[Federal Register Volume 70, Number 15 (Tuesday, January 25, 2005)]
[Rules and Regulations]
[Pages 3475-3477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1327]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9176]
RIN 1545-BC35
Elimination of Forms of Distribution in Defined Contribution
Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that would modify the
circumstances under which certain forms of distribution previously
available are permitted to be eliminated from qualified defined
contribution plans. These final regulations affect qualified retirement
plan sponsors, administrators, and participants.
DATES: These regulations are effective January 25, 2005.
FOR FURTHER INFORMATION CONTACT: Vernon S. Carter, 202-622-6060 (not a
toll free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final amendments to 26 CFR part 1 under
section 411(d)(6) of the Internal Revenue Code of 1986 (Code) as
amended by the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) (115 Stat. 117).
Section 411(d)(6)(A) of the Code 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.
Section 411(d)(6)(B) prior to amendment by EGTRRA provided that an
amendment is treated as reducing an accrued benefit if, with respect to
benefits accrued before the amendment is adopted, the amendment has the
effect of either eliminating or reducing an early retirement benefit or
a retirement-type subsidy, or, except as provided by regulations,
eliminating an optional form of benefit.
The IRS published TD 8900 in the Federal Register on September 6,
2000 (65 FR 53901). TD 8900, which amended Sec. 1.411(d)-4 of the
Income Tax Regulations, added paragraph (e) of Q&A-2 to provide for
additional circumstances under which a defined contribution plan can be
amended to eliminate or restrict a participant's right to receive
payment of accrued benefits under certain optional forms of benefit.
Section 1.411(d)-4, Q&A-2(e)(1), provides that a defined
contribution plan may be amended to eliminate or restrict a
participant's right to receive payment of accrued benefits under a
particular optional form of benefit without violating the section
411(d)(6) anti-cutback rules if, once the plan amendment takes effect
for a participant, the alternative forms of payment that remain
available to the participant include payment in a single-sum
distribution form that is otherwise identical to the eliminated or
restricted optional form of benefit. The amendment cannot apply to a
participant for any distribution with an annuity starting date before
the earlier of the 90th day after the participant receives a summary
that reflects the plan amendment and that satisfies Department of
Labor's requirements for a summary of material modifications under 29
CFR 2520.104b-3, or the first day of the second plan year following the
plan year in which the amendment is adopted. Section 1.411(d)-4, Q&A-
2(e)(2), provides that a single-sum distribution form is otherwise
identical to the optional form of benefit that is being eliminated or
restricted only if it is identical in all respects (or would be
identical except that it provides greater rights to the participant),
except for the timing of payments after commencement. A single-sum
distribution form is not otherwise identical to a specified installment
form of benefit if the single-sum form:
Is not available for distribution on any date on which the
installment form could have commenced;
Is not available in the same medium as the installment
form; or
Imposes any additional condition of eligibility.
Further, an otherwise identical distribution form need not retain
any rights or features of the eliminated or restricted optional form of
benefit to the extent those rights or features would not be protected
from elimination under the anti-cutback rules. The single-sum
distribution form would not, however, be disqualified from being an
otherwise identical distribution form if the single-sum form provides
greater rights to participants than did the eliminated or restricted
optional form of benefit.
Section 645(a)(1) of EGTRRA added section 411(d)(6)(E), which
provides that, except to the extent provided in regulations, a defined
contribution plan is not treated as reducing a participant's accrued
benefit where a plan amendment eliminates a form of distribution
previously available under the plan if a single-sum distribution is
available to the participant at the same time as the form of
distribution eliminated by the amendment and the single-sum
distribution is based on the same or greater portion of the
participant's account as the form of distribution eliminated by the
amendment. Thus, section 411(d)(6)(E) includes conditions that are
similar to those in existing Sec. 1.411(d)-4, Q&A-2(e), but without
the advance notice condition.
On July 8, 2003, a notice of proposed rulemaking (REG-112039-03)
was published in the Federal Register (68 FR 40581) to reflect the
addition of section 411(d)(6)(E) by EGTRRA. The proposed regulations
amended Sec. 1.411(d)-4, Q&A-2(e) to eliminate the 90-day advance
notice condition on plan amendments otherwise permitted under Sec.
1.411(d)-4, Q&A-2(e). Following publication of the proposed
regulations, comments were received, but no public hearing was
requested. After consideration of the comments received, the proposed
regulations are adopted as revised by this Treasury decision.
[[Page 3476]]
Explanation of Provisions
These final regulations retain the general structure and much of
the substance of the proposed regulations, including an example
illustrating the provisions. Some changes have been made in connection
with a specific recommendation for modification and clarification. The
comments received in response to the proposed regulations are generally
summarized below.
Two commentators were concerned that, following the elimination of
the 90-day notice requirement, plan participants who counted on being
able to retire with an annuity could discover that option is suddenly
gone. The commentators argued that the participant may have made plans
based on the expectation of receiving an annuity, and that, although
participants can purchase annuities with their lump sums, they may find
that annuities purchased outside the plan cost more or pay lower
amounts than what they were expecting from the plan. The commentators
recommended that, to the extent plan sponsors adopt amendments that
terminate an annuity option, those plan sponsors should allow
participants within 90 days of retiring at the time of the amendment to
be permitted to elect that annuity.
The legislative history to section 645(a)(1) of EGTRRA shows that
Congress was aware of the notice requirement in existing Sec.
