For Tax Professionals  
REG-113694-98 December 23, 1998

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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-113694-98] RIN 1545-AW59

TITLE: 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.

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,
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
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, 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 * * * 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:

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 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:

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
1.417(e)-1(d).

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

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


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