notice 98-4

INCOME TAXRev. Rul. 98–2, page 15.Insurance companies; interest rate tables. Prevailing stateassumed interest rates are provided for the determination of re-serves under section 807 of the Code for contracts issued in1997 and 1998. Rev. Rul 92–19 supplemented in part.

Rev. Rul. 98–3, page 4.Low-income housing credit; satisfactory bond; “bondfactor” amounts for the period October through Decem-ber 1997. This ruling announces the monthly bond factoramounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period Octoberthrough December 1997. The ruling also corrects errors in thebond factor amounts for properties placed in service in 1987and disposed of between January through September 1997.

Rev. Rul. 98–4, page 18.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382, and other sectionsof the Code, tables set forth the rates for January 1998.

EMPLOYEE PLANSRev. Rul. 98–1, page 5.Limitations on benefits and contributions. Questionsand answers on the limitations on benefits and contributionsunder section 415 of the Code, as amended by the UruguayRound Agreements Act, and taking into account the applica-ble provisions of the Small Business Job Protection Act of1996, are set forth.

Rev. Proc. 98–10, page 35.Minimum funding standards; change in fundingmethod. This procedure provides approval to change thefunding method used to determine the minimum fundingstandard for defined benefit plans for plan years beginningon or after January 1, 1998, to any one of the specificmethods contained in this procedure.

Notice 98–2, page 22.Recovery of basis; retirees. This notice provides a simpli-fied method of calculating the recovery of basis based on the

life of more than one annuitant where the retiree made contri-butions to a tax-qualified pension plan, even if the amount ofthe annuity varies by annuitant. The method is described insection 1403 of the Small Business Job Protection Act of1996 and section 1075 of the Taxpayer Relief Act of 1997.

Notice 98–4, page 25.Questions and answers; SIMPLE-IRAs, SIMPLE IRAplans. This notice pertains to savings incentive matchplans for employees of small employers described in sec-tion 408(p) of the Code as added by the Small Business JobProtection Act of 1996, and modified by the Taxpayer ReliefAct of 1997.

Announcement 98–1, page 38.The Service is proposing to include in the Internal RevenueManual examination guidelines relating to employer deduc-tions to qualified plans under Code section 404 and the min-imum funding standards under Code section 412.

EXEMPT ORGANIZATIONS

Announcement 98–3, page 38.A list is provided of organizations that no longer qualify asorganizations for which contributions are deductible undersection 170 of the Code.

EXCISE TAX

Rev. Rul. 98–5, page 20.Bows and arrows; taxable and nontaxable articles. A listof taxable and nontaxable articles is provided for use by man-ufacturers, producers, and importers in determining their lia-bility for the manufacturers tax on archery equipment im-posed by section 4161 of the Code. The list reflects changesto the tax on archery equipment made by the Taxpayer ReliefAct of 1997. Rev. Rul 75–17 supplemented and superseded.

ADMINISTRATIVE

Announcement 98–2, page 38.New Form 8023, Election Under Section 338 forCorporations Making Qualified Stock Purchases, replacesForm 8023–A, Corporate Qualified Stock Purchases.

Internal Revenue

bbuulllleettiinnBulletin No. 1998–2

January 12, 1998

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page 40.

Mission of the Service

The purpose of the Internal Revenue Service is to collectthe proper amount of tax revenue at the least cost; servethe public by continually improving the quality of our prod-

ucts and services; and perform in a manner warrantingthe highest degree of public confidence in our integrity, effi-ciency, and fairness.

2

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is to adminis-ter the Internal Revenue Code. Tax policy for raising revenueis determined by Congress.

With this in mind, it is the duty of the Service to carry out thatpolicy by correctly applying the laws enacted by Congress;to determine the reasonable meaning of various Code provi-sions in light of the Congressional purpose in enacting them;and to perform this work in a fair and impartial manner, withneither a government nor a taxpayer point of view.

At the heart of administration is interpretation of the Code. Itis the responsibility of each person in the Service, chargedwith the duty of interpreting the law, to try to find the truemeaning of the statutory provision and not to adopt astrained construction in the belief that he or she is “protect-ing the revenue.” The revenue is properly protected onlywhen we ascertain and apply the true meaning of the statute.

The Service also has the responsibility of applying andadministering the law in a reasonable, practical manner.Issues should only be raised by examining officers whenthey have merit, never arbitrarily or for trading purposes.At the same time, the examining officer should never hesi-tate to raise a meritorious issue. It is also important thatcare be exercised not to raise an issue or to ask a court toadopt a position inconsistent with an established Serviceposition.

Administration should be both reasonable and vigorous. Itshould be conducted with as little delay as possible andwith great courtesy and considerateness. It should nevertry to overreach, and should be reasonable within thebounds of law and sound administration. It should, howev-er, be vigorous in requiring compliance with law and itshould be relentless in its attack on unreal tax devices andfraud.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents of a permanent nature are consoli-dated semiannually into Cumulative Bulletins, which are soldon a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemakingand the disbarment and suspension list included in this part,none of these announcements are consolidated in the Cumu-lative Bulletins.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletin of thesucceeding quarterly and semiannual period, respectively.

3

Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

January 12, 1998 4 1998–2 I.R.B.

