Special Rules Regarding Optional Forms of
Benefit Under Qualified Retirement Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-109101-98]

TITLE: Special Rules Regarding Optional Forms of Benefit Under
Qualified Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations that would
permit qualified defined contribution plans to be amended to
eliminate some alternative forms in which an account balance can be
paid under certain circumstances, and would permit certain transfers
between defined contribution plans that are not permitted under
regulations now in effect. These proposed regulations affect
qualified retirement plan sponsors, administrators, and
participants. This document also provides notice of a public hearing
on these proposed regulations.

DATES: Written comments must be received by June 27, 2000. Requests
to speak and outlines of oral comments to be discussed at the public
hearing scheduled for June 27, 2000, at 10 a.m., must be received by
June 6, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-109101-98), 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-109101-98), 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 of the IRS Home Page, or
by submitting comments directly to the IRS Internet site at:
http://www.irs.gov/tax_regs/reglist.html. The public hearing will be
held in room 6718, Internal Revenue Building, 1111 Constitution
Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda
S. F. Marshall, 202-622-6030; concerning submissions and the
hearing, and/or to be placed on the building access list to attend
the hearing, LaNita VanDyke, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 under
section 411(d)(6) of the Internal Revenue Code of 1986 (Code).
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. Section 411(d)(6)
(B), which was added by the Retirement Equity Act of 1984 (REA),
Public Law 98-397 (98 Stat. 1426), provides that 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. However, section 411(d)(6)(B)
authorizes the Secretary of the Treasury to provide exceptions to
this requirement. This authority does not extend to a plan amendment
that would have the effect of eliminating or reducing an early
retirement benefit or a retirement-type subsidy.

Final regulations regarding section 411(d)(6)(B) were published in
the Federa Register on July 8, 1988. Those final regulations, and
subsequent amendments to the regulations, define the optional forms
of benefit that are protected under section 411(d)(6)(B) and provide
for certain exceptions to the general rule of section 411(d)(6)(B).
In general, existing regulatory exceptions to the application of
section 411(d)(6)(B) to optional forms of benefit have been
developed to address certain specific practical problems. For
example, §1.411(d)-4, Q&A-3(b) permits a transfer between plans of a
participant's entire nonforfeitable benefit to be made at the
election of the participant, without a requirement that the
transferee plan preserve all section 411(d)(6) protected benefits,
but only if the participant is eligible to receive an immediate
distribution and certain other conditions are satisfied. In
addition, some regulatory exceptions to the application of section
411(d)(6)(B) to optional forms of benefit address plan amendments
that are related to statutory changes. See Q&A-2(b) and Q&A-10 of
§1.411(d)-4.

The IRS and Treasury recognize that the accumulation of a variety of
payment choices in a plan may increase the cost and complexity of
plan operations. For example, an employer that initially adopted a
plan for which the plan document was prepared by a prototype sponsor
may now be using a different prototype plan that offers a different
array of distribution forms. The requirement to preserve virtually
all preexisting optional forms for benefits accrued up to the date
of change in the prototype plan may present significant practical
problems in certain cases.

Similar issues arise where employers merge with or acquire other
businesses.

These employers often face issues of whether to maintain separate
plans, terminate one or more of the plans, or merge the plans. If
the employer chooses to merge the plans, the resulting plan may
accumulate a wide variety of optional forms, some of which may
differ in insignificant ways or may entail special administrative
costs. Because the existing elective transfer rule of §1.411(d)-4,
Q&A-3(b) applies only to situations in which a participant's
benefits have become distributable, its applicability is limited.

In recent years, it has become easier for individuals to replicate
the various payment choices available from qualified plans through
other means. The Unemployment Compensation Amendments of 1992,
Public Law 102-318 (106 Stat. 290), substantially expanded
participants' ability to transfer distributions from qualified plans
to individual retirement arrangements (IRAs) on a tax-deferred
basis. Individuals who receive single-sum distributions from
qualified plans frequently roll those distributions over directly to
IRAs, under which distributions can be made in a wide variety of
payment forms. There are also indications that the vast majority of
participants in defined contribution plans who are given a choice of
distribution forms that includes a single-sum distribution elect the
single-sum distribution.

The IRS and Treasury have been weighing these considerations as they
apply to various circumstances and various benefit forms. As a
result, the IRS and Treasury have been considering the
appropriateness of exercising the regulatory authority under section
411(d)(6)(B) to provide additional exceptions under that provision,
in order to allow greater flexibility for sponsors to modify
alternative forms of payment and simplify plan provisions and plan
administration.

Notice 98-29 (1998-1 C.B. 1163) requested public comment on several
ways of providing regulatory relief from the requirements of section
411(d)(6)(B) for defined contribution plans. Most of the public
comments received in response to Notice 98-29 indicate that,
particularly for defined contribution plans, the section 411(d)(6)
(B) requirement that a plan continue to offer all existing payment
options often imposes significant administrative burdens that are
disproportionate to any corresponding benefit to participants.
Accordingly, after considering the comments received in response to
Notice 98-29, the IRS and Treasury are issuing these proposed
regulations, which would provide relief from the requirements of
section 411(d)(6)(B) in a wide range of circumstances.

