Special Rules Regarding Optional Forms of Benefit
Under Qualified Retirement Plans

DEPARTMENT OF THE TREASURY               
Internal Revenue Service 26 CFR Part 1 [TD 8900] RIN 1545-AW27

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that 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 permit certain transfers between defined
contribution plans that were not permitted under prior final
regulations. These regulations affect qualified retirement plan
sponsors, administrators, and participants.

DATES: These regulations are effective September 6, 2000.

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, 202-622-6090
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

       This document contains 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 Ltisfying 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. Section 204(g)(2)
of the Employee Retirement Income Security Act of 1974 (ERISA),
Public Law 93-406, (88 Stat. 829) provides a parallel rule to
section 411(d)(6)(B) of the Code that applies under Title I of
ERISA, and authorizes the Secretary of the Treasury to provide
exceptions to this parallel ERISA requirement. Thus, Treasury
regulations issued under section 411(d)(6)(B) of the Code apply as
well for purposes of section 204(g)(2) of ERISA.

       Final regulations regarding section 411(d)(6)(B) (the 1988
regulations) were published in the Federal Register on July 8, 1988.
The 1988 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, these 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) of the 1988
regulations permits a plan-to-plan transfer 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 elective transfer rule of §1.411(d)-4, Q&A-3(b)
of the 1988 regulations has applied only to situations in which a
participant’s benefits have become distributable, its applicability
has been 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 issued Notice 98-29 (1998-1 C.B. 1163) to
request public comment on several ways of providing regulatory
relief from the requirements of section 411(d)(6)(B) for defined
contribution plans in view of these considerations. Most of the
public comments received in response to Notice 98-29 indicated 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. After
considering the comments received in response to Notice 98-29, the
IRS and Treasury issued proposed regulations (REG-109101-98), which
were published in the Federal Register (65 FR 16546) on March 29,
2000, to propose relief from the requirements of section 411(d)(6)
(B) in a wide range of circumstances.

       Seventeen written comments responding to the notice of
proposed rulemaking were received. No public hearing was requested
or held. Nearly all of the written comments expressed support for
the provisions of the proposed regulation that would provide relief
from the requirements of section 411(d)(6)(B) and requested
clarifications or extensions of that relief in various ways. After
consideration of all of the written comments, the IRS and the
Treasury Department are adopting the proposed regulations as revised
by this Treasury Decision for the reasons summarized below.

       These final regulations under section 411(d)(6)(B) do 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, and those requirements are not affected by these
final regulations. Similarly, these final regulations do 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

       In order to simplify plan administration, these final
regulations adopt a modified version of the rule set forth in the
proposed regulations that significantly expands the permitted
changes that may be made to alternative forms of payment under a
defined contribution plan. Under the rule in 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 payment form (such as, for example,
an annuity distribution), each of which was otherwise identical to
the eliminated or restricted optional form of benefit. In the
preamble to the proposed regulations, the IRS and the Treasury
Department requested comments on whether an extended payment form
should be required to be preserved as part of such a plan amendment,
or should be required to be preserved in particular circumstances.

        In general, comments stated that the rule set forth in the
proposed regulations would simplify plan administration. However,
most commentators also indicated that requiring the retention of an
extended payment form would perpetuate administrative burdens that
would not be justified by any comparative advantage to plan
participants. These commentators pointed out various administrative
burdens associated with retaining an extended payment form, such as
maintaining a system to administer the extended payment form for the
few (if any) participants who choose that payment form, including
descriptions of the extended payment form in participant materials,
explaining the extended payment form in response to participant
inquiries, dealing with participant requests to accelerate
distributions under the extended payment form, complying with the
minimum required distribution rules of section 401(a)(9), and
handling the problems that result from an increased incidence of
missing participants. These commentators also pointed out the
special burdens that maintenance of an extended payment option
imposes in mergers and acquisitions. These commentators took the
position that, in light of a participant’s ability to roll over one
or more IRAs, which commonly offer a far wider array of alternative
payment forms, and in light of the ability of many participants to
choose to retain their full vested account balance in the qualified
plan, there is little or no advantage to the participant in rules
requiring the plan sponsor to retain an option to receive extended
payments from a qualified defined contribution plan.

