
investment per quarter
Alternatively, the appropriate adjustment can be made by dividing $42,000 by
210 and multiplying the resulting $200
per month by the number of months in the
period, three (3), which equals a $600 return of investment per quarter.
$600 return of
investment per quarter
(iv) Example 4.
Upon retirement, Employee D, age 57,
begins receiving retirement benefits in the
form of a joint and 50 percent survivor
annuity to be paid for the joint lives of D
and D’s spouse, age 57. D contributed
$31,000 to the plan. D’s annuity starting
date is July 1, 1998. On D’s annuity starting date, in connection with receiving the
first annuity payment, D receives a single-sum payment of $10,000. Had the
single-sum payment of $10,000 been received prior to D’s annuity starting date,
then under the rules of § 72(e), $2,000
would have been considered as a recovery
of D’s investment in the contract. D will
receive a monthly retirement benefit of
$1,500 per month, and D’s spouse will receive a monthly survivor benefit of $750
upon D’s death.
Because the $10,000 is treated as if received before the annuity starting date, D
will include $8,000 in income as a result
of the single-sum payment ($10,000
minus $2,000) and for purposes of determining the tax-free portion of each annu-
1998–2 I.R.B.
ity payment, D’s investment in the contract is $29,000 (the after-tax contributions to the plan minus the $2,000 portion
of the single-sum payment representing
the recovery of D’s investment in the contract). The expected number of monthly
payments for two annuitants whose combined ages are 114 is 360. The tax-free
portion of each $1,500 monthly annuity
payment to D is $80.56, determined by dividing D’s investment ($29,000) by the
expected number of payments (360).
$29,000 investment
360 monthly payments
=
$80.56 return of
investment per month
Upon D’s death, if D has not recovered
the full $29,000 investment, D’s spouse
will also exclude $80.56 from each $750
monthly annuity payment.
Any annuity payments received after
the 360 monthly payments have been
made will be fully includible in gross income. If D and D’s spouse die before 360
monthly payments have been made, a deduction is allowed for the last income tax
88–118) may be used to determine the
taxable and tax-free portions of annuity
payments received in 1996 and 1997. Accordingly, under this transition rule, payors are not to re-issue Forms 1099-R for
1996 (and 1997, if applicable), and distributees are not to file amended income
tax returns for 1996 (and 1997, if applicable), solely because they failed to take
into account the changes to § 72(d) of the
Code made by SBJPA.
However, under this transition rule, a
payor who reports the taxable portion of annuity payments on Form 1099-R must determine the taxable and tax-free portion of
annuity payments using the transition
method described below. The transition
method must be applied to annuity payments made on and after January 1, 1998.
However, payors may choose to apply the
transition method for annuity payments
made on an earlier date (for example, payments made on and after January 1, 1997).
Under the transition method, the tax-free
portion of each annuity payment made on
25,891.67 ($26,000 minus $108.33)
259 payments (260 minus 1)
return in the amount of the unrecovered
investment.
IV. Effective Date
The simplified method described in this
notice is generally effective for annuities
with annuity starting dates after November 18, 1996. For annuity starting dates
after December 31, 1997, if the annuity is
payable based on the lives of more than
one individual, the simplified method
based on the combined ages of the annuitants is to be used.
V. Transition Rule
Some payors and distributees may have
continued to use the law in effect prior to
SBJPA (including the safe-harbor method
contained in Notice 88–118) for annuity
starting dates after November 18, 1996
and before January 1, 1997. This notice
contains a transition rule for these payors
and distributees.
Under this transition rule, for annuities
with annuity starting dates after November 18, 1996 and before January 1, 1997,
the law in effect prior to SBJPA (including the methodology contained in Notice
1998–2 I.R.B
=
and after the transition date is determined by
dividing the remaining investment in the
contract by the remaining number of expected payments. The remaining investment in the contract is the distributee’s original investment in the contract as of the
annuity starting date, minus the amount of
the investment in the contract treated as recovered after the annuity starting date and
prior to the transition date. The remaining
number of expected monthly payments is
the total number of expected monthly payments as of the annuity starting date (as determined by the table in section III(C)(1) of
this notice) minus the number of payments
made prior to the transition date. Where the
payor does not report the taxable portion of
annuity payments on Form 1099-R, a distributee who uses the transition rule must
determine the taxable and tax-free portions
of annuity payments using the transition
method described in this paragraph.
