Part III. — Internal Revenue Bulletin 1997-51

C.B. 621, or in an electronic storage media system consistent with Rev. Proc. 97–22, 1997–13 I.R.B. 9. The § 6695(g) penalty will not be applied with respect to a particular return or claim for refund if the preparer can demonstrate to the satisfaction of the Service that, considering all the facts and circumstances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the 1997 due diligence requirements, and the failure to meet the 1997 due diligence requirements with respect to the return or claim for refund in question was isolated and inadvertent.

REQUEST FOR COMMENTS ON FUTURE GUIDANCE

The Service and Treasury Department invite public comment on the due diligence requirements in § 6695(g) for tax years after 1997. Comments are requested by May 15, 1998. An original and eight copies of written comments should be sent to:

or hand delivered between the hours of 8:00 a.m. and 5:00 p.m. to:

Courier’s Desk Internal Revenue Service Attn: CC:DOM:CORP:R

Room 5228 (IT&A:Br4) 1111 Constitution Ave., NW Washington, DC

Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to http://www.irs.ustreas. gov./prod/tax_regs/comments.html (the IRS Internet site). All comments will be available for public inspection and copying in their entirety.

PAPERWORK REDUCTION ACT

The collections of information contained in this notice have been reviewed

Income Tax Return Preparer Penalties—1997 Federal Income Tax Returns Due Diligence Requirements for Earned Income Credit (EIC)

Notice 97–65

PURPOSE

This notice sets forth due diligence requirements that paid preparers of federal income tax returns or claims for refund (preparers) that involve the Earned Income Tax Credit (EIC) must meet to avoid imposition of the penalty under § 6695(g) of the Internal Revenue Code for 1997 returns and claims for refund. The Treasury Department intends to issue temporary regulations under § 6695(g) that will incorporate the requirements set forth in this notice and that will apply to 1997 returns and claims for refund. However, these regulations may impose different due diligence requirements for returns and claims for taxable years beginning after 1997. Comments are requested regarding possible alternatives for meeting the due diligence requirements in the future.

BACKGROUND

Section 6695(g), as added by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, 111 Stat. 788 (August 5, 1997), imposes a $100 penalty on a preparer with respect to any return or claim for refund for each failure to comply with the due diligence requirements imposed by regulations with respect to determining a taxpayer’s eligibility for the EIC or the amount of any allowable EIC. This new penalty is effective for taxable years beginning after December 31, 1996, and is in addition to any other penalty imposed under present law.

DUE DILIGENCE REQUIREMENTS FOR 1997

For each 1997 income tax return or claim for refund involving the EIC, a preparer will be liable for the § 6695(g) penalty unless all of the following due diligence requirements are met:

(1) The preparer must either (a) complete the “Earned Income Credit (EIC) Eligibility Checklist” (attached to this notice) or (b) otherwise record in the preparer’s paper or electronic files the information that would be necessary to complete the Checklist (“alternate eligibility record”). The preparer’s completion of the Checklist or alternate eligibility record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer. The alternate eligibility record may consist of one or more documents containing the required information.

(2) The preparer must either (a) complete the “Earned Income Credit Worksheet” in the 1997 Form 1040 instructions, or (b) otherwise record in the preparer’s paper or electronic files the preparer’s EIC computation, including the method and information used to make that computation (“alternate computation record”). The preparer’s completion of the Worksheet or alternate computation record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer. The alternate computation record may consist of one or more documents containing the required information.

(3) The preparer must not know or have reason to know that any information used by the preparer in determining the taxpayer’s eligibility for the EIC or in computing the EIC is incorrect. The preparer may not ignore the implications of information furnished to, or known by, the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete;

(4) The preparer must retain (a) the completed Checklist (or alternate eligibility record); (b) a copy of the Worksheet (or alternate computation record); and (c) a record of how and when the information was obtained by the preparer, including the identity of any person furnishing such information. These items must be retained for three years after the June 30th following the date the return was presented to the taxpayer for signature, and may be retained on magnetic media consistent with Rev. Proc. 81–46, 1981–2

Internal Revenue Service

Attn: CC:DOM:CORP:R

Room 5228 (IT&A:Br4) P.O. Box 7604 Ben Franklin Station Washington, DC 20044,

December 22, 1997 14 1997–51 I.R.B.

___ YES ___ NO

(b) Answer YES if the qualifying child is also a qualifying child for one or more other persons and the taxpayer’s modified AGI is higher than each other person’s. Answer YES if the child is a qualifying child only for the taxpayer. ___ YES ___ NO

(c) If the qualifying child is married, is the taxpayer claiming the child as a dependent? (If the qualifying child is not married, answer YES.) ___ YES ___ NO

(a) Was the taxpayer’s main home (and the spouse’s if filing a joint return) in the United States for more than half the year? Military personnel on extended active duty outside the United States are considered to be living in the United States. ___ YES ___ NO

(b) Was the taxpayer (or spouse, if filing a joint return) at least age 25 but under 65 at the end of 1997? ___ YES ___ NO

(c) No one can claim the taxpayer (or spouse if filing a joint return) as a dependent on their return. If the taxpayer (and spouse if filing a joint return) is not eligible to be a dependent on anyone else’s return, answer YES. If taxpayer (or spouse if filing a joint return) is eligible to be claimed as a dependent on someone else’s return, answer NO. ___ YES ___ NO

*PERSONS WITH A QUALIFYING CHILD: If the taxpayer answered YES to questions 1 through 9(a), (b), and (c), the taxpayer can claim the credit. Remember to fill out Schedule EIC and attach it to the taxpayer’s Form 1040 or 1040A.