        After considering these comments regarding the desirability
of requiring the retention of an extended payment form, and in light
of the ability of participants to replicate any extended payment
form that a defined contribution plan may offer by rolling over a
single-sum distribution to an IRA, the IRS and the Treasury
Department have determined that any advantages of requiring the
retention of an extended payment form are outweighed by the
countervailing considerations. Accordingly, these final regulations
generally provide that 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 a single-sum distribution form that
is otherwise identical to the optional form of benefit that is being
eliminated or restricted. The final regulations adopt the rules set
forth in the proposed regulations for determining whether a single-
sum distribution is otherwise identical to an optional form of
benefit that is being eliminated or restricted.

        However, the final regulations include a provision that
protects participants taking distributions shortly after the plan is
amended, who may have planned on the availability of the payment
form that is being eliminated or Lstricted. Under this provision, a
plan amendment that eliminates or restricts the ability of a
participant to receive a particular optional form of benefit cannot
apply to any distribution that has an annuity starting date earlier
than the 90th day after the date the participant receiving 1 the
distribution has been furnished a summary that reflects the
amendment and that satisfies the requirements of the Labor
Department regulations at 29 CFR 2520.104b-3 relating to a summary
of material modifications for pension plans (or, if earlier, the
first day of the second plan year following the plan year in which
the amendment is adopted).

        As noted above, the final regulations do not affect the
survivor annuity requirements of sections 401(a)(11) and 417 or the
direct rollover requirements of section 401(a)(31).

        One commentator expressed concern that permitting plan
amendments that eliminate alternative forms of payment would have
the effect of permitting the elimination of subsidized early
retirement benefits (i.e., distribution forms available upon early
retirement that have a higher actuarial value than the normal
retirement

1 This 90-day requirement is parallel to the 90-day election period
applicable to any plan that is subject to the joint and survivor
annuity requirements of section 417. benefit that has been accrued
at the time the distribution begins). These regulations, however,
permit plan amendments eliminating alternative forms of payment only
in certain circumstances involving defined contribution plans. Under
a defined contribution plan, a participant is entitled to a
distribution, in whatever form may be provided under the plan, only
to the extent of the participant’s individual account, plus earnings
thereon. Accordingly, no alternative form of payment can be
subsidized relative to any other payment form available under a
defined contribution plan. Thus, these regulations do not have the
effect of permitting the elimination of any early retirement subsidy
or any other subsidized benefit forms.

B. Voluntary Direct Transfers Between Plans

       Under certain circumstances, the 1988 regulations permitted
elimination of optional forms of benefit in connection with
transfers of benefits from one plan to another with a participant’s
consent. See §1.411(d)-4, Q&A-3(b) (as contained in 26 CFR part 1
revised April 1, 2000). The proposed regulations contained a number
of changes to the 1988 regulations that would significantly
liberalize the application of these elective transfer provisions.
These final regulations generally finalize the provisions of the
proposed regulations relating to elective transfers, with certain
modifications that are described below.

       The 1988 regulations permitted an elective transfer from one
qualified plan to another only if the participant’s benefit under
the transferring plan was immediately distributable (a distributable
event transfer). This condition precluded use of the elective
transfer provision in the 1988 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 were not distributable because
section 401(k)(10) was not applicable. In response to Notice 98-29,
many commentators 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 previously earned 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.

       Section 1.411(d)-4, Q&A-3(c) of these final regulations
retains and modifies the previously applicable section 411(d)(6)
relief for distributable event transfers, and §1.411(d)-4, Q&A-3(b)
of these final regulations adds new section 411(d)(6) relief for
transfers in connection with certain corporate mergers and
acquisitions or changes in the participant’s employment status
(transaction or employment change transfers). As a result, relief
from section 411(d)(6) applies in each of the following cases:

!      Direct rollover. Existing rules provide that if a direct
	   rollover is made from one qualified retirement plan to
	   another, as described in section 401(a)(31), the receiving
	   plan is not required by section 411(d)(6) to offer the same
	   optional forms of benefit as the sending plan offered. See
	   §1.401(a)(31)-1, Q&A-14.