A was determined under Notice 88-118.
This tax-free portion was $108.33, calculated as follows.
$26,000 investment
240 monthly payments
=
$108.33 return of
investment
The $108.33 was treated as tax-free for
the 1996 return. Under the transition rule,
this treatment for 1996 is allowed. However, the taxable and tax-free portions
must be redetermined using the transition
method with a transition date of January
1, 1998, or earlier.
Assume that A uses January 1, 1997 as
the transition date. For annuity payments
received after December 31, 1996, determine the tax-free portion of each $1,000
annuity payment by dividing the remaining investment in the contract by the remaining number of expected payments as
of the transition date, determined in accordance with § 72(d) and this notice. Accordingly, the tax-free portion of each
$1,000 payment received in 1997 and later
years is $99.97, determined as follows.
$99.97 return of
investment
Under this method, the total amount of
annuity payments that is tax-free is $26,000.
VI. Effect on Other Documents
Notice 88–118 is obsoleted.
Drafting 1`
The principal author of this notice is
Todd Newman of the Employee Plans Division. For further information please contact the Employee Plans Division’s taxpayer assistance telephone service between
the hours of 2:30 p.m. and 3:30 p.m. Eastern time, Monday through Thursday on
(202) 622-6076 (not a toll-free call). Mr.
Newman’s telephone number is (202) 6226262 (also not a toll-free call).
SIMPLE IRA Plan Guidance
Notice 98–4
(i) Example of Transition Rule
Assume the same facts as in Example 1
except that A’s annuity starting date is December 1, 1996. The tax-free portion of
each $1,000 monthly annuity payment to
25
PURPOSE
This notice modifies and supersedes
Notice 97–6, 1997–2 I.R.B. 26, relating to
SIMPLE IRA Plans described in § 408(p)
January 12, 1998
of the Internal Revenue Code. The questions and answers contained in this notice
reflect technical corrections made by the
Taxpayer Relief Act of 1997, Pub. L.
105–34 (“TRA 97”). This notice also
amends the answers to certain questions
in Notice 97–6 in order to reflect the issuance of Form 5304-SIMPLE (Not Subject to the Designated Financial Institution Rules) and provides a transition
period for the use of Form 5305-SIMPLE
(for Use With a Designated Financial Institution) for a SIMPLE IRA Plan that
does not use a designated financial institution.
BACKGROUND
Section 1421 of the Small Business Job
Protection Act of 1996, Pub. L. 104–188
(“SBJPA”) established a simplified taxfavored retirement plan for small employers (a “SIMPLE IRA Plan”) under
§ 408(p) of the Code. Contributions
under a SIMPLE IRA Plan are made to individual retirement accounts or annuities
(“SIMPLE IRAs”) that are established
pursuant to the SIMPLE IRA Plan
adopted by the employer.
Section 1601(d)(1) of TRA 97
amended § 1421 of SBJPA, making technical changes to the statutory requirements for SIMPLE IRA Plans.
Notice 97–6 was issued on December
23, 1996, and provided guidance, in the
form of questions and answers, on SIMPLE IRA Plans.
On October 31, 1996, the Internal Revenue Service issued Form 5305-SIMPLE,
a model form that may be used by an employer to establish a SIMPLE IRA Plan
with a designated financial institution,
and on December 30, 1996, the Service
issued 5304-SIMPLE, a model form that
may be used by an employer to establish a
SIMPLE IRA Plan without using a designated financial institution. Notice 97–6
contained instructions for modifying
Form 5305-SIMPLE for an employer that
did not want to use a designated financial
institution but that wanted to use a Service-approved model form to establish a
SIMPLE IRA Plan. Form 5304-SIMPLE
is now available for this purpose.
On November 25, 1997, the Department of Labor (“DOL”) issued a final
rule, consistent with the statements in
Q&A G–5 of Notice 97–6, amending 29
CFR 2510.3–102, relating to the defini-
January 12, 1998
tion of “plan assets” under Title I of the
Employee Retirement Income Security
Act of 1974 (“ERISA”), to harmonize
those Title I rules with the rules for salary
reduction contributions to SIMPLE IRA
Plans under § 408(p) of the Code.
