[10596]
December 22, 1998
TO: PENSION MEMBERS No. 79-98
PENSION OPERATIONS ADVISORY COMMITTEE No. 74-98
RE: IRS ISSUES TEMPORARY AND PROPOSED REGULATIONS ON CASH-OUT
LIMIT
______________________________________________________________________________
The Internal Revenue Service has issued guidance relating to the increase from $3,500 to
$5,000 of the cash-out limit on involuntary distributions. This increase was made effective by
the Taxpayer Relief Act of 1997 for plan years beginning after August 5, 1997. These
regulations also eliminate the “lookback rule” for most distributions. The guidance is in two
parts – a temporary regulation, designated section 1.411(a)-7T, and a broader proposed
regulation.
Temporary Regulation
Pursuant to the temporary guidance, in determining whether a participant’s
nonforfeitable accrued benefit may be distributed without consent during plan years beginning
on or after August 6, 1997, the new cash-out limit of $5,000 is permitted to be applied as though
it were in effect for all plan years, including those beginning before August 6, 1997. Thus, a plan
may be amended to provide for involuntary distributions of an accrued benefit if the benefit
does not exceed $5,000 at the time of distribution – even in the case of a former participant who
terminated employment prior to the effective date of the statute, and whose benefit had
exceeded $3,500 at that time, thus eliminating the so-called “lookback rule” of section 1.411(a)-
11(c)(3) of the regulations.
The temporary regulation, however, provides an exception applicable to participants
receiving periodic payments: where a participant has begun to receive an optional form of
benefit under which at least one scheduled periodic distribution is still payable and the present
value of the benefit exceeded $5,000 at the time of the first distribution under that optional form
of benefit, the remaining present value of the benefit may not be distributed without consent.
Also, with respect to the distribution of the present value of a qualified joint and survivor
annuity (QJSA) or a qualified preretirement survivor annuity (QJSA), the temporary guidance
changes the dollar limit from $3,500 to $5,000, but does not revise the lookback rule as applied
to plans subject to section 401(a)(11) and 417.
The regulation also clarifies that a plan amendment to permit involuntary cash-outs up
to $5,000 with respect to benefits accrued before the amendment was adopted and effective will
not violate the anti-cutback rules of section 411(d)(6).
Proposed Regulation
The proposed regulation follows the temporary regulation. In addition, the proposed
regulation would completely repeal the lookback rule both for plans that are and are not subject
to sections 401(a)(11) and 417.
Comments on the proposed regulation must be received by March 22, 1999.
Russell G. Galer
Senior Counsel
Attachment