As anticipated in Notice 98-29, the primary focus of these
regulations is on defined contribution plans, and the provisions of
these regulations relating to elimination of alternative forms of
payment are limited to defined contribution plans. Defined benefit
plans have special characteristics, including benefit payment
calculation specifications, early retirement benefits, and other
retirement-type subsidies (for which section 411(d)(6)(B) does not
authorize the issuance of regulatory relief). Features such as these
are not characteristic of defined contribution plans and provide
important protections to participants. While limited comments
relating to defined benefit plans were received in response to
Notice 98-29, the IRS and Treasury remain open to further comment in
this area. As discussed below, the provisions of these proposed
regulations relating to elimination of in-kind distributions extend
to both defined contribution plans and defined benefit plans, and
the provisions of these proposed regulations relating to transfers
between plans apply to defined contribution plans and, to some
extent, to defined benefit plans.

These proposed regulations would not affect other requirements of
the Code. For example, a money purchase pension plan (or a plan
otherwise described in section 401(a)(11)(B)) generally must satisfy
certain requirements relating to qualified joint and survivor
annuities and qualified preretirement survivor annuities. Similarly,
these proposed regulations would not affect the requirements of
section 401(a)(31) relating to direct rollovers.

Explanation of Provisions

A. Permitted Amendments to Alternative Forms of Payment Under a
Defined Contribution Plan

The proposed regulations would simplify plan administration and
allow greater flexibility by significantly expanding the permitted
changes that may be made to alternative forms of payment under a
defined contribution plan. Instead of requiring defined contribution
plans to continue to maintain nearly all existing alternative forms
of payment with only limited exceptions, these proposed regulations
would permit defined contribution plans to be amended to eliminate
nearly all existing forms of payment if certain specified forms of
payment are available. Under the proposed regulations, a defined
contribution plan would not violate the requirements of section
411(d)(6) merely because the plan was amended to eliminate or
restrict the ability of a participant to receive payment of the
participant's accrued benefit under a particular optional form of
benefit if, after the plan amendment became effective with respect
to the participant, the distribution choices available to the
participant included both payment of the accrued benefit in a
single-sum distribution form and payment of the accrued benefit in
an extended distribution form, each of which is otherwise identical
to the eliminated or restricted optional form of benefit.

Under the proposed regulations, a distribution form is an otherwise
identical distribution form with respect to an optional form of
benefit that is eliminated or restricted only if the distribution
form is identical in all respects to the eliminated or restricted
optional form of benefit except with respect to the timing of
payments after commencement. For example, a single-sum distribution
form is not an otherwise identical distribution form with respect to
a specified installment form of benefit if the single-sum
distribution form is not available for distribution on any 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, does not apply to the benefit to which the
installment form applied, imposes any condition of eligibility that
did not apply to the installment form, or lacks any related election
rights that were available with respect to the installment form.
However, a distribution form does not fail to be identical just
because it provides greater rights to the participant. Further, 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 are not
otherwise protected under section 411(d)(6). Moreover, in the case
of an optional form of benefit that is in the form of an annuity and
that provides for distribution of an annuity contract, a
distribution form that is not in the form of an annuity would not
fail to be an otherwise identical distribution form with respect to
that optional form of benefit merely because the non-annuity
distribution form does not provide for distribution of an annuity
contract.

The requirement under the proposed regulations that an extended
distribution form be retained would be satisfied if the plan
provided either (1) a life annuity or (2) periodic payments over the
participant's life expectancy (or, at the election of the
participant, over the joint life expectancy of the participant and
the participant's spouse). Thus, a defined contribution plan would
not violate section 411(d)(6) merely because of a plan amendment
that replaced an optional form of benefit payable under the plan
with either of these two extended distribution forms, together with
a single-sum distribution form, provided that the single-sum
distribution form and the extended distribution form are each
otherwise identical to the replaced optional form of benefit. A plan
providing for periodic payments over life expectancy could provide
for the life expectancy to be fixed when payments begin or,
alternatively, could provide for the life expectancy to be
redetermined annually as described in section 401(a)(9)(D).

As noted above, the proposed regulations would not affect the
survivor annuity requirements of sections 401(a)(11) and 417. Thus,
for example, as required under sections 401(a)(11) and 417, any
profit-sharing plan that provides for payment in the form of a life
annuity (whether or not the life annuity was added to the plan in
lieu of some other optional form) would also be required to offer
payment in the form of a qualified joint and survivor annuity.

A third extended distribution form would generally be permitted
under the proposed regulations for a plan amendment that did not
eliminate any optional form of benefit that is an extended
distribution form described above. For such an amendment, the
requirement to provide an extended distribution form would be
satisfied if the plan offered a distribution in the form of
substantially equal periodic payments made (not less frequently than
annually) over a period at least as long as the longest period over
which the participant is entitled to receive a distribution under
the plan before the plan amendment under any of the optional forms
of benefit that are eliminated by the plan amendment. Thus, for
example, a defined contribution plan that offers distributions in
the form of a single-sum distribution, 5-year installment payments,
10-year installment payments, 15-year installment payments, and 20-
year installment payments could be amended to offer only a single-
sum distribution and 20-year installment payments, each of which is
otherwise identical to the formerly available 5-year, 10-year, and
15-year distribution forms.