CHANGES TO NOTICE 97–6
This notice modifies Q&As B–3, C–1
and H–2 to reflect technical corrections
made by TRA 97; Q&A G–5 to reflect the
amendment to the DOL plan asset regulations; and Q&As E–4, G–1, H–1 and K–3
to reflect the issuance of Form 5304-SIMPLE. A new Q&A, K–4, is added to provide a transition period for employers
using Form 5305-SIMPLE as modified in
accordance with Notice 97–6 for a SIMPLE IRA Plan that does not use a designated financial institution. In addition,
this notice makes certain stylistic changes
to the Q&As as published in Notice 97–6,
including substituting the term “SIMPLE
IRA Plan” for “SIMPLE plan.”
TABLE OF CONTENTS
A. SIMPLE IRA PLANS IN GENERAL
B. EMPLOYERS THAT CAN ESTABLISH SIMPLE IRA PLANS
C. EMPLOYEE ELIGIBILITY TO PARTICIPATE IN A SIMPLE IRA PLAN
D. SIMPLE IRA PLAN CONTRIBUTIONS
E. EMPLOYEE ELECTIONS
F. VESTING REQUIREMENTS
G. EMPLOYER ADMINISTRATIVE
AND NOTIFICATION REQUIREMENTS
H. TRUSTEE ADMINISTRATIVE REQUIREMENTS
I. TAX TREATMENT OF SIMPLE
IRA PLANS
J. EXCEPTION FOR USE OF DESIGNATED FINANCIAL INSTITUTION
K. SIMPLE IRA PLAN ESTABLISHMENT
QUESTIONS AND ANSWERS
A. SIMPLE IRA PLANS IN GENERAL
Q. A–1: What is a SIMPLE IRA Plan?
A. A–1: A SIMPLE IRA Plan is a written arrangement established under
§ 408(p) of the Code that provides a simplified tax-favored retirement plan for
small employers. If an employer establishes a SIMPLE IRA Plan, each employee may choose whether to have the
employer make payments as contributions
26
under the SIMPLE IRA Plan or to receive
these payments directly in cash. An employer that chooses to establish a SIMPLE IRA Plan must make either matching
contributions or nonelective contributions. All contributions under a SIMPLE
IRA Plan are made to SIMPLE IRAs.
Q. A–2: Can contributions made under
a SIMPLE IRA Plan be made to any type
of IRA?
A. A–2: Contributions under a SIMPLE IRA Plan may only be made to a
SIMPLE IRA, not to any other type of
IRA. A SIMPLE IRA is an individual retirement account described in § 408(a), or
an individual retirement annuity described
in § 408(b), to which the only contributions that can be made are contributions
under a SIMPLE IRA Plan and rollovers
or transfers from another SIMPLE IRA.
Q. A–3: Can a SIMPLE IRA Plan be
maintained on a fiscal year basis?
A. A–3: A SIMPLE IRA Plan may
only be maintained on a calendar year
basis. Thus, for example, employer eligibility to establish a SIMPLE IRA Plan
(see Q&As B–1 through B–5) and SIMPLE IRA Plan contributions (see Q&As
D–1 through D–6) are determined on a
calendar-year basis.
B. EMPLOYERS THAT CAN
ESTABLISH SIMPLE IRA PLANS
Q. B–1: Can any employer establish a
SIMPLE IRA Plan?
A. B–1: SIMPLE IRA Plans may be
established only by employers that had no
more than 100 employees who earned
$5,000 or more in compensation during
the preceding calendar year (the “100-employee limitation”). See Q&As C–4 and
C–5 for the definition of compensation.
For purposes of the 100-employee limitation, all employees employed at any time
during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE IRA
Plan. Thus, employees who are excludable under the rules of § 410(b)(3) or who
have not met the plan’s minimum eligibility requirements must be taken into account. Employees also include self-employed individuals described in
§ 401(c)(1) who received earned income
from the employer during the year.
Q. B–2: Is there a grace period that can
be used by an employer that ceases to satisfy the 100-employee limitation?
1998–2 I.R.B.
A. B–2: An employer that previously
maintained a SIMPLE IRA Plan is treated
as satisfying the 100-employee limitation
for the 2 calendar years immediately following the calendar year for which it last
satisfied the 100-employee limitation.
