Permitted Elimination of Preretirement Optional Forms of Benefit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107644-97]

RIN 1545-AV26

Permitted Elimination of Preretirement Optional Forms of Benefit

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations that would permit

an amendment to a qualified plan that eliminates certain preretirement

optional forms of benefit. These regulations affect employers that

maintain qualified plans, plan administrators of qualified plans and

participants in qualified plans. This document provides notice of a

public hearing on these proposed regulations.

DATES: Written comments and outlines of the topics to be discussed at

the public hearing must be received by September 30, 1997. A public

hearing is scheduled for October 28, 1997.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-107644-97), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-107644-97), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html. A public hearing is scheduled to be held in the

Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Thomas Foley, (202) 622-6050 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of information should be received by

September 2, 1997. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of service to provide information.

The collection of information in this proposed regulation is in

Sec. 1.411(d)-4. This information is required for a taxpayer who wants

to amend a qualified plan to eliminate certain preretirement optional

forms of benefit. This information will be used to determine whether

taxpayers have amended a qualified plan. The collection of information

is voluntary to obtain a benefit. The likely recordkeepers are

businesses or other for-profit organizations and non-profit

institutions.

Estimated total recordkeeping burden: 48,800 hours.

Estimated average burden per recordkeeper: For Master and Prototype

Plan Employers: 10 minutes. For Master and Prototype Plan Sponsors: 30

minutes. For Employers with Individually Designed Plans: 30 minutes.

Estimated number of recordkeepers: 135,000.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This notice contains proposed amendments to the income tax

regulations (26 CFR Part 1) under section 411(d) of the Internal

Revenue Code of 1986.

Section 411(d)(6) generally provides that a plan will not be

treated as satisfying the requirements of section 411 if the accrued

benefit of a participant is decreased by a plan amendment. Under

section 411(d)(6)(B), a plan amendment that eliminates an optional form

of benefit will be treated as reducing accrued benefits to the extent

that the amendment applies to benefits accrued as of the later of the

adoption date or the effective date of the amendment. However, section

411(d)(6)(B) also permits the Secretary to provide in regulations that

this rule will not apply to an amendment that eliminates an optional

form of benefit.

Section 401(a)(9) provides that, in order for a plan to be

qualified under section 401(a), distributions from the plan must

commence no later than the ``required beginning date.'' Prior to 1997,

section 401(a)(9)(C) generally provided that the required beginning

date is April 1 following the calendar year in which the employee

attains age 70\1/2\. Consequently, in order to satisfy section

401(a)(9), qualified plans, other than certain church and governmental

plans, have provided for distributions to commence no later than April

1 following the calendar year that an employee attains age 70\1/2\.

These distributions commence without regard to whether the employee has

retired from employment with the employer maintaining the plan.

Section 1404 of the Small Business Job Protection Act of 1996,

Public Law 104-188 (SBJPA), amended the definition of required

beginning date that applies to an employee who is not a 5-percent

owner. Section 401(a)(9)(C)(i), as amended, provides that, in the case

of such an employee, the required beginning date is April 1 of the

calendar year following the later of the calendar year in which the

employee attains age 70\1/2\ or the calendar year in which the employee

retires. Accordingly, except for 5-percent owners, a plan is no longer

required to provide for distributions that commence prior to retirement

in order to satisfy section 401(a)(9).

The right to commence benefit distributions in any form at a

particular time is an optional form of benefit

[[Page 35753]]

within the meaning of section 411(d)(6)(B) and Sec. 1.411(d)-4 Q&A-

1(b). In enacting section 1404 of the SBJPA, Congress did not alter the

application of section 411(d)(6). Thus, except to the extent authorized

by regulations, a plan amendment that eliminates the right to commence

preretirement benefit distributions in a plan after age 70\1/2\ (or

restricts the right by adding an additional condition) violates section

411(d)(6) if the amendment applies to benefits accrued as of the later

of the adoption or effective date of the amendment.

Notice 96-67 (1996-53 I.R.B. 12) provided questions and answers

addressing certain issues relating to the amendment of section

401(a)(9)(C) by the SBJPA and requested comments concerning the extent

to which relief from section 411(d)(6) would be appropriate for plan

amendments that eliminate preretirement distributions after age 70\1/2\

(e.g., by limiting section 411(d)(6) protection to employees above a

certain age).