The provisions of the proposed regulations permitting payment forms
to be eliminated if the defined contribution plan retains a single-
sum distribution form and an extended distribution form are similar
to one of the proposals outlined in Notice 98-29. In response to
Notice 98-29, commentators generally stated that implementing this
relief would be very helpful for plan sponsors, but there was also
substantial comment urging further relief, so that a defined
contribution plan with a single-sum distribution option would not
also be required to continue to offer an extended distribution form.
These commentators took the position that, in light of a
participant's ability to roll over distributions to IRAs, which may
offer multiple payment forms, there is only a marginal advantage to
the participant in requiring the retention of an option to receive
extended payments from a qualified defined contribution plan.

Some of these comments described plans that have been preserving a
variety of payment options because the regulations require it, even
though certain of the options have not been selected by a single
participant for years. Commentators asserted that ultimately,
employee demand would tend to shape the array of payment options
offered by plan sponsors, and that plan sponsors generally would
feel more free to offer or "test market" various payment form
alternatives to participants if the sponsors were not legally
prohibited from ever removing any option, once offered, even when
participants in the plan have evidenced little or no interest in the
option. Commentators observed that participants would in all events
continue to have the option to leave their account balance in the
plan (if above the $5,000 cashout threshold) until they were ready
to begin receiving distributions. It was argued that the vast
majority of participants are not ready to begin drawing lifetime
retirement benefits at the time their employment with a particular
plan sponsor terminates, and that, accordingly, a participant's
rollover to a single IRA of the participant's benefits from a series
of employer-sponsored plans over the course of the participant's
working life is an effective and common means of achieving
portability, consolidation, and preservation of retirement savings.

Commentators also asserted that the protections of section 411(d)(6)
(B) may have adversely affected participants involved in corporate
sale transactions. Specifically, some sellers and buyers that might
otherwise have merged their plans, or transferred benefits under the
seller's plan to the buyer's plan, instead have terminated the
seller's plan or made distributions in order to avoid being required
to preserve all of the distribution forms in the seller's plan.

Although the comments received in response to Notice 98-29 made a
strong case that only a single sum distribution should be required
to be retained, these proposed regulations reflect the view that the
advantages to participants from retaining an extended distribution
form may be worth the plan administration costs of retaining this
additional option. These advantages include the benefits that
participants, especially less sophisticated participants, can derive
from employer involvement, which is subject to the fiduciary
standards, in selecting and monitoring investment options under the
plan after retirement distributions have begun. The IRS and Treasury
are open to further comments on whether or not an extended
distribution form should be required to be preserved, including
comments that identify circumstances in which it may be acceptable
for a plan not to preserve an extended distribution form. In
particular, comments are requested on whether the final regulations
should provide any of the following further relief:

?Should an extended distribution form be required to be retained
only for participants who have reached a specified age, such as age
55, age 62, or normal retirement age, at the time of the
distribution?

?Should there be an exception from this requirement for small
businesses (e.g., employers with fewer than 100 employees or fewer
than 25 employees)?

?Should a plan be treated as satisfying the requirement that it
retain an extended distribution form if the plan allows a
participant to elect to receive distribution by transfer of his or
her vested account to a defined benefit plan for distribution in an
extended distribution form?

?Should a plan be treated as satisfying the requirement that it
retain an extended distribution form if the plan offers installment
payments over a fixed period, such as 20 years?

?Should there be an exception from the requirement that an extended
distribution form be retained if a plan with an extended
distribution form is merged into another plan that does not offer an
extended distribution form (for example, if the plan without the
extended distribution form has a larger number of participants) in
connection with an asset or stock acquisition, merger, or similar
transaction involving a change in employer of the employees of a
trade or business?

?If extended distribution forms are permitted to be eliminated,
should there be additional protections, such as requiring that the
amendment not go into effect for a specified period (such as two,
four, or five years) or that the amendment not apply to participants
who have reached a specified age (such as age 55, age 62, or normal
retirement age) at the time of the amendment, or both?

Approaches such as these may be considered either independently of
each other, as a series of coordinated alternatives, or in
combination (such as permitting small businesses to limit the
availability of extended distribution forms to participants who
receive distributions after attaining a specified age, or such as
permitting plan amendments that make extended distribution forms
available only to participants who reach a specified age before a
specified date, such as five years after the amendment).
Commentators are requested to identify the burdens in plan
administration that may be reduced by any of these approaches and
the extent to which the approaches involve elimination of
distribution alternatives that may be important to a participant.

B. Voluntary Direct Transfers Between Plans The proposed regulations
would make a number of changes in the existing regulations relating
to elective transfers between qualified plans. Under certain
circumstances, the existing regulations permit elimination of
optional forms of benefit in connection with plan transfers with a
participant's consent. The proposed regulations would significantly
liberalize the application of these elective transfer provisions.
The existing regulations do not permit an elective transfer from one
qualified plan to another unless the participant's benefit under the
transferring plan is immediately distributable. This condition has
precluded use of the elective transfer provision in the existing
regulations in connection with merger and acquisition transactions
involving plans with a cash or deferred arrangement under section
401(k) in cases in which benefits under the cash or deferred
arrangement are not distributable because section 401(k)(10) is not
applicable. Many commentators have stated that permitting elective
transfers from the former employer's section 401(k) plan to the new
employer's section 401(k) plan under these circumstances would allow
employers to permit employees to keep their old retirement benefits
in a qualified plan together with their newly earned retirement
benefits, particularly in cases where the new employer chooses not
to maintain the former employer's plan.

