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Guest Article
(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

IRS Final Rules Expand Anti-Cutback Exceptions, Cut Need for Extended Payment Option

by Martha Priddy Patterson, Contributing Editor

Sponsors of 401(k) plans will not violate Code section 411(d)(6) anti-cutback provisions if they amend their plan to eliminate certain alternative forms of benefit payments and permit certain transfers between defined contribution plans that are not currently permitted under IRS regulations, according to final regulations released Aug. 28 by the IRS (see 65 Fed. Reg. 53901).

The final rules took effect Sept. 6, 2000, and generally follow the proposed rules released in March. Plan sponsors now have the necessary information to amend their plans to incorporate these new regulations and the "GUST" provisions.

Extended Payment Option Requirement Eliminated

The final rules change the proposed regulations primarily by eliminating the need for defined contribution plans to preserve annuity or installment payment options in most cases, so long as lump sum options are available. Annuity or installment payment options would apply for participant distributions with an annuity starting date that is prior to 90 days after the participant receives notice of the amendment affecting the distribution or the first day of the second plan year after the amendment is adopted, whichever is earlier.

Under the new rules, plan sponsors have the opportunity to review and simplify their payout options, including eliminating some investment options they may have been retaining primarily because of anti-cutback rule effects on payments.

The final regulations will be especially useful when plan sponsors change from one prototype plan to another as part of a change in plan service providers and in mergers and acquisitions where employers seek to merge 401(k) plans without preserving every payment option contained in the various plans.

The rules could also ease the effects of the "same desk" rule in certain circumstances. Generally, the regulations do not affect defined benefit plans.

The provision in the final regulations resulted in large part from the substantial expansion of rollovers from qualified plans to IRAs as part of The Unemployment Compensation Amendments of 1992, P.L. 102-318. As a result of those changes, the vast majority of participants in defined contribution plans permitting lump-sum distribution elect the lump-sum distribution. IRAs offer a wide variety of distribution options.

Based on this fact and on responses to IRS Notice 98-29, which requested public comment on the regulatory requirements of section 411(d)(6)(B), the IRS concluded that requiring a plan to continue offering all existing payment options is usually more trouble to the plan than it is worth to participants. Instead of requiring defined contribution plans to continue to maintain nearly all existing alternative forms of payment with only limited exceptions, the final regulations permit the plans to eliminate nearly all existing forms of payment if certain specified forms of payment are available, such as lump-sum payments in cash.

QJSA Requirements Remain the Same

The final rules do not affect qualified joint and survivor annuity (QJSA) requirements under sections 401(a)(11) and 417. For example, a profit-sharing plan that offered a life annuity would also be required to offer a joint and survivor annuity. Money purchase plans must continue to offer joint and survivor annuities.

Waiver Prohibition

A participant may not elect to waive section 411(d)(6) protections. As an example of an impermissible transfer, the regulations describe a transfer from a defined benefit plan to a defined contribution plan at a time when the transferred benefit would not be distributable to the participant. A transfer between a defined benefit plan and a defined contribution plan generally is not allowed under the final regulations.

Voluntary Direct Transfers Between Plans

The regulations permit elective transfers among similar plans regardless of whether the employee's benefit could be immediately distributable and even if the amounts were not fully vested. A 401(k) cash or deferred amount can be transferred only to 401(k) cash or deferred amounts. ESOP amounts can be transferred only to ESOPs. Profit-sharing plans that are not cash or deferred arrangements and stock bonus plans that are ESOPs may accept transfers from any type of defined contribution plan. Restrictions on survivor annuities in the transferring plan would apply to the receiving plans.

Transfers of after-tax contributions that could be distributed immediately are permitted under the final rules. This provision applies to both defined benefit and defined contribution plans.

In-Kind Distributions

Under the new rules, defined benefit plans are permitted to substitute cash distributions from the plan for an annuity contract distribution as long as the payments were identical to the annuity contract payments. Defined contribution plans can replace the ability to receive marketable securities, other than employer securities, with distributions in cash. The defined contribution plan amendment can also limit the types of property required to be distributed in-kind to the specific types of property in the participant's account at the time of the amendment. This change includes employer securities.

Martha Priddy Patterson is director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.
Reprinted with permission from the October 2000 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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