Overview

1. Permitted Elimination of Preretirement Distributions After Age 70\1/

2\

The legislative history to section 1404 of the SBJPA indicates that

the reason for amending the definition of required beginning date was

that it is inappropriate to require all participants to commence

distributions by age 70\1/2\ without regard to whether the participant

is still employed by the employer. Because section 1404 did not alter

the application of section 411(d)(6) to plan provisions allowing or

requiring preretirement distributions after age 70\1/2\, an employer's

choices for amending its plan to implement the SBJPA change to the

definition of required beginning date are limited unless the IRS and

Treasury grant relief from section 411(d)(6).

As one choice, in accordance with the guidance in Announcement 97-

24 (1997-11 I.R.B. 24) March 13, 1997, the employer may give employees

the option of commencing distributions at age 70\1/2\ or deferring

commencement until after retirement. As a second alternative, the

employer may amend the plan to eliminate the right to preretirement

distributions solely with respect to future accruals. However, under

this second approach, each current participant would retain the right

to receive preretirement distributions after age 70\1/2\ with respect

to a portion of his or her accrued benefit.

The IRS and Treasury recognize the potential complexity of

administering plans (particularly defined benefit plans) that adopt

either of these choices. In addition, an employer may not have

voluntarily chosen to offer preretirement distributions to employees

who have attained age 70\1/2\ but instead may have included these

provisions in its plan solely to comply with section 401(a)(9) prior to

its amendment by the SBJPA. Therefore, after consideration of the

comments received in response to Notice 96-67 and subject to the

conditions described below, the proposed regulations would provide

relief from section 411(d)(6) for certain plan amendments that

eliminate preretirement distributions commencing at age 70\1/2\.

2. Conditions on the Relief From Section 411(d)(6)

a. Protection for Employees Who Are Near Age 70\1/2\

Under the proposed regulation, an amendment to eliminate a

preretirement age 70\1/2\ distribution option may apply only to

benefits with respect to employees who attain age 70\1/2\ in or after a

calendar year, specified in the amendment, that begins after the later

of December 31, 1998, or the adoption date of the amendment. The relief

from section 411(d)(6) is limited to distributions to employees who

attain age 70\1/2\ after calendar year 1998 because employees who were

near age 70\1/2\ at the time of enactment of the SBJPA may have had an

expectation of receiving preretirement distributions in the near future

and may have made plans that took into account these expected

distributions.

b. Optional Forms of Benefit for Participants Retiring After Age 70\1/

2\

A plan using this relief generally may not preclude an employee who

retires after the calendar year in which the employee attains age 70\1/

2\ from receiving an optional form of benefit that would have been

available if the employee had retired in the calendar year in which the

employee attained age 70\1/2\.

c. Timing of Plan Amendment

An amendment to eliminate a preretirement age 70\1/2\ distribution

option may be adopted no later than the last day of any remedial

amendment period that applies to the plan for changes under the SBJPA.

However, in no event will the deadline for adopting such a plan

amendment be before December 31, 1998. The relief provided is available

only to employers that adopt the amendment within this specified time

period because the relief is being provided to simplify the

implementation of section 401(a)(9), as amended by the SBJPA, for

employers that do not voluntarily provide preretirement distributions

for an extended period after the enactment of the SBJPA.

3. Circumstances Under Which No Relief is Required

Many employers do not need relief under section 411(d)(6) inorder

to implement the SBJPA change in the definition of required beginning

date in their plans. The regulation includes an example of such a plan,

a profit-sharing plan that permits an employee to elect distribution

after age 59\1/2\ at any time and in any amount. The example

illustrates that this plan may be amended to implement the SBJPA change

in the definition of required beginning date without violating section

411(d)(6). In this example, the section 411(d)(6) relief proposed in

this regulation is not required because the optional forms of benefit

in the plan that reflect the pre-SBJPA mandatory distribution

requirements of section 401(a)(9) are encompassed by the optional forms

of benefit provided under the general elective distribution provisions.

The right to commence distributions at age 70\1/2\ continues to be

available under the plan even after the plan is amended to implement

the SBJPA change in the required beginning date.

