Part I. Rulings — Internal Revenue Bulletin 2000-31

filed when the employee is hired or within a reasonable period thereafter ending before the compensation is currently available, then no compensation reduction contributions for the first pay period or subsequent pay period are made on the employee’s behalf to Plan A until the employee makes a subsequent affirmative election to reduce his or her compensation. Elections filed at a later date are effective for payroll periods beginning in the month next following the date the election is filed.

At the time an employee is hired, the employee will receive a notice that explains the automatic compensation reduction election and the employee’s right to elect to have no such compensation reduction contributions made to the plan or to alter the amount of those contributions, including the procedure for exercising that right and the timing for implementation of any such election.

In the case of an employee hired before the January 1 effective date who has not elected compensation reduction contributions of at least 4 percent, Plan A as amended provides that the automatic election will become effective on the first pay period beginning on or after January 1 unless the employee elects during a specified reasonable period ending on January 1 to receive cash or have a different amount contributed to Plan A. Thus, if a current employee files an election to receive cash in lieu of compensation reduction contributions and the election is filed during the reasonable period ending on the January 1 effective date, then no compensation reduction contributions for the first pay period beginning on or after the January 1 effective date or for subsequent pay periods are made on the employee’s behalf to Plan A until the employee makes a subsequent affirmative election to reduce his or her compensation. In the case of a current employee who has a compensation reduction contribution election in effect for less than 4 percent, who does not make a new compensation reduction contribution election during the reasonable period ending on the January 1 effective date, and whose compensation is therefore automatically reduced by 4 percent, if that employee thereafter makes an affirmative election to reduce his or her compensation by another

Section 401.—Qualified Pension, Profit-Sharing And Stock Bonus Plans

26 CFR 1.401(a)(31)–1: Requirement to offer direct rollover of eligible rollover distributions; questions and answers.

Whether a qualified defined contribution plan can be amended to permit a default direct rollover of an involuntary cash-out to an individual retirement arrangement. See Rev. Rul. 2000–36, page 140.

Section 403.—Taxation of Employee Annuities

26 CFR 1.403(b)–1: Taxability of beneficiary under annuity contract purchased by a section 501(c)(3) organization or public school.

Section 403(b) plans; elective defer- rals. This revenue ruling specifies the criteria to be met in order to automatically reduce an employee’s compensation by a certain amount and have that amount contributed as an elective deferral to an employer’s section 403(b) plan.

Rev. Rul. 2000–35

ISSUE

Will employer contributions to an annuity contract described in § 403(b) of the Internal Revenue Code (the “Code”) fail to be considered to be made under a salary reduction agreement merely because they are made pursuant to an arrangement under which a fixed percentage of an employee’s compensation is contributed to the annuity contract unless the employee affirmatively elects to receive the amount in cash?

FACTS

Employer X, an organization described in § 501(c)(3) which is exempt from tax under § 501(a), maintains Plan A, a plan described in § 403(b) of the Code and § 3(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). Under Plan A, any employee of Employer X, including a newly hired employee, may elect to have Employer X make contributions on the employee’s behalf towards the purchase of an annuity contract

in lieu of receiving that amount as cash compensation that would otherwise be payable to the employee. The employee may designate the amount of these compensation reduction contributions as a percentage of the employee’s compensation, subject to certain limitations set forth in the plan. These compensation reduction contributions satisfy the § 403(b) requirements applicable to contributions made pursuant to a salary reduction agreement, and are treated for all purposes as made pursuant to a salary reduction agreement under the plan.

Plan A also provides that Employer X will make matching contributions on account of an employee’s compensation reduction contributions up to a specified percentage of the employee’s compensation. Plan A does not permit any other contributions.

Plan A is amended, effective the next January 1, to add an automatic compensation reduction election feature. Under this feature, each employee’s compensation will automatically be reduced by 4 percent and this amount will be contributed towards the purchase of an annuity contract under Plan A unless the employee affirmatively elects to receive cash or have a different percentage contributed. Both before and after the amendment, the employee is not able to receive, prior to a distributable event described in § 403(b)(11), amounts contributed towards the purchase of an annuity contract. Both before and after the amendment, Plan A and the annuity contracts purchased thereunder satisfy the requirements of § 403(b). An election not to make compensation reduction contributions or to contribute a different percentage of compensation can be made at any time.

