Comments on optional forms of benefits for defined contribution plans.

• Position: Tax Executives Institute's comments on IRS proposed section 411(d - 6

August 1, 2000

On August 1, 2000, Tax Executives Institute submitted the following comments to the Internal Revenue Service on the proposed section 411(d)(6) regulations, relating to optional forms of benefits. The comments were prepared under the aegis of TEI's Federal Tax Committee, whose chair is Philip G. Cohen of Unilever United States, Inc. Materially contributing to the preparation of the comments were Michael J. Nesbitt of Paychex, Inc., David E. Sherwood of Microsoft Corporation, and Leslie A. Honig of the Chase Manhattan Bank.

On March 29, 2000, the Internal Revenue Service released proposed regulations (REG-109101-98) that would (i) permit qualified defined contribution plans to be amended to eliminate some alternative forms in which the account balances can be paid under certain circumstances, and (ii) permit certain transfers between defined contribution plans. The proposed regulations were published in the March 28, 2000, issue of the FEDERAL REGISTER (65 F.R. 16546) and in the April 17, 2000, issue of the INTERNAL REVENUE BULLETIN (2000-16 I.R.B. 903). TEI is pleased to submit these comments on the proposed regulations.

Background

Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 5,200 members represent 2,800 of the leading corporations in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations with special rules regarding optional forms of benefit distributions from qualified plans.

Overview

Section 411 of the Internal Revenue Code sets forth minimum vesting standards for employee pension plans. Section 411(d)(6) provides an anti-cutback rule, i.e., an employer may not decrease an accrued benefit by amending the plan. A plan amendment that retroactively (i) eliminates or reduces an early retirement benefit or a retirement-type subsidy (as defined in regulations), or (ii) eliminates an optional form of benefit is treated as reducing accrued benefits. Thus, once benefits have accrued -- even if they are benefits that the employer was not required to provide -- the employer may not reduce those benefits without imperiling the qualified status of the plan.

Notwithstanding the thrust of section 411(d)(6), the Treasury Department has authority under section 411(d)(6)(B) to provide exceptions to the rule relating to the elimination of optional benefits. Two years ago, the IRS issued Notice 98-29, 1998-1 C.B. 1163, announcing its intent to issue regulations providing such exceptions and asking for comments. On September 11, 1998, the Institute filed comments in response to the Notice. The proposed regulations incorporate the comments received from TEI and others in respect of the elimination of optional forms of benefits.

TEI commends the IRS and Treasury Department for their willingness to consider providing exceptions to the anti-cutback rule in respect of defined contribution plans. The preamble to the proposed regulations notes that the accumulation of a variety of payment choices in a plan may increase the cost and complexity of plan operations. 2000-16 I.R.B. at 903-04. TEI wholeheartedly agrees. Whether a result of mergers, plan redesigns, or other factors, the accumulation of these choices can impose a significant burden and cost to plan sponsors. Participants eligible for these optional benefits must be identified and tracked and regular plan communications must be tailored to these participants. Dealing with these exceptions makes administering the plan more difficult and hinders automation of plan administration.

The inability to eliminate optional forms of benefits can also impose a hardship on participants. Many sponsors have resorted to negotiating the termination of a former plan, prior to an acquisition, to mitigate the complications of the anti-cutback rules. Because termination requires distribution of all plan assets to participants, including the potential cash out of plan investments, such an action may not be in the best interests of participants.

For these reasons, TEI supports the efforts by the IRS and Treasury to provide relief to plan sponsors and participants. Many provisions in the proposed regulations merit support. For example, the provisions that allow transfers between plans in the event of mergers or job transfers by participants are particularly helpful. We suggest, however, that the proposed regulations could go much further in providing relief while not materially reducing benefits to participants. Moreover, published guidance is generally enhanced by the use of examples. For a complex area such as pensions, it is better to err on the side of more, rather than fewer, examples. TEI encourages the IRS to include additional examples highlighting the key points of the regulations, particularly in respect of the proposed changes to Treas. Reg. [sections] 1.411(d)-4, A-3.

The Institute's specific recommendations on the proposed regulations are provided below.

Prop. Reg. [sections] 1.411(d)-4(e): Alternative Forms of Payment

1. Single-Sum Distribution

   Prop. Reg. [sections] 1.411(d)-4(e)(1) generally provides that optional forms of benefits can be eliminated if, after the plan amendment, the distribution choices available to the participants include a single-sum distribution option and an extended-distribution option. The preamble to the regulations acknowledges, however, that a strong case can be made that only a single-sum distribution...