!      Distributable event transfer. As discussed further below, in
	   any case in which a participant is entitled to a distribution
	   from either a defined benefit plan or a defined contribution
	   plan but the participant is not eligible to receive an
	   immediate distribution of the participant’s entire
	   nonforfeitable accrued benefit in a single-sum distribution
	   that can be entirely rolled over, these final regulations
	   provide section 411(d)(6) relief for a voluntary transfer.
	   Thus, these regulations modify the distributable event
	   transfer provisions of the 1988 regulations.

!      Transaction or employment change transfer. As discussed
	   further below, even if a participant is not entitled to a
	   distribution to which the preceding rules would apply, these
	   final regulations, like the proposed regulations, allow a
	   voluntary transfer from a defined contribution plan to
	   another defined contribution plan of the same type if the
	   transfer occurs in connection with a corporate merger or
	   acquisition or a change in the participant’s employment
	   status. See §1.411(d)-4, Q&A-3(b).

       Under certain circumstances, it may be possible to accomplish
a voluntary transfer of a participant’s benefit from one defined
contribution plan to another that could be structured as either a
distributable event transfer or a transaction or employment change
transfer. In such a situation, the plans would be required to comply
with the requirements applicable to either one of those sets of
rules with respect to the transfer.

        1. Expansion of Section 411(d)(6) Relief for Distributable
		Event Transfers

        Under section 401(a)(31), which was enacted after the
issuance of the 1988 regulations, 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, including distributions that are
directly rolled over to another plan under section 401(a)(31).
Accordingly, for amounts that are distributable in an eligible
rollover distribution, the elective transfer rules of the 1988
regulations have largely been duplicated by the enactment of section
401(a)(31) because the same section 411(d)(6) result generally is
available through a direct rollover. These final regulations
generally eliminate this duplication. Under these final regulations,
for transfers occurring on or after January 1, 2002, the
distributable event transfer rules are not available if the
participant is eligible to receive an immediate distribution of the
participant’s entire nonforfeitable accrued benefit in a single-sum
distribution that would consist entirely of an eligible rollover
distribution within the meaning of section 401(a)(31)(C). (Instead,
the plan must offer a section 401(a)(31) direct rollover.) However,
in other situations, including situations in which a single-sum
distribution is not available or the participant’s benefit includes
an amount attributable to after-tax employee contributions, the
distributable event transfer rules will be available.

       Some commentators requested that plans have the ability to
characterize a transfer that could be accomplished totally or in
part as a direct rollover under section 401(a)(31) as a direct
transfer to which section 411(d)(6) relief applies. They point out
that this procedure is permitted under the 1988 regulations and that
this procedure would simplify plan administration. These final
regulations clarify that plans are not required to bifurcate a
transaction into a partial section 401(a)(31) direct rollover and a
partial elective transfer to which section 411(d)(6) relief applies,
but that plans are permitted, as an alternative to bifurcation, to
treat such a transaction entirely as an elective transfer to which
section 411(d)(6) relief applies. However, as noted above, for
transfers occurring on or after January 1, 2002, this section 411(d)
(6) relief for distributable event transfers does not apply to an
elective transfer that occurs at a time at which the participant is
eligible to receive an immediate distribution of the participant’s
entire nonforfeitable account balance in a single-sum distribution
that would consist entirely of an eligible rollover distribution
within the meaning of section 401(a)(31)(C). Instead, a similar
result could be achieved by means of a direct rollover to which
section 401(a)(31) applies.