Table 2Rev. Rul. 98–3

Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits

Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year

Month of Disposition 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Jan ‘97 79.95 82.08 84.67 87.70 91.25 95.32 99.53 103.58 107.56 111.85 112.52Feb ‘97 79.95 81.83 84.41 87.43 90.96 95.00 99.17 103.18 107.11 111.28 112.52Mar ‘97 79.95 81.59 84.15 87.16 90.67 94.69 98.83 102.81 106.69 110.79 112.52Apr ‘97 79.95 81.35 83.91 86.90 90.40 94.39 98.50 102.45 106.31 110.36 112.52May ‘97 79.95 81.11 83.66 86.64 90.13 94.09 98.18 102.11 105.95 109.98 112.52Jun ‘97 79.95 80.88 83.42 86.40 89.87 93.81 97.88 101.79 105.61 109.64 112.52Jul ‘97 79.95 80.65 83.19 86.15 89.61 93.54 97.58 101.48 105.30 109.33 112.52Aug ‘97 79.95 80.43 82.96 85.92 89.36 93.27 97.30 101.18 105.01 109.06 112.52Sep ‘97 79.95 80.21 82.74 85.68 89.12 93.01 97.03 100.90 104.73 108.81 112.52

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 1998. See Rev. Rul. 98–4, page 18.

Low-income housing credit; satisfac-tory bond; “bond factor” amounts forthe period October through December1997. This ruling announces the monthlybond factor amounts to be used by taxpay-ers who dispose of qualified low-incomebuildings or interests therein during theperiod October through December 1997.The ruling also corrects errors in the bondfactor amounts for properties placed inservice in 1987 and disposed of betweenJanuary through September 1997.

Rev. Rul. 98–3

In Rev. Rul. 90–60, 1990–2 C.B. 3, theInternal Revenue Service provided guid-ance to taxpayers concerning the general

methodology used by the Treasury De-partment in computing the bond factoramounts used in calculating the amount ofbond considered satisfactory by the Sec-retary under § 42(j)(6) of the InternalRevenue Code. It further announced thatthe Secretary would publish in the Inter-nal Revenue Bulletin a table of “bond fac-tor” amounts for dispositions occurringduring each calendar month.

This revenue ruling provides in Table 1the bond factor amounts for calculatingthe amount of bond considered satisfac-tory under § 42(j)(6) for dispositions ofqualified low-income buildings or inter-ests therein during the period Octoberthrough December 1997. Table 2 pro-vides a summary of the bond factoramounts for dispositions occurring duringthe period January through September1997. Table 3 provides a summary ofbond factor amounts for dispositions oc-curring during the period January throughDecember 1996.

Due to a miscalculation, Rev. Rul.97–16, 1997–13 I.R.B. 4, Rev. Rul.97–25, 1997–23 I.R.B. 4, and Rev. Rul.97–34, 1997–34 I.R.B. 4, are in error re-garding the specific bond factor amountsfor buildings placed in service in calendaryear 1987 and disposed of in calendaryear 1997. The present revenue rulingprovides a complete list of the correctedamounts. Taxpayers who posted bondsprior to the publication date of this rev-enue ruling based upon the above men-tioned bond factor amounts may continueto rely on these figures under the author-ity of § 7805(b).

For a list of bond factor amounts applic-able to dispositions occurring during othercalendar years, see the following revenuerulings: Rev. Rul. 90–60, 1990–2 C.B. 3,for dispositions occurring during calendaryears 1987, 1988, and 1989;

Rev. Rul. 90–88, 1990–2 C.B. 7, fordispositions occurring during calendaryear 1990; Rev. Rul. 91–67, 1991–2 C.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986




Month of Disposition 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Oct ‘97 79.95 79.99 82.52 85.46 88.88 92.76 96.76 100.63 104.47 108.59 112.52Nov ‘97 79.95 79.78 82.30 85.23 88.65 92.52 96.51 100.38 104.22 108.38 112.52Dec ‘97 79.95 79.57 82.09 85.01 88.42 92.28 96.26 100.13 103.99 108.20 112.52

1998–2 I.R.B 5 January 12, 1998

13, for dispositions occurring during cal-endar year 1991;

Rev. Rul. 92–101, 1992–2 C.B. 9, fordispositions occurring during calendaryear 1992; Rev. Rul 93–83, 1993–2 C.B.6, for dispositions occurring during calen-dar year 1993;

Rev. Rul. 94–71, 1994–2 C.B. 4, fordispositions occurring during calendaryear 1994; and Rev. Rul. 95–83, 1995–2C.B. 8, for dispositions occurring duringcalendar year 1995.

DRAFTING INFORMATION

The principal author of this revenueruling is Jack Malgeri of the Office of As-sistant Chief Counsel (Passthroughs andSpecial Industries). For further informa-tion regarding this revenue ruling, contactMr. Malgeri at (202) 622-3040 (not a toll-free call).

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of January 1998. SeeRev. Rul. 98–4, page 18.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted federal long-term rate is set forth

for the month of January 1998. See Rev. Rul. 98–4,page 18.

Section 412.—MinimumFunding Standards


A revenue procedure describes certain changes tothe funding method used to determine the minimumfunding standard for defined benefit plans for planyears beginning on or after January 1, 1998. SeeRev. Proc. 98–10, page 35.

Section 415. — Limitations onBenefits and ContributionsUnder Qualified Plans

(Also § 417.)

Limitations on benefits and contri-butions. Questions and answers on thelimitations on benefits and contributionsunder section 415 of the Code, asamended by the Uruguay Round Agree-ments Act, and taking into account the ap-plicable provisions of the Small BusinessJob Protection Act of 1996, are set forth.

Rev. Rul. 98-1This revenue ruling modifies and su-

persedes Rev. Rul. 95–29, 1995–1 C.B.81, which provided questions and an-

swers on the limitations on benefits andcontributions under § 415 of the InternalRevenue Code (Code), as amended by theUruguay Round Agreements Act, Pub. L.No. 103–465 (GATT), which includes theRetirement Protection Act of 1994(RPA ’94). This revenue ruling takes intoaccount the applicable provisions of theSmall Business Job Protection Act of1996, Pub. L. No. 104–188 (SBJPA), afterthe technical correction made by the Tax-payer Relief Act of 1997, Pub. L. No.105–34 (TRA ’97).

