For Tax Professionals  
T.D. 8769 June 05, 1998

Permitted Elimination of Preretirement Optional Forms of Benefit

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8769] RIN 1545-
AV26

TITLE: Permitted Elimination of Preretirement Optional Forms of
Benefit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that permit an
amendment to a qualified plan or other employee pension benefit plan
that eliminates plan provisions for benefit distributions before
retirement but after age 70 1/2. These regulations affect employers
that maintain qualified plans and other employee pension benefit
plans, plan administrators of these plans and participants in these
plans.

EFFECTIVE DATE: These regulations are effective, June 5, 1998.

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 these final regulations
has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under the control number 1545- 1545. The collection
of information in these final regulations is in 1.411(d)-4.
Responses to this collection of information are required in order to
obtain a benefit. Specifically, 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.

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.

The estimated average burden per recordkeeper for master and
prototype plan employers is 10 minutes. The estimated average burden
per recordkeeper for master and prototype plan sponsors is 30
minutes. The estimated average burden per recordkeeper for employers
with individually designed plans is 30 minutes.

Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Clearance Officer, T:FS:FP, Washington,
D.C. 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, D.C. 20503.

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 document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 411(d) of the Internal Revenue Code of
1986. The final regulations permit taxpayers to amend qualified
plans to eliminate plan provisions for benefit distributions before
retirement but after age 70 1/2, if certain conditions are
satisfied.

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 in the case of 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 within the meaning of
section 411(d)(6)(B) and 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.

On July 2, 1997, a notice of proposed rulemaking under section
411(d)(6) was published in the Federal Register (62 FR 35752). The
proposed regulations would allow amendment of qualified plans to
eliminate the right to commence preretirement benefit distributions
after age 70 1/2, as required under section 401(a)(9) before its
amendment by the SBJPA. On October 28, 1997, a public hearing was
held on the proposed regulations. In general, most of the comments
received with respect to the proposed regulations did not relate to
the proposed amendments to the regulations under section 411(d)(6),
but rather to the other issues related to the SBJPA amendment to
section 401(a)(9). Many of those issues are addressed in Notice
97-75 (1997-51 I.R.B. 18). Those comments that addressed the
amendments to the proposed regulations under section 411(d)(6) were
generally favorable. Thus, after consideration of the comments
received, the final regulations retain the structure and substance
of the proposed regulations, with the changes or clarifications
discussed below.

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 would
be limited if the IRS and Treasury did not grant relief from section
411(d)(6).

Under previously-issued administrative guidance, one approach that
is available to employers is to give employees the option of
commencing distributions at age 70 1/2 or deferring commencement
until after retirement. See Announcement 97-24 (1997-11 I.R.B. 24)
and Revenue Procedure 97-41 (1997-33 I.R.B.

51). Another alternative available to employers is to 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 approaches. In addition, an employer may not have
chosen voluntarily 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, the proposed regulations set forth a proposal to provide
relief from section 411(d)(6) for certain plan amendments that
eliminate preretirement distributions commencing at age 70 1/2.
After consideration of the comments received with respect to the
proposed regulations, the final regulations provide this relief
using the same approach.

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

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

Under the regulations, an amendment to eliminate a preretirement age
70 1/2 distribution option is permitted to 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. Two of the commentators on the
proposed regulations requested clarification that this requirement
does not impose special additional restrictions with respect to
employees over age 70 1/2 that would require plan sponsors to retain
all plan options in effect during the year any employee attained age
70 1/2. In response to these comments, the final regulations clarify
that no such special additional restrictions are being imposed.
Thus, to the extent a section 411(d)(6) protected benefit may
otherwise be eliminated or reduced under 1.411(d)-4, that protected
benefit can be reduced or eliminated for all employees without
violating section 411(d)(6), even if that benefit would have been
available to an employee who 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 must be adopted no later than the last day of the remedial
amendment period that applies to the plan for changes under the
SBJPA. The relief provided is available only to employers that adopt
the amendment within this specified time period because the relief
is intended 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. The IRS and Treasury have determined that it
is appropriate to provide an extension of the period for
collectively bargained plans to implement an amendment permitted by
these regulations.

This was suggested by a commentator who noted that it might not be
possible to amend a collectively bargained plan until the expiration
of all applicable collective bargaining agreements that are in
effect when the final regulations are issued.

Accordingly, under the final regulations, 1.411(d)-4, Q&A-10( b)(3)
has been amended so that, in the case of a plan maintained pursuant
to one or more collective bargaining agreements between employee
representatives and one or more employers ratified before, September
3, 1998, the amendment deadline is extended to the last day of the
twelfth month beginning after the date on which the last of such
collective bargaining agreements terminates (determined without
regard to any extensions on or after, September 3, 1998, if later
than the last day of the remedial amendment period for the plan for
changes under the SBJPA.

3. Circumstances Under Which No Relief Is Required

Many employers do not need relief under section 411(d)(6) in order
to implement the SBJPA change in the definition of required
beginning date in their plans. The regulations include 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 in these regulations 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 of the plan. 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

These regulations are effective June 5, 1998.

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.

Further, it is hereby certified, pursuant to sections 603(a) and
605(b) of the Regulatory Flexibility Act, that the collection of
information in these regulations does 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, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

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

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
revising the entry for 1.411(d)-4 to read as follows:

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

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:

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 option?

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 Q&A-10 or any
other Q&A in this section, 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 Q&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 age 70 1/2 distribution option.

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--

(i) The last day of the remedial amendment period that applies to
the plan for changes under the Small Business Job Protection Act of
1996 (110 Stat. 1755); or

(ii) Solely in the case of a plan maintained pursuant to one or more
collective bargaining agreements between employee representatives
and one or more employers ratified before September 3, 1998, the
last day of the twelfth month beginning after the date on which the
last of such collective bargaining agreements terminates (determined
without regard to any extension thereof on or after September 3,
1998, if later than the date described in paragraph (b)(3)(i) of
this Q&A-10. For purposes of this paragraph (b)(3)(ii), the rules of
1.410(b)-10(a)(2) apply for purposes of determining whether a plan
is maintained pursuant to one or more collective bargaining
agreements, except that September 3, 1998, is substituted for March
1, 1986, as the date before which the collective bargaining
agreements must be ratified.

(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 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 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 of attainment of 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 Q&A-10.

(e) Effective date. This Q&A-10 applies to amendments adopted and
effective after, June 5, 1998.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as
follows:

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

4. In 602.101, paragraph (c) is amended by adding an entry in
numerical order to the table to read as follows:

602.101 OMB Control numbers.

*****

(c) * * *

CFR part or section Current OMB where identified control No. and
described

*****

1.411(d)-4............................................1545-1545

*****

Deputy Commissioner of Internal Revenue
Michael P. Dolan
Approved: Donald C. Lubick May 11, 1998
Assistant Secretary of the Treasury


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