The proposed regulations would grant broad section 411(d)(6) relief
for many types of elective transfers of a participant's entire
benefit, without regard to whether the participant's benefit is
immediately distributable. The elective transfer provision would be
available for transfers made in connection with certain corporate
transactions (such as a merger or acquisition), or in connection
with the transfer of a participant to a different job (for example,
to a different subsidiary or division of the employer) that is not
covered by the transferor plan, even if the event is not one that
allows a distribution. Insofar as the immediately distributable
requirement of the existing regulations would be eliminated, the
proposed regulations would permit an elective transfer even if the
participant's benefit is not fully vested, provided that the
requirements of section 411(a)(10) are satisfied. The proposed
regulations would not restrict the permissible types of elective
transfers to transfers between plans of the same employer.
Accordingly, elective transfers could be made to plans that are
within the employer's controlled group or to plans that are outside
the employer's controlled group.

The proposed regulations would provide section 411(d)(6) relief for
elective transfers involving corporate transactions or employee job
transfers generally where the defined contribution plans are of the
same type (e.g., from a qualified cash or deferred arrangement under
section 401(k) to another qualified cash or deferred arrangement).
The restrictions on the types of plans between which transfers would
be permitted would ensure that amounts transferred to the receiving
plan will be subject to similar legal restrictions with respect to
in-service distributions. See Rev. Rul. 94-76 (1994-2 C.B. 46). In
the case of transfers from plans that are subject to the survivor
annuity requirements under sections 401(a)(11) and 417, those
survivor annuity requirements would apply to the receiving plan with
respect to the transferred amount in accordance with the transferee
plan rules of section 401(a)(11)(B)(iii)(III).

The existing regulations relating to elective transfers were issued
in 1988. Since then, section 401(a)(31) has been enacted. Under
section 401(a)(31), any eligible rollover distribution may be
directly rolled over to an IRA or to another eligible retirement
plan. The section 411(d)(6) requirements do not apply to amounts
that have been distributed, such as distributions that are directly
rolled over to another plan under section 401(a)(31). Accordingly,
the elective transfer rules of the existing regulations have largely
been duplicated by the enactment of section 401(a)(31) because the
same result generally is available through a direct rollover. The
proposed regulations would eliminate this duplication by replacing
the elective transfer rules of the existing regulations that apply
to immediately distributable amounts, except for certain transfers
of amounts that are not eligible rollover distributions (such as
amounts attributable to after-tax employee contributions).
Specifically, an elective transfer of an immediately distributable
amount would be permitted to the extent the amount is not an
eligible rollover distribution, if the participant's entire
nonforfeitable accrued benefit is transferred by means of a
combination of a section 401(a)(31) transfer and the elective
transfer. This rule would apply to transfers between defined benefit
plans, as well as transfers between defined contribution plans.
Comments are requested regarding whether there are other situations
(where direct rollovers are unavailable) to which the elective
transfer approach should apply.

C. Rules Regarding In-Kind Distributions

The proposed regulations clarify and modify the rules regarding the
application of the protections of section 411(d)(6)(B) to a right to
receive benefit distributions in kind with respect to defined
contribution plans and defined benefit plans. Provisions for
distribution in kind are sometimes found in plans invested in
annuity contracts or in marketable mutual funds. The right to a
particular form of investment is not a protected optional form of
benefit. However, the investments made by a plan generally are
subject to fiduciary requirements, including the prudence
requirement of section 404(a)(1)(B) of the Employee Retirement
Income Security Act of 1974, Public Law 93- 406 (88 Stat. 829). The
existing regulations state that the right to a medium of
distribution, such as cash or in-kind payments, is an optional form
of benefit to which section 411(d)(6)(B) applies.

Under the proposed regulations, if a defined benefit plan includes
an optional form of benefit under which benefits are distributed in
the medium of an annuity contract, that optional form of benefit
could be modified by substituting cash for the annuity contract.
Thus, a defined benefit plan that provides for distribution of an
annuity contract could be amended to substitute cash payments from
the plan that are identical in all respects protected by section
411(d)(6) to the payments available from the annuity contract except
with respect to the source of the payments. Comments are requested
regarding whether any additional section 411(d)(6)(B) relief for
non-cash distributions is appropriate for defined benefit plans.