Under Plan A as amended, in the case of a newly hired employee, an election not to make compensation reduction contributions or to contribute a different percentage is effective for the first pay period and for subsequent pay periods (until superseded by a subsequent election) if filed when the employee is hired or if filed within a reasonable period thereafter ending before the compensation for the first pay period is currently available. Thus, if a newly hired employee files an election to receive cash in lieu of compensation reduction contributions and the election is

July 31, 2000 138 2000–31 I.R.B.

amount (or no amount), then that affirmative election will continue in effect until the employee makes a subsequent affirmative election for a different amount.

At the beginning of the reasonable period ending on the January 1 effective date, each current employee receives a notice that explains the new automatic compensation reduction election and the employee’s right to elect to have no such compensation reduction contributions made to the plan or to alter the amount of those contributions, including the procedure for exercising that right and the timing for implementation of any such election.

Each employee is notified annually of his or her compensation reduction percentage, and of his or her right to change the percentage, including the procedure for exercising that right and the timing for implementation of any such election.

Plan A provides that both matching contributions and compensation reduction contributions will be invested in accordance with the participant’s election among a broad range of annuity contracts. If no investment election is made by a participant, contributions are invested in an annuity contract providing an investment return based on the return on a balanced fund that includes both diversified equity and fixed-income investments ¹ .

LAW AND ANALYSIS

Section 403(b)(1) of the Code provides that amounts contributed by certain employers, including an employer described in § 501(c)(3) which is exempt from tax under § 501(a), for the purchase of an annuity contract for an employee of such an employer are excluded from the gross income of the employee if certain requirements are satisfied.

Contributions to purchase annuity con

1The Department of Labor has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries of a plan must ensure that the plan is administered prudently and solely in the interest of plan participants and beneficiaries. While ERISA § 404(c) may serve to relieve certain fiduciaries from liability when participants or beneficiaries exercise control over the assets in their individual accounts, the Department of Labor has taken the position that a participant or beneficiary will not be considered to have exercised control when the participant or beneficiary is merely apprised of investments that will be made on his or her behalf in the absence of instructions to the contrary. See 29 CFR § 2550.404c–1 and 57 F.R. 46924.

tracts under § 403(b) may be made either pursuant to a salary reduction agreement or not pursuant to a salary reduction agreement. Contributions made pursuant to a salary reduction agreement are subject to different requirements than are contributions not made pursuant to a salary reduction agreement. (See, for example, §§ 403(b)(1)(E), 403(b)(7)(A)(ii), 403(b)–(11) and 403(b)(12).) In general, a contribution is not treated as made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement. See §§ 402(g)(3)(C) and 403(b)(12).

Section 1.403(b)–1(b)(3)(i) of the regulations prescribes rules applicable to contributions made pursuant to a salary reduction agreement, including rules relating to the frequency and revocability of such agreements and to the salary to which such agreements apply.

Section 1450(a) of the Small Business Job Protection Act of 1996 (“SBJPA”) provides that, for purposes of § 403(b) of the Code, the frequency that an employee is permitted to make a salary reduction agreement, the salary to which such an agreement may apply and the ability to revoke such an agreement shall be determined under the rules applicable to cash or deferred elections under § 401(k). Section 1450(a) of SBJPA is effective for taxable years beginning after December 31, 1995. Thus, § 1.403(b)–1(b)(3)(i) of the regulations does not reflect current law, and the rules relating to these aspects of salary reduction agreements are the same as those for cash or deferred elections under § 401(k).

Section 401(k) provides that a profitsharing or stock bonus plan, a preERISA money purchase plan, or a rural cooperative plan can meet the requirements of § 401(a) even if it includes a qualified cash or deferred arrangement. Section 401(k) also sets forth the requirements that a cash or deferred arrangement must satisfy in order to be a qualified cash or deferred arrangement.

Section 1.401(k)–1(a)(2)(i) defines a cash or deferred arrangement as an arrangement under which an eligible employee may make a cash or deferred election with respect to contributions to,

or accruals or other benefits under, a plan that is intended to satisfy the requirements of § 401(a).

