Increase In Cash-Out Limit Under Sections 411(a)(7), 411(a)(11), and 417(e)(1) for Qualified Retirement Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8794]

RIN 1545-AW58

Increase In Cash-Out Limit Under Sections 411(a)(7), 411(a)(11),

and 417(e)(1) for Qualified Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations

providing guidance relating to the increase from $3,500 to $5,000 of

the limit on distributions from qualified retirement plans that can be

made without participant consent. This increase is contained in the

Taxpayer Relief Act of 1997. In addition, these regulations eliminate,

for most distributions, the ``lookback rule'' pursuant to which the

qualified plan benefits of certain participants are deemed to exceed

this limit on mandatory distributions. The final and temporary

regulations affect sponsors and administrators of qualified retirement

plans, and participants in those plans. The final regulations also

amend the existing final regulations to cross-reference the temporary

regulations. The text of the temporary regulations also serves, in

part, as the text of the proposed regulations set forth in the notice

of proposed rulemaking on this subject in the Proposed Rules section of

the Federal Register.

DATES: Effective Date: These regulations are effective December 21,

1998.

Applicability Date: These final and temporary regulations generally

apply to distributions made on or after March 22, 1999. However,

employers are permitted to apply the final regulations and the

temporary regulations other than Sec. 1.411(a)-11T(c)(3)(i) to plan

years beginning on or after August 6, 1997.

FOR FURTHER INFORMATION CONTACT: Michael J. Karlan, (202) 622-6030 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations and

the Employment Tax Regulations (26 CFR parts 1 and 31) under sections

411(a)(7), 411(a)(11), and 417(e)(1) regarding restrictions on

involuntary distributions and joint and survivor annuity requirements

for qualified plans. The final and temporary regulations change the

existing regulations to take into account amendments made by the

Taxpayer Relief Act of 1997 (TRA '97), Public Law 105-34, 111 Stat. 788

(1997).

Explanation of Provisions

A. Restrictions on Mandatory Distributions

Prior to the enactment of TRA '97, section 411(a)(11)(A) provided

that if the present value of any nonforfeitable accrued benefit

exceeded $3,500, a plan met the requirements of section

[[Page 70336]]

411(a)(11) only if such plan provided that such benefit could not be

immediately distributed without the consent of the participant. TRA '97

changed this cash-out limit to $5,000, effective for plan years

beginning after August 5, 1997. For this purpose, both before and after

the enactment of TRA '97, the present value of a participant's

nonforfeitable benefit is calculated in accordance with section

417(e)(3).

Interpreting the law prior to the enactment of TRA '97,

Sec. 1.411(a)-11(c)(3) provides that the written consent of a

participant is required before the commencement of the distribution of

any portion of the participant's accrued benefit if the present value

of the nonforfeitable total accrued benefit is greater than $3,500. If

the present value does not exceed $3,500, the consent requirements are

deemed satisfied, and the plan may distribute such portion to the

participant as a single sum. The regulation further provides that, if

the present value determined at the time of a distribution to the

participant exceeds $3,500, then the present value at any subsequent

time is deemed to exceed $3,500; this is commonly referred to as the

``lookback rule.''

Consistent with the TRA '97 change, these regulations increase the

cash-out limit to $5,000. In determining whether a participant's

nonforfeitable accrued benefit may be distributed without consent

during plan years beginning on or after August 6, 1997, the new cash-

out limit of $5,000 is permitted to be applied as though it were in

effect for all plan years, including those beginning before August 6,

1997. Thus, for example, a calendar year plan may be amended to provide

for the involuntary distribution after December 31, 1997, of the

accrued benefit of a participant who terminated employment on or before

that date, if the present value of the accrued benefit does not exceed

$5,000 at the time of the distribution (subject to the exception

described below for optional forms of benefit under which at least one

scheduled periodic distribution is still payable). This result is the

same even if the accrued benefit could only have been distributed with

the participant's or the spouse's consent at termination of employment

because the present value of the benefit exceeded $3,500 at that time.

In addition, these temporary regulations eliminate, for many

distributions, the lookback rule under Sec. 1.411(a)-11(c)(3). Under

these regulations, a plan may provide that the present value of a

participant's nonforfeitable accrued benefit generally may be

distributed without consent if that present value does not exceed the

cash-out limit as determined at the time of the current distribution

without regard to the present value of the participant's benefit at the

time of an earlier distribution. However, under these temporary

regulations, if a participant has begun to receive distributions

pursuant to an optional form of benefit under which at least one

scheduled periodic distribution is still payable, and if the present

value of the participant's nonforfeitable accrued benefit exceeded the

$5,000 cash-out limit at the time of the first distribution under that

optional form of benefit, then the present value of the participant's

nonforfeitable accrued benefit may not be distributed without consent.