*PERSONS WITHOUT A QUALIFYING CHILD: If the taxpayer answered YES to questions 1 through 8 and 10(a), (b), and (c), taxpayer can claim the credit.

IF THE TAXPAYER ANSWERED NO TO ANY QUESTION, TAXPAYER IS NOT ELIGIBLE FOR THE CREDIT.

and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1570. 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 contained under the heading “DUE DILIGENCE REQUIREMENTS FOR 1997” in this notice. This information is required to implement § 6695(g), and verify that preparers have exercised due diligence in preparing any return or claim for refund for taxable year 1997 that involves the EIC. The likely recordkeepers are preparers.

In 1998, the estimated total annual recordkeeping burden will be 160,000 hours.

The estimated annual burden per recordkeeper will vary from 0 minutes to 16 minutes, depending on individual circumstances, with an estimated average of 8 minutes. The estimated number of recordkeepers is 1,200,000.

Books or records relating to the collection of information in this notice must be retained for three years after the June 30th following the date the return was presented to the taxpayer for signature. 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 Celia Gabrysh, Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Celia Gabrysh at (202) 6224940 (not a toll-free number).

EARNED INCOME CREDIT (EIC)

ELIGIBILITY CHECKLIST For use by income tax return preparers in preparing 1997 tax returns and claims

for refund

Taxpayer may claim the earned income credit if all the following questions are answered YES:

Do the taxpayer, spouse, and qualifying child each have a social security number?

___ YES ___ NO

Is the taxpayer’s total taxable and nontaxable earned income at least $1 but less than:

$9,770 if the taxpayer does not have a qualifying child?
$25,760 if the taxpayer has one qualifying child?
$29,290 if the taxpayer has more than one qualifying child? ___ YES ___ NO

Is the taxpayer’s modified AGI less than:

$9,770 if the taxpayer does not have a qualifying child?
$25,760 if the taxpayer has one qualifying child?
$29,290 if the taxpayer has more than one qualifying child? ___ YES ___ NO

Is the taxpayer’s investment income $2,250 or less? ___ YES ___ NO
Is the taxpayer’s filing status one of the following: married filing jointly, head of household, qualifying widow(er), or single? ___ YES ___ NO
If the taxpayer is a nonresident alien, is the filing status married filing jointly? (If taxpayer is not a nonresident alien, answer YES). ___ YES ___ NO
Answer YES if the taxpayer (and spouse if filing a joint return) is not a qualifying child of another person. ___ YES ___ NO
Answer YES if the taxpayer (and spouse if filing a joint return) is not filing Form 2555 or Form 2555–EZ to exclude from gross income any income earned in foreign countries or to deduct or exclude a foreign housing amount. ___ YES ___ NO

STOP: If the taxpayer has a qualifying child, answer question 9 and skip 10. If the taxpayer does not have a qualifying child, skip 9 and answer 10.

(a) Does the child meet the age, relationship, and residence tests for a qualifying child? See Form 1040 instructions for Line 56a.

1997–51 I.R.B. 15 December 22, 1997

fund of qualified tuition and related expenses to submit an annual information report to the Service with respect to each student on whose behalf the reimbursements or refunds are paid. The terms “eligible educational institution” and “qualified tuition and related expenses” have the same meanings for purposes of § 6050S as they do for purposes of the Hope Scholarship Credit and the Lifetime Learning Credit.

Section 6050S(b) provides that the return of information must be in the form prescribed by the Secretary and contain:

(1) the name, address, and taxpayer identification number (TIN) of the individual with respect to whom the qualified tuition and related expenses were received or the reimbursement or refund was paid,

(2) the name, address, and TIN of any individual certified by the individual named in the first item as the taxpayer who will claim that individual as a dependent for purposes of the deduction under § 151 for any taxable year ending with or within the year for which the information return is filed,

(3) the aggregate amount of payments of qualified tuition and related expenses received by the eligible educational institution or the aggregate amount of reimbursements or refunds (or similar amounts) paid during the calendar year with respect to the individual named in the first item, and

(4) such other information as the Secretary may prescribe.

Section 6050S(d) provides that every person required to make an information return under § 6050S(a) shall furnish to each individual whose name is required to be included in the return a written statement showing the name, address, and phone number of the reporting person’s information contact, and the aggregate amounts required to be included in the return.

DISCUSSION

A. Who Must File for 1998.

For 1998, an eligible educational institution that receives payments of qualified tuition and related expenses in 1998 must file an information return with the Service with respect to each student on whose behalf payments were received. An eligible educational institution that makes reim

Returns Relating to Higher Education Tuition and Related Expenses

Notice 97–73

PURPOSE

This notice describes the information reporting requirements for 1998 under § 6050S of the Internal Revenue Code (as enacted by the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, § 201(c), 111 Stat. 804 (the Act)) that apply to certain educational institutions in connection with the Hope Scholarship Credit and the Lifetime Learning Credit. The Treasury Department intends to issue regulations on the information reporting required under § 6050S. Pending the issuance of those regulations, this notice describes who must report information, and the nature of the information that will be required to be reported under § 6050S for 1998.

BACKGROUND

A. The Hope Scholarship and Lifetime

Learning Credits.