The proposed regulations would permit a defined contribution plan to
be amended to replace the ability to receive a distribution in the
form of marketable securities (other than employer securities) with
the ability to receive a distribution in the form of cash. The right
to distributions from a defined contribution plan in the form of
cash, employer securities or other property that is not marketable
securities would generally be protected. However, the proposed
regulations would also permit a defined contribution plan that gives
a participant the right to an in-kind distribution (including
employer securities and property that is not marketable securities)
to be amended to limit the types of property in which distributions
could be made to the participant to specific types of property in
which the participant's account is invested at the time of the
amendment (and with respect to which the participant had the right
to receive an in-kind distribution before the plan amendment). In
addition, the proposed regulations would permit a defined
contribution plan giving a participant the right to a distribution
in a type of property to be amended to specify that the participant
is permitted to receive a distribution in that type of property only
to the extent that the plan assets held in the participant's account
at the time of the distribution include that type of property. These
provisions of the proposed regulations would not permit a plan to be
amended in a way that would affect protected features of optional
forms of benefit other than the medium of distribution. Thus, for
example, a plan could not be amended to eliminate a participant's
right to payments over a period of years, regardless of the plan's
current investments, except as permitted under other provisions of
the current or proposed regulations (such as the provisions
described above relating to permitted plan amendments affecting
alternative forms of payment under defined contribution plans).

Comments are requested on whether section 411(d)(6) protection for
in-kind distributions of employer securities and property that is
not marketable securities from defined contribution plans should be
preserved or eliminated. Commentators are requested to address the
extent to which these may be important rights for participants. For
example, in a defined contribution plan that does not give
participants the right to payment in kind, it is possible that a
distribution made in cash for a particular asset may be in an amount
that is less than the value that the participant assigns to the
asset. Commentators are further requested to address the potential
administrative burden if, as proposed, plans are prohibited from
eliminating these media of distribution. Comments are also requested
on whether section 411(d)(6)(B) protection should be retained for
any form of in-kind distribution from a defined contribution plan
other than employer securities and property that is not marketable
securities.

Proposed Effective Date

The proposed regulations are proposed to be effective upon
publication of final regulations in the Federal Register and cannot
be relied upon before finalization. Special Analyses

It has been determined that this notice of proposed rulemaking 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, these proposed regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to
the IRS. In addition to the other requests for comments set forth in
this document, the IRS and Treasury also request comments on the
clarity of the proposed rule and how it may be made easier to
understand. All comments will be available for public inspection and
copying.

A public hearing has been scheduled for June 27, 2000, at 10 a.m.,
in room 6718, Internal Revenue Building, 1111 Constitution Avenue
NW., Washington, DC. Due to building security procedures, visitors
must enter at the 10 street entrance, th located between
Constitution and Pennsylvania Avenues, NW. In addition, all visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the
immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER
INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit
written comments by June 6, 2000, and submit an outline of the
topics to be discussed and the time to be devoted to each topic
(signed original and eight (8) copies) by June 6, 2000.

A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

The principal author of these regulations is Linda S. F. Marshall of
the Office of the Associate Chief Counsel (Employee Benefits and
Exempt Organizations). 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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

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

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

1. In Q&A-1, paragraph (b)(1), the last sentence is amended by
removing the language "§1.401(a)(4)-4(d)" and adding "§1.401(a)
(4)-4(e)(1)" in its place.

2. Q&A-2 is amended by:

a. Revising paragraph (b)(2)(iii).

b. Adding paragraph (e).

3. Q&A-3 is amended by:

a. Revising paragraph (a)(3).

b. Adding paragraph (a)(4).

c. Revising paragraphs (b), (c), and (d).

d. Adding paragraph (e).

The additions and revisions read as follows: §1.411(d)-4 Section
411(d)(6) protected benefits.

* * * * *

A-2: * * *

(b) * * *

(2) * * *

(iii) In-kind distributions-(A) Distributions of annuity contracts
payable under defined benefit plans. If a defined benefit plan
includes an optional form of benefit under which benefits are
distributed in the medium of an annuity contract, that optional form
of benefit may be modified by substituting cash for the annuity
contract.

(B) In-kind distributions payable under defined contribution plans
in the form of marketable securities other than employer securities.
If a defined contribution plan includes an optional form of benefit
under which benefits are distributed in the form of marketable
securities, other than securities of the employer, that optional
form of benefit may be modified by substituting cash for the
marketable securities. For purposes of this paragraph (b)(2)(iii),
the term marketable securities means marketable securities as
defined in section 731(c)(2), and the term securities of the
employer means securities of the employer as defined in section
402(e)(4)(E)(ii).

(C) Amendments to defined contribution plans to specify medium of
distribution. If a defined contribution plan includes an optional
form of benefit under which benefits are distributable to a
participant in a medium other than cash, the plan may be amended to
limit the types of property in which distributions may be made to
the participant to the types of property specified in the amendment.
For this purpose, the types of property specified in the amendment
must include all types of property (other than types of property for
which the plan may be amended to substitute cash under paragraph (b)
(2)(iii)(B) of this Q&A-2) that are held in the participant's
account on the effective date of the amendment and in which the
participant would be able to receive a distribution immediately
before the effective date of the amendment. In addition, a plan
amendment may provide that the participant's right to receive a
distribution in the form of specified types of property is limited
to the property held in the participant's account at the time of
distribution that consists of property of those specified types.