However, if the failure to satisfy the 100employee limitation is due to an acquisition, disposition or similar transaction involving the employer, then the 2-year
grace period will apply only in accordance with rules similar to the rules of
§ 410(b)(6)(C)(i).
Q. B–3: Can an employer make contributions under a SIMPLE IRA Plan for a
calendar year if it maintains another qualified plan?
A. B–3: Generally, an employer cannot
make contributions under a SIMPLE IRA
Plan for a calendar year if the employer, or
a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA
Plan) under which any of its employees receives an allocation of contributions (in the
case of a defined contribution plan) or has
an increase in a benefit accrued or treated
as an accrued benefit under § 411(d)(6) (in
the case of a defined benefit plan) for any
plan year beginning or ending in that calendar year. In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures
replace otherwise required contributions.
For purposes of this Q&A B–3, “qualified
plan” means a plan, contract, pension or
trust described in § 219(g)(5) and includes
a plan qualified under § 401(a), a qualified
annuity plan described in § 403(a), an annuity contract described in § 403(b), a plan
established for employees of a State, a political subdivision or by an agency or instrumentality of any State or political subdivision (other than an eligible deferred
compensation plan described in § 457(b)),
a simplified employee pension (“SEP”) described in § 408(k), a trust described in
§ 501(c)(18) and a SIMPLE IRA Plan described in § 408(p).
However, an employer can make contributions under a SIMPLE IRA Plan for a
calendar year even though it maintains
another qualified plan if either:
(1) The other qualified plan maintained
by the employer covers only employees
described in paragraph (1) of Q&A C–1
(i.e., employees covered under a collective
bargaining agreement for which retirement benefits were the subject of good
1998–2 I.R.B
faith bargaining) and the SIMPLE IRA
Plan excludes these employees.
(2) The other qualified plan is maintained by the employer during the calendar year in which an acquisition, disposition or similar transaction occurs (or the
following calendar year); the requirements of this Q&A B–3 would have been
satisfied if the transaction had not occurred (and thus the employer maintaining the SIMPLE IRA Plan had remained a
separate employer); and only individuals
who would have been employees of that
“separate” employer are eligible to participate in the SIMPLE IRA Plan.
Q. B–4: Are tax-exempt employers
and governmental entities permitted to
maintain SIMPLE IRA Plans?
A. B–4: Yes. Excludable contributions
may be made to the SIMPLE IRA of employees of tax-exempt employers and
governmental entities on the same basis
as contributions may be made to employees of other eligible employers.
Q. B–5: Do the employer aggregation
and leased employee rules apply for purposes of the SIMPLE IRA Plan rules
under § 408(p)?
A. B–5: For purposes of applying the
SIMPLE IRA Plan rules under § 408(p),
certain related employers (trades or businesses under common control) are treated
as a single employer. These related employers include controlled groups of corporations under § 414(b), partnerships or
sole proprietorships under common control under § 414(c), and affiliated service
groups under § 414(m). In addition,
leased employees described in § 414(n)
are treated as employed by the employer.
Example: Individual P owns Business
A, a computer rental agency, that has 80
employees who received more than
$5,000 in compensation in 1996. Individual P also owns Business B, which repairs
computers and has 60 employees who received more than $5,000 in compensation
in 1996. Individual P is the sole proprietor of both businesses. Section 414(c)
provides that the employees of partnerships and sole proprietorships that are
under common control are treated as employees of a single employer. Thus, for
purposes of the SIMPLE IRA Plan rules,
all 140 employees are treated as employed by Individual P. Therefore, neither Business A nor Business B is eligible
to establish a SIMPLE IRA Plan for 1997.
27
C. EMPLOYEE ELIGIBILITY TO
PARTICIPATE IN A SIMPLE IRA
PLAN
Q. C–1: Which employees of an employer must be eligible to participate
under the SIMPLE IRA Plan?
A. C–1: If an employer establishes a
SIMPLE IRA Plan, all employees of the
employer who received at least $5,000 in
compensation from the employer during
any 2 preceding calendar years (whether
or not consecutive) and who are reasonably expected to receive at least $5,000 in
compensation during the calendar year,
must be eligible to participate in the SIMPLE IRA Plan for the calendar year.