Section 201(a) of the Act, 111 Stat. 799, added § 25A to the Code. Section 25A allows certain taxpayers who pay qualified tuition and related expenses to an eligible educational institution to claim a Hope Scholarship Credit or a Lifetime Learning Credit against their federal income tax liability. The Hope Scholarship Credit is available for qualified tuition and related expenses paid after December 31, 1997, in taxable years ending after that date for education furnished in academic periods beginning after December 31, 1997. The Lifetime Learning Credit is available for qualified tuition and related expenses paid after June 30, 1998, in taxable years ending after that date for education furnished in academic periods beginning after June 30, 1998. The term “academic period” includes a semester, trimester, quarter, or any other period designated as a period of instructional time by the educational institution. For this purpose, an academic period begins on the first day of classes, and does not include periods of student orientation, counseling, or vacation.

For a taxpayer to be eligible for the Hope Scholarship Credit or the Lifetime Learning Credit, qualified tuition and re

lated expenses must be paid by the taxpayer to an eligible educational institution for the taxpayer, the taxpayer’s spouse or any dependents. Payments by a taxpayer’s dependents are to be treated as having been made by the taxpayer. The Hope Scholarship Credit is available only for the qualified tuition and related expenses of students enrolled at least half-time in the first two years of postsecondary education and can be claimed in no more than two years for each student.

Qualified tuition and related expenses are the tuition and fees an individual is required to pay in order to be enrolled at or attend an eligible educational institution. Amounts paid for any course or other education involving sports, games, or hobbies are not eligible for the credit, unless the course or other education is part of the student’s degree program. Charges and fees associated with room, board, student activities, athletics, insurance, books, equipment, transportation, and similar personal, living, or family expenses are not qualified tuition and related expenses.

An eligible educational institution is a college, university, vocational school, or other postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, is eligible to participate in the student aid programs administered by the Department of Education. This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions.

Notice 97–60, 1997–46 I.R.B. 8, provides additional information about the Hope Scholarship Credit and the Lifetime Learning Credit.

B. Information Reporting Relating to

Qualified Tuition and Related Expenses.

Section 6050S(a) requires eligible educational institutions that receive payments of qualified tuition and related expenses or make reimbursements or refunds of qualified tuition and related expenses to submit an annual information report to the Service with respect to each student on whose behalf the payments are received or the reimbursements or refunds are made. Section 6050S(a) also requires each person engaged in a trade or business who makes a reimbursement or re

December 22, 1997 16 1997–51 I.R.B.

E. Statements To Be Provided to

Students

Each eligible educational institution must provide each student with respect to whom an information return is filed a statement containing the same information that is provided to the Service on the information return required by § 6050S. In addition, the statement provided to the student must contain the phone number of the individual serving as information contact at the eligible educational institution that made the return. The statement with respect to qualified tuition and related expenses paid in 1998 must be provided to the student by February 1, 1999. The statement may be a copy of Form 1098–T or an acceptable substitute statement.

F. Collecting Information

The Service is developing an optional Form W–9S for use in collecting information for the purpose of complying with § 6050S. Eligible educational institutions will be able to use the form to collect a student’s name, address, and TIN. The form is being designed so that it can also be used to collect any information necessary to meet the information reporting requirements associated with the student loan interest deduction provided by new § 221. Eligible educational institutions will be able to collect information from students for 1998 information reporting purposes on a paper or an electronic version of Form W–9S (or an acceptable substitute). The eligible educational institution also may collect the necessary information by using its own forms and procedures.

Eligible educational institutions that are also federal, state or local government agencies are required to provide certain disclosures under the Privacy Act when collecting social security numbers from individuals. See 5 U.S.C. § 552a. The Form W–9S will contain a Privacy Act disclosure statement.

G. Waiver of Penalties.

The Treasury Department intends to issue regulations under § 6050S providing guidance on how institutions are to comply with the requirements of the statute. Until the regulations are adopted, no penalties will be imposed under

bursements or refunds of tuition or related expenses to a student during 1998, that equal or exceed payments of qualified tuition or related expenses received on behalf of that student during 1998, is not required to file an information return or furnish a statement with respect to that student for 1998.

An institution is not required to provide a report with respect to a student whose tuition and related expenses were waived in their entirety or paid entirely with scholarships because it will have received no payments of qualified tuition and related expenses on behalf of such a student.

Persons, other than eligible educational institutions, engaged in a trade or business and making reimbursements or refunds of qualified tuition and related expenses will not be required to file information returns or furnish statements of reimbursements or refunds for 1998.

For purposes of providing these information reports, an eligible educational institution should provide reports on students who are enrolled in the institution for any academic term beginning in 1998. An institution should determine its enrollment for each term as of any of the following three dates:

(a) 30 days after the first day of the academic term; (b) a date during the term on which enrollment data must be collected for purposes of the Integrated Postsecondary Education Data System administered by the Department of Education; or (c) a date during the term on which the institution must report enrollment data to the State, the institution’s governing board or some other external governing body. An institution should provide a single information report for each student on whose behalf qualified tuition and related expenses have been received in 1998 even if the institution receives more than one payment on that student’s behalf during 1998.

B. Information Required for 1998.

Eligible educational institutions required under this notice to file information returns for 1998 must properly complete Form 1098–T, Tuition Payments, for each student with respect to whom information reporting is required. For 1998, a

properly completed Form 1098–T filed with the Service must include:

(1) the name, address, and TIN of the eligible educational institution,

(2) the name, address, and TIN of the individual with respect to whom payments of qualified tuition and related expenses were received during 1998,

(3) an indication as to whether the individual named in the second item was enrolled for at least half the full-time academic workload during any academic period commencing in 1998, and

(4) an indication as to whether the individual named in the second item was enrolled exclusively in a program or programs leading to a graduate-level degree, graduate-level certificate, or other recognized graduate-level educational credential.

