Part III. — Internal Revenue Bulletin 1997-2

Obsolescence of Revenue Rulings and Revenue Procedures Under TD 8697, Simplification of Entity Classification Regulations (Check the Box)

Notice 97–1

This notice accompanies TD 8697, Simplification of Entity Classification Regulations (published in the Federal Register on December 18, 1996). The purpose of this notice is to alert taxpayers to the effect of the regulations on existing revenue rulings and revenue procedures that apply the prior classification regulations under § 7701 of the Internal Revenue Code. Effective January 1, 1997, such revenue rulings and revenue procedures are obsolete to the extent that they use the prior classification regulations to distinguish between partnerships and associations.

The Internal Revenue Service is compiling a list of these obsolete documents that will be published in the Internal Revenue Bulletin.

The principal author of this notice is Mark D. Harris of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Mr. Harris at (202) 622-3050 (not a toll-free call).

Cash or Deferred Arrangements; Nondiscrimination

Notice 97–2

This notice provides guidance and transition relief relating to the revised nondiscrimination rules under § 401(k) and § 401(m) of the Internal Revenue Code. The rules applicable to qualified cash or deferred arrangements under § 401(k) and matching and employee contributions under § 401(m) were changed by the Small Business Job Protection Act of 1996 (SBJPA), Pub. L. 104–188. Under § 401(k) and § 401(m) of the Code, the actual deferral percentage (ADP) and the actual contribution percentage (ACP) of highly compensated employees (HCEs) are compared with those of nonhighly compensated employees (NHCEs). Section 1433(c) of the SBJPA amends § 401(k)(3)(A) and § 401(m)(2)(A), effective for plan years beginning after December 31, 1996, to provide for the use of prior year data in

determining the ADP and ACP of NHCEs, while current year data is used for HCEs. Alternatively, an employer may elect to use current year data for determining the ADP and ACP for both HCEs and NHCEs, but this election may only be changed as provided by the Secretary. Prior to the effective date of these amendments, plans must use current year data in determining the ADP and ACP for both HCEs and NHCEs.

Section 1433(e) of the SBJPA amends § 401(k)(8)(C) and § 401(m)(6)(C), effective for plan years beginning after December 31, 1996, to provide that the distribution of excess contributions and excess aggregate contributions will be made on the basis of the amount of contributions by, or on behalf of, each HCE. Prior to the effective date of these amendments, plans must distribute excess contributions and excess aggregate contributions using a method based on the actual deferral ratio or actual contribution ratio of each HCE.

This notice provides guidance regarding the determination of the ADP and ACP for NHCEs under § 401(k)(3)(A)(ii) and § 401(m)(2)(A) for plan years beginning after December 31, 1996; transition relief for plans that elect to use current year ADP or ACP data for the 1997 plan year; and guidance regarding the distribution of excess contributions and excess aggregate contributions under § 401(k)(8)(C) and § 401(m)(6)(C) for plan years beginning after December 31, 1996.

I. DETERMINATION OF ADP AND ACP FOR NHCEs USING PRIOR YEAR DATA

Section 401(k)(3)(A)(ii), as amended, provides that a cash or deferred arrangement will not be treated as a qualified cash or deferred arrangement unless the actual deferral percentage for eligible HCEs for the plan year meets a nondiscrimination test when compared to the actual deferral percentage for all other eligible employees for the preceding plan year. Thus, as amended, § 401(k)(3)(A)(ii) generally requires the comparison of the current year’s ADP for HCEs to the prior year’s ADP for NHCEs.

For purposes of § 401(k)(3)(A)(ii), the actual deferral percentage for all other eligible employees for the preceding plan year is the ADP for the preceding plan year for the group of employees who were NHCEs in the preceding

plan year, using the definition of HCE in effect for the preceding plan year. Thus, for purposes of § 401(k)(3)(A)(ii), the individuals taken into account in determining the prior year’s ADP for NHCEs are those individuals who were NHCEs during the preceding year, without regard to the individuals’ status in the current year. For example, an individual who was an NHCE for the preceding plan year is included in this calculation even if the individual is no longer employed by the employer or has become an HCE in the current plan year.

As a result, the prior year’s ADP for NHCEs can be calculated as soon as the necessary data on prior year status, contributions and compensation become available. For example, for the 1997 plan year, if a plan does not provide for matching contributions described in § 401(m)(4)(A) or qualified nonelective contributions described in § 401(m)(4)(C), the ADP for the 1997 plan year of HCEs will be compared with the ADP for the 1996 plan year of NHCEs in 1996, i.e., with the same ADP used in nondiscrimination testing for the 1996 plan year under prior law. Future guidance will address the conditions under which and the extent to which matching contributions described in § 401(m)(4)(A) and qualified nonelective contributions described in § 401(m)(4)(C) may be taken into account in determining the current or prior year’s ADP or ACP for NHCEs in nondiscrimination testing for the 1997 plan year and future plan years.

For purposes of determining the prior year’s ACP for NHCEs under § 401(m)(2)(A), as amended, rules similar to those used in determining the prior year’s ADP for NHCEs under § 401(k)(3)(A)(ii) will apply.

II. TRANSITION RELIEF FOR PLANS USING CURRENT YEAR ADP OR ACP DATA FOR THE 1997 PLAN YEAR

Under § 401(k)(3)(A)(ii) and § 401(m)(2)(A), as amended, an employer that elects to use current year data in determining the ADP or ACP of NHCEs for the 1997 plan year or for later plan years must continue to use current year data for all future plan years, unless the election is changed in a manner provided by the Secretary.

Under the transition relief provided by this notice, a plan that uses current

year data in determining the ADP or ACP of NHCEs for the 1997 plan year will be permitted to use prior year data for the 1998 plan year without receiving approval from the Service. For the 1997 plan year, no plan amendment or formal election is required to be made in 1996 or 1997 in order to continue to use current year data in determining the ADP of NHCEs. The Treasury and the Service intend to issue guidance regarding the conditions under which employers that elect to use current year data for the 1998 or a later plan year may switch to using prior year data for subsequent plan years.

III. DISTRIBUTION OF EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS

Section 401(k)(8), as amended, provides a new procedure for correcting a plan’s failure to meet the nondiscrimination test of § 401(k)(3). Under § 401(k)(8)(B), which was not amended by the SBJPA, an excess contribution is determined for each HCE. Section 401(k)(8)(C), prior to amendment, and § 1.401(k)-1(f)(2) of the Income Tax Regulations provided for the distribution of this amount to each HCE. Parallel rules applied to correction of failure to satisfy the nondiscrimination test of § 401(m).

The SBJPA amended § 401(k)(8)(C) to provide that distributions of excess contributions for any plan year are made to HCEs on the basis of the amount of contributions by, or on behalf of, each HCE. This amendment does not affect the total amount of the excess contributions to be distributed, but merely reallocates the distributions among the HCEs.

Accordingly, in order to distribute excess contributions under § 401(k)(8), as amended, the following procedure is used:

Calculate the dollar amount of excess contributions for each affected HCE in a manner described in § 401(k)(8)(B) and § 1.401(k)1(f)(2). However, in applying these rules, rather than distributing the amount necessary to reduce the actual deferral ratio (ADR) of each affected HCE in order of these employees’ ADRs, beginning with the highest ADR, the plan uses these amounts in step 2.
Determine the total of the dollar amounts calculated in step 1.

This total amount in step 2 (total excess contributions) should be distributed in accordance with steps 3 and 4 below:

The elective contributions of the HCE with the highest dollar amount of elective contributions are reduced by the amount required to cause that HCE’s elective contributions to equal the dollar amount of the elective contributions of the HCE with the next highest dollar amount of elective contributions. This amount is then distributed to the HCE with the highest dollar amount. However, if a lesser reduction, when added to the total dollar amount already distributed under this step, would equal the total excess contributions, the lesser reduction amount is distributed.
If the total amount distributed is less than the total excess contributions, step 3 is repeated. If these distributions are made, the cash or deferred arrangement is treated as meeting the nondiscrimination test of § 401(k)(3) regardless of whether the ADP, if recalculated after distributions, would satisfy § 401(k)(3).

A parallel method is used for the purpose of recharacterizing excess contributions under § 401(k)(8)(A)(ii) and for distributing excess aggregate contributions under § 401(m)(6)(C), as amended.

After excess and excess aggregate contributions, if any, have been distributed using the method described above, the multiple use test of § 401(m)(9) is applied. For purposes of § 401(m)(9), if a corrective distribution of excess contributions has been made, or a recharacterization has occurred, the ADP for HCEs is deemed to be the largest amount permitted under § 401(k)(3). Similarly, if a corrective distribution of excess aggregate contributions has been made, the ACP for HCEs is deemed to be the largest amount permitted under § 401(m)(2).

The method described above for distributing excess contributions is illustrated by the following example: For the 1997 plan year, HCE 1 has elective contributions of $8,500 and $85,000 in compensation, for an ADR of 10%, and HCE 2 has elective contributions of $9,500 and compensation of $158,333, for an ADR of 6%. As a result, the ADP for the 2 HCEs under the plan (HCE 1 and HCE 2) is 8%. The ADP for the NHCEs is 3%. Under the ADP test of § 401(k)(3)(A)(ii), the

ADP of the two HCEs under the plan may not exceed 5% (i.e., 2 percentage points more than the ADP of the NHCEs under the plan).

Pursuant to § 401(k)(8)(B), § 1.401(k)-1(f)(2), and this notice, the total excess contributions for the HCEs is determined as follows: Step 1. The elective contributions of

HCE 1 (the HCE with the highest ADR) are reduced by $3,400 in order to reduce the ADR of HCE 1 to 6% ($5,100/$85,000), which is the ADR of HCE 2. Because the ADP of the HCEs still exceeds 5%, the ADP test of § 401(k)(3)(A)(ii) is not satisfied and further reductions in elective contributions are necessary. The elective contributions of HCE 1 and HCE 2 are each reduced by one percent of compensation ($850 and $1,583 respectively). Because the ADP of the HCEs now equals 5%, the ADP test of § 401(k)(3)(A)(ii) is satisfied, and no further reductions in elective contributions are necessary. Step 2. The total excess contributions

for the HCEs that must be distributed equal $5,833, the total reductions in elective contributions under step 1 ($3,400 + $850 + $1,583). Pursuant to § 401(k)(8)(C), the $5,833 in total excess contributions for the 1997 plan year would then be distributed as follows: Step 3. The plan distributes $1,000 in

elective contributions to HCE 2 (the HCE with the highest dollar amount of elective contributions) in order to reduce the dollar amount of the elective contributions of HCE 2 to $8,500, which is the dollar amount of the elective contributions of HCE 1. Step 4. Because the total amount distrib uted ($1,000) is less than the total excess contributions ($5,833), step 3 must be repeated. As the dollar amounts of remaining elective contributions for both HCE 1 and HCE 2 are equal, the remaining $4,833 of excess contributions is then distributed equally to HCE 1 and HCE 2 in the amount of $2,416.50 each. Under this example, HCE 1 must receive a total distribution of $2,416.50 of excess contributions, and HCE 2 must receive a total distribution of $3,416.50 of excess contributions. This is true even though the ADR of HCE 1 exceeded the ADR of HCE 2. The plan is now treated as satisfying the nondiscrimination test of § 401(k)(3) even

New § 1361(b)(3)(B) defines the term ‘‘qualified subchapter S subsidiary’’ as a domestic corporation that is not an ineligible corporation, if (1) an S corporation holds 100 percent of the stock of the corporation, and (2) that S corporation elects to treat the subsidiary as a QSSS. Section 1361(b)(3)(A) provides that a corporation that is a QSSS is not treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of the QSSS are treated as assets, liabilities, and items of income, deduction, and credit of the parent S corporation.

The statutory provisions do not provide guidance on how the corporation makes the election, the effective date of the election, or how the commingling of assets, liabilities, and other items occurs after the election is made. The legislative history, however, indicates that when the parent corporation makes the election, the subsidiary will be deemed to have liquidated under §§ 332 and 337 immediately before the election is effective. See S. Rep. No. 281, 104th Cong., 2d Sess. 53 (1996)(Senate Report); H.R. Rep. No. 586, 104th Cong., 2d Sess. 89 (1996)(House Report). Where the S corporation acquires the stock of the subsidiary in a qualified stock purchase, the corporation may make an election under § 338 with respect to the subsidiary.

Section 1361(b)(3)(C) provides that any QSSS that ceases to meet the requirements of § 1361(b)(3)(B) will be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the cessation from its S corporation parent in a deemed exchange for the subsidiary’s stock. Upon the termination, § 1361(b)(3)(D) provides that the former QSSS (and any successor corporation) is not eligible to make either a QSSS election or an election to be treated as an S corporation before its fifth taxable year that begins after the first taxable year for which the termination is effective, unless the Secretary consents to the election.

REQUEST FOR COMMENTS

The Service and Treasury invite comments from the public on issues that should be addressed in proposed regulations implementing § 1308 of the Act. The Service is particularly interested in receiving comments on the following:

The attribution of dividends received by an S corporation from an 80

though the ADP would fail to satisfy § 401(k)(3), if recalculated after distributions.

COMMENTS REQUESTED

The Treasury and the Service invite comments and suggestions regarding the matters discussed in this notice. Comments are specifically requested concerning:

—The use of qualified matching and qualified nonelective contributions in computing the prior year’s ADP for NHCEs, including methods of preventing inappropriate double counting.

—The appropriate determination of the prior year’s ADP for NHCEs when the group of employees tested is significantly different in the current year than in the prior year.

Comments can be addressed to CC:DOM:CORP:R (Notice 97–2), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, comments may be hand delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (Notice 97–2), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet site at http:// www.irs.ustreas.gov/prod/tax_regs/ comments/html.

DRAFTING INFORMATION

The principal authors of this notice are Kenneth Conn of the Employee Plans Division and Catherine Fernandez of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this notice, contact the Employee Plans Division’s telephone assistance service between 1:30 and 4:00 p.m., Eastern Time, Monday through Thursday at (202) 622–6074/75 or Kenneth Conn at (202) 622–6214. (These telephone numbers are not toll-free numbers.)

Subchapter S Corporation Subsidiaries

Notice 97–4

PURPOSE

Section 1308 of the Small Business Job Protection Act of 1996, Pub. L. No. 104–188, 110 Stat. 1755 (the Act) modified § 1361 of the Internal Revenue

Code to permit an S corporation (1) to own 80 percent or more of the stock of a C corporation, and (2) to elect to own a qualified subchapter S subsidiary (QSSS).

To help taxpayers comply with the law, the Department of the Treasury and the Internal Revenue Service intend to issue regulations interpreting § 1308 of the Act. This notice solicits comments from taxpayers and practitioners regarding the issues listed below. However, any other comments concerning the changes made by § 1308 of the Act will be considered in developing regulatory guidance. This notice also provides temporary guidance on the manner in which a QSSS election must be made and the effective date of the election.

BACKGROUND

Prior law prohibited a subchapter S corporation from owning 80 percent or more of the stock of another corporation. Furthermore, an S corporation could not have a corporation as a shareholder. Congress modified these constraints by enacting § 1308 of the Act, effective for taxable years beginning after December 31, 1996. The Act added new §§ 1361(b)(3), 1362(d)(3)(F), and 1504(b)(8) to the Code, while removing § 1361(b)(2)(A) and 1361(c)(6).

By removing § 1361(b)(2)(A), the Act permits an S corporation to own 80 percent or more of a C corporation. At the same time, new § 1504(b)(8) prevents an S corporation from joining in the filing of a consolidated return with its affiliated C corporations, but does not prevent the C corporation subsidiary from filing a consolidated return with its affiliated C corporations. See H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess. 224 (1996). Under prior law, the S election of a corporation with C earnings and profits terminated if that S corporation received passive income, including dividends, in excess of 25 percent of gross receipts for 3 consecutive years. Section 1363(d)(3)(F) modifies that general rule by excluding dividends from passive investment income to the extent that the dividends are attributable to the active conduct of a trade or business of a C corporation in which the S corporation has an 80 percent or greater ownership interest. However, neither the Act nor the legislative history provides rules for determining the attribution of dividends to an active trade or business.

percent or greater owned C corporation between earnings and profits attributable to the active conduct of a trade or business or to passive investments of the C corporation, particularly in situations where the C corporation is a member of an affiliated group that files a consolidated return;

Issues arising upon the formation of a QSSS, including those arising from the operation of §§ 332 and 337 or § 338;
Issues arising upon the termination of a QSSS; and
Issues arising when a QSSS election is made for a subsidiary that is a member of a consolidated group. Written comments should be sent to the following address:

Internal Revenue Service CC:DOM:CORP (NT 97–4;

CC:DOM:P&SI:1) P.O. Box 7604, Ben Franklin Station Washington, DC 20044 In the alternative, comments may be hand delivered between the hours of 8:00 a.m. and 5:00 p.m. to the courier’s desk at 1111 Constitution Avenue, NW., Washington, DC, or submitted electronically via the IRS internet site at http:// www.irs.ustreas.gov/prod/tax_regs/ comments.html.

TEMPORARY QSSS ELECTION PROCEDURE

The legislative history supporting § 1308 of the Act indicates that when a parent corporation makes an election to treat a subsidiary as a QSSS, the subsidiary will be deemed to have liquidated under §§ 332 and 337 immediately before the election is effective. See Senate Report at 53; House Report at 89. When a corporation liquidates under § 332, that corporation must file a Corporate Dissolution or Liquidation Form 966 within 30 days of the adoption of a liquidating plan or resolution. In addition, that corporation must file a return for the short period ending on the date that it goes out of existence.

The Service and Treasury intend to issue regulations describing the manner in which a QSSS election must be made and the effective date of the election. Until regulations are issued, however, taxpayers should follow the procedures listed in this notice to satisfy the election requirements.

To make the QSSS election, the parent corporation should file a Form 966 with the Service Center. When completing the form, the parent corporation

should follow the instructions applicable to that form with the following modifications:

At the top of the Form 966, print ‘‘FILED PURSUANT TO NOTICE 97–4.’’
In the box labeled ‘‘Employer identification number’’ (EIN), enter the subsidiary’s EIN (if applicable). If the subsidiary was not in existence prior to the time of election and does not have an EIN, there will be no need to obtain a taxpayer identification number for the subsidiary. In this case, insert ‘‘QSSS’’ in the box. (If the parent corporation chooses to obtain an EIN for the newly-formed QSSS, the parent should check ‘‘Other’’ when asked the ‘‘Type of entity’’ on the SS–4, and specify that the entity is a QSSS.)
In Box 4 on Form 966, enter the desired effective date for the election. The election may be effective on the date Form 966 is filed or up to 75 days prior to the filing of Form 966, provided that date is not before the effective date of § 1308 of the Act and that the subsidiary otherwise qualified as a QSSS for the entire period for which the retroactive election is in effect. For these purposes, the requirement that Form 966 be filed within 30 days of the date in Box 4 is ignored.
In Box 7c on Form 966, enter the name of the parent. The parent’s EIN should be included in Box 7d.
In Box 10 on Form 966, enter ‘‘§ 1361(b)(3)(B).’’
Form 966 must be signed by a corporate officer authorized to sign the PARENT’s tax return. Banks and bank holding companies should consult Notice 97–5, 1997–2 I.R.B., before filing an election under the procedures listed above.