Section 1.401(k)–1(a)(3)(i) defines a cash or deferred election as any election (or modification of an earlier election) by an employee to have the employer either provide an amount to the employee in the form of cash (or some other taxable benefit) that is not currently available or contribute an amount to a trust (or provide an accrual or other benefit) under a plan deferring the receipt of compensation. Section 1.401(k)–1(a)(3)(iv) provides that a cash or deferred election does not include a one-time irrevocable election, made at the time an employee commences employment with the employer or upon the employee’s first becoming eligible under any plan of the employer, to have contributions made by the employer on the employee’s behalf to the plan (or to any other plan of the employer) equal to a specified amount or percentage of the employee’s compensation. Section 1.401(k)–1(g)(3) defines elective contributions as employer contributions made to a plan that were subject to a cash or deferred election under a cash or deferred arrangement.

Revenue Ruling 2000–8, 2000–7 I.R.B. 617 (February 14, 2000), holds that where a newly hired or a current employee has an effective opportunity to elect to receive an amount in cash or have that amount contributed by the employer to a profitsharing plan, those employer contributions made on the employees’ behalf to the plan in lieu of receipt of cash compensation will not fail to be considered elective contributions within the meaning of § 1.401(k)–1(g)(3) made under a qualified cash or deferred arrangement within the meaning of § 401(k) merely because they are made pursuant to an arrangement under which, in any case in which an employee does not affirmatively elect to receive cash, the employee’s compensation is reduced by a fixed percentage and that amount is contributed on the employee’s behalf to the plan.

The definition of a cash or deferred election in § 1.401(k)–1(a)(3)(i) requires that the employee have an election between the employer paying cash (or some other taxable benefit) to the employee or making a contribution to a trust on behalf of the employee. The regulation does not require that the employee receive an amount in

2000–31 I.R.B. 139 July 31, 2000

cash in any case in which the employee does not make an affirmative election to have that amount contributed to the trust. Similarly, under § 403(b), there is no requirement that an employee receive an amount in cash in any case in which the employee does not make an affirmative election to have that amount contributed to an annuity contract. Thus, a contribution to purchase an annuity contract under § 403(b) will not fail to be made under a salary reduction agreement merely because, when an employee fails to make an affirmative election with respect to an amount of compensation, that amount is contributed on the employee’s behalf to an annuity contract, provided that the employee had an effective opportunity to elect to receive that amount in cash. The employee has an effective opportunity to elect to receive an amount in cash as required under § 1.401(k)–1(a)(3)(i) if the employee receives notice of the availability of the election and the employee has a reasonable period before the cash is currently available to make the election.

In this case, compensation reduction contributions made by Employer X to Plan A, including those made on behalf of a newly hired employee who has not filed an election to the contrary and those made on behalf of a current employee who has elected less than 4-percent compensation reduction contributions, are amounts contributed pursuant to a procedure under which the employee receives a notice explaining his or her rights to have no compensation reduction contributions made and, after receiving the notice, the employee has a reasonable period before the cash is currently available to elect to receive the cash in lieu of having it contributed towards the purchase of an annuity contract. Thus, an employee has an effective opportunity to elect to receive cash or have a contribution made towards the purchase of an annuity contract. In addition, the employee is not able to receive, prior to a distributable event described in § 403(b)(11), amounts contributed towards the purchase of an annuity contract. Finally, compensation reduction contributions made under the plan are not contributions made pursuant to a one-time irrevocable election because the employee can change the election in the future. Consequently, the compensation reduction contributions under Plan A

as amended are contributions made pursuant to a salary reduction agreement described in § 403(b).

HOLDING

Where, as in this case, a newly hired or current employee has an effective opportunity to elect to receive an amount in cash or have that amount contributed by the employer to an annuity contract described in § 403(b), those contributions made on the employee’s behalf to the annuity contract in lieu of receipt of cash compensation will not fail to be considered to be made under a salary reduction agreement merely because they are made pursuant to an arrangement under which, in any case in which an employee does not affirmatively elect to receive cash, the employee’s compensation is reduced by a fixed percentage and that amount is contributed on the employee’s behalf to the annuity contract. This holding would be the same if (1) Plan A were described in § 403(b)(1)(A)(ii) (relating to arrangements maintained by State and local school systems), or (2) the funding vehicles under Plan A were custodial accounts described in § 403(b)(7) or retirement income accounts described in § 403(b)(9), provided the requirements of such respective Code sections are otherwise satisfied.