For purposes of section 25A and the reporting required under § 6050S, a student will be considered to be enrolled at least half-time if the student is enrolled for at least half the full-time academic workload for the course of study the student is pursuing as determined under the standards of the institution where the student is enrolled. The institution’s standard for a full-time workload must equal or exceed the standards established by the Department of Education under the Higher Education Act and set forth in 34 C.F.R. § 674.2(b).

Although in the future institutions will be required to provide the additional information specified in § 6050S (e.g., the amount of qualified tuition and related expenses received and/or reimbursed), the IRS will not impose penalties on an institution that does not provide this information for 1998.

C. When To File

The information returns required under § 6050S for 1998 must be sent to the Service by March 1, 1999.

D. Manner of Filing

Eligible educational institutions may file the information returns required by § 6050S for 1998 on paper or by magnetic media. Additional guidance will be issued providing further information on how to file returns by magnetic media. In addition, the Service is exploring electronic filing options and will issue further guidance when such options become available.

1997–51 I.R.B. 17 December 22, 1997

Section 401(a)(9) provides that, in order for a plan to be qualified under § 401(a), distributions of each employee’s interest in the plan must commence no later than the “required beginning date” for the employee. Prior to the amendments made by the SBJPA, § 401(a)(9)(C) generally defined the required beginning date for an employee as the April 1 of the calendar year following the calendar year in which the employee attained age 70 ¹ ⁄2. This meant that an employee who attained age 70 ¹ ⁄2 was required to commence receiving distributions from the plan during the following year, even if the employee had not retired from employment with the employer maintaining the plan.

Section 1404(a) of the SBJPA amended § 401(a)(9) of the Code to provide that, in the case of an employee who is not a 5-percent owner, the required beginning date for minimum distributions from a qualified plan is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70 ¹ ⁄2 or the calendar year in which the employee retires. In the case of an employee who is a 5-percent owner, the required beginning date continues to be the April 1 of the calendar year following the calendar year in which the employee attains age 70 ¹ ⁄2. An employee is treated as a 5-percent owner for purposes of § 401(a)(9) as amended by the SBJPA if such employee is a 5percent owner (as defined in § 416) with respect to the plan year ending with or within the calendar year in which such owner attains age 70 ¹ ⁄2. Once an employee is a 5-percent owner described in the preceding sentence, distributions must continue to such employee even if such employee ceases to own more than 5 percent of the employer in a subsequent year.

Section 1404(a) of the SBJPA also amended § 401(a)(9) of the Code to provide that an employee’s accrued benefit shall be actuarially increased to take into account the period after age 70 ¹ ⁄2 in which the employee was not receiving any benefits under the plan. The amendments to § 401(a)(9) of the Code apply to years beginning after December 31, 1996.

§§ 6721 and 6722 for failure to file correct information returns with the Service or to furnish correct statements to the individuals with respect to whom information reporting is required under § 6050S. Furthermore, even after the regulations are adopted, no penalties will be imposed under §§ 6721 and 6722 for failure to file correct information returns or furnish correct written statements for 1998 as required by § 6050S if the institution made a good faith effort to file information returns and furnish statements in accordance with this notice.

DRAFTING INFORMATION

The principal author of this notice is John McGreevy of the Office of the Assistant Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact him on (202) 622-4910 (not a toll-free call).

Weighted Average Interest Rate Update

Notice 97–74

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L. 103–465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for November 1997 is 6.11 percent. The following rates were determined for the plan years beginning in the month shown below.

number). Ms. Prestia’s number is (202) 622-7377 (also not a toll-free number).

Minimum Distribution Requirements

Notice 97–75

I. PURPOSE

This notice provides guidance relating to the amendments to the minimum distribution requirements of § 401(a)(9) of the Internal Revenue Code (“Code”) made by § 1404 of the Small Business Job Protection Act of 1996, Pub. L. 104–188 (“SBJPA”). Specifically, this notice:

Answers questions regarding the actuarial increase that must be provided under a defined benefit plan for an employee who retires after age 70 ¹ ⁄2, and the interaction of this actuarial increase with § 411.
Coordinates the § 401(a)(4) nondiscrimination requirements with the § 401(a)(9) requirement that certain preretirement distribution options be available to an employee at age 70 ¹ ⁄2.
Permits plans to allow participants who commenced distributions under preSBJPA § 401(a)(9) to stop receiving those distributions, and provides guidance on the applicable notice and spousal consent requirements.
Clarifies the extent to which distributions made after 1996 to an employee who has attained age 70 ¹ ⁄2 will be considered eligible rollover distributions under § 402(c)(4)(B).
Gives relief from the direct rollover requirements of § 401(a)(31), the written explanation requirement under § 402(f) and the mandatory 20-percent withhold

II. BACKGROUND

90% to 107% 90% to 110% Weighted Permissible Permissible Month Year Average Range Range

December 1997 6.79 6.11 to 7.26 6.11 to 7.47

Drafting Information

The principal author of this notice is Donna Prestia of the Employee Plans Division. For further information regarding this notice, call (202) 622-6076 between 2:30 and 3:30 p.m. Eastern time (not a toll-free

ing requirement under § 3405(c) for certain distributions made in 1997.