B. Immediate Distribution of the Present Value of a QJSA or QPSA

Prior to the enactment of TRA '97, section 417(e)(1) provided that

a plan subject to sections 401(a)(11) and 417 could provide that the

present value of a qualified joint and survivor annuity (``QJSA'') or a

qualified preretirement survivor annuity (``QPSA'') would be

immediately distributed if such value did not exceed $3,500. Pursuant

to section 417(e)(1), no distribution could be made under the preceding

sentence after the annuity starting date unless the participant and the

spouse of the participant (or where the participant had died, the

surviving spouse) consented in writing to such distribution. TRA '97

changed this dollar limit from $3,500 to the dollar limit under section

411(a)(11)(A), effective for plan years beginning after August 5, 1997.

These regulations change only the dollar limit in Sec. 1.417(e)-

1(b)(2)(i) from $3,500 to the dollar limit under section 411(a)(11)(A),

and do not revise the lookback rule set forth in that section for plans

subject to sections 401(a)(11) and 417.

C. Proposed Regulations

The proposed regulations set forth in the notice of proposed

rulemaking on this subject in the Proposed Rules section of the Federal

Register completely repeal the lookback rule under Secs. 1.411(a)-

11(c)(3) and 1.417(e)-1(b)(2)(i), i.e., both for plans that are and

plans that are not subject to sections 401(a)(11) and 417. In

accordance with section 417(e)(1), the proposed regulations provide

that, in the case of plans subject to sections 401(a)(11) and 417,

consent is required after the annuity starting date for the immediate

distribution of the present value of the accrued benefit being

distributed in any form, including a qualified joint and survivor

annuity or a qualified preretirement survivor annuity, regardless of

the amount of that present value. Where only a portion of an accrued

benefit is being distributed, this provision applies only to that

portion (and not to the portion with respect to which no distributions

are being made).

D. Disregard of Certain Past Service

Section 411(a)(7)(B)(i) provides that, for purposes of determining

the employee's accrued benefit under the plan, the plan may disregard

service performed by the employee with respect to which he has received

a distribution of the present value of his entire nonforfeitable

benefit if such distribution was in an amount not more than $3,500

(prior to the amendment of the cash-out limit under TRA '97), as

permitted under regulations prescribed by the Secretary. Section

411(a)(7)(B)(i) applies only if the distribution was made on

termination of the employee's participation in the plan, and

Sec. 1.411(a)-7(d)(4)(i)(C) provides that such involuntary

distributions must have been made due to the termination of the

employee's participation in the plan. TRA '97 changed this $3,500 limit

to the dollar limit under section 411(a)(11)(A), effective for plan

years beginning after August 5, 1997. These temporary regulations

provide that, for purposes of applying section 411(a)(7)(B)(i), an

involuntary distribution of an employee's nonforfeitable accrued

benefit the present value of which does not exceed $5,000 may be

treated as having occurred due to termination of participation if the

distribution could have been made due to termination of participation

but for the fact that the present value exceeded $3,500 at that time.

E. Conforming Amendments

Several other provisions of the Treasury Regulations incorporate

the cash-out limit, and these regulations make conforming amendments to

those provisions in order to incorporate the new cash-out limit under

section 411(a)(11). Specifically, conforming amendments are made to the

following sections: Secs. 1.401(a)-20 Q&A-8(d); 1.401(a)-20 Q&A-24;

1.401(a)(4)-4(b)(2)(ii)(C); 1.401(a)(26)-4(d)(2); 1.401(a)(26)-6(c)(4);

1.411(a)-11(b); 1.411(a)-11(c)(7); 1.411(d)-4 Q&A-2(b)(2)(v); 1.411(d)-

4 Q&A-4(a); 1.417(e)-1(b)(2)(i); and 31.3121(b)(7)-2(d)(2)(i).

F. Valuation Rules

Section 417(e)(3) prescribes rules and definitions for determining

the present

[[Page 70337]]

value of an accrued benefit under a defined benefit plan for purposes

of sections 417 and 411(a)(11)(A). (In the case of a defined

contribution plan, the present value of the accrued benefit is the

value of the account balance.) The present value of a participant's

accrued benefit for purposes of the cash-out limit is determined in

accordance with section 417(e)(3) using the interest rate and mortality

tables in effect under the plan for the annuity starting date. Thus,

for example, if the present value of the participant's accrued benefit

using the rate described in section 417(e)(3)(B) (often referred to as

the ``PBGC rate'') exceeds $5,000, and the plan is subsequently amended

to reflect the interest rate described in section 417(e)(3)(A)(ii), the

plan may provide that the present value of the accrued benefit may be

distributed without the participant's or spouse's consent if the value

of the accrued benefit does not exceed $5,000, as determined under the

plan provisions then in effect.

