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 8891] RIN 1545-
AW59
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 regulations.
SUMMARY: This document contains final regulations 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 or
spousal consent. This increase is contained in the Taxpayer Relief
Act of 1997. In addition, these regulations eliminate the "lookback
rule" pursuant to which certain qualified plan benefits are deemed
to exceed this limit on involuntary distributions. The final
regulations affect sponsors and administrators of qualified
retirement plans, and participants in those plans.
DATES: Effective Date: These regulations are effective October 17,
2000. Applicability Date: These regulations generally apply to
distributions made on or after October 17, 2000.
FOR FURTHER INFORMATION CONTACT: Robert Walsh, (202) 622-6090 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 21, 1998, a notice of proposed rulemaking
(REG-113694-98) was published in the Federal Register (63 FR 70356)
regarding the "cash-out limit" under sections 411(a)(7), 411(a)(11),
and 417(e)(1) of the Internal Revenue Code. That same day, temporary
and final regulations (TD 8794) were published in the Federa
Register (63 FR 70335) which amended the Income Tax Regulations and
the Employment Tax Regulations (26 CFR parts 1 and 31) relating to
the increase in the cash-out limit enacted by section 1071 of the
Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788 (1997)
(TRA ‘97). The text of the temporary regulations served as a portion
of the text of the proposed regulations. Very few comments were
submitted on the proposed regulations; no hearing was requested or
held. After consideration of the comments, these final regulations
adopt the provisions of the proposed regulations.
Explanation of Provisions
The temporary regulations made several changes to the cash-
out rules under sections 411(a)(7), 411(a)(11), and 417(e)(1). In
accordance with section 1071 of TRA ‘97, the temporary regulations
increased the cash-out limit from $3,500 to $5,000. Thus, a
qualified plan can generally distribute vested accrued benefits
valued at $5,000 or less without participant or spousal consent. The
temporary regulations also provided that, for purposes of section
411(a)(7)(B)(i), an involuntary distribution of an employee’s vested
accrued benefit valued at $5,000 or less could be treated as made
due to termination of the employee’s participation if the
distribution could have been made at termination of participation
but for the fact that the benefit was then valued at more than
$3,500. Finally, the temporary regulations amended §1.411(a)-11(c)
(3) to eliminate the "lookback rule" for distributions other than
those made pursuant to an optional form of benefit under which at
least one scheduled periodic distribution remained payable. Prior to
this amendment, the lookback rule in §1.411(a)-11(c)(3) provided
that the present value of a vested accrued benefit was deemed to
exceed the cash-out limit if it had exceeded the cash-out limit at
the time of any previous distribution. The temporary regulations did
not change the parallel lookback rule under §1.417(e)-1(b)(2)(i).
The proposed regulations generally included the provisions of
the temporary regulations, but they also proposed the complete
removal (on a prospective basis) of the lookback rule under both
§§1.411(a)-11(c)(3) and 1.417(e)-1(b)(2)(i). Thus, under the
proposed regulations, the lookback rule would be eliminated both for
plans subject to the spousal-consent provisions of sections 401(a)
(11) and 417 and for plans not subject to those provisions. Under
this removal of the lookback rule, a participant's vested accrued
benefit valued at $5,000 or less could be distributed without
consent even if the benefit had been valued at more than $5,000 at
the time of a previous distribution. However, in accordance with
section 417(e)(1), the proposed regulations also provided that, in
the case of plans subject to sections 401(a)(11) and 417, consent
would be required after the annuity starting date for the immediate
distribution of the present value of an 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.
Very few comments were received on the proposed regulations.
One commentator inquired whether a cash-out could be made of a
benefit presently valued at $4,500 that had been valued at $4,000
upon termination of the employee’s employment more than two years
earlier. As indicated in the preamble to the final and temporary
regulations published with the proposed regulations, that benefit
could be cashed out.
Another commentator indicated support for the content of the
proposed regulations but expressed concern about the rule, derived
from section 417(e)(1), prohibiting a cashout after the annuity
starting date of a benefit being distributed in any form by a plan
subject to sections 401(a)(11) and 417. The commentator observed
that, under section 417(f)(2)(A), the annuity starting date for a
benefit payable upon termination of employment in non-annuity form
could be the date of termination. The commentator argued that the
rule in the proposed regulations prohibiting a cashout after the
annuity starting date could be read to preclude a cashout of a non-
annuity benefit payable at termination, regardless of the present
value of that benefit. To address this, the commentator urged the
IRS and Treasury to redefine "annuity starting date" such that a
cashout would be permitted as long as a benefit remains immediately
distributable (that is, until the later of normal retirement age or
age 62).