Until further guidance is issued, theguidance provided by these questions andanswers may be relied on to administerplans. If, and to the extent, future guid-ance is more restrictive than the guidancein this revenue ruling, the future guidancewill be applied without retroactive effect.No inference should be drawn regardingissues not raised that may be suggested bya particular question and answer or as towhy certain questions, and not others, areincluded.

Background

Section 415 provides that benefits ac-crued or payable under a qualified definedbenefit plan may not exceed certain speci-fied limitations. In general, annual bene-fits are limited to the lesser of $90,000, asadjusted for cost-of-living increases($130,000 for 1998) and the 10-yearphase-in under § 415(b)(5)(A) (the




Month of Disposition 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Jan ’96 82.72 85.18 87.85 91.00 94.73 99.06 103.57 107.87 111.88 112.52Feb ’96 82.47 84.92 87.58 90.71 94.42 98.71 103.18 107.41 111.30 112.52Mar ’96 82.22 84.66 87.31 90.43 94.11 98.38 102.80 106.98 110.81 112.52Apr ’96 76.76 78.26 79.91 81.94 84.43 87.38 90.40 93.16 95.61 97.21May ’96 76.54 78.03 79.68 81.71 84.19 87.12 90.12 92.86 95.32 97.21Jun ’96 76.32 77.81 79.46 81.48 83.95 86.86 89.85 92.58 95.06 97.21Jul ’96 81.06 83.47 86.09 89.16 92.78 96.94 101.25 105.33 109.16 112.52Aug ’96 80.84 83.24 85.85 88.92 92.52 96.67 100.96 105.04 108.90 112.52Sep ’96 80.61 83.01 85.62 88.68 92.28 96.41 100.68 104.76 108.66 112.52Oct ’96 80.39 82.78 85.39 88.44 92.03 96.15 100.41 104.49 108.44 112.52Nov ’96 80.17 82.56 85.16 88.21 91.80 95.90 100.16 104.25 108.24 112.52Dec ’96 79.96 82.35 84.95 87.99 91.57 95.67 99.92 104.02 108.06 112.52

January 12, 1998 6 1998–2 I.R.B.

§ 415(b) dollar limitation), or 100 percentof the participant’s average compensationfor the participant’s high three consecu-tive years, as adjusted for the 10-yearphase-in under § 415(b)(5)(B) (the§ 415(b) compensation limitation).

Section 415(b)(2)(B) provides, withcertain exceptions, that, if a benefit ispayable other than as an annual straightlife annuity, the benefit must be actuariallyadjusted to an equivalent annual straightlife annuity. Sections 415(b)(2)(C) and(D) require that, if a benefit is payable be-ginning at an age other than the partici-pant’s social security retirement age(SSRA), the § 415(b) dollar limitation atthat age equals the annual benefit that isactuarially equivalent to the § 415(b) dol-lar limitation at the participant’s SSRA.

Section 415(b)(2)(E) provides rules re-garding the actuarial assumptions to beused in making the adjustments requiredunder §§ 415(b)(2)(B), (C), and (D).Section 415(b)(2)(E)(i) generally re-quires that, for purposes of adjusting anylimitation or benefit under § 415(b)(2)(B)or (C), the interest rate assumption shallnot be less than the greater of 5 percent orthe rate specified in the plan. Section415(b)(2)(E)(iii) generally requires that,for purposes of adjusting any limitationunder § 415(b)(2)(D), the interest rate as-sumption shall not be greater than thelesser of 5 percent or the rate specified inthe plan.

Section 417(e)(3) provides rules re-garding the actuarial assumptions to beused to determine the present value of aparticipant’s accrued benefit.

Sections 415(b)(2)(E) and 417(e)(3) ofthe Code were amended by § 767 ofRPA ’94. Section 767(a) provided a spe-cific mortality table and changed the ap-plicable interest rate that must be used todetermine the present value of a benefitsubject to § 417(e)(3) (§ 417(e)(3)changes). Section 767(b) added § 415(b)-(2)(E)(v), which requires the mortalitytable prescribed by the Secretary to beused for adjusting any benefit or limita-tion under § 415(b)(2). Section 767(b)also revised the interest rates used for ad-justing a benefit or limitation in the caseof a form of benefit subject to § 417(e)(3)by inserting a new § 415(b)(2)(E)(ii),which required that in such a case the ap-plicable interest rate be substituted for the5 percent interest rate specified in

§ 415(b)(2)(E)(i).The amendments made by § 767(b) of

RPA ’94 were modified by § 1449 ofSBJPA. The amendments made by§ 1449 of SBJPA are effective as if in-cluded in § 767 of RPA ’94.

In general, § 1449(a) of SBJPA pro-vides that, in the case of plans adoptedand in effect before December 8, 1994,the provisions of § 767(b) shall not be re-quired to be applied with respect to bene-fits accrued before the later of the date aplan amendment applying the amend-ments made by § 767(b) is adopted ormade effective, but not later than the firstday of the first limitation year beginningafter 1999. Section 1449(a) further pro-vides that determinations under§ 415(b)(2)(E) before such date are madewith respect to such benefits on the basisof § 415(b)(2)(E) and the provisions ofthe plan as in effect on December 7, 1994,but only if such provisions of the planmeet the requirements of § 415 as in ef-fect on December 7, 1994. (Section1604(b)(3) of TRA ’97 deleted superflu-ous parenthetical language from thisrule.) Section 1449(d) of SBJPA providesthat if, within one year of the enactmentof SBJPA, an amendment made to con-form the plan to the requirements of § 767of RPA ’94 is repealed, the originalamendment is not taken into account forpurposes of applying § 1449(a).

Section 1449(b) of SBJPA amended§ 415(b)(2)(E) to provide that in the caseof a form of benefit subject to § 417(e)(3),the applicable interest rate is substitutedfor 5 percent solely for purposes of ad-justing the benefit (and not for purposesof adjusting the § 415(b) dollar limita-tion). Thus, regardless of the form ofbenefit, the interest rate used to reduce the§ 415(b) dollar limitation for benefitspayable before SSRA is determined underthe rules of § 415(b)(2)(E)(i) (that is, itcannot be less than the greater of 5 per-cent or the rate specified in the plan).