(D) In-kind distributions after plan termination. If a plan includes
an optional form of benefit under which benefits are distributed in
specified property, that optional form of benefit may be modified
for distributions after plan termination by substituting cash for
the specified property to the extent that, on plan termination, an
employee has the opportunity to receive the optional form of benefit
in the form of the specified property. This exception is not
available, however, if the employer that maintains the terminating
plan also maintains another plan that provides an optional form of
benefit under which benefits are distributed in the specified
property.

(E) Examples. The following examples illustrate the application of
this paragraph (b)(2)(iii):

Example 1. (i) An employer maintains a profit-sharing plan under
which participants may direct the investment of their accounts. One
investment option available to participants is a fund invested in
common stock of the employer. The plan provides that the participant
has the right to a distribution in the form of cash upon termination
of employment. In addition, the plan provides that, to the extent a
participant's account is invested in the employer stock fund, the
participant may receive an in-kind distribution of employer stock
upon termination of employment. On September 1, 2000, the plan is
amended, effective on January 1, 2001, to remove the fund invested
in employer common stock as an investment option under the plan and
to provide for the stock held in the fund to be sold. The amendment
permits participants to elect how the sale proceeds are to be
reallocated among the remaining investment options, and provides for
amounts not so reallocated as of January 1, 2001, to be allocated to
a specified investment option.

(ii) The plan does not fail to satisfy section 411(d)(6) solely on
account of the plan amendment relating to the elimination of the
employer stock investment option, which is not a section 411(d)(6)
protected benefit. See paragraph (d)(7) of Q&A-1 of this section.
Moreover, because the plan did not provide for distributions of
employer securities except to the extent participants' accounts were
invested in the employer stock fund, the plan is not required
operationally to offer distributions of employer securities
following the amendment. In addition, the plan would not fail to
satisfy section 411(d)(6) on account of a further plan amendment,
effective after the plan has ceased to provide for an employer stock
fund investment option, to eliminate the right to a distribution in
the form of employer stock. See paragraph (b)(2)(iii)(C) of this
Q&A-2.

Example 2. (i) An employer maintains a profit-sharing plan under
which a participant, upon termination of employment, may elect to
receive benefits in a single-sum distribution either in cash or in
kind. The plan's investments are limited to a fund invested in
employer stock, a fund invested in XYZ mutual funds (which are
marketable securities), and a fund invested in shares of PQR limited
partnership (which are not marketable securities).

(ii) The following alternative plan amendments would not cause the
plan to fail to satisfy section 411(d)(6):

(A) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of
employer stock and shares of PQR limited partnership. See paragraph
(b)(2)(iii)(B) of this Q&A-2.

(B) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of
employer stock and shares of PQR limited partnership, and that also
lists the participants that hold employer stock in their accounts as
of the effective date of the amendment and provides that only those
participants have the right to distributions in the form of employer
stock, and lists the participants that hold shares of PQR limited
partnership in their accounts as of the effective date of the
amendment and provides that only those participants have the right
to distributions in the form of shares of PQR limited partnership.
See paragraphs (b)(2)(iii)(B) and (C) of this Q&A-2.

(C) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of
employer stock and shares of PQR limited partnership to the extent
that the participant's account is invested in those assets at the
time of the distribution. See paragraphs (b)(2)(iii)(B) and (C) of
this Q&A-2.

(D) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of
employer stock and shares of PQR limited partnership, and that lists
the participants that hold employer stock in their accounts as of
the effective date of the amendment and provides that only those
participants have the right to distributions in the form of employer
stock, and lists the participants that hold shares of PQR limited
partnership in their accounts as of the effective date of the
amendment and provides that only those participants have the right
to distributions in the form of shares of PQR limited partnership,
and further provides that the distribution of that stock or those
shares is available only to the extent that the participants'
accounts are invested in those assets at the time of the
distribution. See paragraphs (b)(2)(iii)(B) and (C) of this Q&A-2.

Example 3. (i) An employer maintains a stock bonus plan under which
a participant, upon termination of employment, may elect to receive
benefits in a single-sum distribution in employer stock. This is the
only plan maintained by the employer under which distributions in
employer stock are available. The employer decides to terminate the
stock bonus plan.

(ii) If the plan makes available a single-sum distribution in
employer stock on plan termination, the plan will not fail to
satisfy section 411(d)(6) solely because the optional form of
benefit providing a single-sum distribution in employer stock on
termination of employment is modified to provide that such
distribution is available only in cash. See paragraph (b)(2)(iii)(D)
of this Q&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 if, after the
plan amendment is effective with respect to the participant, the
alternative forms of payment available to the participant include
payment in both a single-sum distribution form and an extended
distribution form described in paragraph (e)(3) of this Q&A-2, each
of which is an otherwise identical distribution form with respect to
the optional form of benefit that is being eliminated or restricted.