The provision in the proposed regulations prohibits a cashout
after the annuity starting date of a benefit "being distributed in
any form." The rule does not apply to any benefit that is not yet
"being distributed" -- that is, to any benefit with respect to which
no payment has been made. If the present value of a benefit payable
on or after termination of employment does not exceed the cashout
limit, the rule of section 417(e)(1), as set forth in the proposed
regulations, would not prohibit a cashout prior to the date on which
a payment is first made (disregarding, obviously, the cashout
payment itself). Thus, no change has been made to the regulations on
this point.
Another commentator objected to the complete elimination of
the lookback rule under the proposed regulations. The commentator
cited three reasons for its opposition: first, that an amount
distributed in a hardship or other type of distribution remains
part of a participant’s benefit; second, that a participant could
manipulate a distribution in order to evade the spousal-consent
requirements; and, third, that permitting cash-outs after a
hardship or other distribution is contrary to the policy of
discouraging non-retirement distributions.
In contrast, a comment received prior to the issuance of the
proposed regulations noted problems faced by plan administrators
due to the lookback rule. The commentator noted, for example, that
if a plan provides for hardship distributions, the plan
administrator must review its records to determine the value of the
participant’s benefits at the time of any prior distribution. The
commentator added that this can be particularly difficult and
costly where plans sponsored by other employers have merged into
the plan. The commentator further stated that the cash-out
provisions are designed to allow plans to reduce their
administrative costs by making lump sum payments to participants
with small benefits and that the lookback rule is contrary to that
design because the rule (1) makes it more costly for administrators
to determine whether the provisions apply and (2) can prevent a
plan from relying on the provisions in many cases where the value
of the participant’s current benefit is well below $5,000.
After consideration of the comments, the IRS and Treasury
have decided to adopt the regulation eliminating the lookback rule
as proposed. The IRS and Treasury believe that the statutory cash-
out provisions represent a balancing of the interests of
participants in maintaining their benefits in qualified plans with
the reasonable administrative needs of plan sponsors and
administrators. The lookback rule prevents plans from cashing out a
benefit currently valued below the cash-out limit simply because it
had been valued above the cash-out limit at the time of an earlier
distribution. This creates disparity in the treatment of benefits of
equivalent value and requires plans to incur additional
recordkeeping and other administrative costs.
The IRS and Treasury note that removal of the lookback rule
is unlikely to present significant opportunities for participants to
evade the spousal-consent rules. In the case of any plan subject to
the spousal-consent provisions of sections 401(a)(11) and 417, a
distribution that draws a participant’s accrued benefit from a value
above the cash-out limit to a value at or below the cash-out limit
will itself require spousal consent. Furthermore, these final
regulations strengthen the spousal-consent rules by clarifying that
a plan subject to sections 401(a)(11) and 417 may not distribute a
benefit after the annuity starting date without consent. This
prohibition on cash-outs after the annuity starting date, which is
statutory in source, applies without regard to the value of the
benefit at the annuity starting date and without regard to the
distribution form.
Finally, the IRS and Treasury note that concerns about non-
retirement distributions of benefits are mitigated by the
availability of rollovers. In almost all cases, an amount
distributed from a qualified plan in a cash-out distribution will be
an eligible rollover distribution that can be paid directly (or
indirectly, through a 60-day rollover) to another qualified
retirement plan or individual retirement arrangement.
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 Internal
Revenue Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Robert M.
Walsh, 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 Regu ations
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
removing the entry for §1.411(a)-7T and by adding a new entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.411(a)-7 also issued under 26 U.S.C. 411(a)(7)(B)(i). * * *
Par. 2. Section 1.411(a)-7 is amended as follows:
1. Paragraph (d)(4)(i) is revised;
2. Paragraphs (d)(4)(vi) and (d)(4)(vii) are added.
The revision and additions read as follows:
§1.411(a)-7 Definitions and special rules.