Section 415(d)(1)(B) provides that the§ 415(b) compensation limitation is ad-justed annually for cost-of-living in-creases in the case of participants whohave separated from service. Section 732of GATT changed the periods used tocompute increases in the cost of living forpurposes of these adjustments.

Rev. Rul. 95–29 provided guidance onlimitations on benefits and contributions

under § 415 of the Code, as amended byGATT, including RPA ’94. This revenueruling modifies and supersedes Rev. Rul.95–29.

Rev. Proc. 97–41, 1997–33 I.R.B. 51,provides guidance to sponsors of plansthat are qualified under § 401(a) of theCode with respect to the date by whichthey must adopt amendments to complywith changes in the law made by GATTand SBJPA.

Questions and Answers

The following terms are used in thisrevenue ruling:

§ 415(b) compensation limitation. SeeBackground.

§ 415(b) dollar limitation. See Back-ground.

§ 415(b)(2)(E) changes. See Q&A–1.§ 417(e)(3) changes. See Background.§ 1449(b) revisions. See Q&A–11.Age-adjusted dollar limit. See

Q&A–7.Applicable interest rate. See Q&A–4.Applicable mortality table. See

Q&A–6.Final implementation date. See

Q&A–12.Old-law benefits. See Q&A–12.Old-law limitations. See Q&A–13.Participant’s freeze date. See Q&A–13.Plan rate and plan mortality table. See

Q&A–7.Repealing amendment. See Q&A–16.RPA ’94 § 415 effective date. See

Q&A–1.

(1) General Rules and Effective Dates

Q–1. When are the changes to § 415(b)-(2)(E) made by § 767(b) of RPA ’94(§ 415(b)(2)(E) changes) effective?

A–1. Under § 767(d)(1) of RPA ’94, the§ 415(b)(2)(E) changes are generally ef-fective as of the first day of the first limi-tation year beginning in 1995, except thatan employer may elect to treat the§ 415(b)(2)(E) changes as being effectiveon an earlier date that is on or after De-cember 8, 1994. For purposes of this rev-enue ruling, the date described in the pre-ceding sentence is the RPA ’94 § 415effective date.

Plan amendments that apply the§ 415(b)(2)(E) changes must be effectiveas of the RPA ’94 § 415 effective date.However, § 1449(a) of SBJPA provides a

1998–2 I.R.B 7 January 12, 1998

rule under which the § 415(b)(2)(E)changes are not required to be applied tocertain benefits even after the RPA ’94§ 415 effective date. See Q&A–12.

Q–2. What plan benefits are subject tothe interest rate prescribed by § 415(b)-(2)(E)(ii)?

A–2. The interest rate prescribed by§ 415(b)(2)(E)(ii) applies in the case of aform of benefit subject to § 417(e)(3).See § 417(e)(3) and the Income Tax Reg-ulations thereunder to determine whethera form of benefit is subject to § 417(e)(3).

Q–3. Are plans that are not subject to§ 417(e)(3) subject to the requirementsfor assumptions under §§ 415(b)(2)(E)(ii)and (v)?

A–3. Plans that are not subject to§ 417(e)(3), such as governmental plansand certain church plans, are not subjectto the interest rate requirement under§ 415(b)(2)(E)(ii), but are subject to themortality table requirement under§ 415(b)(2)(E)(v).

Q–4. What is the applicable interestrate, as defined in § 417(e)(3), as refer-enced by § 415(b)(2)(E)(ii)?

A–4. The regulations under § 417(e)(3)(currently § 1.417(e)–1T(d)(3)(i)) providethat the applicable interest rate under§ 417(e)(3) is the annual interest rate on30-year Treasury securities as specifiedby the Commissioner.

Q–5. What is the time for determiningthe applicable interest rate?

A-5. A plan that has been amended toreflect the § 417(e)(3) changes must usethe same date for determining the applica-ble interest rate for purposes of applyingthe § 415(b)(2)(E) changes as it uses forpurposes of § 417(e)(3). A plan that hasnot yet been amended to reflect the§ 417(e)(3) changes may use any date fordetermining the applicable interest ratefor purposes of applying the § 415(b)-(2)(E) changes that is permitted under§ 417(e)(3) and the regulations thereunder(currently § 1.417(e)–1T(d)-(4)) for usein determining the applicable interest ratefor purposes of § 417(e)(3).

Q–6. What mortality table must beused to make adjustments to benefits andlimitations under § 415(b)(2)(E)?

A–6. Section 415(b)(2)(E)(v), addedby RPA ’94, provides that, for purposesof adjusting any benefit or limitationunder § 415(b)(2)(B), (C), or (D), themortality table used shall be the table

prescribed by the Secretary. Rev. Rul.95-6, 1995–1 C.B. 80, provides the mor-tality table (applicable mortality table)which generally must be used for thesepurposes. For purposes of adjusting anylimitation under § 415(b)(2)(C) or (D), tothe extent that a forfeiture does not occurupon death, the mortality decrement maybe ignored prior to age 62 and must be ig-nored after SSRA. See Q&A G–3 andQ&A G–4 of Notice 83–10, 1983–1 C.B.536.

Q–7. How are the § 415(b) limitationsapplied to a benefit under a defined bene-fit plan that is not payable in the form ofan annual straight life annuity within themeaning of § 415(b)(2)(A) and that is notsubject to § 417(e)(3)?

A–7. The determination as to whethersuch a benefit satisfies the § 415(b) limi-tations generally is made by comparingthe equivalent annual benefit determinedin Step 1 with the lesser of the age-ad-justed dollar limit determined in Step 2and the § 415(b) compensation limitationdetermined in Step 3.