(2) Otherwise identical distribution form. For purposes of this
paragraph (e), a distribution form is an otherwise identical
distribution form with respect to an optional form of benefit that
is eliminated or restricted pursuant to paragraph (e)(1) of this
Q&A-2 only if the 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 an otherwise
identical distribution form with respect 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, does not apply to
the benefit (or any portion of the benefit) to which the installment
form applied, imposes any condition of eligibility that did not
apply to the installment form, or lacks any related election rights
that were available with respect to the installment form. However,
the single-sum distribution form would not fail to be an otherwise
identical distribution form with respect to the installment form
merely because the single-sum distribution form is available for
distribution on a date on which the installment form would not have
been available for commencement, is available in media of
distribution that the installment form was not, applies (if the
participant so chooses) to a larger portion of the benefit than the
installment form, has fewer or less stringent conditions of
eligibility than the installment form, or has election rights that
the installment form lacked. In addition, 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 are not otherwise protected under section
411(d)(6). Moreover, in the case of an optional form of benefit that
is in the form of an annuity and that provides for distribution of
an annuity contract, a distribution form that is not in the form of
an annuity does not fail to be an otherwise identical distribution
form with respect to that optional form of benefit merely because
the non-annuity distribution form does not provide for distribution
of an annuity contract.

(3) Extended distribution form-(i) In general. For purposes of this
paragraph (e), a distribution form is an extended distribution form
if it is--

(A) An annuity payable for the life of the participant;

(B) Substantially equal periodic payments made (not less frequently
than annually), at the election of the participant, over either the
life expectancy of the participant or the joint life expectancy of
the participant and the participant's spouse (with or without
redetermination of those life expectancies, as described in section
401(a)(9)(D)); or

(C) For a plan amendment that does not eliminate any optional form
of benefit that is an extended distribution form described in
paragraph (e)(3)(i)(A) or (B) of this Q&A-2, substantially equal
periodic payments made (not less frequently than annually) over a
period at least as long as the longest period over which the
participant is entitled to receive a distribution under the plan
before the plan amendment under any of the optional forms of benefit
that are eliminated by the plan amendment.

(ii) Substantially equal periodic payments. For purposes of this
paragraph (e)(3), the rules of section 402(c)(4)(A)(ii) and
§1.402(c)-2, Q&A-5, apply in determining whether payments are
substantially equal periodic payments (but without regard to the 10-
year minimum period for payments and without regard to §1.402(c)-2,
Q&A-5(b), regarding certain periodic payments that decrease upon a
participant's attainment of eligibility for social security
benefits).

(4) Examples. The following examples illustrate the application of
this paragraph

(e):

Example 1. (i) P is a participant in Plan M, a qualified profit-
sharing plan 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 termination of 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. Plan M provides that
distributions on the death of a participant are made in accordance
with section 401(a)(11)(B)(iii)(I). Plan M is amended so that, after
the amendment is effective, 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
termination of employment (or as of the first day of any subsequent
month, except as required by section 401(a)(9)). In addition, P is
entitled to receive P's vested account balance under Plan M payable
in substantially equal monthly payments made, at P's election, over
either P's life expectancy or the joint life expectancies of P and
P's spouse, beginning as of the first day of the month following P's
termination of employment (or as of the first day of any subsequent
month, except as required by section 401(a)(9)).

(ii) Plan M does not violate the requirements of section 411(d)(6)
(or section 401(a)(11)) merely because the plan amendment has
eliminated P's option to receive a distribution in any of the
various annuity contract forms previously available. Example 2. (i)
P is a participant in Plan M, a qualified profit-sharing plan to
which section 401(a)(11)(A) does not apply. Upon termination of
employment, P is entitled to receive cash distributions from Plan M,
payable as of the first day of the month following P's termination
of employment (or as of the first day of any subsequent month,
subject to the requirements of section 401(a)(9)), in the form of a
single-sum distribution, or in substantially equal monthly
installment payments over either 5, 10, 15, or 20 years. Plan M is
amended so that, after the amendment is effective, P is no longer
entitled to receive a distribution in the form of substantially
equal monthly installment payments over 5, 10, or 15 years. However,
after the amendment is effective, P continues to be entitled to
receive cash distributions from Plan M, payable as of the first day
of the month following P's termination of employment (or as of the
first day of any subsequent month, except as required by section
401(a)(9)), in the form of a single-sum distribution or in
substantially equal monthly installment payments over 20 years.

(ii) Plan M does not violate the requirements of section 411(d)(6)
merely because the plan amendment has eliminated P's option to
receive a distribution in the form of substantially equal monthly
installment payments over 5, 10, or 15 years.

(5) Effective date. This paragraph (e) applies to plan amendments
that are adopted and made effective after the date of publication of
final regulations in the Federal Register .

* * * * *

A-3. (a) * * *

(3) Waiver prohibition. In general, except as provided in paragraph
(b) of this Q&A-3, a participant may not elect to waive section
411(d)(6) protected benefits. Thus, for example, the elimination of
the defined benefit feature of a participant's benefit under a
defined benefit plan by reason of a transfer of such benefits to a
defined contribution plan pursuant to a participant election, at a
time when the benefit is not distributable to the participant,
violates section 411(d)(6).

(4) Direct rollovers. A direct rollover described in Q&A-3 of
§1.401(a)(31)-1 that is paid to a qualified plan is not a transfer
of assets and liabilities that must satisfy the requirements of
section 414(l), and is not a transfer of benefits for purposes of
applying the requirements under section 411(d)(6) and paragraph (a)
(1) of this Q&A-3. Therefore, for example, if such a direct rollover
is made to another qualified plan, the receiving plan is not
required to provide, with respect to amounts paid to it in a direct
rollover, the same optional forms of benefit that were provided
under the plan that made the direct rollover. See §1.401(a)(31)-1,
Q&A-14.