An employer, at its option, may exclude from eligibility employees described in § 410(b)(3). These employees
are:
(1) Employees who are included in a
unit of employees covered by an agreement that the Secretary of Labor finds to
be a collective bargaining agreement between employee representatives and one
or more employers, if there is evidence
that retirement benefits were the subject
of good faith bargaining between such
employee representatives and such employer or employers;
(2) In the case of a trust established or
maintained pursuant to an agreement that
the Secretary of Labor finds to be a collective bargaining agreement between air
pilots represented in accordance with
Title II of the Railway Labor Act and one
or more employees, all employees not
covered by that agreement; and
(3) Employees who are nonresident
aliens and who received no earned income (within the meaning of § 911(d)(2))
from the employer that constitutes income
from sources within the United States
(within the meaning of § 861(a)(3)).
Moreover, during the calendar year in
which an acquisition, disposition or similar transaction occurs (or the following
calendar year), an employer may exclude
from eligibility all of the employees who
would not have been eligible if the transaction had not occurred (and thus the employer maintaining the SIMPLE IRA Plan
had remained a separate employer). See
paragraph (2) of Q&A B–3 for circumstances in which exclusion of these employees would be required.
As noted in Q&A B–5, the employer
aggregation and leased employee rules
January 12, 1998
apply for purposes of § 408(p). Thus, for
example, if two related employers must
be aggregated under the rules of § 414(b),
all employees of either employer who satisfy the eligibility criteria must be allowed to participate in the SIMPLE IRA
Plan.
Q. C–2: May an employer impose less
restrictive eligibility requirements?
A. C–2: An employer may impose less
restrictive eligibility requirements by
eliminating or reducing the prior year
compensation requirements, the current
year compensation requirements, or both,
under its SIMPLE IRA Plan. For example, the employer could allow participation for employees who received $3,000
in compensation during any preceding
calendar year. However, the employer
cannot impose any other conditions on
participating in a SIMPLE IRA Plan.
Q. C–3: May an employee participate
in a SIMPLE IRA Plan if he or she also
participates in a plan of a different employer for the same year?
A. C–3: An employee may participate
in a SIMPLE IRA Plan even if he or she
also participates in a plan of a different
employer for the same year. However,
the employee’s salary reduction contributions are subject to the limitations of
§ 402(g), which provides an aggregate
limit on the exclusion for elective deferrals for any individual. Similarly, an employee who participates in a SIMPLE
IRA Plan and an eligible deferred compensation plan described in § 457(b) is
subject to the limitations described in
§ 457(c). An employer that establishes a
SIMPLE IRA Plan is not responsible for
monitoring compliance with either of
these limitations.
Q. C–4: What definition of compensation applies for purposes of the SIMPLE
IRA Plan rules in the case of an individual
who is not a self-employed individual?
A. C–4: For purposes of the SIMPLE
IRA Plan rules, in the case of an individual who is not a self-employed individual,
compensation means the amount described in § 6051(a)(3) (wages, tips, and
other compensation from the employer
subject to income tax withholding under
§ 3401(a)), and amounts described in
§ 6051(a)(8), including elective contributions made under a SIMPLE IRA Plan,
and compensation deferred under a § 457
plan. For purposes of applying the 100-
January 12, 1998
employee limitation, and in determining
whether an employee is eligible to participate in a SIMPLE IRA Plan (i.e., whether
the employee had $5,000 in compensation
for any 2 preceding years), an employee’s
compensation also includes the employee’s elective deferrals under a
§ 401(k) plan, a salary reduction SEP and
a § 403(b) annuity contract.
Q. C–5: What definition of compensation applies for purposes of the SIMPLE
IRA Plan rules in the case of a self-employed individual?
A. C–5: For purposes of the SIMPLE
IRA Plan rules, in the case of a self-employed individual, compensation means
net earnings from self-employment determined under § 1402(a), prior to subtracting any contributions made under the
SIMPLE IRA Plan on behalf of the individual.
D. SIMPLE IRA PLAN
CONTRIBUTIONS
Q. D–1: What contributions must an
employer make under a SIMPLE IRA
Plan?
A. D–1: If an employer establishes a
SIMPLE IRA Plan, it must make salary
reduction contributions, as described in
Q&A D–2, to the extent elected by employees. In addition, the employer must
make employer matching contributions,
as described in Q&As D–4 and D–5, or
employer nonelective contributions, as
described in Q&A D–6. These are the
only contributions that may be made
under a SIMPLE IRA Plan.