DRAFTING INFORMATION

The principal author of this notice is Deanna L. Walton of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Ms. Walton at (202) 622–3050 (not a toll-free call).

Subchapter S Banks — Sections 1362 and 265

Notice 97–5

BACKGROUND

Section 1315 of the Small Business Job Protection Act of 1996 (the Act), P.L. 104–188, amended § 1361(b)(2) of the Internal Revenue Code to allow banks (as defined in § 581) that do not use the reserve method of accounting for bad debts to qualify as small business corporations (and therefore qualify to elect S corporation status), effective for tax years beginning after December 31, 1996. Section 1308(b) of the Act added new § 1361(b)(3) to allow an S corporation to own a qualified subchapter S subsidiary (QSSS). A subsidiary qualifies as a QSSS if (1) the subsidiary would be eligible to elect subchapter S status if its stock were owned directly by the shareholders of its S corporation parent; (2) the S corporation parent owns 100 percent of the subsidiary’s stock; and (3) the parent elects to treat the subsidiary as a QSSS. If the QSSS election is made, the subsidiary is not treated as a separate corporation, and all the assets, liabilities, and items of income, deduction, and credit of the subsidiary are treated as the assets, liabilities, and items of income, deduction, and credit of the parent S corporation.

This notice provides guidance on the effect of the QSSS election under § 1361(b)(3) on banks affiliated with nonbanks; the application of the S corporation passive investment income rules of § 1362(d)(3); the application of the interest expense disallowance rules of § 265; and an automatic change in method of accounting for bad debts.

BANKS AFFILIATED WITH NONBANKS

The Department of the Treasury and the Internal Revenue Service are concerned that the interaction of § 1315 and § 1308(b) of the Act creates unintended and inappropriate results for banks that are affiliated with nonbank entities. Treasury and the IRS believe that the special provisions of the Code that apply to banks should apply only to the specific state-law entity that qualifies as a bank under § 581 of the Code; such special bank treatment should not apply to nonbanks, even if the nonbank is affiliated with a bank and the parent elects to treat the subsidiary as a QSSS.

Treasury intends to work with Congress on appropriate technical corrections to the Act to clarify the tax treatment of banks affiliated with nonbanks. It is anticipated that any technical corrections will be effective as of the effective date of the Act. In the interim, banks (including banks for which QSSS elections are made) should continue to comply with applicable information reporting and filing requirements of the Code (e.g., § 6049 (Returns Regarding Payments of Interest)).

PASSIVE INVESTMENT INCOME

Under § 1362(d)(3)(A), the S election of a corporation with accumulated earnings and profits terminates if the passive investment income of the corporation constitutes more than 25 percent of its gross receipts for each of three consecutive tax years. In general, § 1362(d)(3) defines ‘‘passive investment income’’ as gross receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities. Passive investment income does not include gross receipts directly derived from the active and regular conduct of a lending or finance business, provided the corporation meets the requirements of § 542(c)(6) (lending or finance company excluded from the definition of personal holding company).

Similarly, § 1.1362–2(c)(5)(iii)(B)( 1 )( i ) provides that passive investment income does not include gross receipts directly derived in the ordinary course of a trade or business of lending or financing. Under § 1.1362–2(c)(5)(iii)(B)( 2 ), gross receipts directly derived in the ordinary course of a trade or business of lending or financing include gain (as well as interest income) from loans originated in a lending business; however, interest earned from the investment of idle funds in short-term securities does not constitute gross receipts directly derived in the ordinary course of business.

The Service will treat income earned by an S corporation on the following banking assets as gross receipts directly derived from the active and regular conduct of a banking business—

All loans and REMIC regular interests owned, or considered to be owned, by the bank regardless of whether the loan originated in the bank’s business. For these purposes, securities described in § 165(g)(2)(C) are not considered loans.
Assets required to be held to conduct a banking business (such as Federal Reserve Bank, Federal Home Loan Bank, or Federal Agricultural Mortgage Bank stock or participation certificates issued by a Federal Intermediate Credit Bank which represent nonvoting stock in the bank).
Assets pledged to a third party to secure deposits or business for the bank (such as assets pledged to qualify as a depository for federal taxes or state funds).
Investment assets (other than assets specified in the preceding paragraphs) that are held by the bank to satisfy reasonable liquidity needs (including funds needed to meet anticipated loan demands). As a result, income and gain from these assets will not be considered subject to the passive investment income limitation applicable to S corporations.

INTEREST EXPENSE DISALLOWANCE

Section 265(a)(2) denies taxpayers (including banks) a deduction for interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from federal income taxes.

Section 265(b) denies banks and other financial institutions a deduction for the portion of a bank’s interest expense that is allocable to tax-exempt interest and not otherwise disallowed by § 265(a). The portion of a bank’s interest expense that is allocable to tax-exempt interest is an amount that bears the same ratio to the interest expense as (1) the bank’s average adjusted bases of tax-exempt obligations acquired after August 7, 1986, bears to (2) the average adjusted bases for all assets of the bank.

Section 1366(a)(1) requires S corporation shareholders to determine their tax liability by taking into account their pro rata share of the corporation’s nonseparately computed income or loss and their share of the items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder.

Because § 265(b) provides a special disallowance rule for banks, the Service will apply § 265(b) only at the bank level in determining the amount, if any, of the bank’s interest expense that is disallowed. To the extent indebtedness and tax-exempt obligations are taken

into account in applying § 265(b) at the bank level, they are not taken into account again in applying § 265(a) at the shareholder level.

AUTOMATIC CHANGE IN METHOD OF ACCOUNTING

The Service will issue further guidance granting permission for an automatic change in method of accounting for banks that change from the reserve method of accounting for bad debts. This guidance will permit changes to be effective as of the bank’s first taxable year beginning after December 31, 1996. A bank that wishes to be an S corporation effective January 1, 1997, must file the change in method of accounting and the S election by March 15, 1997. The principal authors of this notice are Martin Scha¨ffer and Deane Burke of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Martin Scha¨ffer or Deane Burke at (202) 622–3080 (not a toll-free call).

SIMPLE IRAs; Questions and Answers

Notice 97–6

PURPOSE

The purpose of this notice is to provide guidance, in the form of questions and answers, with respect to the SIMPLE plan provisions that are part of the Small Business Job Protection Act of 1996 (‘‘SBJPA’’), Pub. Law. 104– 188. Section 1421 of the SBJPA established a simplified tax-favored retirement plan for small employers (‘‘SIMPLE plan’’) under section 408(p) of the Internal Revenue Code. Contributions under a SIMPLE plan are made to individual retirement accounts or annuities (‘‘SIMPLE IRAs’’) that are established pursuant to the SIMPLE plan adopted by the employer.

This notice provides guidance solely with respect to certain issues relating to SIMPLE plans under section 1421 of the SBJPA. No inference should be drawn, however, regarding issues not specifically addressed in this notice that may be suggested by a particular question and answer or as to why certain questions, and not others, are included. This notice does not provide guidance with respect to section 1422 of the

SBJPA, which provides for a simplified 401(k) arrangement within a qualified plan that shares many characteristics with the SIMPLE plans described in this notice.

TABLE OF CONTENTS

A. SIMPLE PLANS IN GENERAL B. EMPLOYERS THAT CAN ESTAB LISH SIMPLE PLANS C. EMPLOYEE ELIGIBILITY TO PARTICIPATE IN A SIMPLE PLAN D. SIMPLE PLAN CONTRIBUTIONS E. EMPLOYEE ELECTIONS F. VESTING REQUIREMENTS G. EMPLOYER ADMINISTRATIVE AND NOTIFICATION REQUIREMENTS H. TRUSTEE ADMINISTRATIVE RE QUIREMENTS I. TAX TREATMENT OF SIMPLE PLANS J. EXCEPTION FOR USE OF DESIG NATED FINANCIAL INSTITUTION K. SIMPLE PLAN ESTABLISHMENT

QUESTIONS AND ANSWERS

A. SIMPLE PLANS IN GENERAL

Q. A–1: What is a SIMPLE plan? A. A–1: A SIMPLE plan is a written arrangement established under section 408(p) of the Code that provides a simplified tax-favored retirement plan for small employers. If an employer establishes a SIMPLE plan, each employee may choose whether to have the employer make payments as contributions under the SIMPLE plan or to receive these payments directly in cash. An employer that chooses to establish a SIMPLE plan must make either matching contributions or nonelective contributions. All contributions under a SIMPLE plan are made to SIMPLE IRAs.

Q. A–2: Can contributions made under a SIMPLE plan be made to any type of IRA?

A. A–2: Contributions under a SIMPLE plan may only be made to a SIMPLE IRA, not to any other type of IRA. A SIMPLE IRA is an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b), to which the only contributions that can be made are contributions under a SIMPLE plan and rollovers or transfers from another SIMPLE IRA.

Q. A–3: Can a SIMPLE plan be maintained on a fiscal year basis?

A. A–3: A SIMPLE plan may only be maintained on a calendar year basis. Thus, for example, employer eligibility to establish a SIMPLE plan (see Q&As B–1 through B–5) and SIMPLE plan contributions (see Q&As D–1 through D–6) are determined on a calendar year basis.

B. EMPLOYERS THAT CAN ESTABLISH SIMPLE PLANS

Q. B–1: Can any employer establish a SIMPLE plan?

A. B–1: SIMPLE plans may be established only by employers that had no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year (the ‘‘100– employee limitation’’). See Q&As C–4 and C–5 for the definition of compensation. For purposes of the 100-employee limitation, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE plan. Thus, employees who are excludable under the rules of section 410(b)(3) or who have not met the plan’s minimum eligibility requirements must be taken into account. Employees also include self-employed individuals described in section 401(c)(1) who received earned income from the employer during the year.

Q. B–2: Is there a grace period that can be used by an employer that ceases to satisfy the 100-employee limitation?

A. B–2: An employer that previously maintained a SIMPLE plan is treated as satisfying the 100-employee limitation for the two calendar years immediately following the calendar year for which it last satisfied the 100-employee limitation. However, if the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving the employer, then the two-year grace period will apply only in accordance with rules similar to the rules of section 410(b)(6)(C)(i).

Q. B–3: Can an employer make contributions under a SIMPLE plan for a calendar year if it maintains another qualified plan?

A. B–3: An employer cannot make contributions under a SIMPLE plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan under which any of its employees receives an allocation of contributions (in the case of a defined contribution plan) or has an increase in a benefit accrued or treated as an ac

crued benefit under section 411(d)(6) (in the case of a defined benefit plan) for any plan year beginning or ending in that calendar year. For this purpose, a ‘‘qualified plan’’ means a plan, contract, pension or trust described in section 219(g)(5) and includes a qualified plan (described in section 401(a)), a qualified annuity plan (described in section 403(a)), an annuity contract (described in section 403(b)), a plan established for employees of a state, a political subdivision or by an agency or instrumentality of any state or political subdivision (other than an eligible deferred compensation plan described in section 457(b)), a simplified employee pension (‘‘SEP’’) (described in section 408(k)) and a trust described in section 501(c)(18). In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions.

Q. B–4: Are tax-exempt employers and governmental entities permitted to maintain SIMPLE plans?

A. B–4: Yes. Excludable contributions may be made to the SIMPLE IRA of employees of tax-exempt employers and governmental entities on the same basis as contributions may be made to employees of other eligible employers.

Q. B–5: Do the employer aggregation and leased employee rules apply for purposes of the SIMPLE plan rules under section 408(p)?

A. B–5: For purposes of applying the SIMPLE plan rules under section 408(p), certain related employers (trades or businesses under common control) are treated as a single employer. These related employers include controlled groups of corporations under section 414(b), partnerships or sole proprietorships under common control under section 414(c), and affiliated service groups under section 414(m). In addition, leased employees described in section 414(n) are treated as employed by the employer.

Example: Individual P owns Business A, a computer rental agency, that has 80 employees who received more than $5,000 in compensation in 1996. Individual P also owns Business B, which repairs computers and has 60 employees who received more than $5,000 in compensation in 1996. Individual P is the sole proprietor of both businesses. Section 414(c) provides that the employees of partnerships and sole proprietorships that are under common control are treated as employees of a single employer. Thus,

for purposes of the SIMPLE plan rules, all 140 employees are treated as employed by Individual P. Therefore, neither Business A nor Business B is eligible to establish a SIMPLE plan for 1997.

C. EMPLOYEE ELIGIBILITY TO PARTICIPATE IN A SIMPLE PLAN

Q. C–1: Which employees of an employer must be eligible to participate under the SIMPLE plan?

A. C–1: If an employer establishes a SIMPLE plan, all employees of the employer who received at least $5,000 in compensation from the employer during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, must be eligible to participate in the SIMPLE plan for the calendar year.

An employer, at its option, may exclude from eligibility employees described in section 410(b)(3). These employees are:

(1) Employees who are included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; (2) In the case of a trust established or maintained pursuant to an agreement that the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with Title II of the Railway Labor Act and one or more employees, all employees not covered by that agreement; and (3) Employees who are nonresident aliens and who received no earned income (within the meaning of section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of section 861(a)(3)). As noted in Q&A B–5, the employer aggregation and leased employee rules apply for purposes of section 408(p). Thus, for example, if two related employers must be aggregated under the rules of section 414(b), all employees of either employer who satisfy the eligibility criteria must be allowed to participate in the SIMPLE plan.

Q. C–2: May an employer impose less restrictive eligibility requirements?

A. C–2: An employer may impose less restrictive eligibility requirements by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both, under its SIMPLE plan. For example, the employer could allow participation for employees who received $3,000 in compensation during any preceding calendar year. However, the employer cannot impose any other conditions on participating in a SIMPLE plan.

Q. C–3: May an employee participate in a SIMPLE plan if he or she also participates in a plan of a different employer for the same year?

A. C–3: An employee may participate in a SIMPLE plan even if he or she also participates in a plan of a different employer for the same year. However, the employee’s salary reduction contributions are subject to the limitations of section 402(g), which provides an aggregate limit on the exclusion for elective deferrals for any individual. Similarly, an employee who participates in a SIMPLE plan and an eligible deferred compensation plan described in section 457(b) is subject to the limitations described in section 457(c). An employer that establishes a SIMPLE plan is not responsible for monitoring compliance with either of these limitations.

Q. C–4: What definition of compensation applies for purposes of the SIMPLE plan rules in the case of an individual who is not a self-employed individual?

A. C–4: For purposes of the SIMPLE plan rules, in the case of an individual who is not a self-employed individual, compensation means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a)), and amounts described in section 6051(a)(8), including elective contributions made under a SIMPLE plan, and compensation deferred under a section 457 plan. For purposes of applying the 100-employee limitation, and in determining whether an employee is eligible to participate in a SIMPLE plan (i.e., whether the employee had $5,000 in compensation for any 2 preceding years), an employee’s compensation also includes the employee’s elective deferrals under a section 401(k) plan, a salary reduction SEP and a section 403(b) annuity contract.

Q. C–5: What definition of compensation applies for purposes of the

SIMPLE plan rules in the case of a self-employed individual?

A. C–5: For purposes of the SIMPLE plan rules, in the case of a selfemployed individual, compensation means net earnings from selfemployment determined under section 1402(a), prior to subtracting any contributions made under the SIMPLE plan on behalf of the individual.

D. SIMPLE PLAN CONTRIBUTIONS

Q. D–1: What contributions must an employer make under a SIMPLE plan?

A. D–1: If an employer establishes a SIMPLE plan, it must make salary reduction contributions, as described in Q&A D–2, to the extent elected by employees. In addition, the employer must make employer matching contributions, as described in Q&As D–4 and D–5, or employer nonelective contributions, as described in Q&A D–6. These are the only contributions that may be made under a SIMPLE plan.

Q. D–2: What is a salary reduction contribution?

A. D–2: A salary reduction contribution is a contribution made pursuant to an employee’s election to have an amount contributed to his or her SIMPLE IRA, rather than have the amount paid directly to the employee in cash. An employee must be permitted to elect to have salary reduction contributions made at the level specified by the employee, expressed as a percentage of compensation for the year. Additionally, an employer may permit an employee to express the level of salary reduction contributions as a specific dollar amount. An employer may not place any restrictions on the amount of an employee’s salary reduction contributions (e.g., by limiting the contribution percentage), except to the extent needed to comply with the annual limit on the amount of salary reduction contributions described in Q&A D–3.

Q. D–3: What is the annual limit on the amount of salary reduction contributions under a SIMPLE plan?

A. D–3: For 1997, the maximum annual amount of salary reduction contributions that can be made on behalf of any employee under a SIMPLE plan is $6,000. This amount will be adjusted by the Service to reflect any changes in the cost of living.

Q. D–4: What employer matching contribution is generally required under a SIMPLE plan?

A. D–4: Under a SIMPLE plan, an employer is generally required to make a contribution on behalf of each eligible employee in an amount equal to the employee’s salary reduction contributions, up to a limit of 3 percent of the employee’s compensation for the entire calendar year.

Q. D–5: Can the 3-percent limit on matching contributions be reduced?

A. D–5: The 3-percent limit on matching contributions is permitted to be reduced for a calendar year at the election of the employer, but only if:

(1) The limit is not reduced below 1 percent; (2) The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective; and (3) Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements. See Q&A E–1. For purposes of applying the rule described in paragraph (2) of this Q&A D–5, in determining whether the limit was reduced below 3 percent for a year, any year before the first year in which an employer (or a predecessor employer) maintains a SIMPLE plan will be treated as a year for which the limit was 3 percent. If an employer chooses to make nonelective contributions for a year (see Q&A D–6), that year also will be treated as a year for which the limit was 3 percent.

Q. D–6: May an employer make nonelective contributions instead of matching contributions?

A. D–6: As an alternative to making matching contributions under a SIMPLE plan (as described in Q&A D–4 and D–5), an employer may make nonelective contributions equal to 2 percent of each eligible employee’s compensation for the entire calendar year. The employer’s nonelective contributions must be made for each eligible employee regardless of whether the employee elects to make salary reduction contributions for the calendar year. The employer may, but is not required to, limit nonelective contributions to eligible employees who have at least $5,000 (or some lower amount selected by the employer) of compensation for the year.

