For Tax Professionals  
T.D. 8781 September 24, 1998

Section 411(d)(6) Protected Benefits (Taxpayer Relief Act of 1997);
Qualified Retirement Plan Benefits

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8781] RIN 1545-AV95

TITLE: Section 411(d)(6) Protected Benefits (Taxpayer Relief Act of
1997); Qualified Retirement Plan Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations
providing for changes to the rules regarding qualified retirement
plan benefits that are protected from reduction by plan amendment,
that have been made necessary by the Taxpayer Relief Act of 1997
(TRA '97). The temporary regulations change the existing regulations
to conform with the TRA '97 rules regarding in-kind distribution
requirements for certain employee stock ownership plans, and specify
the time period during which certain plan amendments for which
relief has been granted by TRA '97 may be made without violating the
prohibition against plan amendments that reduce accrued benefits.
These temporary regulations affect sponsors of qualified retirement
plans, employers that maintain qualified retirement plans, and
qualified retirement plan participants. The final regulations amend
the existing final regulations to cross-reference the temporary
regulations. The text of the temporary regulations also serves as
the text of the proposed regulations set forth in the notice of
proposed rulemaking on this subject in the Proposed Rules section of
this issue of the Federal Register.

DATES: These regulations are effective September 4, 1998.

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, (202)
622-6030 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 411(d)(6). These temporary regulations
change the rules under section 411(d)(6) regarding qualified
retirement plan benefits that are protected from reduction by plan
amendment, to take into account amendments made by the Taxpayer
Relief Act of 1997 (TRA '97), Public Law 105-34 (111 Stat. 788
(1997)). Specifically, these temporary regulations change the
existing regulations to conform to the TRA '97 amendments to section
409 regarding the general requirement that employee stock ownership
plans offer distributions in the form of employer securities. In
addition, these temporary regulations specify the time period during
which certain plan amendments for which relief has been granted by
TRA '97 may be made without violating section 411(d)(6).

Explanation of Provisions

Section 411(d)(6) provides that a plan is not 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
is 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. Sections
1.411(d)-4, Q&A-1(b)(1) and 1.401(a)(4)-4( e) specify that different
optional forms of benefit within the meaning of section 411(d)(6)(B)
result from differences in the medium of a distribution (e.g., cash
or in-kind) from a plan. Section 411(d)(6)(C) provides that any tax
credit employee stock ownership plan or any employee stock ownership
plan is not treated as failing to meet the requirements of section
411(d)(6) merely because it modifies distribution options in a
nondiscriminatory manner.

Special Rules Regarding Medium of Distribution from ESOPs

Section 409(h) contains requirements relating to distributions from
tax credit employee stock ownership plans. Section 4975(e)(7)
extends the requirements of section 409(h) to other employee stock
ownership plans as well, and section 401(a)(23) extends the
requirements of section 409(h) to qualified plans that are stock
bonus plans. Under section 409(h)(1)(A), an employee stock ownership
plan or other stock bonus plan generally is required to make
distributions available in the form of employer securities. Prior to
its amendment by TRA '97, section 409(h)(2) provided an exception to
this rule in the case of an employer whose charter or bylaws
restrict the ownership of substantially all outstanding employer
securities to employees or to a trust described in section 401(a).

Under section 1361, certain small business corporations that do not
have more than 75 shareholders are eligible to elect treatment as S
corporations whose tax attributes generally flow through to
shareholders in accordance with the rules of subchapter S of chapter
1 of subtitle A of the Internal Revenue Code. Prior to the Small
Business Job Protection Act of 1996 (SBJPA), Public Law 104-188 (110
Stat.

1755 (1996)), an S corporation could not maintain an employee stock
ownership plan because an S corporation could not have a qualified
trust described in section 401(a) as a shareholder. SBJPA amended
the requirements for S corporations, effective for tax years
beginning after December 31, 1996, to permit certain tax-exempt
organizations, including qualified trusts described in section
401(a), to be S corporation shareholders.

TRA '97 made an additional change to the rules governing qualified
plans holding securities of an S corporation employer, to make it
easier for S corporation employers to facilitate employee ownership
of employer securities through qualified plans. Section 1506 of TRA
'97 extends the exception of section 409(h)(2) to cover S
corporations, effective for taxable years beginning after December
31, 1997. Pursuant to this change, tax credit employee stock
ownership plans, employee stock ownership plans, and other stock
bonus plans established and maintained by S corporation employers
are not required to offer distributions in the form of employer
securities.

Section 1.411(d)-4, Q&A-2(d)(2)(ii) provides an exception from the
requirements of section 411(d)(6) for plan amendments that eliminate
optional forms of benefit from a tax credit employee stock ownership
plan, an employee stock ownership plan, or a stock bonus plan, for
certain employers. Section 1.411(d)-4, Q&A-2(d)(2)(ii) applies to
employers that become substantially employee-owned, if the employer
otherwise meets the requirements of section 409(h)(2) with respect
to restrictions on the ownership of outstanding employer stock.
These temporary regulations expand this exception from the
requirements of section 411(d)(6) to apply to S corporations as
well, to reflect the TRA '97 changes to section 409(h).