        Under the proposed regulations, the section 411(d)(6) relief
for transfers of immediately distributable amounts other than
eligible rollover distributions would only have applied to transfers
between plans of the same type (i.e., transfers from defined benefit
plans to defined benefit plans and transfers from defined
contribution plans to defined contribution plans), notwithstanding
that the 1988 regulations granted section 411(d)(6) relief to
transfers between plans of different types (i.e., transfers from
defined benefit plans to defined contribution plans and vice versa).
The preamble specifically requested comments on whether section
411(d)(6) relief was needed for distributable event transfers
between different types of plans, given the availability of direct
rollovers. Several commentators stated that this section 411(d)(6)
relief provided under the 1988 regulations was still valuable and
also requested clarification that the relief applied to transfers of
amounts that were immediately distributable only in the form of
periodic payments commencing immediately. These final regulations
adopt both of these recommendations.

        2. Section 411(d)(6) Relief for Transaction or Employment
		 Change Transfers

        Section 1.411(d)-4, Q&A-3(b) of these final regulations
retains and, in some respects, expands provisions of the proposed
regulations that grant, subject to certain conditions, broad section
411(d)(6) relief for many types of elective transfers of a
participant’s entire benefit under a defined contribution plan,
whether or not the benefit is immediately distributable (and whether
or not the participant would be eligible for a distribution of the
participant’s entire benefit in a single-sum distribution that would
be an eligible rollover distribution). In order to ensure that the
participant’s election occurs in connection with an independent
event (and is not, in effect, a mere waiver), the transfer must be
made either in connection with certain corporate transactions (such
as a merger or acquisition) or in connection with a participant’s
change in employment status (for example, the participant’s transfer
to a different subsidiary or division of the employer, without
regard to whether the transfer constitutes a separation from
service) to an employment status with respect to which the
participant is not entitled to additional allocations under the
transferor plan, even if the event is not one that triggers the
right to an immediate distribution. Such elective transfers can be
made to a plan that is outside the employer’s controlled group, to
another plan of the same employer, or to a plan that is maintained
by another member of the employer’s controlled group.

        A transaction or employment change transfer may involve
benefits that are not fully vested under the transferor plan.
However, where a participant’s benefit that is not fully vested
under the transferor plan is transferred pursuant to these rules,
the vesting schedule amendment requirements of section 411(a)(10)
must be satisfied.

         A transaction or employment change transfer generally is
only permitted between defined contribution plans 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 transaction or
employment change transfers are permitted facilitate Lministration
of the qualified plan distribution rules by ensuring that amounts
transferred to the receiving plan, in a transfer that is not itself
a ill 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 of sections 401(a)(11)(A) and 417, those
survivor annuity requirements would in any event apply to the
receiving plan with respect to the transferred amount as a result of
the transferee plan rule of section 401(a)(11)(B)(iii)(III).

        In response to comments, the final regulations clarify that
the right to a transaction or employment change transfer is an other
right or feature for purposes of section 401(a)(4) (unlike a
distributable event transfer, which is treated as an optional form
of benefit for purposes of section 401(a)(4)). In applying section
401(a)(4) to a transaction or employment change transfer right, the
final regulations permit certain conditions to be disregarded. Thus,
for example, section 401(a)(4) would be satisfied if, with respect
to all participants: (1) the plan provides a transfer right in the
event that an employee ceases to be covered by the plan because of
any asset or stock disposition, merger or other similar business
transaction involving a change of the employer; (2) the plan
provides a transfer right in the event that an employee ceases to be
covered by the plan because of an identified asset or stock
disposition, merger or other similar business transaction that
involves a change of the employer; or (3) the plan provides a
transfer right in the event that an employee ceases to be covered by
the plan because of a transfer of employment to a position covered
by another plan within the employer’s controlled group.

C. Rules Regarding In-Kind Distributions

        The final 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 from defined
contribution plans and defined benefit plans. Provisions for
distribution in kind are sometimes found, for example, 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 ERISA. The 1988 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.