Q. D–2: What is a salary reduction
contribution?
A. D–2: A salary reduction contribution is a contribution made pursuant to an
employee’s election to have an amount
contributed to his or her SIMPLE IRA,
rather than have the amount paid directly
to the employee in cash. An employee
must be permitted to elect to have salary
reduction contributions made at the level
specified by the employee, expressed as a
percentage of compensation for the year.
Additionally, an employer may permit an
employee to express the level of salary reduction contributions as a specific dollar
amount. An employer may not place any
restrictions on the amount of an employee’s salary reduction contributions
(e.g., by limiting the contribution percentage), except to the extent needed to com-
28
ply with the annual limit on the amount of
salary reduction contributions described
in Q&A D–3.
Q. D–3: What is the annual limit on
the amount of salary reduction contributions under a SIMPLE IRA Plan?
A. D–3: For 1997 (and for 1998), the
maximum annual amount of salary reduction contributions that can be made on behalf of any employee under a SIMPLE
IRA Plan is $6,000. This amount will be
adjusted by the Service to reflect any
changes in the cost of living.
Q. D–4: What employer matching contribution is generally required under a
SIMPLE IRA Plan?
A. D–4: Under a SIMPLE IRA Plan,
an employer is generally required to make
a contribution on behalf of each eligible
employee in an amount equal to the employee’s salary reduction contributions,
up to a limit of 3 percent of the employee’s compensation for the entire calendar year.
Q. D–5: Can the 3-percent limit on
matching contributions be reduced?
A. D–5: The 3-percent limit on matching contributions is permitted to be reduced for a calendar year at the election
of the employer, but only if:
(1) The limit is not reduced below 1
percent;
(2) The limit is not reduced for more
than 2 years out of the 5-year period that
ends with (and includes) the year for
which the election is effective; and
(3) Employees are notified of the reduced limit within a reasonable period of
time before the 60-day election period
during which employees can enter into
salary reduction agreements. See Q&A
E–1.
For purposes of applying the rule described in paragraph (2) of this Q&A
D–5, in determining whether the limit
was reduced below 3 percent for a year,
any year before the first year in which an
employer (or a predecessor employer)
maintains a SIMPLE IRA Plan will be
treated as a year for which the limit was 3
percent. If an employer chooses to make
nonelective contributions for a year (see
Q&A D–6), that year also will be treated
as a year for which the limit was 3 percent.
Q. D–6: May an employer make nonelective contributions instead of matching
contributions?
1998–2 I.R.B.
A. D–6: As an alternative to making
matching contributions under a SIMPLE
IRA Plan (as described in Q&A D–4 and
D–5), an employer may make nonelective
contributions equal to 2 percent of each
eligible employee’s compensation for the
entire calendar year. The employer’s nonelective contributions must be made for
each eligible employee regardless of
whether the employee elects to make
salary reduction contributions for the calendar year. The employer may, but is not
required to, limit nonelective contributions to eligible employees who have at
least $5,000 (or some lower amount selected by the employer) of compensation
for the year.
For purposes of the 2-percent nonelective contribution, the compensation taken
into account must be limited to the
amount of compensation that may be
taken into account under § 401(a)(17) for
the year. The § 401(a)(17) limit for 1997
(and for 1998) is $160,000. This amount
will be adjusted by the Service for subsequent years to reflect changes in the cost
of living.
An employer may substitute the 2-percent nonelective contribution for the
matching contribution for a year, only if:
(1) Eligible employees are notified that
a 2-percent nonelective contribution will
be made instead of a matching contribution; and
(2) This notice is provided within a
reasonable period of time before the 60day election period during which employees can enter into salary reduction agreements. See Q&A E–1.
E. EMPLOYEE ELECTIONS
Q. E–1: When must an employee be
given the right to enter into a salary reduction agreement?
A. E–1: During the 60-day period immediately preceding January 1 of a calendar year (i.e., November 2 to December
31 of the preceding calendar year), an eligible employee must be given the right to
enter into a salary reduction agreement
for the calendar year, or to modify a prior
agreement (including reducing the
amount subject to this agreement to $0).