Provides an optional rule under which an employee’s required beginning date under pre-SBJPA § 401(a)(9) may be retained.

sion. For further information regarding this which an employee’s required beginning The amendments retain the existing notice, call (202) 622-6076 between 2:30 date under pre-SBJPA § 401(a)(9) may be rules relating to the determination of the and 3:30 p.m. Eastern time (not a toll-free retained. required beginning date for distributions

December 22, 1997 18 1997–51 I.R.B.

the actuarial equivalent of the employee’s retirement benefits that would have been payable as of the date the actuarial increase must commence under Q&A–1 (i.e., the later of the April 1 following the calendar year in which the employee attained 70 ¹ ⁄2 or January 1, 1997) if benefits had commenced on that date; plus the actuarial equivalent of any additional benefits accrued after that date; reduced by the actuarial equivalent of any distributions made with respect to the employee’s retirement benefits after that date. Actuarial equivalence is determined using the plan’s assumptions for determining actuarial equivalence for purposes of satisfying § 411.

Q–3: How does the actuarial increase required under § 401(a)(9)(C)(iii) relate to the actuarial increase required under § 411?

A–3: As reflected in § 1.411(c)–1(f)(2) of the proposed Income Tax Regulations, in order for an employee’s accrued benefit to be nonforfeitable as required by § 411, a defined benefit plan must make an actuarial adjustment to an accrued benefit the payment of which is deferred past normal retirement age. The only exception to this rule is that generally no actuarial adjustment is required to reflect the period during which a benefit is suspended as permitted under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA). The actuarial increase required under § 401(a)(9) of the Code for the period described in Q&A–1 is generally the same as, and not in addition to, the actuarial increase required for that same period under § 411 to reflect any delay in the payment of retirement benefits after normal retirement age. However, unlike the actuarial increase required under § 411, the actuarial increase required under § 401(a)(9)(C) must be provided even during the period during which an employee is in section 203(a)(3)(B) service. Q–4: To what extent may additional accruals required under § 411(b)(1)(H) be reduced by actuarial increases required under § 401(a)(9)(C)(iii)?

A–4: For purposes of § 411(b)(1)(H)– (iii)(II), the actuarial increase required under § 401(a)(9)(C)(iii) will be treated as an adjustment attributable to the delay in distribution of benefits after the attainment of normal retirement age. Accordingly, to

from an individual retirement account or individual retirement annuity under § 408, and the determination of the required beginning date for church plans and government plans.

Notice 96–67, 1996–2 C.B. 235, provides guidance on the application of the amendments to § 401(a)(9)(C) made by the SBJPA to employees who attained age 70 ¹ ⁄2 in 1996 but did not retire by the end of 1996.

Announcement 97–24, 1997–11 I.R.B. 24, provides that an employer may offer employees (other than 5-percent owners) who attain age 70 ¹ ⁄2 after 1995 and have not retired, an option to defer commencement of benefit distributions under a qualified plan rather than to begin receiving benefits from the plan by April 1, 1997, even if the plan has not yet been amended to provide for the option.

Announcement 97–70, 1997–29 I.R.B. 14, provides transition relief for a plan under which certain distributions required under the terms of the plan were not made to an employee (other than a 5percent owner) who attained age 70 ¹ ⁄2 in 1996 and who did not retire from employment with the employer maintaining the plan by the end of 1996.

Section 1.411(d)–4, Q&A 10, of the proposed Income Tax Regulations, 62 F.R. 35752 (July 2, 1997), would provide relief from § 411(d)(6) for certain plan amendments that eliminate preretirement distributions commencing at age 70 ¹ ⁄2.

Rev. Proc. 97–41, 1997–33 I.R.B. 51, provides guidance to sponsors of plans that are qualified under § 401(a) with respect to the date by which they must adopt amendments to comply with changes in the law, including a remedial amendment period for amendments to reflect changes to the qualification requirements made by the SBJPA.

This notice provides guidance on additional issues relating to the amendments to § 401(a)(9)(C) made by the SBJPA.

III. QUESTIONS AND ANSWERS

(1) ACTUARIAL INCREASE FOR

DEFINED BENEFIT PLANS Q–1: If an employee retires in a calendar year after the calendar year in which the employee attains age 70 ¹ ⁄2, for what period must the employee’s accrued bene

fit under a defined benefit plan be actuarially increased?

A–1: (a) Actuarial increase starting date. Under § 401(a)(9)(C)(iii), in the case of an employee (other than a 5-percent owner) who retires in a calendar year after the calendar year in which the employee attains age 70 ¹ ⁄2, the employee’s accrued benefit under a defined benefit plan must be actuarially increased in order to take into account the period after age 70 ¹ ⁄2 in which the employee is not receiving benefits under the plan. If an employee retires at age 70 ¹ ⁄2, then, in order to satisfy § 401(a)(9), the distribution of the employee’s benefits is required to begin no later than the April 1 following the calendar year in which the employee attains age 70 ¹ ⁄2. Thus, if an employee retires after the calendar year in which the employee attains age 70 ¹ ⁄2, the actuarial increase required to satisfy § 401(a)(9) to reflect the delay in payment must be provided for the period starting on the April 1 following the calendar year in which the employee attains age 70 ¹ ⁄2. In the case of an employee who attained age 70 ¹ ⁄2 prior to 1996, the starting date for the period of actuarial increase is January 1, 1997.

(b) Actuarial increase ending date. The period for which the actuarial increase must be provided ends on the date on which benefits commence after retirement in an amount sufficient to satisfy § 401(a)(9).

(c) Nonapplication to defined benefit plans using optional rule. If, pursuant to the optional rule of Q&A–10, minimum distributions under a plan to an employee commence no later than April 1 of the calendar year following the calendar year in which the employee attains age 70 ¹ ⁄2, in an amount sufficient to satisfy § 401(a)(9) as in effect prior to amendment by the SBJPA, no actuarial increase is required under § 401(a)(9)(C)(iii).