For purposes of the 2-percent nonelective contribution, the compensation taken into account must be limited to the amount of compensation that may be

taken into account under section 401(a)(17) for the year. The section 401(a)(17) limit for 1997 is $160,000. This amount will be adjusted by the Service for subsequent years to reflect changes in the cost of living.

An employer may substitute the 2-percent nonelective contribution for the matching contribution for a year, only if:

(1) Eligible employees are notified that a 2-percent nonelective contribution will be made instead of a matching contribution; and (2) This notice is provided within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements. See Q&A E–1.

E. EMPLOYEE ELECTIONS

Q. E–1: When must an employee be given the right to enter into a salary reduction agreement?

A. E–1: During the 60-day period immediately preceding January 1 of a calendar year (i.e., November 2 to December 31 of the preceding calendar year), an eligible employee must be given the right to enter into a salary reduction agreement for the calendar year, or to modify a prior agreement (including reducing the amount subject to this agreement to $0). However, for the year in which the employee becomes eligible to make salary reduction contributions, the period during which the employee may enter into a salary reduction agreement or modify a prior agreement is a 60-day period that includes either the date the employee becomes eligible or the day before that date. For example, if an employer establishes a SIMPLE plan effective as of July 1, 1997, each eligible employee becomes eligible to make salary reduction contributions on that date and the 60-day period must begin no later than July 1 and cannot end before June 30, 1997.

During these 60-day periods, employees have the right to modify their salary reduction agreements without restrictions. In addition, for the year in which an employee becomes eligible to make salary reduction contributions, the employee must be able to commence these contributions as soon as the employee becomes eligible, regardless of whether the 60-day period has ended.

Q. E–2: Can a SIMPLE plan provide additional or longer election periods?

A. E–2: Nothing precludes a SIMPLE plan from providing additional or longer

periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For example, a SIMPLE plan can provide a 90-day election period instead of the 60-day period described in Q&A E–1. Similarly, in addition to the 60-day period described in Q&A E–1, a SIMPLE plan can provide quarterly election periods during the 30 days before each calendar quarter.

Q. E–3: Does an employee have the right to terminate a salary reduction agreement outside a SIMPLE plan’s normal election period?

A. E–3: An employee must be given the right to terminate a salary reduction agreement for a calendar year at any time during the year. A SIMPLE plan may provide that an employee who terminates a salary reduction agreement at any time other than the periods described in Q&A E–1 or E–2 is not eligible to resume participation until the beginning of the next calendar year.

Q. E–4: Must an employer allow an employee to select the financial institution to which the employer will make all SIMPLE plan contributions on behalf of the employee?

A. E–4: Generally, under section 408(p), an employer must permit an employee to select the financial institution for the SIMPLE IRA to which the employer will make all contributions on behalf of the employee. If an employer uses Form 5305-SIMPLE as modified in Q&A K–3, the employer may modify page 3 of Form 5305–SIMPLE (October 1996) (Model Salary Reduction Agreement) to include a section for employees to indicate the financial institution they have selected and any additional information necessary to facilitate transmittal of the contribution to that institution. Alternatively, under the exception described in Q&A J–1, an employer may require that all contributions be made to a designated financial institution.

F. VESTING REQUIREMENTS

Q. F–1: Must contributions under a SIMPLE plan be nonforfeitable?

A. F–1: Yes. All contributions under a SIMPLE plan must be fully vested and nonforfeitable when made.

Q. F–2: May amounts held in a SIMPLE IRA be withdrawn at any time?

A. F–2: Yes. An employer may not require an employee to retain any portion of the contributions in his or her

SIMPLE IRA or otherwise impose any withdrawal restrictions.

G. EMPLOYER ADMINISTRATIVE AND NOTIFICATION REQUIREMENTS

Q. G–1: What notification requirements apply to employers?

A. G–1: An employer must notify each employee, immediately before the employee’s 60-day election period described in Q&A E–1, of the employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement. If applicable, this notification must disclose an employee‘‘s ability to select the financial institution that will serve as the trustee of the employee’’s SIMPLE IRA as described in Q&A E–4. If an employer uses Form 5305– SIMPLE as modified in Q&A K–3, the employer may modify page 3 of Form 5305–SIMPLE (October 1996) (Model Notification to Eligible Employees) to disclose an employee‘‘s ability to select the financial institution that will serve as the trustee of the employee’’s SIMPLE IRA as described in Q&A E–4. The notification must also include the summary description described in Q&A H–1. In the case of a SIMPLE plan established using Form 5305–SIMPLE, the summary description requirement may be satisfied by providing a completed copy of pages one and two of Form 5305–SIMPLE that reflects the terms of the employer’s plan (including the materials provided by the trustee for completion of Article VI).

Q. G–2: May the notifications regarding a reduced matching contribution (described in Q&A D–5) and a nonelective contribution in lieu of a matching contribution (described in Q&A D–6) be provided at the same time as the notification of an employee’s opportunity to enter into a salary reduction agreement and the summary description?

A. G–2: Yes. An employer is deemed to provide the notification regarding a reduced matching contribution or a nonelective contribution in lieu of a matching contribution within a reasonable period of time before the 60-day election period if, immediately before the 60-day election period, this notification is included with the notification of an employee’s opportunity to enter into a salary reduction agreement.

Q. G–3: What reporting penalties under the Code apply if an employer fails to provide one or more of the required notices?

A. G–3: If the employer fails to provide one or more of the required notices described in Q&A G–1, the employer will be liable, under the Code, for a penalty of $50 per day until the notices are provided. If the employer shows that the failure was due to reasonable cause, the penalty will not be imposed. To the extent that each employee is permitted to select the trustee for his or her SIMPLE IRA pursuant to Q&A E–4, and is so notified in accordance with Q&A G–1, and the information with respect to the trustee (the name and address of the trustee and its withdrawal procedures) is not available at the time the employer is required to provide the summary description, the employer is deemed to have shown reasonable cause for failure to provide this information to eligible employees, but only if the employer sees to it that this information is provided to the employee as soon as administratively feasible once the trustee has been selected.

Q. G–4: What if an eligible employee is unwilling or unable to establish a SIMPLE IRA?

A. G–4: If an eligible employee who is entitled to a contribution under a SIMPLE plan is unwilling or unable to establish a SIMPLE IRA with any financial institution prior to the date on which the contribution is required to be made to the SIMPLE IRA of the employee under Q&A G–5 or G–6, an employer may execute the necessary documents to establish a SIMPLE IRA on the employee‘‘s behalf with a financial institution selected by the employer.

Q. G–5: When must an employer make salary reduction contributions under a SIMPLE plan?

A. G–5: The employer must make salary reduction contributions to the financial institution maintaining the SIMPLE IRA no later than the close of the 30-day period following the last day of the month in which amounts would otherwise have been payable to the employee in cash. The Department of Labor has indicated that most SIMPLE plans are also subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The Department of Labor has informed the Treasury Department and the Service that, as a matter of enforcement policy, for these plans, salary reduction contributions must be made to the SIMPLE IRA as of the earliest date on which the contributions can reasonably be segregated from

the employer’s general assets, but in no event later than the 30-day deadline described above.

Q. G–6: When must an employer make matching and nonelective contributions under a SIMPLE plan?

A. G–6: Matching and nonelective employer contributions must be made to the financial institution maintaining the SIMPLE IRA no later than the due date for filing the employer’s income tax return, including extensions, for the taxable year that includes the last day of the calendar year for which the contributions are made.

H. TRUSTEE ADMINISTRATIVE REQUIREMENTS

Q. H–1: What information must a SIMPLE IRA trustee provide to an employer?

A. H–1: Each year, a SIMPLE IRA trustee must provide the employer sponsoring the SIMPLE plan with a summary description containing the following information:

(1) The name and address of the employer and the trustee. (2) The requirements for eligibility for participation. (3) The benefits provided with respect to the arrangement. (4) The time and method of making elections with respect to the arrangement. (5) The procedures for, and effects of, withdrawals (including rollovers) from the arrangement. The trustee must provide the summary description to the employer early enough to allow the employer to meet its notification obligation described in Q&A G–1. However, a trustee is not required to provide the summary description prior to agreeing to be the trustee of a SIMPLE IRA for the SIMPLE plan.

A trustee that fails to provide the employer with a summary plan description incurs a $50 penalty, under the Code, for each day the failure continues, unless the trustee shows that the failure is due to reasonable cause. To the extent that the employer or trustee provides the information described in paragraphs (1) through (5) of this Q&A H–1 within the time period prescribed in Q&A G–1 to the employee for whom the SIMPLE IRA is established, the trustee of that SIMPLE IRA is deemed to have shown reasonable cause for failure to provide that information to the employer. For example, if the employer provides its

I. TAX TREATMENT OF SIMPLE PLANS

Q. I–1: What are the tax consequences of SIMPLE plan contributions?

A. I–1: Contributions to a SIMPLE IRA are excludable from federal income tax and not subject to federal income tax withholding. Salary reduction contributions to a SIMPLE IRA are subject to tax under the Federal Insurance Contributions Act (‘‘FICA’’), the Federal Unemployment Tax Act (‘‘FUTA’’), and the Railroad Retirement Act (‘‘RRTA’’), and must be reported on Form W–2, Wage and Tax Statement. Matching and nonelective contributions to a SIMPLE IRA are not subject to FICA, FUTA, or RRTA taxes, and are not required to be reported on Form W–2.

Q. I–2: What are the tax consequences when amounts are distributed from a SIMPLE IRA?

A. I–2: Generally, the same tax results apply to distributions from a SIMPLE IRA as to distributions from a regular IRA (i.e., an IRA described in section 408(a) or (b)). However, a special rule applies to a payment or distribution received from a SIMPLE IRA during the two-year period beginning on the date on which the individual first participated in any SIMPLE plan maintained by the individual’s employer (the ‘‘two-year period’’).

Under this special rule, if the additional income tax on early distributions under section 72(t) applies to a distribution within this two-year period, section 72(t)(6) provides that the rate of additional tax under this special rule is increased from 10 percent to 25 percent. If one of the exceptions to application of the tax under section 72(t) applies (e.g., for amounts paid after age 59 1/2, after death, or as part of a series of substantially equal payments), the exception also applies to distributions within the two-year period and the 25percent additional tax does not apply.

Q. I–3: Are there any special rollover rules that apply to a distribution from a SIMPLE IRA?

A. I–3: Section 408(d)(3)(G) provides that the rollover provisions of section 408(d)(3) apply to a distribution from a SIMPLE IRA during the two-year period described in Q&A I–2 only if the distribution is paid into another SIMPLE IRA. Thus, a distribution from a SIMPLE IRA during that two-year period qualifies as a rollover contribution (and thus is not includable in gross income) only if the distribution is paid

name and address and the information described in paragraphs (2) through (4) of this Q&A H–1, and the effects of withdrawal to all eligible employees in a SIMPLE plan in accordance with Q&A G–1, and the trustee provides its name and address and its procedures for withdrawal to each eligible employee for whom a SIMPLE IRA is established with the trustee under the SIMPLE plan, the trustee will be deemed to have shown reasonable cause for failing to provide the employer the information described in paragraphs (1) through (5) of this Q&A H–1.

In the case of a SIMPLE plan established using Form 5305–SIMPLE, a trustee may satisfy this obligation by providing an employer with a current copy of Form 5305–SIMPLE, with instructions, the information required for completion of Article VI, and the name and address of the financial institution. The trustee should provide guidance to the employer concerning the need to complete the first two pages of Form 5305–SIMPLE in accordance with its plan’s terms and to distribute completed copies to eligible employees.

The trustee of a transfer SIMPLE IRA is not required to provide the summary description described in the preceding paragraph. A SIMPLE IRA is a transfer SIMPLE IRA if it is not a SIMPLE IRA to which the employer has made contributions under the SIMPLE plan.

Q. H–2: What information must a SIMPLE IRA trustee provide to participants in the SIMPLE plan?

A. H–2: Within 30 days after the close of each calendar year, a SIMPLE IRA trustee must provide each individual on whose behalf an account is maintained with a statement of the individual’’s account balance as of the close of that calendar year and the account activity during that calendar year. A trustee who fails to provide individuals with this statement incurs a $50 penalty, under the Code, for each day the failure continues, unless the trustee shows that the failure is due to reasonable cause. However, no penalty will apply if a trustee provides this statement not later than January 31 following the calendar year to which the statement relates. The trustee must also provide any other information required to be furnished to IRA holders (e.g., disclosure statements for individual retirement plans as referred to in section 1.408–6 of the regulations).

Q. H–3: What information must a SIMPLE IRA trustee provide to the Service?

A. H–3: Section 408(i) requires the trustee of an individual retirement account to make reports regarding these accounts to the Service. The Service intends to modify Form 5498, Individual Retirement Arrangement Information, to require that the amount of contributions to a SIMPLE IRA, rollover contributions, and the fair market value of the account be reported, and that contributions to a SIMPLE IRA be identified as such. A trustee who fails to file these reports incurs a $50 penalty under the Code for each failure, unless it is shown that the failure is due to reasonable cause.

Q. H–4: Are distributions from a SIMPLE IRA required to be reported on Form 1099–R?

A. H–4: Pursuant to section 6047 of the Code and section 35.3405–1 of the regulations, the payor of a designated distribution from an IRA must report the distribution on Form 1099–R. A distribution from a SIMPLE IRA is a designated distribution from an IRA and thus must be reported on Form 1099–R. The IRS intends to revise Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-sharing Plans, IRAs, Insurance Contracts, Etc., to reflect the requirements that apply to SIMPLE IRAs. The penalty, under the Code, for failure to report a designated distribution from an IRA (including a SIMPLE IRA) is determined under sections 6721–6724.

Q. H–5: Is a SIMPLE IRA trustee responsible for reporting whether a distribution to a participant occurred during the two-year period described in Q&A I–2?

A. H–5: Yes. A SIMPLE IRA trustee is required to report on Form 1099–R whether a distribution to a participant occurred during the two-year period described in Q&A I–2. A trustee is permitted to prepare this report on the basis of its own records with respect to the SIMPLE IRA account. A trustee may, but is not required to, take into account other adequately substantiated information regarding the date on which an individual first participated in any SIMPLE plan maintained by the individual’s employer. See Q&A I–2 on the effect of distributions within this twoyear period.

into another SIMPLE IRA and satisfies the other requirements of section 408(d)(3) for treatment as a rollover contribution.

Q. I–4: Can an amount be transferred from a SIMPLE IRA to another IRA in a tax-free trustee-to-trustee transfer? A. I–4: During the two-year period described in Q&A I–2, an amount in a SIMPLE IRA can be transferred to another SIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this two-year period, an amount is paid from a SIMPLE IRA directly to the trustee of an IRA that is not a SIMPLE IRA, the payment is neither a tax-free trustee-totrustee transfer nor a rollover contribution; the payment is a distribution from the SIMPLE IRA and a contribution to the other IRA that does not qualify as a rollover contribution. After the expiration of the two-year period, an amount in a SIMPLE IRA can be transferred in a tax-free trustee-to-trustee transfer to an IRA that is not a SIMPLE IRA.

Q. I–5: When does the two-year period described in Q&A I–2 begin?

A. I–5: The two-year period described in Q&A I–2 begins on the first day on which contributions made by the individual‘‘s employer are deposited in the individual’’s SIMPLE IRA.

Q. I–6: Do the qualification rules of section 401(a) apply to contributions under a SIMPLE plan?

A. I–6: None of the qualification rules of section 401(a) apply to SIMPLE plans. For example, the section 415 and 416 rules do not apply to contributions under a SIMPLE plan. Similarly, the section 401(a)(17) limit does not apply to salary reduction contributions and matching contributions. However, as noted in Q&A D–6, the amount of compensation that may be taken into account for purposes of the 2-percent nonelective contribution is limited to the amount that may be taken into account under section 401(a)(17) for the year.

Q. I–7: What rules apply to an employer’s ability to deduct contributions under a SIMPLE plan?

A. I–7: Pursuant to section 404(m), contributions under a SIMPLE plan are deductible in the taxable year of the employer with or within which the calendar year for which contributions were made ends (without regard to the limitations of section 404(a)). For example, if an employer has a June 30 taxable year end, contributions under the SIMPLE plan for the calendar year 1997 (including contributions made in 1997 before

June 30, 1997) are deductible in the taxable year ending June 30, 1998. Contributions will be treated as made for a particular taxable year if they are made on account of that taxable year and are made by the due date (including extensions) prescribed by law for filing the return for the taxable year.

J. EXCEPTION FOR USE OF DESIGNATED FINANCIAL INSTITUTION

Q. J–1: Can an employer designate a particular financial institution to which all contributions under the SIMPLE plan will be made?

A. J–1: Yes. In accordance with section 408(p)(7), instead of making SIMPLE plan contributions to the financial institution selected by each eligible employee (see Q&A E–4), an employer may require that all contributions on behalf of all eligible employees under the SIMPLE plan be made to SIMPLE IRAs at a particular financial institution if the following requirements are met: (1) the employer and the financial institution agree that the financial institution will be a designated financial institution under section 408(p)(7) (‘‘DFI’’) for the SIMPLE plan; (2) the financial institution agrees that, if a participant so requests, the participant’s balance will be transferred without cost or penalty to another SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at a financial institution selected by the participant; and (3) each participant is given written notification describing the procedures under which, if a participant so requests, the participant’s balance will be transferred without cost or penalty to another SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at a financial institution selected by the participant. This Q&A J–1 is illustrated by the following examples:

Example 1: A representative of Financial Institution L approaches Employer B concerning the establishment of a SIMPLE plan. Employer B agrees to establish a SIMPLE plan for its eligible employees. Employer B would prefer to avoid writing checks to more than one financial institution on behalf of employees, and is interested in making all contributions under the SIMPLE plan to a single financial institution. Employer B and Financial Institution L agree that Financial Institution L will be a DFI and Financial

Institution L agrees that, if a participant so requests, it will transfer the participant’s balance, without cost or penalty, to another SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at a financial institution selected by the participant. A SIMPLE IRA is established for each participating employee of Employer B at Financial Institution L. Each participant is provided with a written description of how and when the participant may direct that the participant’s balance attributable to contributions made to Financial Institution L be transferred without cost or penalty to a SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at another financial institution selected by the participant. Financial Institution L is a DFI, and Employer B may require that all contributions on behalf of all eligible employees be made to SIMPLE IRAs at Financial Institution L. Example 2: A representative of Financial Institution M approaches Employer C concerning the establishment of a SIMPLE plan. Employer C invites Financial Institution M to make a presentation on its investment options for SIMPLE IRAs to Employer C’s employees. Each eligible employee receives notification that the employer must permit the employee to select which financial institution will serve as the trustee of the employee’s SIMPLE IRA (see Q&A G–1). All eligible employees of Employer C voluntarily select Financial Institution M to serve as the trustee of the SIMPLE IRAs to which Employer C will make all contributions on behalf of the employees. Financial Institution M is not a DFI merely because all eligible employees of Employer C selected Financial Institution M to serve as the trustee of their SIMPLE IRAs and Employer C consequently makes all contributions to Financial Institution M. Therefore, Financial Institution M is not required to transfer SIMPLE IRA balances without cost or penalty. Example 3: Assume the same facts as Example 2, except that Employee X and Employee Y, who made salary reduction elections, failed to establish SIMPLE IRAs to receive SIMPLE plan contributions on their behalf before the first date on which Employer C is required to make a contribution to their SIMPLE IRAs. Employer C establishes SIMPLE IRAs at Financial

Institution M for these employees and contributes the amount required to their accounts. Financial Institution M is not a DFI merely because Employer C establishes SIMPLE IRAs on behalf of Employee X and Employee Y while all other employees voluntarily select Financial Institution M to serve as the trustee of the SIMPLE IRAs to which Employer C will make contributions on their behalf. Q. J–2: May the time and manner in which a participant may transfer his or her balance without cost or penalty be limited without violating the requirements of section 408(p)(7)?