However, for the year in which the employee becomes eligible to make salary
reduction contributions, the period during
which the employee may enter into a
salary reduction agreement or modify a
1998–2 I.R.B
prior agreement is a 60-day period that includes either the date the employee becomes eligible or the day before that date.
For example, if an employer establishes a
SIMPLE IRA Plan effective as of July 1,
1997, each eligible employee becomes eligible to make salary reduction contributions on that date and the 60-day period
must begin no later than July 1 and cannot
end before June 30, 1997.
During these 60-day periods, employees have the right to modify their salary
reduction agreements without restrictions.
In addition, for the year in which an employee becomes eligible to make salary
reduction contributions, the employee
must be able to commence these contributions as soon as the employee becomes eligible, regardless of whether the 60-day
period has ended.
Q. E–2: Can a SIMPLE IRA Plan provide additional or longer election periods?
A. E–2: Nothing precludes a SIMPLE
IRA Plan from providing additional or
longer periods for permitting employees
to enter into salary reduction agreements
or to modify prior agreements. For example, a SIMPLE IRA Plan can provide a
90-day election period instead of the 60day period described in Q&A E–1. Similarly, in addition to the 60-day period described in Q&A E–1, a SIMPLE IRA Plan
can provide quarterly election periods
during the 30 days before each calendar
quarter.
Q. E–3: Does an employee have the
right to terminate a salary reduction
agreement outside a SIMPLE IRA Plan’s
normal election period?
A. E–3: An employee must be given
the right to terminate a salary reduction
agreement for a calendar year at any time
during the year. A SIMPLE IRA Plan
may provide that an employee who terminates a salary reduction agreement at any
time other than the periods described in
Q&A E–1 or E–2 is not eligible to resume
participation until the beginning of the
next calendar year.
Q. E–4: Must an employer allow an
employee to select the financial institution to which the employer will make all
SIMPLE IRA Plan contributions on behalf of the employee?
A. E–4: Generally, under § 408(p), an
employer must permit an employee to select the financial institution for the SIMPLE IRA to which the employer will
29
make all contributions on behalf of the
employee. The employee must communicate to the employer the name of the financial institution selected and any additional information necessary to facilitate
transmittal of the contribution to that institution. The Model Salary Reduction
Agreement on page 3 of Form 5304-SIMPLE can be used for this purpose. Alternatively, under the exception described in
Q&A J–1, an employer may require that
all contributions on behalf of employees
be made to a specified designated financial institution.
F. VESTING REQUIREMENTS
Q. F–1: Must contributions under a
SIMPLE IRA Plan be nonforfeitable?
A. F–1: Yes. All contributions under a
SIMPLE IRA Plan must be fully vested
and nonforfeitable when made.
Q. F–2: May amounts held in a SIMPLE IRA be withdrawn at any time?
A. F–2: Yes. An employer may not require an employee to retain any portion of
the contributions in his or her SIMPLE
IRA or otherwise impose any withdrawal
restrictions.
G. EMPLOYER ADMINISTRATIVE
AND NOTIFICATION
REQUIREMENTS
Q. G–1: What notification requirements apply to employers?
A. G–1: An employer must notify each
employee, immediately before the employee’s 60-day election period described
in Q&A E–1, of the employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement. If
applicable, this notification must disclose
an employee’s ability to select the financial institution that will serve as the
trustee of the employee’s SIMPLE IRA as
described in Q&A E–4. In the case of a
SIMPLE IRA Plan established using
Form 5304-SIMPLE (Not Subject to the
Designated Financial Institution Rules),
the employer may use the Model Notification to Eligible Employees on page 3 of
the form to disclose to each employee the
employee’s right to select the financial institution that will serve as the trustee of
the employee’s SIMPLE IRA as described
in Q&A E–4. The notification must also
include the summary description described in Q&A H–1. In the case of a
January 12, 1998
SIMPLE IRA Plan established using
Form 5304-SIMPLE (Not Subject to the
Designated Financial Institution Rules) or
Form 5305-SIMPLE (for Use With a Designated Financial Institution), the summary description requirement may be satisfied by providing a completed copy of
pages 1 and 2 of the form that reflects the
terms of the employer’s plan (including
the materials provided by the trustee for
completion of Article VI).