Step 1: Under § 415(b)(2)(B), determinethe annual benefit in the form of a straightlife annuity commencing at the same agethat is actuarially equivalent to the planbenefit. In general, §§ 415(b)(2)(E)(i) and(v) require that the equivalent annual bene-fit be the greater of the equivalent annualbenefit computed using the interest rateand mortality table, or tabular factor, speci-fied in the plan for actuarial equivalencefor the particular form of benefit payable(plan rate and plan mortality table, or plantabular factor, respectively) and the equiv-alent annual benefit computed using a 5percent interest rate assumption and theapplicable mortality table. This step doesnot apply to a benefit that is not required tobe converted to a straight life annuity pur-suant to § 415(b)(2)(B) (for example, aqualified joint and survivor annuity).

Step 2: Under § 415(b)(2)(C) or (D),determine the § 415(b) dollar limitationthat applies at the age the benefit ispayable (age-adjusted dollar limit). Theage-adjusted dollar limit is the annualbenefit that is actuarially equivalent to anannual benefit equal to the § 415(b) dollarlimitation payable at the participant’sSSRA.

If the age at which the benefit ispayable is 62 or greater, and less than theparticipant’s SSRA, the age-adjusted dol-

lar limit is determined by reducing the§ 415(b) dollar limitation at the partici-pant’s SSRA using adjustment factors thatare consistent with the factors used to re-duce old-age insurance benefits under theSocial Security Act. Pursuant to Q&A–5of Notice 87–21, 1987–1 C.B. 458, the§ 415(b) dollar limitation at the partici-pant’s SSRA is reduced by 5/9 of 1 per-cent for each of the first 36 months bywhich benefits commence before themonth in which the participant’s SSRA isattained and by 5/12 of 1 percent for eachadditional month.

If the age at which the benefit ispayable is less than 62, the age-adjusteddollar limit is determined by reducing theage-adjusted dollar limit at age 62 on anactuarially equivalent basis. In general,§§ 415(b)(2)(E)(i) and (v) require that thereduced age-adjusted dollar limit be thelesser of the equivalent amount computedusing the plan rate and plan mortalitytable (or plan tabular factor) used for ac-tuarial equivalence for early retirementbenefits under the plan and the amountcomputed using 5 percent interest and theapplicable mortality table (used to the ex-tent described in Q&A–6).

If the age at which the benefit ispayable is greater than the participant’sSSRA, the age-adjusted dollar limit is de-termined by increasing the § 415(b) dollarlimitation at the participant’s SSRA on anactuarially equivalent basis. In general,§§ 415(b)(2)(E)(i) and (v) require that theincreased age-adjusted dollar limit be thelesser of the equivalent amount computedusing the plan rate and plan mortalitytable (or plan tabular factor) used for ac-tuarial equivalence for late retirementbenefits under the plan and the equivalentamount computed using 5 percent interestand the applicable mortality table (used tothe extent described in Q&A–6).

Step 3: Determine the participant’s§ 415(b) compensation limitation. Thislimitation is equal to the participant’scompensation averaged over the consecu-tive three-year period producing the high-est average, as provided in § 415(b)(3).

The plan does not satisfy the § 415(b)limitations unless the equivalent annualbenefit determined in Step 1 is no greaterthan the lesser of the age-adjusted dollarlimit determined in Step 2 and the§ 415(b) compensation limitation deter-mined in Step 3.

January 12, 1998 8 1998–2 I.R.B.

Q–8. How is § 415(b)(2)(B) applied toa benefit under a defined benefit plan thatis in a form of benefit subject to§ 417(e)(3)?

A–8. If a defined benefit plan providesa benefit in a form that is subject to§ 417(e)(3), the determination of theequivalent annual benefit is the same as inQ&A–7, Step 1, except that, under§ 415(b)(2)(E)(ii), the applicable interestrate is substituted for the 5 percent inter-est rate under § 415(b)(2)(E)(i). Thus, theequivalent annual benefit must be thegreater of the equivalent annual benefitcomputed using the plan rate and planmortality table (or plan tabular factor) andthe equivalent annual benefit computedusing the applicable interest rate and theapplicable mortality table.

Example: Plan A provides that single-sum distributions are determined as theactuarial present value of the annualstraight life annuity payable at the actualretirement date. Plan A provides that aparticipant’s single sum is determined asthe greater of the present value using 6percent interest and the UP-1984 Mortal-ity Table and the present value using theapplicable interest rate and applicablemortality table. In accordance with§ 417(e) and the regulations thereunder,Plan A provides that the single sum is notless than the actuarial present value of thenormal retirement benefit using the ap-plicable interest rate and the applicablemortality table. The plan has beenamended to apply the § 415(b)(2)(E)changes and, in accordance with thatamendment, the § 415(b)(2)(E) changesare applied to all accrued benefits for allparticipants under the plan.

Participant M, whose SSRA is age 65,retires at age 60 from Plan A and elects toreceive a distribution in the form of a sin-gle sum. Under the plan formula, and be-fore the application of § 415 under theplan, the amount of the single sum is$950,000, which is the present value ofthe early retirement benefit based upon 6percent interest and the UP-1984 mortal-ity table. This benefit must be convertedto an actuarially equivalent straight lifeannuity commencing at age 60 in order toapply § 415 under the plan. Assumingthat the plan’s applicable interest rateunder § 417(e)(3) is 8 percent, the conver-sion is made as follows:

First, divide $950,000 by an immediatestraight life annuity purchase rate at age

60 using the plan rate and plan mortalitytable for determining single sums. Basedon 6 percent interest and the UP-1984Mortality Table, the equivalent annualbenefit is $950,000/10.596, or $89,656.Second, divide $950,000 by an immediatestraight life annuity purchase rate at age60 using the applicable interest rate andthe applicable mortality table. Based on 8percent interest and the applicable mortal-ity table, the equivalent annual benefit is$950,000/10.098, or $94,078. The equiv-alent annual benefit for purposes of § 415is the greater of the two resultingamounts, or $94,078.