A. J–2: Yes. Section 408(p)(7) will not be violated merely because a participant is given only a reasonable period of time each year in which to transfer his or her balance without cost or penalty. A participant will be deemed to have been given a reasonable period of time in which to transfer his or her balance without cost or penalty if, for each calendar year, the participant has until the end of the 60-day period described in Q&A E–1 to request to transfer, without cost or penalty, his or her balance attributable to SIMPLE plan contributions for the calendar year following that 60-day period (or, for the year in which an employee becomes eligible to make salary reduction contributions, for the balance of that year) and subsequent calendar years.

If the time or manner in which a participant may transfer his or her balance without cost or penalty is limited, any such limitation must be disclosed as part of the written notification described in Q&A J–1. In the case of a SIMPLE plan established using Form 5305– SIMPLE, if the summary description requirement is being satisfied by providing a completed copy of pages one and two of Form 5305–SIMPLE, Article VI (Procedures for Withdrawal) must contain a clear explanation of any such limitation.

This Q&A J–2 is illustrated by the following examples:

Example 1: Employer A first establishes a SIMPLE plan effective January 1, 1998, and intends to make all contributions to Financial Institution M, which has agreed to serve as a DFI. For the 1998 calendar year, Employer A provides the 60-day election period described in Q&A E–1 beginning November 2, 1997, and notifies each participant that he or she may request that his or her balance

attributable to future contributions be transferred from Financial Institution M to a SIMPLE IRA at a financial institution that the participant selects. The notification states that the transfer will be made without cost or penalty if the participant contacts Financial Institution M prior to January 1, 1998. For the 1998 calendar year, the requirements of section 408(p)(7) will not be violated merely because participants are given only a 60-day period in which to request to transfer their balances without cost or penalty. Example 2: Assume the same facts as Example 1. Participant X does not request a transfer of her balance by December 31, 1997, but requests a transfer of her current balance to another SIMPLE IRA on July 1, 1998. Participant X‘‘s current balance would not be required to be transferred without cost or penalty because Participant X did not request such a transfer prior to January 1, 1998. However, during the 60-day period preceding the 1999 calendar year, Participant X may request a transfer, without cost or penalty, of her balance attributable to contributions made for the 1999 calendar year and, if she so elects, for all future calendar years (but not her balance attributable to contributions for the 1998 calendar year). Example 3: Assume the same facts as Example 1 . Under the terms of the SIMPLE plan, Participant Y becomes an eligible employee on June 1, 1998, and, for Participant Y, the 60-day period described in Q&A E–1 begins on that date. For the 1998 calendar year, Participant Y will be deemed to have been given a reasonable amount of time in which to request to transfer, without cost or penalty, his balance attributable to contributions for the balance of the 1998 calendar year if Financial Institution M allows such a request to be made prior to July 31, 1998. Q. J–3: Is there a limit on the frequency with which a participant’s balance must be transferred without cost or penalty?

A. J–3: In order to satisfy Section 408(p)(7), if a participant acts, within applicable reasonable time limits, if any, to request a transfer of his or her balance, the participant’s balance must be transferred on a reasonably frequent basis. A participant’s balance will be

deemed to be transferred on a reasonably frequent basis if it is transferred on a monthly basis.

Q. J–4: How does a DFI transfer a participant’s balance without cost or penalty?

A. J–4: In order to satisfy section 408(p)(7), a participant’s balance must be transferred in a trustee-to-trustee transfer directly to a SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at the financial institution specified by the participant.

A transfer is deemed to be made without cost or penalty if no liquidation, transaction, redemption or termination fee, or any commission, load (whether front-end or back-end) or surrender charge, or similar fee or charge is imposed with respect to the balance being transferred. A transfer will not fail to be made without cost or penalty merely because contributions that a participant has elected to have transferred without cost or penalty are required to be invested in one specified investment option until transferred, even though a variety of investment options are available with respect to contributions that participants have not elected to transfer. This Q&A J–4 is illustrated by the following examples:

Example 1: Financial Institution Q agrees to be a DFI for the SIMPLE plan maintained by Employer D. Employer D provides the 60-day election period described in Q&A E–1 beginning on November 2 of each year and each participant is notified that he or she may request, before the end of the 60-day period, a transfer of his or her future contributions from Financial Institution Q without cost or penalty to a SIMPLE IRA (or, after the two-year period described in Q&A I–2, to any IRA) at a financial institution selected by the participant. The notification states that a participant’s contributions that are to be transferred without cost or penalty will be invested in a specified investment option and will be transferred to the financial institution selected by the participant on a monthly basis. Financial Institution Q offers various investment options to account holders of IRA SIMPLE accounts, including investment options with a sales charge. Any participant who does not elect to have his or her balance transferred to another financial institution may invest the contributions made on his or her behalf in any investment option available to account

holders of SIMPLE IRA accounts at Financial Institution Q. However, contributions that a participant has elected to have transferred are automatically invested, prior to transfer, in a specified investment option that has no sales charge. The requirement that a participant’s balance be transferred without cost or penalty will not be violated merely because contributions that have been designated to be transferred pursuant to a participant’’s election are automatically invested in one specified investment option and transferred on a monthly basis to the financial institution selected by the participant. Example 2: Assume the same facts as in Example 1. Financial Institution Q generally charges its IRA accounts a reasonable annual administration fee. Financial Institution Q also charges this annual administration fee with respect to SIMPLE IRA accounts, including SIMPLE IRA accounts from which balances must be transferred in accordance with participants’ transfer elections. The requirement that participants‘‘ balances be transferred without cost or penalty will not be violated merely because a reasonable annual administration fee is charged to SIMPLE IRA accounts from which balances must be transferred in accordance with participants’’ transfer elections. Q. J–5: Is the ‘‘without cost or penalty’’ requirement violated if a DFI charges an employer for a participant‘‘s transfer of his or her balance?

A. J–5: The ’’without cost or penalty‘‘ requirement of section 408(p)(7) is not violated merely because a DFI charges an employer an amount that takes into account the financial institution’s responsibility to transfer balances upon participants’ requests or otherwise charges an employer for transfers requested participants, provided that the charge is not passed through to the participants who request the transfer.

K. SIMPLE PLAN ESTABLISHMENT

Q. K–1: Must an employer establish a SIMPLE plan on January 1?

A. K–1: An existing employer may establish a SIMPLE plan effective on any date between January 1 and October 1 of a year beginning after December 31, 1996, provided that the employer (or any predecessor employer) did not previously maintain a SIMPLE plan. This requirement does not apply to a new

employer that comes into existence after October 1 of the year the SIMPLE plan is established if the employer establishes the SIMPLE plan as soon as administratively feasible after the employer comes into existence. If an employer (or predecessor employer) previously maintained a SIMPLE plan, the employer may establish a SIMPLE plan effective only on January 1 of a year.

Q. K–2: When must a SIMPLE IRA be established for an employee?

A. K–2: A SIMPLE IRA is required to be established for an employee prior to the first date by which a contribution is required to be deposited into the employee’’s SIMPLE IRA (see Q&As G–5 and G–6).

Q. K–3: Will the Service issue model forms employers can use to establish SIMPLE plans?

A. K–3: Yes. On October 31, 1996, the Service issued Form 5305–SIMPLE, which is a form that may be used by an employer establishing a SIMPLE plan with a financial institution that is a DFI. The Service also intends to issue a model form that may be used by an employer establishing a SIMPLE plan that does not use a DFI. (The Service issued Form 5304–SIMPLE on December 30, 1996.) Until the Service issues this model form, an employer establishing a SIMPLE plan that does not use a DFI and wishes to use a model form may use Form 5305–SIMPLE (October 1996), subject to the following modifications:

A. Modifications to the Form:

(1) Form Title: strike the parenthetical ‘‘(for Use With a Designated Financial Institution)’’; (2) Item 1 of Article I: strike ‘‘SIMPLE individual retirement account or annuity established at the designated financial institution (SIMPLE IRA) for’’ and substitute ‘‘SIMPLE IRA established by’’; (3) Item 3 of Article III: strike ‘‘to the designated financial institution for the IRAs established under this SIMPLE plan’’ each time it appears and substitute ‘‘for each eligible employee to the SIMPLE IRA established at the financial institution selected by that employee’’; (4) Item 4 of Article IV: strike this Item and substitute ‘‘ Selection of IRA Trustee . The employer must permit each eligible employee to select the financial institution that will serve as trustee, custodian or issuer of the

SIMPLE IRA to which the employer will make all contributions on behalf of that employee.’’; (5) Item 4 of Article V: strike this Item; substitute ‘‘ SIMPLE IRA . A SIMPLE IRA is an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b), to which the only contributions that can be made are contributions under a SIMPLE plan and rollovers or transfers from another SIMPLE IRA.’’; (6) Article VI, heading: strike everything after the title and substitute ‘‘(The employer will provide each employee with the procedures for withdrawals of contributions received by the financial institution selected by that employee unless that financial institution provides the procedures directly to the employee.)’’; and (7) Article VII: strike the paragraph pertaining to the agreement to be a designated financial institution (i.e., the paragraph that begins ‘‘The undersigned agrees . . .’’) and the related name, address, and signature block.

B. Modifications to the Instructions:

(1) Under heading ‘‘ What is a SIMPLE Plan? ’’: strike ‘‘designated financial institution named in Article VII’’ and substitute ‘‘financial institution selected by each eligible employee’’; (2) Under heading ‘‘ When to Use Form 5305–SIMPLE ’’: strike Item 1 and renumber Items 2 and 3 accordingly; (3) Under heading ‘‘ Completing Form 5305–SIMPLE ’’: strike ‘‘and the designated financial institution’’; (4) Under heading ‘‘ Contributions (Article III) ’’, subheading ‘‘ Salary Reduction Contributions ’’: strike ‘‘designated financial institution for the employee’s SIMPLE IRA’’ and substitute ‘‘financial institution selected by each eligible employee’’; (5) Under heading ‘‘ Other Important Information About Your SIMPLE Plan ’’, subheading ‘‘ Timing of Sal- ary Reduction Contributions ’’:

(a) Strike ‘‘designated financial institution for the SIMPLE IRAs of all eligible employees’’ and substitute ‘‘financial institution selected by each eligible employee for his or her SIMPLE IRA’’; and

(b) Strike ‘‘the SIMPLE IRA at the designated financial institution’’ and substitute ‘‘each participant’s SIMPLE IRA’’; (6) Under heading ‘‘ Other Impor- tant Information About Your SIMPLE Plan ’’, subheading ‘‘ Em- ployee Notification ’’: strike everything after the title and substitute ‘‘You must notify each eligible employee prior to the employee’s 60-day election period described above that he or she can make or change salary reduction elections and select the financial institution that will serve as the trustee, custodian, or issuer of the employee’s SIMPLE IRA. In this notification, you must indicate whether you will provide:

A matching contribution equal to your employees’ salary reduction contributions up to a limit of 3% of their compensation;
A matching contribution equal to your employees’ salary reduction contributions subject to a percentage limit that is between 1% and 3% of their compensation; or
A nonelective contribution equal to 2% of your employees’ compensation.

You can use the Model Notifica- tion to Eligible Employees on page 3 to satisfy these employee notification requirements for this SIMPLE plan, provided you either: (1) modify the model to disclose employees’ ability to select the financial institution that will serve as the trustee, custodian, or issuer of the employee’s SIMPLE IRA or (2) provide this same disclosure in a separate document. A Sum- mary Description must also be provided to eligible employees at this time. This summary description requirement may be satisfied by providing a completed copy of pages 1 and 2 of Form 5305–SIMPLE (including the Article VI Procedures for Withdrawals).

If you fail to provide the employee notification (including the summary description) described above, you will be liable for a penalty of $50 per day until the notification is provided. If you can show that the failure was due to reasonable cause, the penalty will not be imposed.

If the summary description information with respect to the financial institution (i.e., the name and address of the financial institution and its withdrawal procedures) is not available at the time the employee must be

REQUEST FOR COMMENTS

The Service and Treasury request comments on the guidance provided in these questions and answers for use in developing any future guidance on SIMPLE plans.

Comments can be addressed to CC:DOM:CORP:R (Notice 97–6), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, comments may be hand delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (Notice 97–6), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet site at http:// www.irs.ustreas.gov/prod/tax_regs/ comments.html

given the summary description, you must provide the summary description without this information. In such a case, you will have reasonable cause for not including this information with respect to the financial institution in the summary description.’’; (7) Under heading ‘‘ Other Impor- tant Information About Your SIMPLE Plan ’’: strike subheading ‘‘ Choosing the Designated Financial Institution ’’ and the following three paragraphs; (8) Strike the heading ‘‘ Instructions for the Designated Financial Insti- tution ’’ and the subheading ‘‘ Com- pleting Form 5305–SIMPLE ’’ and the following paragraph; and (9) Under the subheading ‘‘ Summary Description ’’:

(a) In the first paragraph, strike ‘‘you’’ and substitute ‘‘the financial institution for the SIMPLE IRA of each eligible employee’’; (b) In the first paragraph, strike ‘‘your procedures for withdrawals and transfers from the SIMPLE IRAs established under this SIMPLE plan’’ and substitute ‘‘that financial institution’’s procedures for withdrawals from SIMPLE IRAs established at that financial institution, including the financial institution‘‘s name and address’’; and (c) Strike the second paragraph and substitute ‘‘There is a penalty of $50 per day for each failure to provide the summary description described above. However, if the failure was due to reasonable cause, the penalty will not be imposed.’’

PAPERWORK REDUCTION ACT

The collections of information contained in this notice have been reviewed and approved by the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1502.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The collections of information in this notice are in the sections headed: Em- ployee Elections, Employer Administra- tive And Notification Requirements, Trustee Administrative Requirements, and SIMPLE Plan Establishments . This information is required by the IRS to assure compliance with the new provisions of the Small Business Job Protection Act of 1996. The likely respondents are individuals, business or other forprofit institutions, and not-for-profit institutions.

The estimated total annual reporting burden is 769,000 hours. The estimated average annual burden per respondent is 2 hours and 34 minutes. The estimated number of respondents is 300,000.

The estimated annual frequency of responses is annually.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this notice is Carlton Watkins of the Employee Plans Division. For further information regarding this notice, please contact the Employee Plans Division’s taxpayer assistance telephone service at (202) 622– 6074/6075 (not a toll-free number), between the hours of 1:30 and 4:00 p.m. Eastern Time, Monday through Thursday.

Adoption Assistance

Notice 97–9

Sections 23 and 137, relating to certain adoption expenses, were added to the Internal Revenue Code by the Small Business Job Protection Act of 1996, Pub. L. 104–188. This notice provides general guidance concerning the tax

credit under § 23 for qualified adoption expenses paid or incurred by an individual, and the exclusion from gross income under § 137 for amounts paid or expenses incurred by an employer for qualified adoption expenses under an adoption assistance program. Both the credit and the exclusion are effective for taxable years beginning after December 31, 1996. They both generally terminate after December 31, 2001 (except for the credit with respect to a child with special needs).

This notice is divided into six sections. Section I explains the adoption credit. Section II explains the exclusion from gross income under an adoption assistance program. Section III describes the coordination of the credit and the exclusion. Sections IV and V cover filing and reporting requirements and the effective dates of the credit and the exclusion, respectively. Section VI invites comments on future guidance regarding the credit and the exclusion.

I. Adoption Credit. A. In General.

Section 23 provides an income tax credit for qualified adoption expenses paid or incurred by an individual in connection with the adoption of an eligible child. The phrase ‘‘paid or incurred’’ refers to the method of accounting (i.e., cash or accrual) of the individual. Under a dollar limitation, the maximum credit is $5,000 ($6,000 in the case of an adoption of a child with special needs). See section I.D.1. The credit is also subject to an income limitation which may reduce or eliminate the credit for any particular year. See section I.D.2. For the effective date and partial expiration date of the credit, see section V.

B. Eligible Child and Child with Special

Needs.

In general. An eligible child is any individual who, at the time a qualified adoption expense is paid or incurred, is under the age of 18, or is physically or mentally

C. Qualified Adoption Expenses.

‘‘Qualified adoption expenses’’ include the reasonable and necessary adoption fees, court costs, attorney’s fees, traveling expenses (including amounts expended for meals and lodging) while away from home, and other expenses that are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer. Qualified adoption expenses do not include any expense (1) for which a deduction or credit is allowed under any other provision of the Code, (2) to the extent that funds for the expense are received under any federal, state, or local program, (3) that is incurred in violation of federal or state law, (4) that is incurred in carrying out any surrogate parenting arrangement, (5) that is incurred in connection with the adoption of a child of the taxpayer’s spouse, or (6) for which reimbursement is made under an employer program or otherwise. In addition, an expense paid (by a cash basis taxpayer) or incurred (by an accrual basis taxpayer) in a

incapable of caring for himself or herself. For qualified adoption expenses paid or incurred after December 31, 2001, an eligible child must also be a child with special needs.

Child with Special Needs. A child with special needs is an otherwise eligible child who meets two additional requirements. First, a state must have determined that (1) the child cannot or should not be returned to the parents’ home, and (2) it is reasonable to conclude the child cannot be placed with adoptive parents without adoption assistance because of a specific factor or condition. Examples of a specific factor or condition include a child’s ethnic background, age, membership in a minority or sibling group, medical condition, or handicap. Second, a child with special needs must be a citizen or resident of the United States. The term ‘‘United States’’ includes any possession of the United States.

taxable year beginning before 1997 is not a qualified adoption expense eligible for the credit.