Q. G–2: May the notifications regarding a reduced matching contribution (described in Q&A D–5) and a nonelective
contribution in lieu of a matching contribution (described in Q&A D–6) be provided at the same time as the notification
of an employee’s opportunity to enter into
a salary reduction agreement and the summary description?
A. G–2: Yes. An employer is deemed
to provide the notification regarding a reduced matching contribution or a nonelective contribution in lieu of a matching
contribution within a reasonable period of
time before the 60-day election period if,
immediately before the 60-day election
period, this notification is included with
the notification of an employee’s opportunity to enter into a salary reduction agreement.
Q. G–3: What reporting penalties
under the Code apply if an employer fails
to provide one or more of the required notices?
A. G–3: If the employer fails to provide
one or more of the required notices described in Q&A G–1, the employer will be
liable, under the Code, for a penalty of
$50 per day until the notices are provided.
If the employer shows that the failure was
due to reasonable cause, the penalty will
not be imposed. To the extent that each
employee is permitted to select the trustee
for his or her SIMPLE IRA pursuant to
Q&A E–4, and is so notified in accordance
with Q&A G–1, and the information with
respect to the trustee (the name and address of the trustee and its withdrawal procedures) is not available at the time the
employer is required to provide the summary description, the employer is deemed
to have shown reasonable cause for failure
to provide this information to eligible employees, but only if the employer sees to it
that this information is provided to the
employee as soon as administratively feasible once the trustee has been selected.
January 12, 1998
Q. G–4: What if an eligible employee
is unwilling or unable to establish a SIMPLE IRA?
A. G–4: If an eligible employee who is
entitled to a contribution under a SIMPLE
IRA Plan is unwilling or unable to establish a SIMPLE IRA with any financial institution prior to the date on which the
contribution is required to be made to the
SIMPLE IRA of the employee under
Q&A G–5 or G–6, an employer may execute the necessary documents to establish
a SIMPLE IRA on the employee’s behalf
with a financial institution selected by the
employer.
Q. G–5: When must an employer make
salary reduction contributions under a
SIMPLE IRA Plan?
A. G–5: The employer must make
salary reduction contributions to the financial institution maintaining the SIMPLE IRA no later than the close of the 30day period following the last day of the
month in which amounts would otherwise
have been payable to the employee in
cash. The Department of Labor has indicated that most SIMPLE IRA Plans are
also subject to Title I of ERISA, and
under Department of Labor regulations, at
29 CFR 2510.3–102, salary reduction
contributions to these plans must be made
to the SIMPLE IRA as of the earliest date
on which the contributions can reasonably
be segregated from the employer’s general assets, but in no event later than the
30-day deadline described above.
Q. G–6: When must an employer make
matching and nonelective contributions
under a SIMPLE IRA Plan?
A. G–6: Matching and nonelective employer contributions must be made to the
financial institution maintaining the SIMPLE IRA no later than the due date for filing the employer’s income tax return, including extensions, for the taxable year
that includes the last day of the calendar
year for which the contributions are
made.
H. TRUSTEE ADMINISTRATIVE
REQUIREMENTS
Q. H–1: What information must a
SIMPLE IRA trustee provide to an employer?
A. H–1: (1) Summary description.
Each year, a SIMPLE IRA trustee must
provide the employer sponsoring the
SIMPLE IRA Plan with a summary de-
30
scription containing the following information:
(a) The name and address of the employer and the trustee.
(b) The requirements for eligibility for
participation.
(c) The benefits provided with respect
to the arrangement.
(d) The time and method of making
employee elections with respect to the
arrangement.
(e) The procedures for, and effects of,
withdrawals (including rollovers) from
the arrangement.
(2) Timing. Each trustee must provide
the summary description to the employer
early enough to allow the employer to
meet its notification obligation described
in Q&A G–1. However, a trustee is not
required to provide the summary description prior to agreeing to be a trustee of a
SIMPLE IRA under the SIMPLE IRA
Plan.
(3) Penalties. Each trustee that fails to
provide the employer with one or more
summary descriptions incurs a $50
penalty, under § 6693(c) of the Code, for
each day the failures continue, unless the
trustee shows that the failures are due to
reasonable cause. To the extent that the
employer or a trustee provides the information described in paragraphs (1)(a)
through (e) of this Q&A H–1 within the
time period prescribed in Q&A G–1 to the
employee for whom the
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