Rules for Plan Amendments Pursuant to TRA '97

Section 1541 of TRA '97 contains provisions relating to plan
amendments that are adopted as a result of TRA '97. If section 1541
applies to a plan amendment, section 1541(a) provides that the plan
will be treated as operated in accordance with its terms and will
not fail to satisfy the requirements of section 411(d)(6) by reason
of the amendment. Section 1541 applies to a plan amendment that is
made pursuant to a legislative change in the pension and employee
benefit provisions of TRA '97, provided the following conditions are
satisfied. First, the plan amendment must be adopted before the
first day of the first plan year beginning on or after January 1,
1999 (2001, in the case of a governmental plan, as defined in
section 414(d)). Second, the plan must be operated in accordance
with the terms of the plan amendment, beginning on the date the
legislative change takes effect, or, if the amendment is not
required by the legislative change, the effective date of the
amendment specified by the plan. Third, the plan amendment must be
made retroactively effective.

The remedial amendment period for adopting plan amendments to which
section 1541 of TRA '97 applies was extended pursuant to the rules
of section 401(b) in Rev.

Proc. 98-14 (1998-4 I.R.B. 22). To provide a uniform time for plan
amendment, these temporary regulations extend the time for the
section 411(d)(6) relief provided by section 1541 of TRA '97 to the
end of the remedial amendment period for these plan amendments.

Other Section 411(d)(6) Issues

In Notice 98-29 (1998-22 I.R.B. 8), the IRS requested public comment
regarding a number of possible methods of providing section 411(d)
(6) relief, particularly for defined contribution plans. The IRS
will also consider comments submitted pursuant to Notice 98-29 that
propose other methods of providing section 411(d)(6) relief to
address special concerns of employee stock ownership plans.

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 temporary 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 Linda S. F. Marshall,
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.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1
is 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(d)-4T also issued under 26 U.S.C. 411(d)(6). * * *

Par. 2. Section 1.411(d)-4 is amended by:

1. Removing the reference "Q&A-5" and adding Q&A-2" in its place in
the first sentence of Q&A-2(d)(1) introductory text.

2. Adding a sentence at the end of Q&A-2(d)(3) to read as follows:

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

* * * * *

Q-2: * * *

A-2: * * *

(d) * * *

(3) * * * (For taxable years after December 31, 1997, see
1.411(d)-4T Q&A-2( d).)

* * * * *

Par. 3. Section 1.411(d)-4T is added to read as follows: 
1.411(d)-4T Section 411(d)(6) protected benefits (temporary).

Q&A-1: [Reserved]. For further information, see 1.411(d)-4 Q&A-1.

Q-2: To what extent may section 411(d)(6) protected benefits under a
plan be reduced or eliminated?

(a) through (c) [Reserved]. For further information, see 1.411(d)-4
Q&A-2(a) through (c).

(d) ESOP and stock bonus plan exception--(1) In general. Subject to
the limitations in paragraph (d)(2) of this Q&A-2, a tax credit
employee stock ownership plan (as defined in section 409(a)), an
employee stock ownership plan (as defined in section 4975(e)(7)), or
a stock bonus plan that is not an employee stock ownership plan will
not be treated as violating the requirements of section 411(d)(6)
merely because of the circumstances described in paragraph (d)(1)
(ii) of this Q&A-2.

(i) [Reserved]. For further information, see 1.411(d)-4 Q&A-2(d)(1)
(i).

(ii) Employer becomes substantially employee-owned or is an S
corporation.

The employer eliminates, or retains the discretion to eliminate,
with respect to all participants, optional forms of benefit by
substituting cash distributions for distributions in the form of
employer stock with respect to benefits subject to section 409(h) in
the circumstances described in paragraph (d)(1)(ii)(A) or (B) of
this Q&A-2, but only if the employer otherwise meets the
requirements of section 409(h)(2)--

(A) The employer becomes substantially employee-owned; or

(B) For taxable years of the employer beginning after December 31,
1997, the employer is an S corporation as defined in section 1361. 
(iii) and (iv) [Reserved]. For further information, see 1.411(d)-4
Q&A-2(d)(1)(iii) and (iv).

(2) Limitations on ESOP and stock bonus plan exceptions. [Reserved].
For further information, see 1.411(d)-4 Q&A-2(d)(2).

(3) Effective date. Paragraph (d) of this Q&A-2 applies for taxable
years beginning after December 31, 1997. For taxable years beginning
prior to January 1, 1998, see 1.411(d)-4 Q&A-2(d).

(4) [Reserved]. For further information, see 1.411(d)-4 Q&A-2(d)
(4).

Q&A-3 through Q&A-10 [Reserved]. For further information, see
1.411(d)-4 Q&A-3 through Q&A-10.

Q-11: To what extent may a plan amendment that is made pursuant to
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111
Stat. 788), reduce or eliminate section 411(d)(6) protected
benefits?

A-11: A plan amendment does not violate the requirements of section
411(d)(6) merely because the plan amendment reduces or eliminates
section 411(d)(6) protected benefits as of the effective date of the
plan amendment, provided that--

(a) The plan amendment is made pursuant to an amendment made by
title XV, or subtitle H of title X, of TRA '97; and

(b) The plan amendment is adopted no later than the last day of any
remedial amendment period that applies to the plan pursuant to
1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.

Michael P. Dolan
Deputy Commissioner of Internal Revenue
Approved: July 24, 1998
Donald C. Lubick
Assistant Secretary of the Treasury


SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.





1998 Regulations Main | IRS Regulations Main | Home