Q–9. How is the age-adjusted dollarlimit determined under § 415(b)(2)(C)when a benefit is payable before SSRA ina form subject to § 417(e)(3)?

A–9. If a defined benefit plan providesa form of benefit subject to § 417(e)(3)and the benefit is payable before a partici-pant’s SSRA, the age-adjusted dollar limitis determined in the same manner as inQ&A–7, Step 2. Thus, the § 415(b) dollarlimitation at the participant’s SSRA is re-duced by 5/9 of 1 percent for each of thefirst 36 months by which benefits com-mence before the month in which the par-ticipant’s SSRA is attained and by 5/12 of1 percent for each additional month and,if the age at which the benefit is payableis less than 62, is further reduced in accor-dance with § 415(b)(2)(E)(i) and (v).

Example: Plan A described in Q&A–8also provides that early retirement annuitybenefits are equal to the normal form ofannuity benefit payable at age 65, reducedby 4 percent for each year by which theearly retirement age is less than 65. Par-ticipant M’s retirement age is age 60, andParticipant M has more than 10 years ofplan participation at age 60. The age-ad-justed dollar limit at age 60 is computedas follows:

The age-adjusted dollar limit at age 62is determined by reducing the § 415(b)dollar limitation at SSRA (assumed to be$125,000) by a factor of 5/9 of 1 percentfor 36 months. This results in an age-ad-justed dollar limit of $100,000 at age 62,which is further reduced as describedbelow.

First, using the plan tabular factor forearly retirement reductions of 4 percentper year, the benefit adjustment factor atage 62 would be 88 percent (100%-(4% x 3)). At age 60, the factor would be80 percent (100%-(4% x 5)). Accord-

ingly, the actuarially equivalent benefit atage 60 reduced in accordance with planfactors is equal to $100,000 x 80%/88%,or $90,909.

Second, even though Participant M’sdistribution is in the form of a single sumwhich is subject to § 417(e)(3), the age-adjusted dollar limit at age 62 is now re-duced using an interest rate of 5 percentand the applicable mortality table. As-suming no mortality decrement is appliedprior to age 62 (which is permitted be-cause plan benefits are not subject to for-feiture upon death prior to the annuitystarting date), the actuarially equivalentbenefit at age 60 is $86,661.

The age-adjusted dollar limit at age 60is the lesser of $90,909 and $86,661, or$86,661. Because the equivalent annualbenefit of $94,078 exceeds the age-ad-justed dollar limit at age 60, the single-sum benefit determined in Q&A-8 doesnot satisfy the § 415(b) limitations.

Q–10. Does a plan amendment that ap-plies the § 415(b)(2)(E) changes violate§ 411(d)(6)?

A–10. In general, a plan amendmentthat changes the interest rate or mortalitytable taken into account in determining aparticipant’s accrued benefit is subject tothe anti-cutback rules under § 411(d)(6)of the Code. However, under § 767(d)(2)of RPA ’94, a participant’s accrued bene-fit is not considered to be reduced in vio-lation of § 411(d)(6) merely because theplan is amended to apply the§ 415(b)(2)(E) changes. Therefore, a planamendment that merely applies the§ 415(b)(2)(E) changes will not violate§ 411(d)(6) even if the amendment ap-plies those changes to previously accruedbenefits, including benefits accrued be-fore the RPA ’94 § 415 effective date.Similarly, a plan amendment that merelyapplies the § 415(b)(2)(E) changes willnot violate § 411(d)(6) even if the amend-ment applies those changes to distribu-tions made on or after the RPA ’94 § 415effective date and before the amendment.In addition, an amendment that merely re-peals an original § 415(b)(2)(E) amend-ment, as described in Q&A-16, will betreated as an amendment to apply the§ 415(b)(2)(E) changes for purposes of§ 767(d)(2) and, therefore, will not violate§ 411(d)(6).

Q–11. How is the relief provided under§ 767(d)(2) of RPA ’94 affected by theretroactive amendment to § 415(b)(2)(E)

1998–2 I.R.B 9 January 12, 1998

made by § 1449(b) of SBJPA (the§ 1449(b) revisions)?

A–11. As described in Q&A-10, the§ 411(d)(6) relief provided by § 767(d)(2)applies only to the extent that a reductionin accrued benefits results from a planamendment that merely applies the§ 415(b)(2)(E) changes. For this purpose,a plan amendment is considered to applythe § 415(b)(2)(E) changes only if eitherthe plan, as amended, reflects the§ 1449(b) revisions for all distributionsfor periods on and after the RPA ’94 § 415effective date or the plan, as amended, re-flects the § 1449(b) revisions for all distri-butions for periods after August 20, 1996.Thus, the relief under § 767(d)(2) doesnot apply to a plan amendment that failsto reflect the § 1449(b) revisions for dis-tributions for periods after Au-gust 20, 1996. Consequently, a plan thathas been amended to apply the§ 415(b)(2)(E) changes without regard tothe § 1449(b) revisions must be furtheramended, within the remedial amendmentperiod under § 401(b) for disqualifyingprovisions under SBJPA and GATT, to re-flect the § 1449(b) revisions (that is, itmust use the greater of 5 percent and theplan rate in determining the age-adjusteddollar limit for early retirement) for distri-butions for periods after August 20, 1996.As described in Q&A-18, plan operationsmust be conformed to the terms of theplan. Accordingly, distributions for peri-ods on or after the RPA ’94 § 415 effec-tive date may have to be redetermined.

(2) Transition Rules

Q–12. Must the § 415(b)(2)(E) changesbe applied to all benefits under the planon and after the RPA ’94 § 415 effectivedate?