(d) Nonapplication to defined contribu- tion plans. The actuarial increase required under this Q&A–1 does not apply to defined contribution plans.

Q–2: What amount of actuarial increase is required under § 401(a)(9)(C)(iii)?

A–2: In order to satisfy § 401(a)(9)(C)(iii), the retirement benefits payable with respect to an employee as of the end of the period for actuarial increases (described in Q&A–1) must be no less than:

1997–51 I.R.B. 19 December 22, 1997

the extent permitted under § 411(b)(1)(H), the actuarial increase required under § 401(a)(9)(C)(iii) may reduce the benefit accrual otherwise required under § 411(b)– (1)(H)(i). However, the rule in the last sentence of § 1.411(b)–2(b)(4)(iii)(B) of the proposed Income Tax Regulations regarding the actuarial adjustment in the case of a plan that suspends benefits in accordance with § 203(a)(3)(B) of ERISA and the regulations thereunder is not applicable to the calculation of additional accruals for the period of time for which actuarial increases are required under § 401(a)(9)(C)(iii).

(2) COORDINATION OF SECTION

401(a)(4) AND SECTION 401(a)(9) FOR CERTAIN PRERETIREMENT AGE 70 ¹ ⁄2 DISTRIBUTION OPTIONS

Q–5: Are there special rules that coordinate the implementation of the SBJPA changes to § 401(a)(9) with the nondiscriminatory current and effective availability requirements of § 1.401(a)(4)–4 of the Income Tax Regulations?

A–5: (a) Aggregation of optional forms of benefit. Solely for purposes of determining whether a plan satisfies the nondiscriminatory current and effective availability requirements of § 1.401(a)(4)–4, a preretirement age 70 ¹ ⁄2 distribution option that is only available to required group members is permitted to be aggregated with another optional form of benefit that provides for commencement in the retirement period and the two optional forms of benefit may be treated as a single optional form of benefit. This aggregation treatment is permitted only if the other optional form of benefit is the same optional form of benefit as the preretirement age 70 ¹ ⁄2 distribution option except for the difference in the timing of the commencement of payments.

(b) Interim minimum distributions. In the case of a defined contribution plan, if a preretirement age 70 ¹ ⁄2 distribution option is available only to required group members and provides for payment of installment payments equal to the minimum amount (calculated in accordance with a method specified in the plan) necessary to satisfy § 401(a)(9) (before or after amendment by the SBJPA) with payment commencing during the 70 ¹ ⁄2 period and ending by the end of the retirement period,

and this form of payment does not apply to benefit payments after the end of the retirement period, this preretirement distribution option is treated as satisfying the requirements of § 1.401(a)(4)–4.

(i) 70 ¹ ⁄2 period. The 70 ¹ ⁄2 period is the period beginning on January 1 of the year in which the employee attains age 70 ¹ ⁄2 and ending on the April 1 of the following year.

(ii) Retirement period. The retirement period is the period beginning on January 1 of the year in which the employee retires from employment with the employer maintaining the plan and ending on April 1 of the following year. (iii) Preretirement age 70 ¹ ⁄2 distribution option. A preretirement age 70 ¹ ⁄2 distribution option is an optional form of benefit under which benefits payable in a particular distribution form (including any modifications that may be elected after benefit commencement) commence during the 70 ¹ ⁄2 period prior to the employee’s retirement from employment with the employer maintaining the plan.

(iv) Required group member. An employee who is a 5-percent owner for purposes of section 401(a)(9) is a required group member. If a plan is amended to eliminate a preretirement age 70 ¹ ⁄2 distribution option with respect to all employees (other than 5-percent owners) who attain age 70 ¹ ⁄2 after a specified calendar year, and the plan satisfied § 1.401(a)(4)–4 with respect to availability of the preretirement age 70 ¹ ⁄2 distribution option immediately before the amendment, then employees who attained age 70 ¹ ⁄2 in or before the specified calendar year are also required group members with respect to the preretirement age 70 ¹ ⁄2 distribution option under the plan even if the employees are not 5-percent owners for purposes of section 401(a)(9).

Q–6: For purposes of § 401(a)(9)(C) after amendment by the SBJPA, what is the required beginning date for an employee (other than a 5-percent owner) who attained age 70 ¹ ⁄2 before 1997, but

(3) ISSUES RELATING TO

EMPLOYEES WHO ATTAINED AGE 70 ¹ ⁄2 BEFORE JANUARY 1, 1997

did not retire from employment with the employer maintaining the plan before January 1, 1997?

A–6: For purposes of determining the amount of minimum distributions required after December 31, 1996, the required beginning date for an employee who did not retire from employment with the employer maintaining the plan before January 1, 1997 is determined under § 401(a)(9)(C), as amended by the SBJPA. Accordingly, as described in Q&A–2 of Notice 96–67, in the case of an employee (other than a 5-percent owner) who attained age 70 ¹ ⁄2 in 1996 and retired from employment with the employer maintaining the plan on or after January 1, 1997, the required beginning date is April 1 of the calendar year following the year in which the employee retires from employment with the employer maintaining the plan. Furthermore, an employee (other than a 5-percent owner) who attained age 70 ¹ ⁄2 prior to 1996, and retires from employment with the employer maintaining the plan on or after January 1, 1997, has a required beginning date for purposes of determining minimum distributions that are required on or after January 1, 1997 that is different from the required beginning date for the employee for purposes of determining minimum distributions that were required prior to January 1, 1997. Thus, for example, an employee (other than a 5-percent owner) who attained age 70 ¹ ⁄2 in 1995, and retired from employment with the employer maintaining the plan in 1997, has a required beginning date of April 1, 1998. See Q&A–10 of this notice for a special rule permitting an employee’s required beginning date determined without regard to the SBJPA amendments to be treated as the required beginning date for purposes of determining the minimum distributions required after January 1, 1997.