D. Limitations on the Credit.

The credit for qualified adoption expenses is subject to a dollar limitation and an income limitation.

Dollar Limitation. The maximum amount of qualified adoption expenses that may be taken into account for the credit is $5,000 ($6,000 in the case of an adoption of a child with special needs). The legislative history to this provision clarifies that the $5,000 (or $6,000) limitation is with respect to the adoption of each child and is cumulative over all taxable years (rather than an annual limitation). See section I.G., Examples 1 and 2. Therefore, the maximum amount that may be taken into account in connection with a taxpayer’s effort to adopt an eligible child is $5,000 (or $6,000), including qualified adoption expenses paid or incurred in any unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another eligible child. See section I.G., Example
The $5,000 (or $6,000) limitation on qualified adoption expenses applies both to married individuals and to unmarried individuals adopting an eligible child. Therefore, an unmarried couple that seeks to adopt an eligible child must apply the $5,000 (or $6,000) limitation to the couple’s combined qualified adoption expenses.
Income Limitation. If a taxpayer’s modified adjusted gross income (modified AGI, as defined in section I.D.3. below) is $75,000 or less, the income limitation does not apply and the taxpayer’s allowable credit is not reduced. If a taxpayer’s modified AGI is $115,000 or more, no credit is available. If a taxpayer’s modified AGI is between $75,000 and $115,000, the allowable credit is ratably reduced (but not below zero) as follows:

^AGI ^� ^$75,000

ALLOWABLE CREDIT = QAE(YR) � [QAE(YR) × ( modified $40,000 )]¶

‘‘QAE(YR)’’ is the amount of qualified adoption expenses taken into account for the taxable year after applying the dollar limitation.

For example, assume that in 1997 an unmarried individual has modified AGI of $85,000 and pays $5,000 for quali

fied adoption expenses. The adoption becomes final in 1997. The individual’s reduction percentage is 25% ($85,000 minus $75,000 equals $10,000; $10,000 divided by $40,000 equals 25%). The maximum credit available is $3,750 ($5,000 times 25% equals $1,250;

$5,000 minus $1,250 equals $3,750) and is claimed in 1997. In addition, see section I.G., Example 4.

Modified Adjusted Gross Income.

Modified AGI for the taxable year in which qualified adoption expenses are

taken into account is adjusted gross income for that year determined after applying the income exclusion under § 137, but without applying § 911 (the foreign earned income exclusion or the foreign housing exclusion), § 931 (the exclusion for income from Guam, American Samoa, and the Northern Mariana Islands), and § 933 (the exclusion for income from Puerto Rico).

E. Year of Credit.

Domestic adoptions. The credit for qualified adoption expenses paid or incurred in connection with the adoption of an eligible child who is a citizen or resident of the United States at the time the adoption commenced (including such amounts paid or incurred in an unsuccessful effort to adopt such a child) is allowed in the next taxable year unless the expenses are paid or incurred in the taxable year the adoption becomes final. The credit for expenses paid or incurred in the taxable year an adoption becomes final is allowed in that year.
Foreign adoptions. A special rule applies in the case of the adoption of an eligible child who is not a citizen or resident of the United States at the time the adoption commenced. The credit is only available for adoptions that become final. Qualified adoption expenses paid or incurred in any taxable year before the taxable year in which the adoption becomes final are treated as paid or incurred in the taxable year in which the adoption becomes final. Therefore, the credit for qualified adoption expenses paid or incurred in the taxable year in which the adoption becomes final, or in any earlier taxable year, is allowed in the taxable year the adoption becomes final.

For example, assume that in 1997 and 1998 an unmarried individual pays $1,000 and $3,000, respectively, of qualified adoption expenses in connection with the adoption of an eligible child who is not a citizen or resident of the United States. In 1999, the year the adoption becomes final, the individual pays an additional $4,000 of such expenses. The individual’s modified adjusted gross income for 1999 is less than $75,000 (and thus the income limitation does not apply). The individual may claim a credit of $5,000 (the maximum credit permitted) on his or her 1999 federal income tax return (the year the adoption becomes final).

Pre-1997 Expenses. An expense paid (by a cash basis taxpayer) or incurred (by an accrual basis taxpayer) in a taxable year beginning before 1997 in connection with the adoption (either domestic or foreign) of an eligible child does not qualify for the credit. See section V.A.

F. Carryforward of Unused Credit.

The adoption credit allowable under § 23 is a nonrefundable credit that, along with credits allowable under § 21 (relating to dependent care), § 22 (relating to the elderly and the disabled), and § 25 (relating to interest on home mortgages), is limited under § 26 to the excess of the taxpayer’s regular tax liability for the taxable year over the tentative minimum tax for the taxable year (determined without regard to the alternative minimum tax foreign tax credit). If § 26 limits the amount of an adoption credit otherwise allowable in a particular year, the excess may be carried forward to the succeeding taxable year, but not beyond the fifth taxable year following the taxable year in which the credit arose.

G. Examples.

The following examples illustrate the rules described in section I. For purposes of these examples, except as otherwise provided, assume that each eligible child is a citizen of the United States who is not a child with special needs, and that H and W are a married couple who file a joint federal income tax return on the cash basis and seek to adopt one child. Example 1. Dollar limitation. In an effort to adopt an eligible child, H and W pay $4,000 of qualified adoption expenses in 1997 and an additional $2,000 of qualified adoption expenses in 1998. The adoption becomes final in 1998. For 1998, H and W have modified AGI of $75,000 or less (and thus the income limitation does not apply). H and W may not claim any qualified adoption expenses as a credit in 1997 because of the 1-year delay rule in section I.E.1. H and W, on their joint federal income tax return for 1998, may claim $5,000 of qualified adoption expenses as a credit. The remaining $1,000 of qualified adoption expenses H and W paid may never be claimed as a credit. Example 2. Dollar Limitation. Assume the same facts as in Example 1, except that the child is a child with special needs. H and W, on their joint federal income tax return for 1998, may claim $6,000 of qualified adoption expenses as a credit. Example 3. Dollar limitation. In an effort to adopt an eligible child, H and W pay $3,000 of qualified adoption expenses in January 1997 to Agency 1 . Although Agency 1 was able to identify an eligible child for H and W to adopt, the adoption ultimately was unsuccessful. H and W then paid $4,000 of qualified adoption expenses to Agency 2 in September 1997 in a further effort to adopt a child. This time, the effort was successful and H

and W finalized the adoption of A, an eligible child, in December 1997. H and W have modified AGI of $75,000 or less (and thus the income limitation does not apply). The total amount that H and W may take into account in connection with the adoption of an eligible child is limited to $5,000. See section I.D.1. Thus, H and W, on their 1997 joint federal income tax return, may claim $5,000 of qualified adoption expenses as a credit. The remaining $2,000 of qualified adoption expenses H and W paid may never be claimed as a credit. Example 4. Income limitation. In an effort to adopt an eligible child, H and W pay $1,000 of qualified adoption expenses in 1997, an additional $2,000 of those expenses in 1998, and $4,000 of those expenses in 1999 when the adoption becomes final. H and W have modified AGI of $85,000 for all taxable years and thus the income limitation applies. H and W may not claim any qualified adoption expenses as a credit in 1997 because of the 1-year delay rule in section I.E.1. H and W, on their 1998 joint federal income tax return, may take into account the $1,000 of qualified adoption expenses paid in 1997, subject to any reduction under the income limitation. H and W ’s reduction percentage for 1998 under the income limitation is 25% ($85,000 minus $75,000 equals $10,000; $10,000 divided by $40,000 equals 25%). H and W ’s allowable credit for 1998 is $750 ($1,000 times 25% equals $250; $1,000 minus $250 equals $750). H and W, on their joint federal income tax return for 1999, first reduce the dollar limitation ($5,000) by the amount of qualified adoption expenses taken into account in all prior years ($5,000 minus $1,000 equals $4,000) before applying the income limitation. Thus, H and W may take into account only $4,000 of the $6,000 of qualified adoption expenses paid in 1998 and 1999 on their 1999 joint federal income tax return before applying the income limitation. H and W ’s reduction percentage for 1999 under the income limitation is 25% and their allowable credit for 1999 is $3,000 ($4,000 times 25% equals $1,000; $4,000 minus $1,000 equals $3,000). The remaining $2,000 of qualified adoption expenses that H and W paid in 1998 and 1999 ($6,000 minus $4,000 equals $2,000) may never be claimed as a credit.

II. Adoption Assistance Program. A. In General.

Section 137 provides an exclusion from an employee’s gross income for amounts paid or expenses incurred by an employer for qualified adoption expenses in connection with the adoption of an eligible child by an employee if such amounts are furnished pursuant to an adoption assistance program. See section II.D., which describes the requirements of an adoption assistance program. Under a dollar limitation, the maximum exclusion from gross income is $5,000 ($6,000 in the case of an adoption of a child with special needs). See section II.F.1. The exclusion is also subject to an income limitation, which may reduce or eliminate the exclusion for any particular year. See section II.F.2. For the effective date and expiration date of the exclusion, see section V.

B. Eligible Child and Child with Spe cial Needs.

In General. An eligible child is any individual who, at the time a qualified adoption expense is paid or incurred, is under the age of 18, or is physically or mentally incapable of caring for himself or herself.
Child with Special Needs. A child with special needs is an otherwise eligible child who meets two additional requirements. First, a state must have determined that (1) the child cannot or should not be returned to the parents’ home, and (2) it is reasonable to conclude the child cannot be placed with adoptive parents without adoption assistance because of a specific factor or condition. Examples of a specific factor or condition include a child’s ethnic background, age, membership in a minority or sibling group, medical condition, or handicap. Second, a child with special needs must be a citizen or resident of the United States. The term ‘‘United States’’ includes any possession of the United States.

C. Qualified Adoption Expenses.

‘‘Qualified adoption expenses’’ include the reasonable and necessary adoption fees, court costs, attorney’s fees, traveling expenses (including amounts expended for meals and lodging) while away from home, and other expenses that are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer. Qualified adoption expenses do not include any expense (1) that is incurred in violation of federal or state law, (2) that is incurred in carrying out any surrogate parenting arrangement, (3) that is incurred in connection with the adoption of a child of the taxpayer’s spouse, or (4) that is reimbursed other than under an adoption assistance program that satisfies the requirements of § 137.

D. Adoption Assistance Program Requirements.

In General. An adoption assistance program is a separate written plan of an employer for

the exclusive benefit of its employees under which the employer provides adoption assistance and which meets the requirements described below. The exclusion is not available unless, before adoption expenses are incurred by either the employer or employee, the written plan is in existence and the employee receives notification of the existence of the plan. An adoption assistance program may be part of a more comprehensive benefit plan and is not required to be funded. In addition, an employer is not required to apply to the Internal Revenue Service for a determination that the plan is a qualified program.

Plan Requirements. A brief description of the plan requirements follows:

(a) all employees who are eligible to participate in the program are required to be given reasonable notice of the terms and availability of the program;

(b) an adoption assistance program must benefit the employer’s employees generally and eligibility requirements may not discriminate in favor of highly compensated employees or their dependents;

(c) shareholders or owners (or their spouses or dependents) may receive no more than five percent of all the adoption assistance reimbursements or expenses paid by the employer during the year (for this purpose, a shareholder or owner is someone who owns on any day of the year more than five percent of the stock, or capital or profits interest of the employer); and

(d) an employee receiving payments under an adoption assistance program must provide the employer reasonable substantiation that payments or reimbursements made under the program constitute qualified adoption expenses.

Without regard to whether the foregoing requirements are satisfied, adoption reimbursement programs under § 1052 of title 10, United States Code (relating to the armed forces) or § 514 of title 14, United States Code (relating to members of the Coast Guard) are treated as adoption assistance programs for purposes of the exclusion.

E. Cafeteria Plans.

An adoption assistance program that meets the requirements of § 137 (described in section II.D.) constitutes a qualified benefit under § 125 of the Code. Consequently, the program may be offered through a cafeteria plan.

F. Limitations on the Exclusion.

The exclusion from gross income for qualified adoption expenses under an adoption assistance program is subject to a dollar limitation and an income limitation.

Dollar Limitation. The maximum amount of qualified adoption expenses that may be taken into account is $5,000 ($6,000 in the case of an adoption of a child with special needs). The $5,000 (or $6,000) limitation is with respect to the adoption of each child and is cumulative over all taxable years (rather than an annual limitation). See section II.J., Examples 1 and 2. Therefore, the maximum amount that may be taken into account in connection with a taxpayer’s effort to adopt an eligible child is $5,000 (or $6,000), including amounts paid or expenses incurred for qualified adoption expenses in connection with any unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another eligible child. See section II.J., Example 3. The $5,000 (or $6,000) limitation on qualified adoption expenses applies both to married individuals and to unmarried individuals adopting an eligible child. Therefore, an unmarried couple that seeks to adopt an eligible child must apply the $5,000 (or $6,000) limitation to the couple’s combined qualified adoption expenses.
Income Limitation. If a taxpayer’s modified adjusted gross income (modified AGI) (as defined in section II.F.3. below) is $75,000 or less, the income limitation does not apply and the taxpayer’s allowable exclusion is not reduced. If a taxpayer’s modified AGI is $115,000 or more, no exclusion is available. If a taxpayer’s modified AGI is between $75,000 and $115,000, the allowable exclusion is ratably reduced (but not below zero) as follows:

^AGI ^� ^$75,000

Exceptions & meaning →

ALLOWABLE EXCLUSION = QAE(YR) � [QAE(YR) × ( modified $40,000 )]¶

‘‘QAE(YR)’’ is the amount of qualified adoption expenses taken into account for the taxable year after applying the dollar limitation.

For example, assume that in 1997 an unmarried employee has modified AGI of $85,000 and is reimbursed $5,000 by his or her employer under an adoption assistance program for qualified adoption expenses. The employee’s reduction percentage is 25% ($85,000 minus $75,000 equals $10,000; $10,000 divided by $40,000 equals 25%). The maximum amount of the exclusion from the employee’s gross income in 1997 is $3,750 ($5,000 times 25% equals $1,250; $5,000 minus $1,250 equals $3,750). The remaining $1,250 is included in the employee’s gross income for 1997. In addition, see section II.J., Example 4. For the employee’s tax filing obligations and responsibilities, see section II.G.2.

Modified adjusted gross income. Modified AGI for the taxable year in which the exclusion may be claimed is adjusted gross income for that year, but without applying § 137 (the exclusion for adoption assistance program payments), § 911 (the foreign earned income exclusion or the foreign housing exclusion), § 931 (the exclusion for income from Guam, American Samoa, and the Northern Mariana Islands), and § 933 (the exclusion for income from Puerto Rico). Modified AGI as defined for the exclusion is different from modified AGI as defined for the credit.

G. Tax Withholding, Reporting, and Fil ing Obligations.

Employer’s Withholding and Reporting Obligations.

Amounts paid or expenses incurred by an employer for qualified adoption expenses under an adoption assistance program are not subject to income tax withholding. However, these amounts are subject to social security and Medicare taxes (FICA), federal unemployment tax (FUTA), and railroad retirement tax withholding. Employers are to report amounts paid or expenses incurred for qualified adoption expenses in accordance with appropriate forms (for example, Form W–2) and instructions or other guidance issued by the Internal Revenue Service. See Announcement 96–134, 1996–53 I.R.B. 1, for instructions relating to reporting adoption assistance program payments on Form W–2.

Employee’s Tax Filing Obligations and Responsibilities.

As described above, amounts paid or expenses incurred for qualified adoption expenses by an employer under an adoption assistance program are not subject to income tax withholding. Therefore, an employee who receives reimbursements or payments that do not qualify, or only partially qualify, for the exclusion from gross income (see sections II.F.2. and II.H.2.) must make an appropriate adjustment on Form 1040 (in accordance with the form and its instructions) to include in gross income the taxable portion of the reimbursement. In addition, the employee may need to make an adjustment to his or her income tax withholding (on Form W–4) or make estimated tax payments (see Publication 505, Tax Withholding and Estimated Tax) to avoid potential penalties for underpayment of tax on the taxable portion of a reimbursement.

H. Year of Exclusion.

Domestic Adoptions. In general, amounts are excludable from the employee’s gross income for the year in which the employer pays the qualified adoption expense in connection with the adoption of an eligible child who is a citizen or resident of the United States at the time the adoption commenced.
Foreign Adoptions. A special rule applies in the case of the adoption of an eligible child who is not a citizen or resident of the United States at the time the adoption commenced. The exclusion is only available for adoptions that become final. Amounts paid or expenses incurred by the employer for qualified adoption expenses before the taxable year in which the adoption becomes final are excludable from the employee’s gross income in the taxable year in which the adoption becomes final. Therefore, amounts paid or expenses incurred by the employer under an adoption assistance program in a taxable year prior to a final adoption are includible in the employee’s gross income in that year. The employee must make an appropriate adjustment on the employee’s Form
Provided the adoption becomes final before January 1, 2002, the employee may claim the exclusion in the taxable year in which the adoption becomes final by making an appropriate adjustment on the employee’s Form 1040 for that year. See section II.J., Example 5. See also section II.G. for

employer and employee tax withholding, reporting, and filing obligations.