PAPERWORK REDUCTION ACT

The collection of information contained in this revenue ruling has been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1694.

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 OMB control number.

The collections of information in this revenue ruling are in the third, fifth, seventh and eighth paragraphs in the section headed “FACTS” and in the tenth paragraph in the section headed “LAW AND ANALYSIS.” The collections of information are required to enable personnel in the Tax Exempt and Government Entities Division of the Internal Revenue Service to determine if an employer’s retirement plan satisfies the requirements to obtain

favorable tax treatment and to enable certain employee elections to meet the requirements of § 403(b). The collections of information are required to obtain a benefit. The likely respondents are State and local government entities and not-forprofit institutions.

The estimated total annual reporting burden is 175 hours. The estimated annual burden per respondent is 1 hour and 45 minutes. The estimated number of respondents is 100. The estimated annual frequency of responses is on occasion.

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 revenue ruling is Roger Kuehnle of the Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, call the Employee Plans’ taxpayer assistance telephone service at (202) 622-6074/6075 (not toll-free numbers) between 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday.

Section 411.—Minimum Vesting Standards

26 CFR 1.411(d)–4: Section 411(d)(6) protected benefits. (Also, § 401; § 1.401(a)(31)–1.)

Qualified plan; default rollover; in- voluntary cash-out. This ruling provides that if plan participants are given adequate notice including their right to elect a cash distribution, a qualified plan can be amended to permit a default direct rollover under section 401(a)(31) of an involuntary cash-out without there being a violation of section 411(d)(6) of the Code.

Rev. Rul. 2000–36

ISSUE

Will an amendment to change the default method of payment to a direct rollover for involuntary distributions when a distributee fails affirmatively to elect to make a direct

July 31, 2000 140 2000–31 I.R.B.

rollover or to elect a cash payment under the facts described below cause the plan to fail to satisfy § 401(a)(31) or § 411(d)(6) of the Internal Revenue Code?

FACTS

Employer X maintains Plan A, a qualified defined contribution plan that does not include any after-tax contributions or other amounts that would not be included in gross income upon distribution. Plan A provides for an involuntary distribution to an employee upon separation from service if his or her vested account balance is $5,000 or less. Plan A includes a direct rollover option for all distributions. Plan A provides that if a separating employee’s vested account balance is $5,000 or less, and the separating employee does not elect a direct rollover either to another qualified plan or to an individual retirement arrangement (“IRA”), the vested account balance is to be paid in a single sum cash payment to the employee.

Employer X amends Plan A to provide that the default form of payment of any involuntary cash-out from Plan A greater than $1,000 but less than or equal to $5,000 will be a direct rollover (an eligible rollover distribution that is paid directly to an eligible retirement plan for the benefit of the distributee) to an IRA, but that separating employees will instead receive a cash payment if they so elect. Under the amendment, this default direct rollover applies only if the separating employee fails to request affirmatively (1) a cash payment to that employee or (2) a direct rollover to another qualified plan or

1The Department of Labor (the “DOL”) has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act (“ERISA”), in the context of a default direct rollover described in this ruling, where the distribution constitutes the entire benefit rights of the participant, the participant will cease to be a participant covered under the plan within the meaning of 29 CFR § 2510.3–3(d)(2)(ii)(B), and the distributed assets will cease to be plan assets within the meaning of 29 CFR § 2510.3–101. The DOL also noted that the selection of an IRA trustee, custodian or issuer and IRA investment for purposes of a default direct rollover would constitute a fiduciary act subject to the general fiduciary standards and prohibited transaction provisions of ERISA. In addition, plan provisions governing the default direct rollover of distributions, including the participant’s ability to affirmatively opt out of the arrangement, must be described in the plan’s summary plan description furnished to participants and beneficiaries.

an IRA designated by the separating employee. The amendment also provides that in the case of a default direct rollover, the plan administrator will select ¹ an IRA trustee, custodian, or issuer (the “trustee”) that is unrelated to Employer X, establish the IRA with that trustee on behalf of any separating employee who fails affirmatively to elect a direct rollover or a cash payment, and make the initial investment choices for the account.