G. Benefits Protected From Reduction or Elimination

Section 411(d)(6) provides, in general, that a plan shall be

treated as not satisfying the requirements of section 401(a) if the

accrued benefit of a participant is decreased, or an optional form of

benefit is eliminated, by an amendment of the plan. Section 1.411(d)-4,

paragraph (b)(2)(v) of Q&A-2 provides that a plan may be amended to

provide for the involuntary distribution of an employee's benefit to

the extent such distribution is permitted under sections 411(a)(11) and

417(e). In accordance with that provision, a plan may be amended for

plan years beginning on or after August 6, 1997, to permit the

involuntary distribution of an accrued benefit using a cash-out limit

of $5,000, with respect to benefits accrued before the amendment was

adopted and effective. Such an amendment is permitted even if the plan,

prior to amendment, did not permit involuntary distributions (as well

as if the plan permitted involuntary distributions if the present value

of the participant's benefit did not exceed the prior cash-out limit of

$3,500). Such an amendment will not violate the anti-cutback rules of

section 411(d)(6).

H. Remedial Amendment Period

Rev. Proc. 98-14 (1998-4 I.R.B. 22) at section 4, provides the

remedial amendment period for certain plan amendments made pursuant to

TRA '97. A plan may be amended retroactively to implement the increase

in the cash-out limit to $5,000 in accordance with section 4 of the

revenue procedure.

Special Analyses

It has been determined that this Treasury decision 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, and because the regulation does

not impose a collection of information on small entities, the

Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal Revenue Code, these

regulations will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small

business.

Drafting Information

The principal author of these regulations is Michael J. Karlan,

Office of the Associate Chief Counsel (Employee Benefits and Exempt

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

Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensation.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 31 are amended as follows:

PART 1--INCOME TAXES

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

an entry for Sec. 1.411(a)-7T and revising the entry for Sec. 1.411(d)-

4 to read as follows:

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

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

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

Par. 2. Section 1.411(a)-7 is amended by adding a sentence at the

end of the concluding text of paragraph (d)(4)(i) to read as follows:

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

* * * * *

(d) * * *

(4) Certain cash-outs of accrued benefits. (i) * * *

* * * * *

* * * (For distributions made on or after March 22, 1999, see

Sec. 1.411(a)-7T.)

* * * * *

Par. 3. Section 1.411(a)-7T is added to read as follows:

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

(a) through (d)(3) [Reserved]. For further guidance, see

Sec. 1.411(a)-7(a) through (d)(3).

(d)(4) Certain cash-outs of accrued benefits--(i) Involuntary cash-

outs. For purposes of determining an employee's right to an accrued

benefit derived from employer contributions under a plan, the plan may

disregard service performed by the employee with respect to which--

(A) The employee receives a distribution of the present value of

his entire nonforfeitable benefit at the time of the distribution;

(B) The requirements of section 411(a)(11) are satisfied at the

time of the distribution;

(C) The distribution is made due to the termination of the

employee's participation in the plan; and

(D) The plan has a repayment provision which satisfies the

requirements of Sec. 1.411(a)-7(d)(4)(iv) in effect at the time of the

distribution.

(d)(4)(ii) through (v) [Reserved]. For further guidance, see

Sec. 1.411(a)-7(d)(4)(ii) through (v).

(vi) For purposes of paragraph (d)(4)(i) of this section, a

distribution shall be deemed to be made due to the termination of an

employee's participation in the plan if it is made no later than the

close of the second plan year following the plan year in which such

termination occurs, or if such distribution would have been made under

the plan by the close of such second plan year but for the fact that

the present value of the nonforfeitable accrued benefit then exceeded

the cash-out limit in effect under Sec. 1.411(a)-11T(c)(3)(ii). For

purposes of determining the entire nonforfeitable benefit, the plan may

disregard service after the distribution, as illustrated in

Sec. 1.411(a)-7(d)(2)(i).

(vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this section

apply to distributions made on or after March 22, 1999 through December

18, 2001. For plan years beginning before March 22, 1999, see

Sec. 1.411(a)-7(d)(4)(i). However, an employer is permitted to apply

paragraphs (d)(4)(i) and (vi) of this section to plan years beginning

on or after August 6, 1997.

[[Page 70338]]

(d)(5) and (6) [Reserved]. For further guidance, see Sec. 1.411(a)-

7(d)(5) and (6).

Par. 4. Section 1.411(a)-11 is amended by adding a sentence at the

end of paragraph (c)(3) to read as follows:

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

* * * * *

(c) * * *

(3) $3,500. * * * (For distributions made on or after March 22,

1999, see Sec. 1.411(a)-11T.)

* * * * *

Par. 5. Section 1.411(a)-11T is added to read as follows:

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

(temporary).

(a) and (b) [Reserved]. For further guidance, see Sec. 1.411(a)-

11(a) and (b).