        The proposed regulations provided that, if a defined benefit
plan included an optional form of benefit under which benefits were
distributed in the medium of an annuity contract, that optional form
of benefit could be modified by substituting cash for the annuity
contract. The proposed regulations separately provided a similar
rule for defined contribution plans that provided an annuity
optional form of benefit and for distribution of an annuity
contract, and that substituted a non-annuity optional form of
benefit for the annuity form. These final regulations combine and
simplify these two rules. The final regulations clarify that a
participant’s right to receive a particular benefit in the form of
cash payments from either a defined benefit plan or a defined
contribution plan and a participant’s right to receive that benefit
in the form of the distribution of an annuity contract that provides
for cash payments that are otherwise identical in all respects to
those cash payments from the plan are not separate optional forms of
benefit. Therefore, for example, if a plan includes an optional form
of benefit under which benefits are distributed in the medium of an
annuity contract that provides for cash payments, that optional form
of benefit may be modified by a plan amendment that substitutes cash
payments from the plan for the distribution of the annuity contract,
where those cash payments from the plan are identical to the cash
payments payable from the annuity contract in all respects except
for the source of the payments. Of course, a defined contribution
plan that continues to offer a life annuity form of distribution
must purchase an annuity contract from an insurance carrier in order
to provide that optional form (and the plan may either distribute
that contract to the participant or hold the contract as a plan
asset from which it makes the payments for the participant).

       These final regulations 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. Thus, the
right to distributions from a defined contribution plan in the form
of cash, employer securities or other property that is not
marketable securities is generally protected. The protection for
employer securities reflects the potential value of the special tax
treatment provided to net unrealized appreciation (NUA) on employer
securities under section 402(e)(4). The protection for assets that
are not marketable Lcurities reflects that possibility that a
participant may assign a higher value to such assets than the plan
without the participant having the ability to acquire the asset
after receiving a cash distribution.

        The proposed regulations would 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 can be made to a participant to specific types of
property allocated to the participant’s account 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 allocated to the participant’s
account at the time of the distribution include that type of
property.

These provisions of the proposed regulations were supported by
commentators and have been adopted in these final regulations. In
response to commentator suggestions, the examples from the proposed
regulations have been modified in these regulations to clarify that
a plan amendment that limits the right of a distribution in
specified types of property to certain participants, as permitted by
these regulations, need not itself contain a list of those
participants. These provisions of the final regulations do not
permit a plan to be amended in a way that affects protected features
of optional forms of benefit other than the medium of distribution.

Effective Date and Applicability Date

        These final regulations are effective September 6, 2000.
These final regulations apply to plan amendments that are adopted
and effective on or after September 6, 2000, except as provided in
§1.411(d)-4, Q&A-2(e)(1)(ii) and Q&A-3(c)(1)(ii). 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 Linda S. F.
Marshall 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

       Accordingly, 26 CFR part 1 is 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. In paragraph (a)(1), removing the language "in paragraph
(b) of this Q&A-2" and adding the language "in this section" in its
place.

      b. Adding two sentences at the beginning of paragraph (a)(3)
	   (ii)(A).

      c. Revising the second sentence of paragraph (b)(2)
	   introductory text.

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

      e. Amending paragraph (b)(2)(viii) by removing the language "
	   of the employer".

      f. 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).

        The additions and revisions read as follows:

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

* * * * *

        A-2: * * *

        (a) * * *

        (3) * * *

        (ii) Annuity contracts--(A) General rule. The right of a
participant to receive a benefit in the form of cash payments from
the plan and the right of a participant to receive that benefit in
the form of the distribution of an annuity contract that provides
for cash payments that are identical in all respects to the cash
payments from the plan except with respect to the source of the
payments are not separate optional forms of benefit. Therefore, for
example, if a plan includes an optional form of benefit under which
benefits are distributed in the medium of an annuity contract that
provides for cash payments, that optional form of benefit may be
modified by a plan amendment that substitutes cash payments from the
plan for the annuity contract, where those cash payments from the
plan are identical to the cash payments payable from the annuity
contract in all respects except with respect to the source of the
payments. * * *

* * * * *

        (b) * * *

        (2) * * * The rules with respect to permissible eliminations
and reductions provided in this paragraph (b)(2) generally are
effective January 30, 1986; however, the rules of paragraphs (b)(2)
(iii)(A) and (B) and (b)(2)(viii) of this Q&A-2 are effective for
plan amendments that are adopted and effective on or after September
6, 2000. * * *

* * * * *

(iii) In-kind Distributions--(A) 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 a plan amendment that substitutes cash for the
marketable securities as the medium of distribution. For purposes of
this paragraph (b)(2)(iii)(A) and paragraph (b)(2)(iii) (B) of this
Q&A-2, 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).