The administrative procedures of Plan A are changed with respect to any § 402(f) notice provided on or after the effective date of the amendment to a separating employee with a vested account balance greater than $1,000 but not greater than $5,000. After the change, the plan administrator will include with the § 402(f) notice an explanation, as required by § 1.401(a)(31)–1 of the Income Tax Regulations, of the default direct rollover (and other appropriate information such as the name, address, and telephone number of the IRA trustee and information regarding IRA maintenance and withdrawal fees and how the IRA funds will be invested). The default direct rollover will occur not less than 30 days and not more than 90 days after the § 402(f) notice with the explanation of the default direct rollover is provided to the separating employee.

LAW AND ANALYSIS

Section 401(a)(31) provides, in part, that a trust shall not constitute a qualified trust unless the plan of which the trust is a part provides that if the distributee of any eligible rollover distribution (i) elects to have the distribution paid to an eligible retirement plan, and (ii) specifies the eligible retirement plan to which the distribution is to be paid, the distribution will be paid in a direct rollover to the eligible retirement plan specified.

Section 402(f) requires a plan administrator, within a reasonable period of time before making an eligible rollover distribution from an eligible retirement plan, to provide to the recipient a written explanation of the rollover provisions of § 401(a)(31) and § 402(c) (direct rollover and 60-day rollover), the 20percent mandatory withholding requirement under § 3405, and other tax provisions in § 402 that apply to the eligible rollover distribution.

Section 411(d)(6)(A) provides, in part, that a plan participant’s accrued benefit may not be decreased by a plan amendment other than by an amendment described in § 412(c)(8) of the Code or § 4281 of the Employee Retirement Income Security Act of 1974. Section 411(d)(6)(B) provides that an amendment eliminating or reducing an optional form of benefit is treated as an amendment reducing an employee’s accrued benefit unless otherwise provided in Income Tax Regulations.

Section 1.401(a)(31)–1, Q&A-7 provides, in part, that a plan administrator may establish a default procedure so that if a distributee fails to make an affirmative election, he or she is treated as having made a direct rollover election. However, that regulation requires the plan administrator to first furnish the distributee with an explanation of the default procedure and an explanation of the direct rollover option within the time period provided in § 1.402(f)–1, Q&A-2 for the written explanation described in § 402(f).

Section 1.402(f)–1, Q&A-1 prescribes the general rule with respect to the contents of the written explanation (§ 402(f) notice) that must be provided to a distributee by a plan administrator before an eligible rollover distribution is made. Section 1.402(f)–1, Q&A-2 provides generally that the plan administrator must provide a distributee of an eligible rollover distribution with a § 402(f) notice no less than 30 days and no more than 90 days before the date of the distribution. Although a participant may, under the circumstances described in § 1.402(f)–1, Q&A-2, affirmatively elect to receive a distribution before the expiration of the 30 days after the receipt of a § 402(f) notice, that rule would not apply to a default direct rollover.

Section 1.411(d)–4, Q&A-1(a) defines a “section 411(d)(6) protected benefit” as a benefit described in § 411(d)(6)(A), early retirement benefits and retirement-type subsidies described in § 411(d)(6)(B)(i), and optional forms of benefit described in § 411(d)(6)(B)(ii) and provides that those benefits, to the extent that they are accrued, are subject to the protections of § 411(d)(6).

The default status of an optional form of benefit is not a section 411(d)(6) protected benefit. Thus, an amendment to change Plan A’s default method of pay

2000–31 I.R.B. 141 July 31, 2000

ment for an involuntary distribution from a direct cash payment to a direct rollover does not violate § 411(d)(6). As required in § 1.401(a)(31)–1, Q&A-7, Plan A’s procedures provide that each distributee subject to the default will receive an explanation of the default procedure and the direct rollover option within a time period before the default direct rollover that satisfies the timing requirements of § 1.402(f)–1, Q&A-2. Thus, the provision of a direct rollover as the default method of payment under the facts described above does not cause Plan A to fail to satisfy § 401(a)(31).