(c) Consent, etc. requirements--(1) General rule. [Reserved]. For

further guidance, see Sec. 1.411(a)-11(c)(1).

(2) Consent. [Reserved]. For further guidance, see Sec. 1.411(a)-

11(c)(2).

(3) Cash-out limit. (i) Written consent of the participant is

required before the commencement of the distribution of any portion of

an accrued benefit if the present value of the nonforfeitable total

accrued benefit is greater than the cash-out limit in effect under

paragraph (c)(3)(ii) of this section on the date the distribution

commences. The consent requirements are deemed satisfied if such value

does not exceed the cash-out limit, and the plan may distribute such

portion to the participant as a single sum. Present value for this

purpose must be determined in the same manner as under section 417(e);

see Sec. 1.417(e)-1(d). If a participant has begun to receive

distributions pursuant to an optional form of benefit under which at

least one scheduled periodic distribution has not yet been made, and if

the present value of the participant's nonforfeitable accrued benefit,

determined at the time of the first distribution under that optional

form of benefit, exceeded the cash-out limit currently in effect under

paragraph (c)(3)(ii) of this section, then the present value of the

participant's nonforfeitable accrued benefit is deemed to continue to

exceed the cash-out limit. Thus, for example, if the present value of a

participant's accrued benefit does not exceed the cash-out limit on the

date of a distribution after termination of employment but did, at the

time of an earlier in-service hardship withdrawal, exceed the cash-out

limit in effect on the date of the post-termination distribution, the

plan is permitted to distribute the present value of the participant's

accrued benefit on the date of the post-termination distribution

without the participant's consent. However, if a participant began to

receive scheduled installment payments under a plan and, at that time,

the participant's accrued benefit exceeded the cash-out limit currently

in effect, the present value of the participant's accrued benefit is

deemed to continue to exceed the cash-out limit and may not be

distributed without the participant's consent.

(ii) The cash-out limit in effect for a date is the amount

described in section 411(a)(11)(A) for the plan year that includes that

date. The cash-out limit in effect for dates in plan years beginning on

or after August 6, 1997, is $5,000. The cash-out limit in effect for

dates in plan years beginning before August 6, 1997, is $3,500.

(iii) Effective date. Paragraphs (c)(3)(i) and (ii) of this section

apply to distributions made on or after March 22, 1999 through December

18, 2001. For plan years beginning before March 22, 1999, see

Sec. 1.411(a)-11(c)(3). However, an employer is permitted to apply

paragraph (c)(3)(ii) of this section to plan years beginning on or

after August 6, 1997.

(c)(4) through (e) [Reserved]. For further guidance, see

Sec. 1.411(a)-11(c)(4) through (e).

PARTS 1 AND 31--[AMENDED]

Par. 6. In the table below, for each section indicated in the left

column, remove the language in the middle column and add the language

in the right column:

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Section Remove Add

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1.401(a)-20, Q&A-8, paragraph $3,500................ the cash-out

(d), first sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.401(a)-20, Q&A-24, paragraph $3,500................ the cash-out

(a)(1), fourth sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.401(a)(4)-4, paragraph $3,500................ the cash-out

(b)(2)(ii)(C). limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.401(a)(26)-4, paragraph $3,500................ the cash-out

(d)(2), last sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.401(a)(26)-6, paragraph $3,500................ the cash-out

(c)(4), first sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.411(a)-11, paragraph (b), $3,500................ the cash-out

first sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.411(a)-11, paragraph (c)(7), $3,500................ the cash-out

third sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.411(d)-4, Q&A-2, paragraph $3,500................ the cash-out

(b)(2)(v), second, third, and limit in effect

fourth sentences. under Sec.

1.411(a)-11T(c)

(3)(ii).

1.411(d)-4, Q&A-2, paragraph $1,750................ $3,500.

(b)(2)(v), second sentence.

1.411(d)-4, Q&A-4, paragraph $3,500................ the cash-out

(a), eighth sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii).

1.411(d)-4, Q&A-4, paragraph Sec. 1.401(a)-4 Q&A-4 Sec. 1.401(a)(4

(a), last sentence in the )-4(b)(2)(ii)(C

parenthetical. ).

1.417(e)-1, paragraph $3,500................ the cash-out

(b)(2)(i), first, fourth, and limit in effect

fifth sentences. under Sec.

1.411(a)-11T(c)

(3)(ii).

31.3121(b)(7)-2, paragraph $3,500................ the cash-out

(d)(2)(i), last sentence. limit in effect

under Sec.

1.411(a)-11T(c)

(3)(ii) of this

chapter.

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[[Page 70339]]

David A. Mader,

Acting Deputy Commissioner of Internal Revenue.

Approved: November 18, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98-32928 Filed 12-18-98; 8:45 am]

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