* * * * *
(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 paragraph (d)(4)(iv) of this section in effect at
the time of the distribution.
* * * * *
(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)-11(c)(3)
(ii). For purposes of determining the entire nonforfeitable benefit,
the plan may disregard service after the distribution, as
illustrated in paragraph (d)(2)(i) of this section.
(vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this
section apply to distributions made on or after March 22, 1999.
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. Otherwise, for distributions prior to March 22, 1999,
§§1.411(a)-7 and 1.411(a)-7T, in effect prior to October 17, 2000
(as contained in 26 CFR part 1, revised as of April 1, 2000) apply.
* * * * *
§1.411(a)-7T [Removed]
Par. 3. Section 1.411(a)-7T is removed. Par. 4. Section
1.411(a)-11 is amended by revising paragraph (c)(3) to read
as
follows:
§1.411(a)-11 Restriction and valuation of distributions.
* * * * *
(c) * * *
(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).
(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 October 17, 2000.
However, an employer is permitted to apply the $5,000 cash-out limit
described in paragraph (c)(3)(ii) of this section to plan years
beginning on or after August 6, 1997. Otherwise, for distributions
prior to October 17, 2000, §1.411(a)-11 and 1.411(a)-11T in effect
prior to October 17, 2000 (as contained in 26 CFR Part 1 revised as
of April 1, 2000) apply.
* * * * *
§1.411(a)-11T [Removed]
Par. 5. Section 1.411(a)-11T is removed. Par. 6. Section 1.417(e)-1
is amended by revising the last sentence of paragraph (b)(2)(i) and
by adding new paragraph (b)(2)(iii) to read as follows: §1.417(e)-1
Restrictions and valuations of distributions from plans subject to
sections 401(a)(11) and 417.
* * * * *
(b) * * *
(2) * * * (i) * * * After the annuity starting date, consent
is required 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 such present value.
* * * * *
(iii) Paragraph (b)(2)(i) of this section applies to
distributions made on or after October 17, 2000. For distributions
prior to October 17, 2000, §1.417(e)-1(b)(2)(i) in effect prior to
October 17, 2000 (as contained in 26 CFR part 1 revised as of April
1, 2000) applies.
* * * * *
PARTS 1 AND 31--[AMENDED]
Par. 7. 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, §1.411(a)- §1.411(a)-11(c)(3)(ii)
paragraph (d), first sentence 11T(c)(3)(ii)
1.401(a)-20, Q&A-24, §1.411(a)- §1.411(a)-11(c)(3)(ii)
paragraph (a)(1), fourth 11T(c)(3)(ii)
sentence
1.401(a)(4)-4, paragraph §1.411(a)- §1.411(a)-11(c)(3)(ii)
(b)(2)(ii)(C) 11T(c)(3)(ii)
1.401(a)(26)-4, paragraph §1.411(a)- §1.411(a)-11(c)(3)(ii)
(d)(2), last sentence 11T(c)(3)(ii)
1.401(a)(26)-6, paragraph §1.411(a)- §1.411(a)-11(c)(3)(ii)
(c)(4), first sentence 11T(c)(3)(ii)
1.411(a)-11, paragraph (b), §1.411(a)- paragraph (c)(3)(ii) of this
first sentence 11T(c)(3)(ii) section
1.411(a)-11, paragraph §1.411(a)- paragraph (c)(3)(ii) of this
(c)(7), third sentence 11T(c)(3)(ii) section
1.411(d)-4, Q&A-2, §1.411(a)- §1.411(a)-11(c)(3)(ii)
paragraph (b)(2)(v), second, 11T(c)(3)(ii)
third, and fourth sentences
1.411(d)-4, Q&A-4, §1.411(a)- §1.411(a)-11(c)(3)(ii)
paragraph (a), eighth 11T(c)(3)(ii)
sentence
1.417(e)-1, paragraph §1.411(a)- §1.411(a)-11(c)(3)(ii)
(b)(2)(i), first, fourth, and fifth 11T(c)(3)(ii)
sentences
31.3121(b)(7)-2, paragraph §1.411(a)- §1.411(a)-11(c)(3)(ii)
(d)(2)(i), last sentence 11T(c)(3)(ii)
Deputy Commissioner of Internal Revenue
Approved:
Deputy Assistant Secretary of the Treasury (Tax Policy)
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