Effective Date

The guidance in these proposed regulations will only be effective

after the date that final regulations are adopted and will only apply

to amendments adopted and effective after that date. In order to

provide employers with ample time to craft the appropriate plan

amendment to implement the relief from section 411(d)(6) that would be

provided when these regulations are finalized, the IRS and the Treasury

intend to finalize these regulations on an expedited schedule after

consideration of the comments received.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations. Further, it is hereby

certified, pursuant to sections 603(a) and 605(b) of the Regulatory

Flexibility

[[Page 35754]]

Act, that the collection of information in these regulations will not

have a significant economic impact on a substantial number of small

entities. The burden imposed by the collection of information is the

burden of amending a plan to modify the provisions reflecting section

401(a)(9). The cost of the amendment varies depending upon whether the

small entity involved maintains an individually designed plan or uses a

master or prototype plan. For an individually designed plan, the small

entity maintaining the plan will be responsible for arranging to have

the amendment made. Most small entities with individually designed

plans will have the amendment done by a skilled outside service

provider, such as a consulting firm or law firm. The time required to

make such an amendment is estimated at 30 minutes, which is not a

significant economic impact, even for a very small entity. Moreover,

most very small entities that maintain a qualified plan use a master or

prototype plan. For master and prototype plans, the plan sponsor drafts

a single amendment for all of the employers participating in the plan.

The average time required for the amendment per employer participating

in a master or prototype plan is estimated to be 10 minutes, which

certainly is not a substantial economic impact. Therefore, a regulatory

flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed rulemaking will be submitted to

the Chief Counsel for Advocacy of the Small Business Administration for

comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (preferably a

signed original and eight (8) copies) that are submitted timely to the

IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for October 28, 1997, at 10

a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC. Because of access restrictions, visitors

will not be admitted beyond the building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral arguments at the hearing must

submit written comments and an outline of the topics to be discussed

and the time devoted to each topic by September 30, 1997.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of speakers will be prepared after

the deadline for receiving outlines has passed. Copies of the agenda

will be available free of charge at the hearing.

Drafting Information: The principal author of these regulations is

Cheryl Press, Office of the Associate Chief Counsel (Employee Benefits

and Exempt Organizations), IRS. However, other personnel from the IRS

and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by

revising the entry for Sec. 1.411(d)-4 to read as follows:

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

Sec. 1.411(d)-4 also issued under 26 U.S.C. 411(d)(6). * * *

Par. 2. Section 1.411(d)-4 is amended by adding Q&A-10 to read as

follows:

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

* * * * *

Q-10. If a plan provides for an age 70\1/2\ distribution option

that commences prior to retirement from employment with the employer

maintaining the plan, to what extent may the plan be amended to

eliminate this distribution provision?

A-10. (a) In general. The right to commence benefit distributions

in a particular form and at a particular time prior to retirement from

employment with the employer maintaining the plan is a separate

optional form of benefit within the meaning of section 411(d)(6)(B) and

Q&A-1 of this section, even if the plan provision creating this right

was included in the plan solely to comply with section 401(a)(9), as in

effect for years before January 1, 1997. Therefore, except as otherwise

provided in paragraph (b) of this A-10, a plan amendment violates

section 411(d)(6) if it eliminates an age 70 1/2 distribution option

(within the meaning of paragraph (c) of this A-10) to the extent that

it applies to benefits accrued as of the later of the adoption date or

effective date of the amendment.

(b) Permitted elimination of optional form. An amendment of a plan

will not violate the requirements of section 411(d)(6) merely because

the amendment eliminates an age 70\1/2\ distribution option to the

extent that the option provides for distribution to an employee prior

to retirement from employment with the employer maintaining the plan,

provided that--

(1) The amendment eliminating this optional form of benefit applies

only to benefits with respect to employees who attain age 70\1/2\ in or

after a calendar year, specified in the amendment, that begins after

the later of--

(i) December 31, 1998; or

(ii) The adoption date of the amendment;

(2) The plan does not, except to the extent required by section

401(a)(9), preclude an employee who retires after the calendar year in

which the employee attains age 70\1/2\ from receiving benefits in any

of the same optional forms of benefit (except for the difference in the

timing of the commencement of payments) that would have been available

had the employee retired in the calendar year in which the employee

attained age 70\1/2\; and

(3) The amendment is adopted no later than the last day of any

remedial amendment period that applies to the plan for changes under

the Small Business Job Protection Act of 1996 (110 Stat. 1755) (but in

no event will the adoption of the amendment be required before December

31, 1998).