HOLDING

An amendment to change the default method of payment to a direct rollover as the default when a distributee fails affirmatively to elect to make a direct rollover or to elect a cash payment under the facts described above does not cause Plan A to fail to satisfy § 401(a)(31) or § 411(d)(6).

DRAFTING INFORMATION

The principal author of this revenue ruling is Michael Rubin of the Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, call the Employee Plans’ taxpayer assistance telephone service at (202) 622-6074/6075 (not toll-free numbers) between 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday. Mr. Rubin’s telephone number is (202) 6226214 (also not a toll-free call).

Section 457.—Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations

26 CFR 1.457–1: Compensation deferred under eligible deferred compensation plans.

Cash or deferred arrangements; nonqualified deferred compensation. This ruling specifies the criteria to be met in order to automatically defer a certain percentage of an employee’s compensation into that employee’s account in an eligible deferred compensation plan sponsored by the eligible employer.

Rev. Rul. 2000–33

ISSUE

Will a deferred compensation plan fail to be an “eligible deferred compensation plan” described in § 457(b) of the Internal Revenue Code merely because deferrals are made under an arrangement whereby a fixed percentage of an employee’s compensation is deferred on the employee’s behalf under the plan unless the employee affirmatively elects to receive the amount in cash?

FACTS

County M, a political subdivision of State X, maintains Plan A, an eligible deferred compensation plan described in § 457(b). Under Plan A, any employee of County M, including a newly hired employee, may choose to enter into an agreement pursuant to which the employee’s taxable compensation is reduced and deferrals to the employee’s account in Plan A are credited by County M on the employee’s behalf. The employee may designate a percentage of the employee’s compensation as elective deferrals, subject to the limitations of § 457(b). Plan A does not permit any other type of deferrals, and no other plan of County M permits employees to make elective deferrals. Deferrals under Plan A are immediately nonforfeitable and are subject to the limitations and requirements of § 457(b).

County M proposes to implement, effective the next January 1, an automatic election feature in Plan A under which, if a newly hired or current employee has not affirmatively elected to receive cash compensation or to have at least 2 percent of compensation deferred under Plan A, his or her compensation will automatically be reduced by 2 percent, and this amount will be credited to the employee’s account in Plan A. An election not to make deferrals or to defer a different percentage of compensation can be made at any time. Elections filed at a later date are effective for the month next following the date the election is filed.

In the case of a new employee, the election not to make deferrals will be effective for the first month after the individual first became an employee and for subsequent months (until superseded by a subsequent election) if filed within a reasonable period of time ending before the beginning of the month. Thus, if a new employee files an

election to receive cash in lieu of making deferrals and the election is filed a reasonable period ending before the beginning of the first month after the individual first becomes an employee, then no deferrals for that (or any subsequent) month are made on the employee’s behalf to Plan A until the employee makes a subsequent affirmative election to reduce his or her compensation. At the time the employee is hired, the employee will receive a notice that explains the automatic election and the employee’s right to elect to have no such deferrals made under the plan or to alter the amount of those deferrals, including the procedure for exercising that right and the timing for implementation of any such election.

The proposed amendment to Plan A also provides that, with respect to current employees, if the employee files an election to receive cash in lieu of making deferrals and the election is filed during the reasonable period ending on the January 1 effective date, then no deferrals for the period beginning on or after the January 1 effective date are made on the employee’s behalf under Plan A until the employee makes a subsequent affirmative election to reduce his or her compensation. At the beginning of the reasonable period ending on the January 1 effective date, each current employee receives a notice that explains the new automatic election and the employee’s right to elect to have no such deferrals made under the plan or to alter the amount of those deferrals, including the procedure for exercising that right and the timing for implementation of any such election.

Thereafter, each employee is notified annually of his or her deferral percentage, and of his or her right to change the percentage or to elect not to make deferrals, including the procedure for exercising that right and the timing for implementation of any such election.