(b) Elective transfers of benefits between defined contribution
plans-(1) General rule. A transfer of a participant's entire benefit
between qualified defined contribution plans (other than a direct
transfer described in section 401(a)(31)) that results in the
elimination or reduction of section 411(d)(6) protected benefits
does not violate section 411(d)(6) if the following requirements are
met:

(i) Voluntary election. The plan from which the benefits are
transferred must provide that the transfer is conditioned upon a
voluntary, fully-informed election by the participant to transfer
the participant's entire benefit to the other qualified defined
contribution plan. As an alternative to the transfer, the
participant must be offered the opportunity to retain the
participant's section 411(d)(6) protected benefits under the plan
(or, if the plan is terminating, to receive any optional form of
benefit for which the participant is eligible under the plan as
required by section 411(d)(6)).

(ii) Types of plans to which transfers may be made. To the extent
the benefits are transferred from a money purchase pension plan, the
transferee plan must be a money purchase pension plan. To the extent
the benefits being transferred are part of a qualified cash or
deferred arrangement under section 401(k), the benefits must be
transferred to a qualified cash or deferred arrangement under
section 401(k). To the extent the benefits being transferred are
part of an employee stock ownership plan as defined in section
4975(e)(7), the benefits must be transferred to another employee
stock ownership plan. Benefits transferred from a profit-sharing
plan other than from a qualified cash or deferred arrangement, or
from a stock bonus plan other than an employee stock ownership plan,
may be transferred to any type of defined contribution plan.

(iii) Circumstances under which transfers may be made. The transfer
must be made in connection with an asset or stock acquisition,
merger, or other similar transaction involving a change in employer
of the employees of a trade or business (i.e., an acquisition or
disposition within the meaning of §1.410(b)-2(f)) or in connection
with the participant's transfer of employment to a different job for
which service does not result in additional allocations under the
transferor plan.

(2) Applicable qualification requirements. A transfer described in
this paragraph

(b) is a transfer of assets or liabilities within the meaning of
section 414(l)(1) that must meet the requirements of section 414(l)
and all other applicable qualification requirements. Thus, for
example, if the survivor annuity requirements of sections 401(a)(11)
and 417 apply to the plan from which the benefits are transferred,
as described in this paragraph (b), but do not otherwise apply to
the receiving plan, the requirements of sections 401(a)(11) and 417
must be met with respect to the transferred benefits under the
receiving plan. In addition, the vesting provisions under the
receiving plan must satisfy the requirements of section 401(a)(10)
with respect to the amounts transferred.

(c) Elective transfers of certain distributable benefits between
defined benefit plans or between defined contribution plans-(1) In
general. A transfer of a participant's benefits that are
distributable between qualified defined benefit plans, or between
defined contribution plans (other than the portion of such a
transfer that is a direct transfer described in section 401(a)(31)),
that results in the elimination or reduction of section 411(d)(6)
protected benefits does not violate section 411(d)(6) if-

(i) The voluntary election requirement of paragraph (b)(1)(i) of
this Q&A-3 is met; and

(ii) The amount of the benefit transferred, together with the amount
of a contemporaneous section 401(a)(31) transfer to the transferee
plan, equals the entire nonforfeitable accrued benefit under the
plan of the participant whose benefit is being transferred,
calculated to be at least the greater of the single-sum distribution
provided for under the plan for which the participant is eligible
(if any) or the present value of the participant's accrued benefit
payable at normal retirement age (calculated by using interest and
mortality assumptions that satisfy the requirements of section
417(e) and subject to the limitations imposed by section 415).

(2) Treatment of transfer. The transfer of benefits pursuant to this
paragraph (c) generally is treated as a distribution for purposes of
section 401(a). For example, the transfer is subject to the cash-out
rules of section 411(a)(7), the early termination requirements of
section 411(d)(2), and the survivor annuity requirements of sections
401(a)(11) and 417. However, the transfer is not treated as a
distribution for purposes of the minimum distribution requirements
of section 401(a)(9).

(3) Distributable benefits. For purposes of this paragraph (c), a
participant's benefits are distributable on a particular date if, on
that date, the participant is eligible, under the terms of the plan
from which the benefits are transferred, to receive an immediate
distribution of these benefits from that plan under provisions of
the plan not inconsistent with section 401(a).

(d) Status of elective transfer as optional form of benefit. A right
to a transfer of benefits pursuant to the elective transfer rules of
paragraph (b) or (c) of this Q&A-3 is an optional form of benefit
under section 411(d)(6). The availability of such optional form is
subject to the nondiscrimination requirements of section 401(a)(4).
However, a plan will not be treated as failing to satisfy §1.401(a)
(4)-4 merely because it restricts the transfer option to benefits
that exceed the dollar limits on mandatory distributions that can be
made without the consent of the participant under section 411(a)
(11).

(e) Effective date. This Q&A-3 is applicable for transfers made
after the date of publication of final regulations in the Federal
Register.

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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