1.411(d)-4, Q&A-2(e)(2), and adopted all of the same provisions in
section 411(d)(6)(E) as are in existing Sec. 1.411(d)-4, Q&A-2(e)(2),
except for the notice requirement. See Conference Report No. 107-84,
107th Cong., 1st Session 253-254. Accordingly, these final regulations
adopt the amendments in the proposed regulation. The regulations retain
the rules under which a defined contribution plan may be amended to
eliminate or restrict a participant's right to receive payment of
accrued benefits under a particular optional form of benefit without
violating the section 411(d)(6) anti-cutback rules if, once the plan
amendment takes effect for a participant, the alternative forms of
payment that remain available to the participant include payment in a
single-sum distribution. The regulations clarify that such an amendment
can apply only to distributions with annuity starting dates after the
amendment is adopted and, therefore, cannot apply to distributions that
have already commenced. However, these final regulations remove the 90-
day notice condition previously applicable to these plan amendments.\1\
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\1\ The Department of Labor has advised Treasury and the IRS
that plans covered by Title I of ERISA are subject to the
requirement under Title I that plan amendments be described in a
timely summary of material modifications (SMM) or a revised summary
plan description (SPD) to be distributed to plan participants and
beneficiaries in accordance with applicable Department of Labor
disclosure rules (see 29 CFR 2520.104b-3).
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One commentator commented on the example in Sec. 1.411(d)-4, Q&A-
2(e), of the proposed regulations. The commentator stated it is not
clear from the example why the amendment does not apply to P (the
participant in the Plan) if P elects to have annuity payments begin
before July 1, 2004. The commentator stated that the confusion may
result because the example provided that the amendment is adopted on
May 2, 2004, but does not provide when the amendment is effective. The
example has been revised to reflect the comment.
Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR
47713), the Secretary of the Treasury has interpretive jurisdiction
over the subject matter addressed in these regulations for purposes of
the Employee Retirement Income Security Act of 1974 (ERISA). Section
204(g)(2) of ERISA, as amended by EGTRRA, provides a parallel rule to
section 411(d)(6)(E) of the Code that applies under Title I of ERISA,
and authorizes the Secretary of the Treasury to provide exception to
this parallel ERISA requirement. Therefore, regulations issued under
section 411(d)(6)(E) of the Code apply for purposes of the parallel
requirements of section 204(g)(2) of ERISA, as well as for section
411(d)(6)(E) of the Code.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 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 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 Vernon S. Carter of
the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities). However, other personnel from the IRS and
Treasury participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
0
Paragraph 1. The authority citation for part 1 is amended to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.411(d)-4, Q&A-2(e) is revised to read as follows:
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
A-2: * * *
(e) Permitted plan amendments affecting alternative forms of
payment under defined contribution plans--(1) General rule. A defined
contribution plan does not violate the requirements of section
411(d)(6) merely because the plan is amended to eliminate or restrict
the ability of a participant to receive payment of accrued benefits
under a particular optional form of benefit for distributions with
annuity starting dates after the date the amendment is adopted if,
after the plan amendment is effective with respect to the participant,
the alternative forms of payment available to the participant include
payment in a single-sum distribution form that is otherwise identical
to the optional form of benefit that is being eliminated or restricted.
(2) Otherwise identical single-sum distribution. For purposes of
this paragraph (e), a single-sum distribution form is otherwise
identical to an optional form of benefit that is eliminated or
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the
single-sum distribution form is identical in all respects to the
eliminated or restricted optional form of benefit (or would be
identical except that it provides greater rights to the participant)
except with respect to the timing of payments after commencement. For
example, a single-sum distribution form is not otherwise identical to a
specified installment form of benefit if the single-sum distribution
form is not available for distribution on the date on which the
installment form would have been available for commencement, is not
available in the same medium of distribution as the installment form,
or imposes any
[[Page 3477]]
condition of eligibility that did not apply to the installment form.
However, an otherwise identical distribution form need not retain
rights or features of the optional form of benefit that is eliminated
or restricted to the extent that those rights or features would not be
protected from elimination or restriction under section 411(d)(6) or
this section.
(3) Example. The following example illustrates the application of
this paragraph (e):
Example. (i) P is a participant in Plan M, a qualified profit-
sharing plan with a calendar plan year that is invested in mutual
funds. The distribution forms available to P under Plan M include a
distribution of P's vested account balance under Plan M in the form
of distribution of various annuity contract forms (including a
single life annuity and a joint and survivor annuity). The annuity
payments under the annuity contract forms begin as of the first day
of the month following P's severance from employment (or as of the
first day of any subsequent month, subject to the requirements of
section 401(a)(9)). P has not previously elected payment of benefits
in the form of a life annuity, and Plan M is not a direct or
indirect transferee of any plan that is a defined benefit plan or a
defined contribution plan that is subject to section 412.
Distributions on the death of a participant are made in accordance
with plan provisions that comply with section 401(a)(11)(B)(iii)(I).
On September 2, 2004, Plan M is amended so that, effective for
payments that begin on or after November 1, 2004, P is no longer
entitled to any distribution in the form of the distribution of an
annuity contract. However, after the amendment is effective, P is
entitled to receive a single-sum cash distribution of P's vested
account balance under Plan M payable as of the first day of the
month following P's severance from employment (or as of the first
day of any subsequent month, subject to the requirements of section
401(a)(9)).
(ii) Plan M does not violate the requirements of section
411(d)(6) (or section 401(a)(11)) merely because, as of November 1,
2004, the plan amendment has eliminated P's option to receive a
distribution in any of the various annuity contract forms previously
available.
(4) Effective date. This paragraph (e) is applicable on January 25,
2005.
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: January 10, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-1327 Filed 1-24-05; 8:45 am]
BILLING CODE 4830-01-P