A–12. The § 415(b)(2)(E) changes gen-erally must be applied to all benefitsunder the plan on and after the RPA ’94§ 415 effective date, or, if later, the datethe plan becomes effective. However,under § 767(d)(3)(A) of RPA ’94, asamended by § 1449(a) of SBJPA, a planadopted and in effect before December 8,1994, may provide that the § 415(b)(2)(E)changes do not apply with respect to ben-efits accrued before the earlier of (i) thelater of the date a plan amendment apply-ing the § 415(b)(2)(E) changes is adoptedor made effective, or (ii) the first day ofthe first limitation year beginning after

December 31, 1999. For purposes of thisrevenue ruling, the date described in thepreceding sentence (the earlier of thedates described in (i) and (ii)) is referredto as the final implementation date, andthe benefits to which the § 415(b)(2)(E)changes are not applied are referred to asold-law benefits. For purposes of deter-mining the final implementation date, thedate in (i) above that a plan amendmentapplying the § 415(b)(2)(E) changes ismade effective is the earliest date as ofwhich, under the amendment, the§ 415(b)(2)(E) changes apply to all bene-fits accruing for the participants under theplan.

Any amendment that provides that the§ 415(b)(2)(E) changes will not apply tocertain benefits must be adopted prior tothe end of the remedial amendment periodunder § 401(b) for disqualifying provi-sions under SBJPA and GATT. In addi-tion, except where an employer makes arepealing amendment under Q&A–16,once the final implementation date for aplan resulting from any plan amendmentimplementing the § 415(b)(2)(E) changeshas passed, the extent to which the§ 415(b)(2)(E) changes are not applied tocertain benefits may not be changed.

Q–13. How is a participant’s old-lawbenefit determined?

A–13. A participant’s old-law benefit isdetermined as of a date specified in theplan for the participant (participant’sfreeze date) that is before the final imple-mentation date. The plan may providethat the freeze date for all participants isthe day before the final implementationdate for the plan. Alternatively, the planmay specify an earlier date as the freezedate for some or all participants. The par-ticipant’s old-law benefit is determinedfor each possible annuity starting date andoptional form of benefit based on the par-ticipant’s accrued benefit under the termsof the plan as of the participant’s freezedate, after applying § 415 as in effect onDecember 7, 1994 (old-law limitations),including the participation requirementsunder § 415(b)(5).

Under the second sentence of§ 767(d)(3)(A) of RPA ’94 (as amendedby SBJPA), before the final implementa-tion date the old-law limitations are ap-plied using all plan terms that were in ef-fect on December 7, 1994 (that is, withoutregard to amendments made after Decem-

ber 7, 1994) and that are relevant in deter-mining actuarial equivalence under§ 415(b)(2)(E). Therefore, except as pro-vided in Q&A-15, in order to determinethe old-law benefit, the § 415(b) limita-tions must be applied using the plan’smortality table as in effect on December7, 1994 and, except as provided in§ 415(b)(2)(D), an interest rate that is noless than the greater of 5 percent or theplan rate as in effect on December 7, 1994to determine actuarial equivalence. If, asof December 7, 1994, the plan rate for aparticular optional form of benefit was avariable interest rate, the plan rate thatwould be compared to 5 percent is thevalue of the variable rate at the time theold-law limitations are applied, not thevalue of the variable rate on December 7,1994.

Except as provided in Q&A–15, planamendments that are adopted after the par-ticipant’s freeze date are not taken into ac-count in determining the old-law benefit,and the old-law benefit is determinedwithout regard to cost-of-living adjust-ments that become effective under§ 415(d) after the participant’s freeze date.

Example: Plan B has a calendar planyear and limitation year. N is currently aparticipant in Plan B and has never partic-ipated in any other plan. Plan B isamended on December 1, 1998, to applythe § 415(b)(2)(E) changes. As amended,the plan specifies that the § 415(b)(2)(E)changes will not apply to benefits accruedas of December 31, 1997 (that is, Decem-ber 31, 1997, is the freeze date for all par-ticipants). Thus, any optional form ofbenefit provided under the plan as of thefreeze date (taking into account the old-law limitations) is an old-law benefit. Asof December 7, 1994, the plan providesthe normal retirement benefit in the formof a straight life annuity beginning at age65. Early retirement benefits are avail-able at any age on or after age 60 with anactuarial reduction. The plan rate and theplan mortality table used for the reductionare 5 percent and the UP-1984 MortalityTable, respectively.

Under the plan, single-sum distribu-tions are available at any permitted retire-ment age. Single-sum distributions arecalculated as the actuarial present value ofthe straight life annuity benefit payable atthe actual retirement age using the PBGCimmediate interest rate and the UP-1984

January 12, 1998 10 1998–2 I.R.B.

Mortality Table. In accordance with§ 417(e) and the regulations thereunder,the plan further provides that any single-sum distribution must be at least as greatas the actuarial present value of the partic-ipant’s accrued normal retirement benefitcomputed using the PBGC interest ratesfor deferred annuities and the UP–1984Mortality Table. The plan has not beenamended to change the interest rate ormortality table used for determining sin-gle-sum benefits or early retirement reduc-tions at any time after December 7, 1994.

There is no forfeiture of accrued bene-fits under the plan on account of deathprior to the annuity starting date. Underthe plan, the § 415(b) limitations are ap-plied only after the otherwise determinedbenefit has been adjusted for early retire-ment and for any optional form of benefit,and the mortality decrement is ignoredprior to age 62.

Participant N’s SSRA is 65. As of thefreeze date, Participant N has 10 years ofparticipation in the plan. Under the planformula as of N’s freeze date, ParticipantN’s accrued benefit payable at normal re-tirement age (before the application of§ 415 under the plan) is $110,000.