Plan A provides that deferrals will be invested in accordance with the participant’s election among a broad range of investment funds held by the trustee of Plan A or, if no investment election is made by a participant, in the trust’s balanced fund which includes both diversified equity and fixed income investments.

LAW AND ANALYSIS

Section 457(a) provides that in the case of a participant in an eligible deferred compensation plan, any amount

July 31, 2000 142 2000–31 I.R.B.

of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary.

Section 457(b) defines the term “eligible deferred compensation plan.” Section 457(b)(4) and §1.457–2(g) of the Income Tax Regulations provide that an “eligible deferred compensation plan” must provide that compensation will be deferred for any calendar month only if an agreement providing for the deferral has been entered into before the beginning of such month.

No provision of § 457(b) limits deferrals under an eligible plan to elective or voluntary deferrals, nor do the provisions of § 457(b) (including the limitations of § 457(b)(2) and (3)) distinguish between elective or voluntary deferrals and other types of deferrals. See Notice 87–13, Q &A 26, 1987–1 C.B. 432, 444. In the case of these other types of deferrals, the requirements of § 457(b)(4) are satisfied without the employee entering into an agreement to defer compensation. Rather, the obligation of the employer (or the obligation of the employee as a condition of employment) satisfies § 457(b)(4).

Similarly, the automatic election procedure described above will not cause a plan to fail the requirements of § 457(b)(4). In the absence of an affirmative election to the contrary entered into before the beginning of the month, deferrals with respect to compensation for the month will be made pursuant to the automatic election procedure. Alternatively, if an employee makes an affirmative election to change the automatic election and receive a corresponding amount in cash, the employee’s affirmative election will govern any deferrals for the month. In either case, the deferrals for a month with respect to an employee are clearly established before the beginning of the month, and the requirements of § 457(b)(4) are satisfied.

HOLDING

Where, as under the proposed amendment to Plan A, the obligation to make deferrals with respect to an employee’s compensation for a month is established

before the beginning of a month by either an automatic election or by an agreement to alter the terms of the automatic election and receive cash in lieu of making deferrals, an eligible deferred compensation plan will satisfy the requirements of § 457(b)(4).

PAPERWORK REDUCTION ACT

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 OMB control number.

The collection of information in this revenue ruling is in the third, fourth, and fifth paragraphs in the section headed “FACTS”. The collection of information is necessary to ensure that the increased retirement savings due to automatic enrollment is truly voluntary. The collection of information is needed to obtain a benefit. The likely respondents are state and local governmental entities, and to a lesser extent, not-for-profit organizations.

The estimated total annual reporting burden is 500 hours. The estimated average annual burden per respondent is 1 hour. The estimated number of respondents is 500. The estimated annual frequency of responses is on occasion.

DRAFTING INFORMATION

The principal author of this revenue ruling is John Tolleris of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact him at (202) 622-6060 (not a toll free number).

Section 6012.—Persons Required to Make Returns of Income

26 CFR 1.6012–5: Composite return in lieu of specified form.

What are the obligations of those who participate in the Form 1040 IRS e-file program to the Service, taxpayers, and other participants. See Rev. Proc. 2000–31, page 146.

Section 6061.—Signing of Returns and Other Documents

26 CFR 1.6061–1: Signing of returns and other documents by individuals.

What are the obligations of those who participate in the Form 1040 IRS e-file program to the Service, taxpayers, and other participants. See Rev. Proc. 2000–31, page 146.

Section 6695.—Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons

26 CFR 1.6695(b): Failure to sign return.

T.D. 8893

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Retention of Income Tax Return Preparers’ Signatures

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that provide income tax return preparers with two alternative means of meeting the requirement that a preparer retain the copy of the return or claim manually signed by the preparer. The regulations are necessary to inform preparers about the two alternatives and to provide them with the guidance needed to comply with the alternatives.

DATES: Effective Date: These regulations are effective July 18, 2000.

Applicability Date : For dates of applicability, see §1.6695–1(g) of these regulations.

2000–31 I.R.B. 143 July 31, 2000

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman (202) 6224940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26 CFR part 1) relating to the penalty for failure to sign an income tax return under section 6695(b) of the Internal Revenue Code.