        (B) 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 marketable securities
that are not securities of the employer) that are allocated to 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 if a
distributable event occurred. 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
allocated to the participant’s account at the time of distribution
that consists of property of those specified types.

        (C) 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 as the medium of distribution 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.

        (D) 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 October 18, 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 (and participants’ accounts
have ceased to be invested in employer securities), to eliminate the
right to a distribution in the form of employer stock. See paragraph
(b)(2)(iii)(B) 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)(A) 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
provides that only participants with employer stock allocated to
their accounts as of the effective date of the amendment have the
right to distributions in the form of employer stock, and that only
participants with shares of PQR limited partnership allocated to
their accounts as of the effective date of the amendment have the
right to distributions in the form of shares of PQR limited
partnership. To comply with the plan amendment, the plan
administrator retains a list of participants with employer stock
allocated to their accounts as of the effective date of the
amendment, and a list of participants with shares of PQR limited
partnership allocated to their accounts as of the effective date of
the amendment. See paragraphs (b)(2)(iii)(A) and (B) 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 those assets are allocated to the participant’s account at the
time of the distribution. See paragraphs (b)(2)(iii)(A) and (B) 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
provides that only participants with employer stock allocated to
their accounts as of the effective date of the amendment have the
right to distributions in the form of employer stock, and that only
participants with shares of PQR limited partnership allocated to
their accounts as of the effective date of the amendment have the
right to distributions in the form of shares of PQR limited
partnership, and that further provides that the distribution of that
stock or those shares is available only to the extent that those
assets are allocated to those participants’ accounts at the time of
the distribution. To comply with the plan amendment, the plan
administrator retains a list of participants with employer stock
allocated to their accounts as of the effective date of the
amendment, and a list of participants with shares of PQR limited
partnership allocated to their accounts as of the effective date of
the amendment. See paragraphs (b)(2)(iii)(A) and (B) 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)
(C) 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--

        (i) 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; and

        (ii) The amendment does not apply to the participant with
respect to any distribution with an annuity starting date that is
earlier than the earlier of--

        (A) The 90th day after the date the participant has been
furnished a summary that reflects the amendment and that satisfies
the requirements of 29 CFR 2520.104b-3 (relating to a summary of
material modifications) for pension plans; or

        (B) The first day of the second plan year following the plan
year in which the amendment is adopted.

        (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 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) 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 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 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). On May 15, 2001, 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, subject
to the requirements of section 401(a)(9)). The amendment does not
apply to P if P elects to have annuity payments begin before the
earlier of January 1, 2003, or 90 days after the date on which the
plan administrator of Plan M furnishes P with a summary that
reflects the amendment and that satisfies the requirements of 29 CFR
2520.104b-3. On December 14, 2001, the plan administrator of Plan M
furnishes P with a summary plan description that reflects the
amendment and that satisfies the requirements of 29 CFR 2520.104b-3.

        (ii) Plan M does not violate the requirements of section
411(d)(6) (or section 401(a)(11)) merely because, as of March 14,
2002, 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. On May 15, 2001, 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, 15, or 20 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, subject to the requirements of section 401(a)
(9)), in the form of a single-sum distribution. The amendment does
not apply to P if P elects to have annuity payments begin before
January 1, 2002. On September 20, 2001, the plan administrator of
Plan M furnishes P with a summary of material modifications that
reflects the amendment and that satisfies the requirements of 29 CFR
2520.104b-3.

        (ii) Plan M does not violate the requirements of section
411(d)(6) merely because, as of January 1, 2002, the plan amendment
has eliminated P’s option to receive a distribution in the form of
substantially equal monthly installment payments over 5, 10, 15, or
20 years.