Q–7: May a plan permit an employee who attained age 70 ¹ ⁄2 before 1997 but did not retire from employment with the employer maintaining the plan before January 1, 1997 to elect to stop current distributions?

A–7: (a) Election to stop permitted. An employee who attained age 70 ¹ ⁄2 before 1997, but did not retire from employment with the employer maintaining the plan before January 1, 1997 has a new required

December 22, 1997 20 1997–51 I.R.B.

beginning date as described in Q&A–6. Accordingly, distributions are not required to be made to that employee after December 31, 1996 and prior to the employee’s new required beginning date in order to satisfy § 401(a)(9). A plan may provide that such an employee may affirmatively elect to stop distributions at any time until the employee retires, subject to the terms of an applicable qualified domestic relations order (QDRO), within the meaning of § 414(p).

(b) Compliance with sections 401(a)- (11) and 417. An employee’s election to stop and recommence distributions under paragraph (a) of this Q&A–7 is subject to the requirements of §§ 401(a)(11) and 417, if the plan is otherwise subject to those rules. However, a plan that permits an employee to stop distributions in accordance with paragraph (a) of this Q&A–7 and that complies with either of the alternatives set forth in Q&A–8, will not violate § 401(a)(11) and § 417 on account of the employee’s cessation and recommencement of those distributions.

Q–8: What special alternatives are available for a plan that is subject to § 401(a)(11) and § 417 in order to satisfy those sections with respect to an employee who, pursuant to Q&A–7, elects to stop and recommence distributions?

A–8 (a): In general. A plan will not violate § 401(a)(11) and § 417 on account of an employee’s cessation and recommencement of distributions in accordance with Q&A–7(a) if the plan operationally complies with either paragraph (b) or (c) of this Q&A–8, the plan is amended within the remedial amendment period for the plan for SBJPA changes to reflect that operational compliance, and the distributions stop prior to the end of that remedial amendment period.

(b) No new annuity starting date upon

recommencement.

(i) Under this alternative, the plan provides that there is no new annuity starting date under § 417 upon recommencement of benefits. In such case, no spousal consent is required for an employee to elect to stop distributions pursuant to Q&A– 7(a). Moreover, no spousal consent is required when payments recommence to the employee if:

(A) payments recommence to the employee with the same beneficiary and in a

form of benefit that is the same but for the cessation of distributions,

(B) the individual who was the employee’s spouse on the annuity starting date executed a general consent within the meaning of § 1.401(a)–20, A–31 of the Income Tax Regulations, or

(C) the individual who was the employee’s spouse on the annuity starting date executed a specific consent to waive a QJSA within the meaning of § 1.401(a)– 20, A–31, and the employee is not married to that individual when benefits recommence.

(ii) However, in order to comply with this paragraph (b), consent of the individual who was the employee’s spouse on the annuity starting date is required prior to recommencement if the employee chooses to recommence benefits either in a different form than the form in which they were being distributed prior to the cessation of distributions or with a different beneficiary and if:

(A) the original form was a qualified joint and survivor annuity (QJSA) within the meaning of § 417(b), or

(B) the individual who was the employee’s spouse on the annuity starting date originally executed a specific consent to waive a QJSA within the meaning of § 1.401(a)–20, A–31, of the Income Tax Regulations, and the employee is still married to that individual when benefits recommence.

(c) New annuity starting date upon recommencement. Under this alternative, the plan provides that there is a new annuity starting date under § 417 upon recommencement of benefits. In such case, no spousal consent is required for an employee to elect to stop distributions pursuant to Q&A–7(a), except where such distributions are being paid in the form of a qualified joint and survivor annuity (QJSA) within the meaning of § 417(b). Where such distributions are being paid in the form of a QJSA, in order to comply with this paragraph (c), the person who was the employee’s spouse on the original annuity starting date must consent to the election to stop distributions under Q&A– 7(a) and the spouse’s consent must acknowledge the effect of the election. Because there is a new annuity starting date upon recommencement of benefits, the plan, in order to satisfy this paragraph (c), must comply with all of the requirements

of § 417 upon such recommencement, including payment of a qualified preretirement survivor annuity (QPSA) if the employee dies before the new annuity starting date.

(4) ISSUES RELATING TO

ELIGIBILITY FOR ROLLOVERS

Q–9: If distributions are made under a plan to an employee (other than a 5-percent owner) who did not retire before January 1, 1997 from employment with the employer maintaining the plan, is any portion of a distribution made after attainment of age 70 ¹ ⁄2 a required distribution under § 401(a)(9) for purposes of § 402(c)(4)(B)?