I. Reserved.

J. Examples.

The following examples illustrate the rules described in section II. For purposes of these examples, except as otherwise provided, assume that each eligible child is a citizen of the United States who is not a child with special needs, that Employee Y is married, is a cash method taxpayer, and files a joint federal income tax return with Y ’s spouse. Y and Y ’s spouse seek to adopt one child. Also assume that Employer X establishes an adoption assistance program that meets the requirements of § 137 on January 1, 1997, and that Y is a plan participant. Example 1. Dollar limitation. In 1997, pursuant to the adoption assistance program, X pays $5,000 of qualified adoption expenses on behalf of Y in connection with Y ’s effort to adopt an eligible child. Y and Y ’s spouse have modified AGI of $75,000 or less for 1997 and 1998 (and thus the income limitation does not apply). In 1997, Y can exclude $5,000 from gross income. In 1998, X pays an additional $2,000 of qualified adoption expenses on behalf of Y . Y must include the additional amounts in gross income in 1998. See section II.G. for X and Y ’s tax withholding, reporting, and filing obligations. Example 2. Dollar limitation. Assume the same facts as in Example 1, except that the child is a child with special needs. In 1997, Y can exclude $5,000 from gross income. In 1998, Y can exclude an additional $1,000 from gross income. Y must include the remaining $1,000 in gross income in 1998. See section II.G. for X and Y ’s tax withholding, reporting, and filing obligations. Example 3. Dollar limitation. In 1997, pursuant to the adoption assistance program, X pays $7,000 of qualified adoption expenses on behalf of Y in connection with Y ’s effort to adopt an eligible child ($3,000 of qualified adoption expenses to Agency 1 for an unsuccessful attempt to adopt A and $4,000 of qualified adoption expenses to Agency 2 for the final adoption of B ). Y and Y ’s spouse have modified AGI of $75,000 or less for 1997 (and thus the income limitation does not apply). The total amount that Y may take into account in connection with the adoption of an eligible child is limited to $5,000. Thus, in 1997, Y can exclude $5,000 from gross income. See section II.F.1. The remaining $2,000 of qualified adoption expenses X paid on behalf of Y are includible in Y ’s gross income in 1997. See section II.G. for X and Y ’s tax withholding, reporting, and filing obligations. Example 4. Income limitation. Pursuant to the adoption assistance program, X pays $3,000 of qualified adoption expenses in 1997, and $4,000 of those expenses in 1998 on behalf of Y in connection with Y ’s effort to adopt an eligible child. Y and Y ’s spouse have modified AGI of $85,000 for all taxable years (and thus the income limitation applies). In 1997, Y can exclude $2,250 from income. The income limitation reduces the maximum exclusion as follows: Y ’s reduction percentage is 25% [$85,000 minus $75,000 equals $10,000; $10,000 divided by $40,000 equals 25%]; $3,000 times 25% equals $750; $3,000

minus $750 equals $2,250. In 1998, the income limitation reduces the maximum exclusion as follows: the dollar limitation ($5,000) is reduced by the amount of qualified adoption expenses taken into account for the exclusion in all prior years ($3,000 in 1997). Thus, of the $4,000 of qualified adoption expenses paid in 1998, Y may take into account only $2,000 ($5,000 minus $3,000 equals $2,000) before applying the income limitation. Y ’s reduction percentage is 25% and Y can exclude $1,500 from income in 1998 ($2,000 times 25% equals $500; $2,000 minus $500 equals $1,500). See section II.G. for X and Y ’s tax withholding, reporting, and filing obligations. Example 5. Cafeteria Plan. Assume that for 1997, Y elects $2,400 in adoption assistance offered under a calendar year cafeteria plan maintained by X . In December 1997, Y submits, and X reimburses, a claim of $2,400 for qualified adoption expenses incurred by Y for services provided in 1997 in connection with a foreign adoption. The adoption becomes final in 1998. Y and Y ’s spouse have modified adjusted gross income of $75,000 or less in 1998 (and thus the income limitation does not apply). Y is required to include the $2,400 reimbursement in gross income for the 1997 tax year (because of the rules in section II.H.2.). However, Y is entitled to exclude $2,400 (the reimbursement received in 1997) from gross income for the 1998 tax year (the year the adoption becomes final) by making an appropriate adjustment to Y ’s Form 1040 for 1998. See section II.G. for X and Y ’s tax withholding, reporting, and filing obligations.

III. Coordination of Credit and Exclu sion. A. Credit or Exclusion. An individual may claim both a credit and an exclusion in connection with the adoption of an eligible child. An individual may not, however, claim both a credit and an exclusion for the same expense. For example, assume that in 1997 an unmarried individual pays $6,500 in qualified adoption expenses to an adoption agency for the final adoption of an eligible child who is not a child with special needs. In that same year, the individual’s employer, under an adoption assistance program that satisfies the requirements of § 137, pays an additional $5,000 for other qualified adoption expenses to a private attorney on behalf of the employee for the adoption of the child. In 1997, assuming the individual’s modified AGI is $75,000 or less, the individual may exclude $5,000 from gross income, and may claim a credit of $5,000, because the exclusion and credit are not for the same expenses. The remaining $1,500 of qualified adoption expenses may never be claimed as a credit or excluded from gross income.

B. No Credit for Employer Payments. An individual may not claim a credit for any expense reimbursed by the individual’s employer, whether or not reimbursed under an adoption assistance pro

gram. See section I.C. For example, assume that in 1997 an unmarried individual pays $1,000 in qualified adoption expenses to a private attorney for the final adoption in that year of an eligible child who is not a child with special needs. In the same year, the individual’s employer, under an adoption assistance program that satisfies the requirements of § 137, pays an additional $7,000 in qualified adoption expenses to an adoption agency on behalf of the employee. Assuming the individual’s modified AGI for 1997 is $75,000 or less, the individual may exclude $5,000 (of the $7,000 paid by the employer) from gross income, and may claim a credit for the $1,000 paid by the individual. The remaining $2,000 of adoption expenses paid by the employer may never be claimed as a credit (nor excluded), and must be included in the individual’s gross income in 1997.

IV. Filing and Reporting. A. In General.

Taxpayers will be required to provide (on a form to be published by the Internal Revenue Service) available information about the name, age, and taxpayer identification number (TIN) of each eligible child for whom qualified adoption expenses are taken into account for purposes of the credit or exclusion. In lieu of such information, taxpayers may be required to furnish other information, including identification of the agent assisting with the adoption. Taxpayers should maintain records to support any adoption credit or exclusion claimed.

B. Married Individuals.

Individuals who are married at the end of the taxable year must file a joint federal income tax return to claim the credit or the exclusion unless they lived apart from each other for the last six months of the taxable year and the individual claiming the credit or the exclusion (1) maintained as his or her home a household for the eligible child for more than one-half of the taxable year, and (2) furnished over one-half of the cost of maintaining that household in that taxable year. For this purpose, an individual legally separated from his or her spouse under a decree of divorce or separate maintenance will not be considered married.

C. Forms and Instructions.

The Service will publish forms and instructions with respect to the filing

requirements for individuals and the reporting requirements for employers.

V. Effective Dates of the Credit and the

Exclusion. A. Effective Date.

Both the credit and the exclusion are effective for taxable years beginning after December 31, 1996.

B. Expiration Date.

The credit under § 23 for qualified adoption expenses in connection with the adoption of an eligible child who is not a child with special needs expires for expenses paid or incurred after December 31, 2001. Therefore, no credit is available for those expenses paid (by a cash method taxpayer) or incurred (by an accrual method taxpayer) after December 31, 2001. The credit for qualified adoption expenses paid or incurred in connection with an adoption of an eligible child with special needs does not expire.

The exclusion under § 137 for adoption assistance expires after December 31, 2001. Therefore, no exclusion from gross income applies to amounts paid or expenses incurred under an adoption assistance program after December 31, 2001.

In the case of a foreign adoption that becomes final after December 31, 2001, taxpayers cannot receive either a credit or an exclusion.

VI. Comments on Future Guidance In vited. The Service invites comments on future guidance concerning §§ 23 and 137. The Service requests that written comments be submitted by [INSERT DATE THAT IS [90] DAYS AFTER DATE OF PUBLICATION OF THIS DOCUMENT IN THE INTERNAL REVENUE BULLETIN]. Send submissions to: CC:DOM:CORP:R (Notice 97– 9), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 97–9), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the internet directly to the IRS internet site at http://www.irs.ustreas.gov/prod/tax regs/comments.html.

The principal authors of this notice are Marilyn E. Brookens of the Office of the Assistant Chief Counsel (Income Tax and Accounting), and Sharon Cohen and Catherine Fuller of the Office of the

QPSA. This Notice contains the sample language for the spousal consent forms. Section 1457 also directs the Secretary to publish sample language that can be included in a qualified domestic relations order (QDRO). The QDRO sample language is contained in Notice 97–11 in this Bulletin.

III. SAMPLE LANGUAGE

The Appendices to this Notice contain four sets of sample language:

Appendix A contains sample language that can be included in a spouse’s consent to a participant’s waiver of a QJSA. This language can be used for a defined benefit plan and for a defined contribution plan to the extent that it is subject to section 401(a)(11).
Appendix B contains sample language that can be included in a spouse’s consent to a participant’s waiver of a QPSA, and, if the plan so provides, to the participant’s choice of a beneficiary other than the spouse to receive any survivor benefit. This language can be used for a defined benefit plan.
Appendix C contains sample language that can be included in a spouse’s consent to a participant’s waiver of a QPSA, and, if the plan so provides, to the participant’s choice of a beneficiary other than the spouse to receive any survivor benefit. This language can be used for a defined contribution plan to the extent that it is subject to section 401(a)(11).
Appendix D contains sample language that can be included in a spouse’s consent to a participant’s choice of a beneficiary other than the spouse for a participant’s account balance. This language can be used for a defined contribution plan to the extent that it is not subject to section 401(a)(11). If the plan administrator chooses to use the sample language provided in an Appendix, the sample language should be conformed to the terms of the plan. The plan administrator should read the sample language carefully and select only those portions of the sample language that apply to the particular plan. For example, the sample language in Appendix A refers to certain optional forms of benefits under the plan, including a lump sum payment. If a plan administrator decides to include this sample language in the plan’s spousal consent form, the sample language

Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding the tax credit portion of the notice, contact Ms. Brookens at (202) 622–4920 (not a toll-free call). For further information regarding the adoption assistance program portion of the notice, contact Ms. Cohen or Ms. Fuller on (202) 622–6080 (not a toll-free call).

Sample Language for a Spouse’s Waiver to a QJSA or a QPSA

Notice 97–10

I. PURPOSE

This Notice provides sample language designed to make it easier for spouses of plan participants to understand their rights to survivor annuities under qualified plans. The sample language can be included in a form used for a spouse to consent to a participant’s waiver of a qualified joint and survivor annuity (QJSA) or qualified preretirement survivor annuity (QPSA), or to a participant’s choice of a non-spouse beneficiary in a defined contribution plan not subject to the QJSA and QPSA requirements.

The language is designed to assist plan administrators in preparing spousal consent forms that meet the statutory requirements. No one is required to use the sample language, and plan administrators that choose to use it are free to incorporate all or any part of it in their spousal consent forms.

II. BACKGROUND

Section 401(a)(11) of the Internal Revenue Code of 1986 provides that, in order to be qualified under section 401(a), all defined benefit plans and certain defined contribution plans must provide benefits in the form of a QJSA and in the form of a QPSA. Section 417 permits a participant to waive the QJSA and to elect another form of retirement benefit, or to waive the right to a QPSA, if the participant’s spouse signs a consent form.

Section 417(a)(3) requires that the plan provide an explanation to the participant of the QJSA and of his or her right to waive the QJSA within a reasonable time before the participant’s annuity starting date. However, effective for plan years beginning after December 31, 1996, section 417(a)(7)(A) provides that a plan can provide the explanation after the annuity starting date, but the required election period must not end

earlier than 30 days after notice was given to the participant. Section 417(a)(3)(B) requires the plan to provide an explanation to the participant of the QPSA and of his or her right to waive the QPSA within the applicable period, as defined in section 417(a)(3)(B)(ii).

Section 417(a)(2)(A)(i) provides that, in order for a participant to elect to waive the QJSA or QPSA, the spouse of the participant must consent in writing to the election. Section 417(a)(2)(A)(ii) provides that, in general, the waiver of, and the consent to a waiver of, a QJSA must state the specific nonspouse beneficiary who will receive the benefit and the particular optional form of benefit. The waiver of, and the consent to a waiver of, a QPSA must state the specific nonspouse beneficiary who will receive the benefit but is not required to state the form of benefit selected (if any). However, a plan may permit a spouse to execute a general consent that allows the participant to waive the QJSA or the QPSA, and change the designated beneficiary or the optional form of benefit payment, without obtaining further consent of the spouse. Section 1.401(a)– 20, Q&A–31(c), of the Regulations provides that a general consent must acknowledge that the spouse has the right to limit his or her consent to a specific beneficiary and a specific form of payment (where applicable) and that the spouse elects to relinquish both of these rights. Section 417(a)(2)(A)(iii) requires that the spouse’s consent acknowledge the effect of the participant’s waiver of the QJSA or QPSA and requires that the consent be witnessed by a plan representative or a notary public.

Under section 401(a)(11), to the extent a defined contribution plan that is not subject to the QJSA and QPSA requirements, the plan must provide that the participant’s nonforfeitable account balance be paid in full to the participant’s surviving spouse upon the participant’s death. The account balance can be paid to another beneficiary if the participant so elects and the spouse consents to the election. In general, the spousal consent must meet the same conditions as a consent to the waiver of a QPSA.

Section 1457 of the Small Business Job Protection Act of 1996, Pub. L. No. 104–188, directs the Secretary of the Treasury (‘‘Secretary’’) to develop sample language, written in a manner calculated to be understood by the average person, that can be included in a form used for a spouse to consent to a participant’s waiver of a QJSA or a

should be compared to the optional forms of benefit payments available under the plan and modified, if necessary, to reflect the plan’s optional forms. Further, spousal consent forms for some plans will need additional language discussing issues specific to the plan.

In order for a spouse’s consent to be valid, the spousal consent form is not required to include the specific language contained in the Appendices. In all cases, however, spousal consent forms should be written clearly to ensure that the spouse both understands and acknowledges the effect of the participant’s waiver of rights.

The Appendix provides sample language for incorporation in a spousal consent form only. The Appendix does not provide sample language for the explanation of the QJSA or QPSA that is required to be provided to the participant or the agreement in which the participant waives the QJSA or QPSA.

IV. COMMENTS

Notice 94–23, 1994–1 C.B. 340, requested comments from the public to aid in the development of additional guidance concerning spousal consent forms. The comments that were made in response to Notice 94–23 have been taken into consideration in drafting the sample language accompanying this Notice.

The Service invites the public to comment on the sample language accompanying this Notice as well as to suggest possible additional sample language. Comments can be addressed to CC:DOM:CORP:R (Notice 97–10), Room 5228, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, comments may be hand delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (Notice 97–10), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet site at ‘http:// www.irs.ustreas.gov/prod/tax_regs/ comments.html’.

DRAFTING INFORMATION

The principal authors of this Notice are Susan Lennon of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations) and Steven Linder of the Employee Plans Division. For further information regarding this Notice, please contact the Employee Plans Division’s taxpayer assis

tance telephone service at (202) 622– 6074/6075, between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday. Alternatively, please call Ms. Lennon at (202) 622–4606 or Mr. Linder at (202) 622–6214. These telephone numbers are not toll-free.

APPENDIX A

SAMPLE LANGUAGE THAT MAY BE INCLUDED IN A SPOUSE’S AGREEMENT TO GIVE UP THE RIGHT TO THE QUALIFIED JOINT AND SURVIVOR ANNUITY (UNDER A DEFINED BENEFIT PLAN OR A DEFINED CONTRIBU- TION PLAN)

Instruction: The sample language does not address the one-year-of-marriage rule under section 417(d); if a plan applies the one-year rule, the sample language should be modified to explain this rule. The sample language contains language in brackets that pertains to a partici- pant’s selection of a non-spouse benefi- ciary to receive death benefits. The bracketed language should be deleted if the plan provides death benefits only to the participant’s surviving spouse.

1. What is a Qualified Joint and Sur- vivor Annuity (QJSA)?

Federal law requires the (name of plan) to pay retirement ben ~~efits~~ in a ~~specia~~ l payment form unless your spouse chooses a different payment form and you agree to that choice. This special payment form is often called a ‘‘qualified joint and survivor annuity’’ or ‘‘QJSA’’ payment form. The QJSA payment form gives your spouse a (insert period of QJSA payment, e.g., m ~~onthly)~~ ~~retirement~~ ~~payment~~ ~~for~~ ~~the~~ ~~rest~~ of ~~his~~ or her life. This is often called an ‘‘annuity.’’ Under the QJSA payment form, after your spouse dies, each (insert pe- riod of QJSA payment, e.g., ~~month)~~ ~~the~~ ~~plan~~ ~~will~~ ~~pay~~ ~~you~~ ~~(insert~~ ~~survivor~~ per- centage for the Q ~~JSA~~ ~~form~~ ~~under~~ ~~the~~ ~~plan)~~ ~~percent~~ of ~~the~~ ~~retirement~~ ~~benefit~~ ~~that~~ w as paid to your spouse. The benefit paid to you after your spouse dies is often called a ‘‘survivor annuity’’ or a ‘‘survivor benefit.’’ You will receive this survivor benefit for the rest of your life.

Example Pat Doe and Pat’s spouse, Robin, receive payments from the plan under the QJSA payment form. Beginning after Pat retires, Pat receives $600 each month from the plan. Pat then dies. The plan will pay Robin $ (insert ap-

plicable dollar amount for the QJSA) a ~~month~~ ~~for~~ ~~the~~ ~~rest~~ of ~~Robin’s~~ ~~life.~~

2. How Can Your Spouse Change the Way Benefits Are Paid?

Your spouse and you will receive benefits from the plan in the special QJSA payment form required by federal law unless your spouse chooses a different payment form and you agree to the choice. If you agree to change the way the plan’s retirement benefits are paid, you give up your right to the special QJSA payments.

3. Do You Have to Give Up Your Right to the QJSA Benefit?

Your choice must be voluntary. It is your personal decision whether you want to give up your right to the special QJSA payment form.

4. What Other Benefit Forms Can My Spouse Choose?

Instruction: The plan administrator may make additions to the paragraph below to explain the plan’s optional forms of benefits. For example, the plan administrator could list all op- tional forms of benefits or provide a cross-reference to a description of ben- efit options provided to participants. The examples following the paragraph are common optional forms of benefits. The examples should be modified to be consistent with the plan’s optional forms of benefits. The plan administra- tor may give additional examples to explain other available optional forms.

If you agree, your spouse can choose to have the retirement benefits paid in a different form. Other payment forms may give your spouse larger retirement benefits while he or she is alive, but might not pay you any benefits after your spouse dies.

Example of Single Life Annuity Pay- ment Form If Pat and Robin Doe receive retirement benefits in the special QJSA payment form, Pat would receive retirement benefits of $600 each month from the plan until Pat dies and Robin would receive $ (insert appli- cable dollar amount for ~~the~~ ~~QJSA)~~ a ~~month~~ ~~for~~ ~~the~~ ~~rest~~ of ~~Robin’s~~ ~~life.~~ P at and Robin Doe agree not to receive retirement benefits in the special QJSA payment form and decide instead to receive payments only during Pat’s life. After Pat retires, Pat will receive more than $600 each month from the plan until Pat’s death. Robin

will not receive any payments from the plan after Pat’s death.

Example of Lump Sum Payment Form Pat and Robin Doe agree not to receive the special QJSA payments and decide instead that Pat will receive a single payment equal to the value of all of Pat’s retirement benefits. In this case, no further payments will be made to Pat or Robin.

[ If you agree, your spouse can name someone other than you to receive all or a part of the survivor benefits from the plan after your spouse dies. The person your spouse selects to receive all or part of the survivor benefits is often called a ‘‘beneficiary.’’ If you agree to let your spouse name someone else as the beneficiary for all of the survivor benefits, you will not receive any payments from the plan after your spouse dies. If you agree to let your spouse name someone else as the beneficiary for a part of the survivor benefits, your survivor benefits will be less than you would have received under the special QJSA payment form.