(c) Age 70\1/2\ distribution option. For purposes of this Q&A-10,

an age 70\1/2\ distribution option is an optional form of benefit under

which benefits payable in a particular distribution form (including any

modifications that may be elected after benefit commencement) commence

at a time during the period that begins on or after January 1 of the

calendar year in which an employee attains age 70\1/2\ and ends April 1

of the immediately following calendar year.

(d) Examples. The provisions of this section are illustrated by the

following examples:

Example 1. Plan A, a defined benefit plan, provides each

participant with a qualified joint and survivor annuity (QJSA) that

is available at any time after the later of age 65 or retirement.

However, in accordance with section 401(a)(9) as in effect prior to

January 1, 1997, Plan A provides that if an employee does not retire

by the end of the calendar year in which the employee attains age

70\1/2\, then the QJSA commences on the following April 1. On

October 1, 1998, Plan A is amended to provide that, for an employee

[[Page 35755]]

who is not a 5-percent owner and who attains age 70\1/2\ after 1998,

benefits may not commence before the employee retires but must

commence no later than the April 1 following the later of the

calendar year in which the employee retires or the calendar year in

which the employee attains age 70\1/2\. This amendment satisfies

this Q&A-10 and does not violate section 411(d)(6).

Example 2. Plan B, a money purchase pension plan, provides each

participant with a choice of a QJSA or a single sum distribution

commencing at any time after the later of age 65 or retirement. In

addition, in accordance with section 401(a)(9) as in effect prior to

January 1, 1997, Plan B provides that benefits will commence in the

form of a QJSA on April 1 following the calendar year in which the

employee attains age 70\1/2\, except that, with spousal consent, a

participant may elect to receive annual installment payments equal

to the minimum amount necessary to satisfy section 401(a)(9)

(calculated in accordance with a method specified in the plan) until

retirement, at which time a participant may choose between a QJSA

and a single sum distribution (with spousal consent). On June 30,

1998, Plan B is amended to provide that, for an employee who is not

a 5-percent owner and who attains age 70\1/2\ after 1998, benefits

may not commence prior to retirement but benefits must commence no

later than April 1 after the later of the calendar year in which the

employee retires or the calendar year in which the employee attains

age 70\1/2\. The amendment further provides that the option

described above to receive annual installment payments prior to

retirement will not be available under the plan to an employee who

is not a 5-percent owner and who attains age 70\1/2\ after 1998.

This amendment satisfies this Q&A-10 and does not violate section

411(d)(6).

Example 3. Plan C, a profit-sharing plan, contains two

distribution provisions. Under the first provision, in any year

after an employee attains age 59 \1/2\, the employee may elect a

distribution of any specified amount not exceeding the balance of

the employee's account. In addition, the plan provides a section

401(a)(9) override provision under which, if, during any year

following the year that the employee attains age 70\1/2\, the

employee does not elect an amount at least equal to the minimum

amount necessary to satisfy section 401(a)(9) (calculated in

accordance with a method specified in the plan), Plan C will

distribute the difference by December 31 of that year (or for the

year the employee attains age 70\1/2\, by April 1 of the following

year). On December 31, 1996, Plan C is amended to provide that, for

an employee other than an employee who is a 5-percent owner in the

year that the employee attains age 70\1/2\, in applying the section

401(a)(9) override provision, the later of the year of retirement,

or year of attainment of age 70\1/2\, is substituted for the year

that the employee attains age 70\1/2\. After the amendment, Plan C

still permits each employee to elect to receive the same amount as

was available before the amendment. Because this amendment does not

eliminate an optional form of benefit, the amendment does not

violate section 411(d)(6). Accordingly, the amendment is not

required to satisfy the conditions of paragraph (b) of this A-10.

(e) This Q&A-10 applies to amendments adopted and effective after

the publication of final regulations in the Federal Register.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 97-17218 Filed 7-1-97; 8:45 am]

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