A–9: (a) General rule. Section 402(c)– (4)(B) provides that a distribution is not an eligible rollover distribution to the extent that it is required under § 401(a)(9). As noted in Q&A–6, for purposes of determining the amount of minimum distributions that are required after December 31, 1996, the required beginning date for an employee who did not retire before January 1, 1997 from employment with the employer maintaining the plan is redetermined under § 401(a)(9)(C), as amended by the SBJPA. Therefore, whether or not a plan allows an employee who attained age 70 ¹ ⁄2 before January 1, 1997, but did not retire from employment with the employer maintaining the plan before that date, to stop receiving distributions in accordance with Q&A–7, a distribution to such an employee prior to the year the employee retires is not a required distribution under § 401(a)(9). Such a distribution is an eligible rollover distribution unless it is excepted for some other reason. An exception is provided under § 402(c)(4)(A) for a series of substantially equal periodic payments made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and the employee’s designated beneficiary, or for a specified period of 10 years or more. If an employee’s benefit is being distributed in a series of annual payments that would equal the required minimum distribution determined in accordance with Q&A F–1 of § 1.401(a)(9)–1 of the proposed Income Tax Regulations, then the series of payments will be considered a series of substantially equal payments over the life (or life expectancy) of the employee or

1997–51 I.R.B. 21 December 22, 1997

the joint lives (or joint life expectancy) of the employee and the employee’s designated beneficiary, or for a specified period of 10 years or more, in accordance with Q&A–5 of § 1.402(c)–2 of the Income Tax Regulations. Therefore, payments under such a series of payments are not eligible rollover distributions.

(b) Treatment of 1996 distributions for employees who attained age 70 ¹ ⁄2 in 1996. As provided in Q&A–3 of Notice 96–67, if a distribution is made during 1996 to an employee who attained age 70 ¹ ⁄2 in 1996, whether that distribution is a required distribution under § 401(a)(9) is determined by applying § 401(a)(9) as in effect prior to amendment by the SBJPA.

(c) Transition rule for 1997 distribu- tions. A plan will not fail to satisfy § 401(a)(31) merely because the plan administrator or payor did not offer an employee (other than a 5-percent owner), who has attained age 70 ¹ ⁄2 but has not retired from employment with the employer maintaining the plan, a direct rollover option with respect to the eligible rollover distributions described in this paragraph (c). A distribution is described in this paragraph (c) if it is paid in calendar year 1997 and, under pre-SBJPA § 401(a)(9), the distribution would not have been an eligible rollover distribution because it would have been a required minimum distribution. In addition, with respect to such a distribution, a plan will not be required to satisfy the written explanation requirement under § 402(f) or the mandatory 20-percent withholding requirement under § 3405(c).

(5) PLANS MAINTAINING

PRE-SBJPA REQUIRED BEGINNING DATE

Q–10: Will a plan satisfy § 401(a)(9) as amended by SBJPA if it provides for minimum required distributions for an employee commencing no later than an employee’s required beginning date of April 1 of the calendar year following the calendar year the employee attained age 70 ¹ ⁄2, regardless of whether the employee is a 5-percent owner?

A–10: (a) A plan will not fail to satisfy § 401(a)(9) as amended by SBJPA merely because it provides for minimum distributions commencing no later than an employee’s pre-SBJPA required beginning date of April 1 of the calendar

year following the calendar year the employee attained age 70 ¹ ⁄2, regardless of whether the employee is a 5-percent owner. For example, a plan may provide, in the case of all employees who attained age 70 ¹ ⁄2 before 1999, that minimum required distributions will commence by the pre-SBJPA required beginning date of April 1 of the calendar year following the calendar year the employee attained age 70 ¹ ⁄2.

(b) If, pursuant to this Q&A–10, the plan provides for minimum distributions commencing no later than an employee’s required beginning date of April 1 of the calendar year following the calendar year in which the employee attained age 70 ¹ ⁄2, both the employee’s designated beneficiary and whether recalculation of life expectancy applies will be determined based on any elections in effect as of that date. Furthermore, an employee who dies after the required beginning date determined under the plan terms is treated as dying after the required beginning date within the meaning of § 401(a)(9)(C). Thus, to determine the distributions after such a death, § 401(a)(9)(B)(i) (and not § 401(a)(9)(B)(ii)) applies, requiring the remaining portion of the employee’s interest to be distributed at least as rapidly as under the method being used under § 401(a)(9)(A)(ii) as of the employee’s date of death. See Q&As B–4 and F–3A of § 1.401(a)(9)–1 of the proposed Income Tax Regulations for guidance on satisfying the requirements of § 401(a)(9)(B)(i).

(c) Regardless of whether, pursuant to this Q&A–10, the plan provides for minimum distributions commencing no later than an employee’s required beginning date of April 1 of the calendar year following the calendar year the employee attained age 70 ¹ ⁄2, the employee’s required beginning date for purposes of § 4974 (excise tax on excess accumulations) and § 402(c) (definition of eligible rollover distribution) is determined in accordance with § 401(a)(9) as amended by the SBJPA. Thus, in the case of an employee who is not a 5-percent owner, no excise tax under § 4974 will apply prior to the calendar year in which the employee retires. However, beginning with that year, the amount that is required to be distributed each year to satisfy § 401(a)(9), as amended by the SBJPA, for purposes of

§ 4974 and § 402(c), will be determined using the required beginning date under the plan.

IV. COMMENTS

The Treasury and the Service invite comments and suggestions regarding the matters discussed in this notice. Comments can be addressed to CC:DOM: CORP:R (Notice 97–75), 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 97–75), 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.

V. DRAFTING INFORMATION

The principal authors of this notice are Ingrid Grinde of the Employee Plans Division and Cheryl Press of the Office of the Associate Chief Counsel (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) 6226074/6075 between the hours of 1:30 p.m. and 3:30 p.m. Eastern Time, Monday through Thursday. Alternatively, please call Thomas Foley at (202) 622-6050 or Ingrid Grinde at (202) 622-6214. These telephone numbers are not toll-free.

26 CFR 601.201: Rulings and determination letters. (Also Part I, § 636; 1.636–3.)

Rev. Proc. 97–55