Example of Naming a Beneficiary Who Is Not the Spouse Pat and Robin Doe select a payment form that has a survivor benefit of $200 a month payable after Pat dies. Pat and Robin agree that 1/2 of the survivor benefit will be paid to Robin and 1/2 will be paid to Pat and Robin’s child, Chris. After Pat dies, the plan will pay $100 a month to Robin for the rest of Robin’s life. Chris will also receive payments from the plan as long as Chris lives. Chris will receive less than $100 a month because Chris, being younger than Robin, is expected to receive payments over a longer period. ]

5. Can Your Spouse Make Future Changes if You Sign this Agreement?

Instruction: The plan administrator should select Option A if the agreement is a ‘‘specific consent,’’ that is, the spouse agrees to the participant’s choice of a particular form of benefit and beneficiary. The plan administra- tor should select Option B if the agree- ment is a ‘‘general consent,’’ that is, the spouse agrees to allow the partici- pant to choose any form of benefit and any beneficiary without telling the spouse the selection.

Option A If you sign this agreement, you agree that benefits under the plan will be paid in the form stated in this agreement.

[ You also agree that the beneficiary named in this agreement will receive all or a part of the survivor benefits from the plan after your spouse has died ]. Your spouse cannot change the payment form [ or the beneficiary ] unless you agree to the change by signing a new agreement. However, your spouse can change to the special QJSA payment form without getting your agreement.

Option B If you sign this agreement, you agree that your spouse can choose the form of payments that he or she will receive from the plan without telling you and without getting your agreement. [ Your spouse can also choose the beneficiary who will receive any survivor benefits from the plan after your spouse dies without telling you and without getting your agreement. ] Your spouse does not need to tell you or get your agreement to any future changes in the form of payments [ or the beneficiary ].

You may limit your agreement to a particular payment form [ and a particular beneficiary ] . If you want to allow your spouse to select only a particular payment form [and a particular beneficiary], do not sign this form. In that case, contact the plan administrator for more information and to get a new agreement that lets you state the particular payment form [ and the particular beneficiary ] that you will allow your spouse to select.

6. Can You Change Your Mind After You Sign this Agreement?

Instruction: The plan administrator should select Option A if the plan does not allow a spouse to revoke his or her consent. The plan administrator should select Option B if the plan allows a spouse to revoke his or her consent. The language in double brackets in Options A and B applies only to general consent forms. For an explanation of a specific consent and a general consent, see the Instruction to section 5.

Option A You cannot change this agreement after you sign it. Your decision is final

[ even if your spouse later chooses a different type of retirement benefit or beneficiary ] .

Option B You can change this agreement until (date) . After that date, you cannot ~~change~~ the agreement [ even if your spouse later chooses a different type of retirement benefit or beneficiary ] . If you change your mind, you must notify the plan administrator by (insert the plan procedure for revoking consent) .

7. What Happens to this Agreement if You Become Separated or Divorced?

Legal separation or divorce may end your right to survivor benefits from the plan even if you do not sign this agreement. However, if you become legally separated or divorced, you might be able to get a special court order (which is called a qualified domestic relations order or ‘‘QDRO’’) that would give you rights to receive retirement benefits even if you sign this agreement. If you are thinking about separating or getting a divorce, you should get legal advice on your rights to benefits from the plan.

8. What Should You Know Before Signing this Agreement?

Instruction: The plan administrator should modify the language below to reflect the plan’s administrative proce- dures and insert the appropriate ad- dress or telephone number.

This is a very important decision. You should think very carefully about whether you want to sign this agreement. Before signing, be sure that you understand what retirement benefits you may get and what benefits you will no longer be able to receive.

Your spouse should have received information on the types of retirement benefits available from the plan. If you have not seen this information, you should get it and read it before you sign this agreement. For additional information, you can contact (name of person or department, such as ~~the~~ ~~Human~~ ~~Re-~~ ~~sources~~ ~~Department)~~ at ~~the~~ ~~following~~ ~~address~~ ~~(or~~ ~~telephone~~ number).

9. Your Agreement

Option A I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand that I ~~have~~ ~~the~~ ~~right~~ to ha ve (name of plan) pay my spouse’s retire~~ment~~ ~~benefits~~ i n the special QJSA payment form and I agree to give up that right. I understand that by signing this agreement, I may receive less money than I would have received under the special QJSA payment form and I may receive nothing after my spouse dies, depending on the payment form [or beneficiary] that my spouse chooses.

I agree that my spouse can receive retirement benefits in the form of a (insert form of benefit selected) . [ I also ~~agree~~ to my ~~spouse’s~~ ~~choice~~ of (name of beneficiary) as the beneficiary ~~who~~ ~~will~~ ~~receive~~ ~~(ins~~ ert percentage of survivor benefit t ~~hat~~ ~~will~~ be ~~paid~~ to ~~the~~ ~~benefi-~~ ~~ciary)~~ of ~~the~~ ~~survivor~~ ~~benefits~~ ~~from~~ ~~the~~ ~~plan~~ a fter my spouse dies. ] I understand that my spouse cannot choose a different form of retirement benefits [ or a different beneficiary ] unless I agree to the change.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then my spouse and I will receive payments from the plan in the special QJSA payment form.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Option B I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand that I ~~have~~ ~~the~~ ~~right~~ to ha ve (name of plan) pay my spouse’s retire~~ment~~ ~~benefits~~ i n the special QJSA payment form, and I agree to give up that right. I understand that by signing this agreement, I may receive less money than I would have received under the special QJSA payment form and I may receive nothing after my spouse dies depending on the payment form [ or beneficiary ] that my spouse chooses.

I understand that by signing this agreement, my spouse can choose any retirement benefit form [ and any beneficiary ] that is allowed by the plan without telling me and without getting my agreement. I also understand that my spouse can change the retirement benefit form selected [ or the name of a beneficiary ] at any time before retirement

benefits begin without telling me and without getting my agreement.

I understand that I can limit my spouse’s choice to a particular retirement benefit form [ and a particular beneficiary who will receive payments from the plan after the death of my spouse ] and that I am giving up that right.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then my spouse and I will receive payments from the plan in the special QJSA payment form.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

APPENDIX B SAMPLE LANGUAGE THAT MAY BE INCLUDED IN A SPOUSE’S AGREEMENT TO GIVE UP THE RIGHT TO THE QUALIFIED PRERETIREMENT SURVIVOR AN- NUITY UNDER A DEFINED BEN- EFIT PLAN

1. What is a Qualified Preretirement Survivor Annuity (QPSA)?

Instruction: The final sentence in the sample language before the example addresses situations where a plan pays the survivor benefit in a lump sum if the value of the survivor benefit is $3,500 or less. That sentence should be deleted if the plan pays survivor ben- efits with a value of $3,500 or less as an annuity.

Federal law gives you the right to receive a special death benefit from (name of plan) if your spouse dies ~~before~~ ~~you,~~ ~~unle~~ ss your spouse chooses to give up this benefit and you agree to that choice. You have this right if your spouse has earned retirement benefits under the plan and dies before he or she begins receiving those benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). You have the right to receive this special (insert period of QPSA payment, e.g., ~~monthly)~~ ~~death~~ ~~benefit~~ ~~for~~

the rest of your life beginning no later than when your spouse could have begun receiving retirement benefits. The special death benefit is (insert a percent- age that is no less t ~~han~~ ~~the~~ ~~survivor~~ ~~percentage~~ ~~for~~ ~~the~~ ~~QJSA~~ ~~form~~ ~~under~~ ~~the~~ ~~plan)~~ ~~percent~~ of ~~the~~ ~~retirement~~ ~~benefit~~ ~~your~~ spouse earns before death. The special death benefit is often called a ‘‘qualified preretirement survivor annuity’’ or ‘‘QPSA’’ benefit. (The plan will pay this death benefit in a lump sum, rather than as a QPSA, if the value of the death benefit is $3,500 or less.)

Example Pat Doe dies at age 45 after earning a retirement benefit. The value of Pat’s death benefit is more than $3,500. If Pat had lived, Pat could have retired and begun receiving payments as early as age 55 under the plan’s terms. The plan will pay a monthly benefit to Pat’s spouse, Robin Doe, for the rest of Robin’s life. Robin has the right to begin receiving the benefit no later than when Pat would have been 55 years old. There is a cost for the QPSA benefit. Your spouse’s retirement benefits will be reduced for this cost.

Instruction: The paragraph above should be deleted if the plan does not reduce a participant’s benefit because of the QPSA coverage and does not impose a charge for the QPSA. If the plan imposes the QPSA charge other than by reducing the participant’s re- tirement benefit, this paragraph should be modified accordingly.

2. What Are Your Rights if You Sign this Agreement?

Your right to the QPSA benefit provided by federal law cannot be taken away unless you agree to give up that benefit.

Instruction: The plan administrator should select Option A if the agreement is intended to waive the QPSA in a plan that imposes a charge for the QPSA. The plan administrator should select Option B if the participant’s spouse is agreeing to allow someone else to receive any death benefits, regardless of whether the plan imposes a charge for the QPSA.

Option A If you sign this agreement, you will not receive the QPSA benefit and your spouse’s retirement benefits will not be reduced for the cost of the QPSA benefit you give up.

spouse later chooses a different beneficiary ] . If you change your mind, you must notify the plan administrator by (the plan procedure for revoking con- ~~sent)~~ .

6. What Happens to this Agreement if You Become Separated or Divorced?

You may lose your right to the QPSA benefit if your spouse and you become legally separated or divorced, even if you do not sign this agreement. However, if you become legally separated or divorced, you might be able to get a special court order (which is called a qualified domestic relations order or ‘‘QDRO’’) that specifically protects your rights to receive the QPSA benefit or that gives you other benefits under this plan. If you are thinking about separating or getting a divorce, you should get legal advice on your rights to benefits from the plan.

7. Your Agreement

Instruction: The plan administrator should select Option A if the agreement is a waiver of the QPSA and the plan does not allow a non-spouse benefi- ciary to receive a QPSA benefit. The plan administrator should select Op- tion B if the agreement is a specific consent to have a different beneficiary receive a QPSA benefit. The plan ad- ministrator should select Option C if the agreement is a general consent to have any beneficiary chosen by the participant receive a QPSA benefit. For an explanation of a specific con- sent and a general consent, see the Instruction to section 4. The final sentence in the first and last paragraphs of the sample language in this section address situations where a plan pays the survivor benefit in a lump sum if the value of the death benefit is $3,500 or less. These sen- tences should be deleted if the plan pays death benefits with a value of $3,500 or less as an annuity.

Option A I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand tha t I ~~have~~ a ~~right~~ to the QPSA benefit from (name of plan) if my spouse dies befor e he or ~~she~~ ~~beg~~ ins receiving retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also understand that if the value of the QPSA benefit is $3,500 or less,

Option B

You can agree to give up all or part of the QPSA benefit. If you agree to give up all of the QPSA benefit, the plan will pay this benefit to another person selected by your spouse. The person your spouse selects to receive this benefit is often called a ‘‘beneficiary’’. If you agree to give up part of the QPSA benefit, that part will be paid to the beneficiary named by your spouse, and you will receive the rest of the QPSA benefit. For example, if you agree, your spouse can have the death benefits paid to his or her children instead of you.

Example of Naming a Beneficiary Who is Not the Spouse

Pat and Robin Doe agree that Robin will not receive the QPSA benefit. Pat and Robin also decide that 1/2 of the death benefits under the plan will be paid to Robin and 1/2 of the death benefits will be paid to Pat and Robin’s child, Chris. The total death benefits are $200 per month. After Pat dies, the plan will pay $100 a month to Robin for the rest of Robin’s life. Chris will also receive payments from the plan as long as Chris lives. Chris will receive less than $100 a month because Chris, being younger than Robin, is expected to receive payments over a longer period.

3. Do You Have to Give Up Your Right to the QPSA Benefit?

Your choice must be voluntary. It is your personal decision whether you want to give up your right to the QPSA benefit.

4. Can Your Spouse Make Future Changes if You Sign this Agreement?

Instruction: Option A is for use if the plan does not allow a non-spouse beneficiary to receive death benefits. Option B is for use in a ‘‘specific consent agreement,’’ that is, where the spouse agrees to the participant’s waiver of the QPSA and to the partici- pant’s choice of a specific beneficiary to receive death benefits. Option C is for use in a ‘‘general consent agree- ment,’’ that is, where the spouse agrees to the participant’s waiver of the QPSA and to allow the participant to select any other beneficiary to receive the death benefits.

Option A Even if you sign this agreement, your spouse can later select the QPSA benefit for you without having you sign a new agreement.

Option B If you sign this agreement, your spouse cannot change the beneficiary named in this agreement unless you agree to the new beneficiary by signing a new agreement. If you agree, your spouse can change the beneficiary at any time before your spouse begins receiving benefits or dies. You do not have to agree to let your spouse change the beneficiary. However, your spouse can later select the QPSA benefit for you without having you sign a new agreement.

Option C If you sign this agreement, your spouse can choose the beneficiary who will receive the QPSA benefit without telling you and without getting your agreement. Your spouse can change the beneficiary at any time before your spouse begins receiving benefits or dies.

You have the right to agree to allow your spouse to select only a particular beneficiary. If you want to allow your spouse to select only a particular beneficiary, do not sign this form. In that case, contact the plan administrator for more information and to get a new agreement that lets you state the particular beneficiary that you will allow your spouse to select.

5. Can You Change Your Mind After You Sign this Agreement?

Instruction: The plan administrator should select Option A if the plan does not allow a spouse to revoke his or her consent. The plan administrator should select Option B if the plan allows a spouse to revoke his or her consent. The bracketed language in Options A and B applies only to general consent forms. For an explanation of a specific consent and a general consent, see the Instruction to section 4.

Option A You cannot change this agreement after you sign it. Your decision is final

[ even if your spouse later chooses a different beneficiary ] .

Option B You can change this agreement until (date) . After that date, you cannot ~~change~~ the agreement [ even if your

the plan will pay the benefit to me in one lump sum payment.

I agree to give up my right to the QPSA benefits.

I understand that by signing this agreement, I may receive less money than I would have received under the special QPSA payment form and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then I will receive the QPSA benefit if my spouse dies before he or she begins to receive retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also understand that if the value of the QPSA benefit is $3,500 or less, the plan will pay the benefit to me in one lump sum payment.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Option B I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand tha t I ~~have~~ a ~~right~~ to the QPSA benefit from (name of plan) if my spouse dies befor e he or ~~she~~ ~~beg~~ ins receiving retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also understand that if the value of the QPSA benefit is $3,500 or less, the plan will pay the benefit to me in one lump sum payment.

I agree to give up my right to (insert percentage) percent of the QPSA ~~benefit~~ ~~and~~ ~~instead~~ to have that benefit paid to the following beneficiaries:

Name of Beneficiary Percent of QPSA

I understand that my spouse cannot select a different beneficiary unless I agree to the change.

I understand that by signing this agreement, I may receive less money than I would have received under the special QPSA payment form and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Option C I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand tha t I ~~have~~ a ~~right~~ to the QPSA benefit from (name of plan) if my spouse dies befor e he or ~~she~~ ~~beg~~ ins receiving retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also understand that if the value of the QPSA benefit is $3,500 or less, the plan will pay the benefit to me in one lump sum payment.

I agree to give up my right to (insert percentage) percent of the QPSA ~~benefit~~ ~~and~~ to ~~allow~~ my spouse to choose any beneficiary to receive that benefit. I understand by signing this agreement, my spouse can choose the beneficiary without telling me and without getting my agreement. I also understand that my spouse can change the beneficiary at any time before retirement benefits begin without telling me and without getting my agreement.

I understand that I can limit my spouse’s choice to a particular beneficiary who will receive payments from the plan after the death of my spouse and that I am giving up that right.

I understand that by signing this agreement, I may receive less money than I would have received under the special QPSA payment form and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then I will receive the QPSA benefit from the plan if my spouse dies before he or she begins to receive retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also

understand that if the value of the QPSA benefit is $3,500 or less, the plan will pay the benefit to me in one lump sum payment.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Note to plan administrator: A partici- pant in a plan subject to the survivor annuity requirements of section 401(a)(11) generally may waive the QPSA benefit with spousal consent only on or after the first day of the plan year in which the participant attains age 35. However, a plan may provide for an earlier waiver with spousal consent, provided that a writ- ten explanation of the QPSA is given to the participant and that the waiver executed prior to age 35 becomes invalid upon the beginning of the plan year in which the participant’s thirty- fifth birthday occurs. If a new waiver and spousal consent is not executed on or after that date, the QPSA benefit must be provided.

APPENDIX C SAMPLE LANGUAGE THAT MAY BE INCLUDED IN A SPOUSE’S AGREEMENT TO GIVE UP THE RIGHT TO A QUALIFIED PRERETIREMENT SURVIVOR AN- NUITY WITH RESPECT TO A PAR- TICIPANT IN A DEFINED CON- TRIBUTION PLAN TO THE EXTENT THE PLAN IS SUBJECT TO SECTION 401(a)(11)

What is a Qualified Preretirement Survivor Annuity (QPSA)?

Instruction: The final sentence of the sample language before the example addresses situations where a plan pays the survivor benefit in a lump sum if the value of the survivor benefit is $3,500 or less. That sentence should be deleted if the plan pays survivor ben- efits with a value of $3,500 or less as an annuity.

Your spouse has an account in (name of plan) . The money in the accou nt ~~that~~

your spouse will be entitled to receive is called the vested account. Federal law states that you will receive a special death benefit that is paid from the vested account if your spouse dies before he or she begins receiving retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). You have the right to receive this (insert period of QPSA payment, e.g., m ~~onthly)~~ ~~payment~~ ~~for~~ ~~your~~ ~~life~~ ~~beginning~~ ~~after~~ yo ur spouse dies. The special death benefit is often called a ‘‘qualified preretirement survivor annuity’’ or ‘‘QPSA’’ benefit. (The plan will pay this death benefit in a lump sum, rather than as a QPSA, if the value of the death benefit is $3,500 or less.)

2. Can Your Spouse Choose Other Beneficiaries to Receive the Account?

Your right to the QPSA benefit provided by federal law cannot be taken away unless you agree to give up that benefit. If you agree, your spouse can choose to have all or a part of the death benefits paid to someone else. The person your spouse chooses to receive the death benefits is usually called the ‘‘beneficiary.’’ For example, if you agree, your spouse can have the death benefits paid to his or her children instead of you.

