For Tax Professionals  
T.D. 8794 December 23, 1998

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

TITLE: 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.

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 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 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,
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 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 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
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 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: 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 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 1.411(a)-7T and revising the entry for 1.411(d)-4 to
read as follows:

Authority: 26 U.S.C. 7805 * * * 1.411(a)-7T also issued under 26
U.S.C. 411(a)(7)(B)(i).

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:

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
1.411(a)-7T.)

* * * * *

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

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

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

(d)(5) and (6) [Reserved]. For further guidance, see 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:

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

* * * * *

(c) * * *

(3) $3,500. * * * (For distributions made on or after March 22,
1999, see 1.411(a)-11T.)

* * * * *

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

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

(a) and (b) [Reserved]. For further guidance, see 1.411(a)-11(a)
and (b).

(c) Consent, etc. requirements--(1) General rule. [Reserved]. For
further guidance, see 1.411(a)-11(c)(1).

(2) Consent. [Reserved]. For further guidance, see 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
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 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
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: Section
Remove Add

1.401(a)-20, Q&A-8, $3,500 the cash-out limit in effect paragraph
(d), first sentence under 1.411(a)-11T(c)(3)(ii) 1.401(a)-20,
Q&A-24, $3,500 the cash-out limit in effect paragraph (a)(1), fourth
under 1.411(a)-11T(c)(3)(ii) sentence

1.401(a)(4)-4, paragraph $3,500 the cash-out limit in effect (b)(2)
(ii)(C) under 1.411(a)-11T(c)(3)(ii)

1.401(a)(26)-4, paragraph $3,500 the cash-out limit in effect (d)
(2), last sentence under 1.411(a)-11T(c)(3)(ii)

1.401(a)(26)-6, paragraph $3,500 the cash-out limit in effect (c)
(4), first sentence under 1.411(a)-11T(c)(3)(ii)

1.411(a)-11, paragraph (b), $3,500 the cash-out limit in effect
first sentence under 1.411(a)-11T(c)(3)(ii)

1.411(a)-11, paragraph $3,500 the cash-out limit in effect (c)(7),
third sentence under 1.411(a)-11T(c)(3)(ii)

1.411(d)-4, Q&A-2, $3,500 the cash-out limit in effect paragraph (b)
(2)(v), second, under 1.411(a)-11T(c)(3)(ii) third, and fourth
sentences 1.411(d)-4, Q&A-2, $1,750 $3,500 paragraph (b)(2)(v),
second sentence

1.411(d)-4, Q&A-4, $3,500 the cash-out limit in effect paragraph
(a), eighth under 1.411(a)-11T(c)(3)(ii) sentence.1.411(d)-4,
Q&A-4, 1.401(a)-4 Q&A-4 1.401(a)(4)-4(b)(2)(ii)(C) paragraph (a),
last sentence in the parenthetical

1.417(e)-1, paragraph $3,500 the cash-out limit in effect (b)(2)(i),
first, fourth, and fifth under 1.411(a)-11T(c)(3)(ii) sentences

31.3121(b)(7)-2, paragraph $3,500 the cash-out limit in effect (d)
(2)(i), last sentence under 1.411(a)-11T(c)(3)(ii) of this chapter

David A. Mader
Acting Deputy Commissioner of Internal Revenue
Approved: November 18, 1998
Donald C. Lubick
Assistant Secretary of the Treasury


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