On December 31, 1998, final and temporary regulations (T.D. 8803, 1999–12 I.R.B. 15) under section 6695 were published in the Federal Register (63 F.R. 72182). A notice of proposed rulemaking (REG–106386–98, 1999–12 I.R.B. 31) cross-referencing the temporary regulations was published in the Federal Register (63 F.R. 72218) on the same date. Although written or electronic comments and requests for a public hearing were solicited, no comments were received and no public hearing was requested or held. The proposed regulations under section 6695 are adopted by this Treasury decision and the corresponding temporary regulations are removed.

fund, must manually sign the return or claim (which may be a photocopy) in the appropriate space provided on the return or claim after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature.

Explanation of Provisions

The final regulations provide that the employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner of a partnership which is a preparer), must retain the manually signed copy of the return or claim. In the alternative, the person required to retain the manually signed copy of the return or claim may either retain a photocopy of that manually signed copy or use an electronic storage system meeting the requirements of section 4 of Rev. Proc. 97–22 (1997–1 C.B. 652), or procedures subsequently prescribed by the Commissioner, to store and produce a copy of the return or claim manually signed by the preparer.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Beverly A. Baughman of the Office of Assistant Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entry for section 1.6695–1T and by revising the entry for section 1.6695–1 to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.6695–1 also issued under 26 U.S.C. 6060(b) and 6695(b). * * *

Par. 2. Section 1.6695–1 is amended by:

Revising paragraph (b)(4)(i).
Adding paragraph (g).
Removing the authority citation immediately following the end of the section.

The revision and addition read as follows: §1.6695–1 Other assessable penalties with respect to the preparation of income tax returns for other persons.

(b) * * * (4)(i) The manual signature requirement of paragraphs (b)(1) and (2) of this section may be satisfied by a photocopy of a copy of the return or claim for refund which copy is manually signed by the preparer after completion of its preparation. After a copy of the return or claim for refund is signed by the preparer and before it is photocopied, no person other than the preparer may alter any entries on the copy other than to correct arithmetical errors discernible on the return or claim for refund. The employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner of a partnership which is a preparer), must retain the manually signed copy of the return or claim for refund. In the alternative, for a return or claim for refund presented to a taxpayer for signature after December 31, 1998, and for returns or claims for refund retained on or before that date, the person required to retain the manually signed copy of the return or claim for refund may choose to retain a photocopy of the manually signed copy of the return or claim for refund, or use an electronic storage system to store and pro

Section 6695(b) provides that any person who is an income tax return preparer with respect to a return or claim for refund, who is required by regulations prescribed by the Secretary to sign the return or claim, and who fails to comply with those regulations, must pay a penalty of $50 for such failure, unless it is shown that the failure is due to reasonable cause and not willful neglect. The maximum penalty imposed with respect to documents filed during a calendar year will not exceed $25,000.

Section 7701(a)(36)(A) provides that, in general, the term income tax return preparer means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax or claim for refund imposed by subtitle A. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim is treated as if it were the preparation of such return or claim.

Section 1.6695–1(b)(1) generally provides that an income tax return preparer, with respect to a return or claim for re

July 31, 2000 144 2000–31 I.R.B.

duce a copy of the manually signed return or claim for refund. For purposes of this paragraph (b)(4)(i), an electronic storage system must meet the electronic storage system requirements prescribed in section 4 of Rev. Proc. 97–22 (1997–1 C.B. 652)(see §601.601(d)(2) of this chapter) or other procedures prescribed by the Commissioner. A record of any arithmetical errors corrected must be retained and made available upon request by the person required to retain the manually signed copy of the return or claim for refund.

(g) Effective date . This section applies to income tax returns and claims for refund presented to a taxpayer for signature after December 31, 1998, and for returns or claims for refund retained on or before that date.

Section 1.6695–1T [Removed]

Par. 3. Section 1.6695–1T is removed.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved June 30, 2000.

Jonathan Talisman, Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on July 17, 2000, 8:45 a.m., and published in the issue of the Federal Register for July 18, 2000, 65 F.R. 44436)

2000–31 I.R.B. 145 July 31, 2000