Example Pat and Robin Doe agree that Robin will not receive the QPSA benefit. Pat and Robin also decide that 1/2 of the death benefits that are paid from Pat’s vested account will be paid to Robin and 1/2 of the death benefits will be paid to Pat and Robin’s child, Chris. The total death benefits are $200 per month. After Pat dies, the plan will pay $100 a month to Robin for the rest of Robin’s life. Chris will also receive payments from the plan as long as Chris lives. Chris will receive less than $100 a month because Chris, being younger than Robin, is expected to receive payments over a longer period.

3. Do You Have to Give Up Your Right to the QPSA Benefit?

Your choice must be voluntary. It is your personal decision whether you want to give up your right to the special QPSA payment form. 4. Can Your Spouse Change the Ben- eficiary in the Future if You Sign this Agreement?

Instruction: Option A is for use in a ‘‘specific consent agreement,’’ that is, where the spouse agrees to the partici- pant’s waiver of the QPSA and to the participant’s choice of a specific ben- eficiary to receive death benefits. Op- tion B is for use in a ‘‘general consent agreement,’’ that is, where the spouse agrees to the participant’s waiver of the QPSA and to allow the participant to select any other beneficiary to re- ceive the death benefits.

Option A If you sign this agreement, your spouse cannot change the beneficiary named in this agreement unless you agree to the new beneficiary by signing a new agreement. If you agree, your spouse can change the beneficiary at any time before your spouse begins receiving benefits or dies. You do not have to agree to let your spouse change the beneficiary. However, your spouse can select the QPSA benefit for you without getting your agreement.

Option B If you sign this agreement, your spouse can choose the beneficiary who will receive the death benefits without telling you and without getting your agreement. Your spouse can change the beneficiary at any time before he or she begins receiving benefits or dies.

5. Can You Change Your Mind After You Sign this Agreement?

Instruction: The plan administrator should select Option A if the plan does not allow a spouse to revoke his or her consent. The plan administrator should select Option B if the plan allows a spouse to revoke his or her consent. The bracketed language in Options A and B applies only to general consent forms. For an explanation of a specific consent and a general consent, see the Instruction to section 4.

Option A You cannot change this agreement after you sign it. Your decision is final

[ even if your spouse later chooses a different beneficiary ] .

Option B You can change this agreement until (date) . After that date, you cannot ~~change~~ the agreement [ even if your spouse later chooses a different beneficiary ] . If you change your mind, you must notify the plan administrator by (the plan procedure for revoking con- ~~sent)~~ .

6. What Happens to this Agreement if You Become Separated or Divorced?

You may lose your right to the QPSA benefit if your spouse and you become legally separated or divorced even if you do not sign this agreement. However, if you become legally separated or divorced, you might be able to get a special court order (which is called a qualified domestic relations order or ‘‘QDRO’’) that specifically protects your rights to receive the QPSA benefit or that gives you other benefits under this plan. If you are thinking about separating or getting a divorce, you should get legal advice on your rights to benefits from the plan.

7. Your Agreement

Instruction: The plan administrator should select Option A if the agreement is a specific consent. The plan adminis- trator should select Option B if the agreement is a general consent. For an explanation of a specific consent and a general consent, see the Instruction to section 4. The final sentence in the first and last paragraphs of the sample language in this section address situations where a plan pays the survivor benefit in a lump sum if the value of the death benefit is $3,500 or less. These sen- tences should be deleted if the plan pays death benefits with a value of $3,500 or less as an annuity.

I agree to give up my right to (insert percentage) percent of the QPSA ~~benefit~~ ~~and~~ ~~instead~~ to have that benefit paid to the following beneficiaries:

Your spouse has an account in (name of plan) . The money in the accou nt ~~that~~ ~~your~~ ~~spo~~ use will be entitled to receive is called the vested account. Federal law states that you will receive the vested account after your spouse dies.

Example

Pat Doe dies at age 45 and Pat’s vested account in the (name of plan) was $10,000 at the time of Pat’s death. The plan will pay the $10,000 to Pat’s spouse, Robin Doe (adjusted for gains and losses after Pat’s death).

2. Can Your Spouse Choose Other Beneficiaries to Receive the Account?

Your right to your spouse’s vested account provided by federal law cannot be taken away unless you agree. If you agree, your spouse can elect to have all or part of the vested account paid to someone else. Each person your spouse chooses to receive a part of the vested account is called a ‘‘beneficiary.’’ For example, if you agree, your spouse can have the vested account paid to his or her children instead of you.

Example Pat and Robin Doe agree that 1/2 of the Pat’s vested account will be paid to Robin and 1/2 of the vested account will be paid to Pat’s child, Chris. If Pat’s vested account at the time of his death is $10,000, the plan will pay $5,000 to Robin and $5,000 to Chris (each amount adjusted for gains and losses after Pat’s death). Your spouse cannot have the vested account paid to someone else unless you agree and sign this agreement.

3. Do You Have to Give Up Your Right to Your Spouse’s Vested Ac- count?

Your choice must be voluntary. It is your personal decision whether you want to give up your right to your spouse’s vested account.

4. Can Your Spouse Change the Ben- eficiary in the Future if You Sign this Agreement?

Instruction: The plan administrator should select Option A if the agreement is a ‘‘specific consent,’’ that is, where the spouse agrees to the beneficiary selected by the participant. The plan administrator should select Option B if the agreement is a ‘‘general consent,’’ that is, where the spouse agrees to allow the participant to select any beneficiary even if the spouse does not know the identity of the beneficiary.

Name of Beneficiary Percent of QPSA

I understand that my spouse cannot select a different beneficiary unless I agree to the change.

I understand that by signing this agreement, I may receive less money than I would have received under the special QPSA payment form and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Option B I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participant~~ ) . I understand tha t I ~~have~~ a ~~right~~ to the QPSA benefit from (name of plan) if my spouse dies befor e he or ~~she~~ ~~beg~~ ins receiving retirement benefits (or, if earlier, before the beginning of the period for which the retirement benefits are paid). I also understand that if the value of the QPSA benefit is $3,500 or less, the plan will pay the benefit to me in one lump sum payment.

I agree to give up my right to (insert percentage) percent of the QPSA ~~benefit~~ ~~and~~ to ~~allow~~ my spouse to choose any beneficiary to receive that benefit. I understand that by signing this agreement, my spouse can choose the beneficiary without telling me and without getting my agreement. I also understand that my spouse can change the beneficiary at any time before retirement benefits begin without telling me and without getting my agreement.

I understand that I can limit my spouse’s choice to a particular beneficiary who will receive payments from the plan after the death of my spouse and that I am giving up that right.

I understand that by signing this agreement, I may receive less money than I would have received under the special QPSA payment form and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

APPENDIX D SAMPLE LANGUAGE THAT MAY BE INCLUDED IN A SPOUSE’S AGREEMENT TO GIVE UP THE RIGHT TO BE THE BENEFICIARY OF A PARTICIPANT IN A DEFINED CONTRIBUTION PLAN TO THE EXTENT THE PLAN IS NOT SUB- JECT TO SECTION 401(a)(11)

1. What Rights Do You Have to Ben- efits After Your Spouse Dies?

Option A If you sign this agreement, your spouse cannot change the beneficiary named in this agreement to anyone other than you, unless you agree to the new beneficiary by signing a new agreement. If you agree, your spouse can change the beneficiary at any time before your spouse dies.

Option B If you sign this agreement, your spouse can choose the beneficiary who will receive all or part of the vested account without telling you and without getting your agreement. Your spouse can change the beneficiary at any time before the account is paid out.

5. Can You Change Your Mind After You Sign this Agreement?

Instruction: The plan administrator should select Option A if the plan does not allow a spouse to revoke his or her consent. The plan administrator should select Option B if the plan allows a spouse to revoke his or her consent. The bracketed language in Options A and B applies only to general consent forms. For an explanation of a specific consent and a general consent, see the Instruction to section 4.

Option A You cannot change this agreement after you sign it. Your decision is final

[ even if your spouse later chooses a different beneficiary ] .

Option B You can change this agreement until (date) . After that date, you cannot ~~change~~ the agreement [ even if your spouse later chooses a different beneficiary ] . If you change your mind, you must notify the plan administrator by (insert the plan procedure for revoking ~~consent)~~ . ~~The~~ ~~plan~~ ~~administrator~~ ~~must~~ ~~receive~~ this information before (date) .

6. What Happens to this Agreement if You Become Separated or Divorced?

Legal separation or divorce may end your right to the vested account even if you do not sign this agreement. How

ever, if you become legally separated or divorced, you might be able to get a special court order (which is called a qualified domestic relations order or ‘‘QDRO’’) that specifically protects your rights to the vested account. If you are thinking about separating or getting a divorce, you should get legal advice on your rights to benefits from the plan.

7. Your Agreement

Option A I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand that I ~~have~~ ~~the~~ ~~right~~ to ~~all~~ of my spouse’s vested account in the (name of plan) after my spouse dies. I ~~agree~~ to ~~give~~ up the right to (insert percentage) of the account and t o ~~have~~ ~~that~~ ~~amount~~ paid to the following beneficiaries:

Name of Beneficiary Percent of QPSA

I understand that my spouse cannot change the name of any beneficiary in the future unless I agree to the change.

I understand that by signing this agreement, I may receive less money than I would have received if I had not signed this agreement and I may receive nothing from the plan after my spouse dies.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then I will receive my spouse’s vested account under the plan when my spouse dies.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Option B I, (name of participant’s spouse), am the ~~spouse~~ of ~~(name~~ of ~~participan~~ t) . I understand that I ~~have~~ ~~the~~ ~~right~~ to ~~all~~ of my spouse’s vested account in the (name of plan) after my spouse dies.

I agree to give up (insert percentage) percent of the accou nt ~~and~~ to ~~have~~ ~~that~~ amount paid to someone else as the beneficiary. I understand that by signing this agreement, my spouse can choose the beneficiary of the vested account without telling me and without getting my agreement. I also understand that by signing this agreement, my spouse can change the beneficiary of the vested account in the future without telling me and without getting my agreement again.

I understand that by signing this agreement, I may receive less money than I would have received if I had not signed this agreement and I may receive nothing from the plan after my spouse dies.

I understand that I can limit my spouse’s choice to a particular beneficiary who will receive the vested account balance and that I am giving up that right.

I understand that I do not have to sign this agreement. I am signing this agreement voluntarily.

I understand that if I do not sign this agreement, then I will receive my spouse’s account under the plan when my spouse dies.

Instruction: The plan administrator should add a line for the spouse’s signature and a place for the witness’ acknowledgment.

Sample Language for a Qualified Domestic Relations Order

Notice 97–11

I. PURPOSE

This Notice provides information intended to assist domestic relations attorneys, plan participants, spouses and former spouses of participants, and plan administrators in drafting and reviewing a qualified domestic relations order (‘‘QDRO’’). The Notice provides sample language that may be included in a QDRO relating to a plan that is qualified under § 401(a) or § 403(a) of the Internal Revenue Code of 1986 (‘‘qualified plan’’ or ‘‘plan’’) and that is subject to § 401(a)(13). The Notice also discusses a number of issues that should be considered in drafting a QDRO. A QDRO is a domestic relations order that provides for payment of benefits from a qualified plan to a spouse, former spouse, child or other dependent of a plan participant and that meets certain requirements.

A. Statutory QDRO Requirements

Section 401(a)(13)(A) of the Code provides that benefits under a qualified plan may not be assigned or alienated. Section 401(a)(13)(B) establishes an exception to the antialienation rule for assignments made pursuant to domestic relations orders that constitute QDROs within the meaning of § 414(p). A ‘‘domestic relations order’’ is defined in § 414(p)(1)(B) as any judgment, decree, or order (including approval of a property settlement agreement) that (i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (ii) is made pursuant to a State domestic relations law (including a community property law). There is no exception to the § 401(a)(13)(A) antialienation rule for assignments made pursuant to domestic relations orders that are not QDROs.

Section 414(p)(1)(A) provides, in general, that a QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee’s right, or assigns to an alternate payee the right, to receive all or a portion of the benefits payable with respect to a participant under a plan, and that meets the requirements of paragraphs (2) and (3) of § 414(p). Section 414(p)(2) requires that a QDRO clearly specify: (A) the name and last known mailing address (if any) of the participant and of each alternate payee covered by the order, (B) the amount or percentage of the participant’s benefits to be paid by the plan to each alternate payee, or the manner in which that amount or percentage is to be determined, (C) the number of payments or period to which the order applies, and (D) each plan to which the order applies.

Section 414(p)(3) provides that a QDRO cannot require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan; cannot require a plan to provide increased benefits (determined on the basis of actuarial value); and cannot require the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO. Section 414(p)(4)(A)(i) provides that a domestic relations order shall not be treated as failing to meet the requirements of § 414(p)(3)(A) (and thus will not fail to be a QDRO) solely because the order requires payment of

benefits to an alternate payee on or after the participant’s earliest retirement age, even if the participant has not separated from service at that time. Section 414(p)(4)(B) defines earliest retirement age as the earlier of (i) the date on which the participant is entitled to a distribution under the plan, or (ii) the later of (I) the date the participant attains age 50, or (II) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.

Section 414(p)(5) permits a QDRO to provide that the participant’s former spouse shall be treated as the participant’s surviving spouse for purposes of §§ 401(a)(11) and 417 (relating to the right to receive survivor benefits and requirements concerning consent to distributions), and that any other spouse of the participant shall not be treated as a spouse of the participant for these purposes. An alternate payee is defined under § 414(p)(8) as any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to the participant. Section 414(p)(10) provides that a plan shall not fail to satisfy the requirements of § 401(a), 401(k) or 403(b) solely by reason of payments made to an alternate payee pursuant to a QDRO.

B. Small Business Job Protection Act of 1996

Section 1457(a)(2) of the Small Business Job Protection Act of 1996 (‘‘SBJPA’’) directs the Secretary of the Treasury (‘‘Secretary’’) to develop sample language for inclusion in a form for a QDRO described in § 414(p)(1)(A) of the Code and § 206(d)(3)(B)(i) of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’) that meets the requirements contained in those sections, and the provisions of which focus attention on the need to consider the treatment of any lump sum payment, qualified joint and survivor annuity (‘‘QJSA’’), or qualified preretirement survivor annuity (‘‘QPSA’’). Accordingly, the Service and Treasury are publishing the discussion and sample QDRO language set forth in the Appendix to this Notice.

Section 1457(a)(1) of the SBJPA directs the Secretary to publish sample language that can be included in a form that is used for a spouse to consent to a participant’s waiver of a QJSA or

QPSA. This sample language for use in spousal consent forms is contained in Notice 97–10 in this Bulletin.

C. Department of Labor Interpre- tive Authority

Section 206(d)(3) of ERISA (29 U.S.C. § 1056(d)(3)) contains QDRO provisions that are substantially parallel to those of § 414(p) of the Code. The Department of Labor has jurisdiction to interpret these provisions (except to the extent provided in § 401(n) of the Code) and the provisions governing the fiduciary duties owed with respect to domestic relations orders and QDROs. Section 401(n) gives the Secretary of the Treasury the authority to prescribe rules or regulations necessary to coordinate the requirements of §§ 401(a)(13) and 414(p), and the regulations issued by the Department of Labor thereunder, with other Code provisions. The Department of Labor has reviewed this Notice, including its Appendix, and has advised the Service and Treasury that the discussion and sample language are consistent with the views of the Department of Labor concerning the statutory requirements for QDROs. This Notice, including its Appendix, is not intended by the Service or Treasury to convey interpretations of the statutory requirements applicable to QDROs, but only to provide examples of language that may be (but are not required to be) used in drafting a QDRO that satisfies these requirements.

II. SAMPLE LANGUAGE

The Appendix to this Notice has two parts. Part I discusses certain issues that should be considered when drafting a QDRO. Part II contains sample language that will assist in drafting a QDRO. Drafters who use the sample language will need to conform it to the terms of the retirement plan to which the QDRO applies, and to specify the amounts assigned and other terms of the QDRO so as to achieve an appropriate division of marital property or level of family support. A domestic relations order is not required to incorporate the sample language in order to satisfy the requirements for a QDRO, and a domestic relations order that incorporates part of the sample language may omit or modify other parts.

The sample language addresses a variety of matters, but is not designed to address all retirement benefit issues that may arise in each domestic relations matter or QDRO. Further, some of the sample language, while helpful in facili

tating the administration of a QDRO, is not necessarily required for the order to satisfy the requirements for a QDRO. Alternative formulations would be permissible for use in drafting orders that meet the statutory requirements for a QDRO.

III. OTHER SOURCES OF INFOR- MATION

The Pension Benefit Guaranty Corporation (‘‘PBGC’’) recently published a booklet entitled ‘‘Divorce Orders & PBGC,’’ which discusses the special QDRO rules that apply for plans that have been terminated and are trusteed by PBGC, and provides model QDROs for use with those plans. This publication may be obtained by calling PBGC’s Customer Service Center at 1–800–400– PBGC or electronically via the PBGC internet site at ‘‘http://www.pbgc.gov’’.

Additional information on the rights of participants and spouses to plan benefits can be found in a two-booklet set published by the Service, entitled ‘‘Looking Out for #2.’’ These booklets discuss retirement benefit choices under a defined contribution or a defined benefit plan, and may be obtained by calling the Internal Revenue Service at 1–800–TAX–FORM, and asking for Publication 1565 (defined contribution plans) or Publication 1566 (defined benefit plans).

IV. COMMENTS

The Service invites the public to comment on the QDRO discussion and sample language included in the Appendix to this Notice, and welcomes suggestions concerning possible additional sample language. Comments may be submitted to the Internal Revenue Service at CC:DOM:CORP:R (Notice 97– 11), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, D.C. 20044. Alternatively, taxpayers may hand-deliver comments between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (Notice 97–11), Courier’s desk, Internal Revenue Service, 1111 Constitution Ave., N.W., Washington, D.C., or may submit comments electronically via the IRS internet site at ‘‘http://www.irs.ustreas.gov/prod/ tax_regs/comments.html’’.

DRAFTING INFORMATION

The principal authors of this Notice are Diane S. Bloom of the Employee Plans Division and Susan M. Lennon of the Office of the Associate Chief Coun

sel (Employee Benefits and Exempt Organizations); however, other personnel from the Service and Treasury contributed to its development. For further information regarding this Notice, please contact the Employee Plans Division’s taxpayer assistance telephone service at (202) 622–6074/6075, between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday. Alternatively, please call Ms. Bloom at (202) 622– 6214 or Ms. Lennon at (202) 622–4606. Questions concerning QDROs may be addressed to Susan G. Lahne of the Pension and Welfare Benefits Administration, Department of Labor, at (202) 219–7461. These telephone numbers are not toll-free.

APPENDIX

Exceptions & meaning →