Increase in Cash-Out Limit Under Sections 411(a)(7), 411(a)(11), and 417(e)(1)

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113694-98]

RIN 1545-AW59

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

and 417(e)(1)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary

regulations and notice of proposed rulemaking.

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SUMMARY: In the Rules and Regulations section of this issue of the

Federal Register, the IRS is issuing 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. The text of those temporary regulations also serves as a

portion of the text of these proposed regulations. In addition, these

proposed regulations propose the elimination, for all distributions, of

the ``lookback rule'' pursuant to which the qualified plan benefits of

certain participants are deemed to exceed this limit on mandatory

distributions. These proposed regulations affect sponsors and

administrators of qualified retirement plans, and participants in those

plans. The text of those temporary regulations also serves as a portion

of the text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be

received by March 22, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-113694-98), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered Monday through

Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-

113694-98), 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.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Michael J.

Karlan, (202) 622-6030 (not a toll-free call); concerning submissions,

Michael Slaughter, (202) 622-7190 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in the Rules and Regulations section of this

issue of the Federal Register amend the Income Tax Regulations (26 CFR

part 1) relating to the increase from $3,500 to $5,000 of the ``cash-

out limit'' described in sections 411(a)(7), 411(a)(11), and 417(e)(1)

of the Internal Revenue Code, as amended by section 1071 of the

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

The text of the temporary regulations also serves as a portion of

the text of the proposed regulations. The preamble to the temporary

regulations explains the temporary regulations.

As also discussed in the preamble to the temporary regulations,

Sec. 1.411(a)-11(c)(3), interpreting the law prior to the enactment of

TRA '97, 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 that 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 shall be deemed to exceed $3,500; this is commonly referred to as

the ``lookback rule.'' Section 1.417(e)-1(b)(2)(i) includes a parallel

lookback rule.

The temporary regulations remove the lookback rule under section

411(a)(11) for most distributions, but preserve the rule for

distributions pursuant to an optional form of benefit under which at

least one scheduled periodic distribution is still payable.

These proposed regulations remove the lookback rule under

Secs. 1.411(a)-11(c)(3) and 1.417(e)-1(b)(2)(i). In accordance with

section 417(e)(1), these proposed regulations also 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,

[[Page 70357]]

this provision applies only to that portion (and not to the portion

with respect to which no distributions are being made).

Under this removal of the lookback rule, the present value of a

participant's nonforfeitable accrued benefit could be distributed

without consent if the present value does not exceed $5,000, even if

the present value of the participant's nonforfeitable accrued benefit

exceeded $5,000 at the time of a previous distribution. Thus, if the

present value of a participant's nonforfeitable accrued benefit

previously had been $6,000, but is presently $4,000, these proposed

regulations would permit the plan to be amended to permit the present

value of that participant's nonforfeitable accrued benefit to be

distributed without consent (provided that the distribution would not

fail to satisfy section 417(e)(1)). The complete removal of the

lookback rule described in these proposed regulations would become

effective 90 days after the publication of final regulations.

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, 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, 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 electronic and written comments (a

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

IRS. The IRS and Treasury specifically request comments on the clarity

of the proposed regulations and how it may be made easier to

understand. All comments will be available for public inspection and

copying. A public hearing may be scheduled if requested in writing by

any person that timely submits written comments. If a public hearing is

scheduled, notice of the date, time, and place for the hearing will be

published in the Federal Register.

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 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 adding

an entry in numerical order to read in part as follows:

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

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

Par. 2. Section 1.411(a)-7 is amended by revising paragraphs

(d)(4)(i) and (d)(4)(vi) to read as follows:

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

* * * * *

(d) Rules relating to certain distributions and cash-outs of

accrued benefits. * * *

(4) Certain cash-outs of accrued benefits. (i) and (vi) [The text

of proposed paragraphs (d)(4)(i) and (vi) is the same as the text of

Sec. 1.411(a)-7T(d)(4)(i) and (vi) published elsewhere in this issue of

the Federal Register.]

* * * * *

Par. 3. Section 1.411(a)-11 is amended by revising paragraph (c)(3)

to read as follows:

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

* * * * *

(c) * * *

(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).

(ii) [The text of proposed paragraph (c)(3)(ii) is the same as the

text of Sec. 1.411(a)-11T(c)(3)(ii) published elsewhere in this issue

of the Federal Register.]

* * * * *

Par. 4. Section 1.417(e)-1 is amended by revising the last sentence

of paragraph (b)(2)(i) to read as follows:

Sec. 1.417(e)-1 Restrictions and valuations of distributions from

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

* * * * *

(b) * * *

(2) * * * (i) * * * After the annuity starting date, consent is

required 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 such present value.

* * * * *

David A. Mader,

Acting Deputy Commissioner of Internal Revenue.

[FR Doc. 98-32929 Filed 12-18-98; 8:45 am]

BILLING CODE 4830-01-P