        (4) Effective date. This paragraph (e) applies to plan
		 amendments that are

adopted on or after September 6, 2000.

* * * * *

       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 any direct rollover described in Q&A-3 of §1.401(a)(31)-1) 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) Under which transfers may be made. The transfer must
be made either 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 change in employment status to an employment
status with respect to which the participant is not entitled to
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) and, thus, must
satisfy the requirements of section 414(l). In addition, this
paragraph (b) only provides relief under section 411(d)(6); a
transfer described in this paragraph must satisfy 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 411(a)(10) with respect to the
amounts transferred.

       (3) Status of elective transfer as other right or feature. A
right to a transfer of benefits from a plan pursuant to the elective
transfer rules of this paragraph (b) is an other right or feature
within the meaning of §1.401(a)(4)-4(e)(3), the availability of
which is subject to the nondiscrimination requirements of section
401(a)(4) and §1.401(a)(4)-4. However, for purposes of applying the
rules of §1.401(a)(4)-4, the following conditions are to be
disregarded in determining the employees to whom the other right or
feature is available--

       (i) A condition restricting the availability of the transfer
to benefits of participants who are transferred to a different
employer in connection with a specified asset or stock disposition,
merger, or other similar transaction involving a change in employer
of the employees of a trade or business (i.e., a disposition within
the meaning of §1.410(b)- 2(f)), or in connection with any such
disposition, merger, or other similar transaction.

       (ii) A condition restricting the availability of the transfer
to benefits of participants who have a change in employment status
to an employment status with respect to which the participant is not
entitled to additional allocations under the transferor plan.

       (c) Elective transfers of certain distributable benefits
between qualified plans--(1) In general. A transfer of a
participant’s benefits between qualified plans that results in the
elimination or reduction of section 411(d)(6) protected benefits
does not violate section 411(d)(6) if--

       (i) The transfer occurs at a time at which the participant’s
benefits are distributable (within the meaning of paragraph (c)(3)
of this Q&A-3);

       (ii) For a transfer that occurs on or after January 1, 2002,
the transfer occurs at a time at which the participant is not
eligible to receive an immediate distribution of the participant’s
entire nonforfeitable accrued benefit in a single-sum distribution
that would consist entirely of an eligible rollover distribution
within the meaning of section 401(a)(31)(C);

       (iii) The voluntary election requirements of paragraph (b)
(1)(i) of this Q&A-3 are met;

       (iv) The participant is fully vested in the transferred
benefit in the transferee plan;

       (v) In the case of a transfer from a defined contribution
plan to a defined benefit plan, the defined benefit plan provides a
minimum benefit, for each participant whose benefits are
transferred, equal to the benefit, expressed as an annuity payable
at normal retirement age, that is derived solely on the basis of the
amount transferred with respect to such participant; and

       (vi) The amount of the benefit transferred, together with the
amount of any contemporaneous section 401(a)(31) direct rollover to
the transferee plan, equals the entire nonforfeitable accrued
benefit under the transferor 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--(i) In general. A 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. A
transfer pursuant to the elective transfer rules of this paragraph
(c) is not treated as a distribution for purposes of the minimum
distribution requirements of section 401(a)(9).

        (ii) Status of elective transfer as optional form of
benefit. A right to a transfer of benefits from a plan pursuant to
the elective transfer rules of this paragraph (c) is an optional
form of benefit under section 411(d)(6), the availability of which
is subject to the nondiscrimination requirements of section 401(a)
(4) and §1.401(a)(4)-4.

        (3) Distributable benefits. For purposes of paragraph (c)
(1)(i) of this Q&A-3, 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 (e.g., in the
form of an immediately commencing annuity) from that plan under
provisions of the plan not inconsistent with section 401(a).

       (d) Effective date. This Q&A-3 is applicable for transfers
made on or after September 6, 2000.

* * * * *

Robert E. Wenzel    
Deputy Commissioner of Internal Revenue        
Approved: August 28, 2000     
Jonathan Talisman    
Acting Assistant Secretary of the Treasury

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