If Participant N were to retire in 1999 atage 60 and to elect, with spousal consent,to receive a distribution in the form of asingle sum, then Participant N’s single-sum distribution at retirement (before theapplication of § 415 under the plan)would equal the single-sum equivalent ofthe early retirement annuity benefit underthe terms of the plan. Participant N’searly retirement benefit accrued as of N’sfreeze date and payable at age 60, deter-mined using the plan rate and plan mortal-ity table, is $75,242. Under the plan, thesingle-sum distribution at age 60 (beforethe application of § 415 under the plan),which is based on the immediate annuityof $75,242, the PBGC immediate rate of 6percent, and the UP-1984 MortalityTable, is $797,264.

The old-law limitations must now beapplied under the plan to determine theold-law benefit for any optional form ofbenefit elected by N. In this case, the planrate used to determine single sums is thePBGC immediate rate of 6 percent andthe plan mortality table is the UP-1984Mortality Table. The age-adjusted dollarlimit at age 60 determined on the basis of§ 415(b)(2)(E) as in effect on December

7, 1994 (using 5 percent interest and theUP-1984 Mortality Table) and withouttaking into account cost-of-living in-creases under § 415(d) after the freezedate is $86,143. Because $75,242 (theannual benefit payable at age 60 that isactuarially equivalent to $797,264, deter-mined on the basis of § 415(b)(2)(E) as ineffect on December 7, 1994) does not ex-ceed $86,143, the single-sum old-lawbenefit is $797,264.

Alternatively, if N were to elect to re-ceive a distribution in the form of astraight life annuity commencing at age60, then the old-law benefit for that op-tional form would be $75,242 becausethat amount does not exceed the age-ad-justed dollar limit of $86,143.

Q–14. How are the § 415(b) limitationsapplied to a benefit under a defined bene-fit plan if the § 415(b)(2)(E) changes arenot applied to the old-law benefits?

A–14. If the § 415(b)(2)(E) changes arenot applied to old-law benefits, the plancan apply the § 415(b) limitations usingone of three methods as outlined below.The plan must specify which of the threemethods is being used.

Method 1: Under this method, the planapplies the § 415(b) limitations using thesteps in Q&A–7, and, if applicable,Q&A–8, except that, if the benefit is notpayable in the form of an annual benefitwithin the meaning of § 415(b)(2)(A), theequivalent annual benefit determined inStep 1 is computed separately with re-spect to the old-law benefit (not to exceedthe total plan benefit) and the portion ofthe total plan benefit that exceeds the old-law benefit. The annual benefit that isequivalent to the old-law benefit is deter-mined in accordance with § 415(b)(2)(E)as in effect on December 7, 1994. Thedetermination of the annual benefit that isequivalent to the portion of the plan bene-fit that is in excess of the old-law benefitmust reflect the § 415(b)(2)(E) changes.The results of these two separate compu-tations are added together to determinethe equivalent annual benefit, which isthen used in the remaining steps inQ&A–7.

In accordance with § 767(d)(3)(A) asamended by SBJPA, if the determinationis being made before the final implemen-tation date, then the plan rate and planmortality table used to determine the an-nual benefit that is equivalent to the old-

law benefit are based on the plan provi-sions in effect on December 7, 1994. Bycontrast, if the determination is beingmade on or after the final implementationdate, then the plan rate and plan mortalitytable used to determine the annual benefitthat is equivalent to the old-law benefitare based on the plan provisions in effecton the date of determination.

In some cases, the use of the applicablemortality table in adjusting the § 415(b)dollar limitation under § 415(b)(2)(C) or(D) can result in an age-adjusted dollarlimit lower than the age-adjusted dollarlimit used in determining the old-law ben-efit. A plan using Method 1 may providethat in any event the participant will re-ceive no less than the old-law benefit,limited to the extent required underQ&A–15.

Method 2: Under this method, the planapplies the § 415(b) limitations, using thesteps in Q&A–7 and, if applicable,Q&A–8, to the total plan benefit, but pro-vides that in any event the participant willreceive no less than the old-law benefit,limited to the extent required underQ&A–15.

Method 3: Under this method, the planapplies the § 415(b) limitations by limit-ing a benefit only to the extent needed tosatisfy either Method 1 or Method 2 de-scribed above.

The following examples illustrate theapplication of Method 1, Method 2, andMethod 3, respectively, of this Q&A–14.

Example 1: The facts with respect toPlan B and Participant N are as describedin the example under Q&A-13. In addi-tion, before applying § 415 under theplan, N’s total single-sum benefit payableat age 60 under Plan B is $950,000. Thisamount is the present value of N’s straightlife annuity benefit commencing underPlan B at age 60 and computed using thePBGC immediate rate of 6 percent andUP–1984 Mortality Table. The applicableinterest rate under § 417(e)(3) and Plan Bis 8 percent.

Plan B provides that the § 415(b)(2)(E)changes will not apply to benefits accruedthrough December 31, 1997, in accor-dance with Method 1. In addition, as al-lowed by Method 1, Plan B provides thatin any event a participant will receive noless than the benefits accrued through De-cember 31, 1997, limited to the extent re-quired under Q&A–15.

1998–2 I.R.B 11 January 12, 1998

Under Plan B’s terms, the § 415(b) lim-itations are applied to N’s benefit usingthe steps in Q&A–7 (as modified in ac-cordance with Q&A–8 for distributionssubject to § 417(e)(3)), except that theequivalent annual benefit determined inaccordance with Step 1 of Q&A–7 iscomputed separately with respect to N’ssingle-sum old-law benefit and the por-tion of N’s total single-sum benefit thatexceeds the single-sum old-law benefit,and these two amounts are added togetherto determine N’s total equivalent annualbenefit.

First, the annual benefit payable at age60 that is actuarially equivalent to N’s sin-gle-sum old-law benefit of $797,264 isdetermined on the basis of § 415(b)(2)(E)as in effect on December 7, 1994. If thedetermination were before the final im-plementation date, all plan terms in effecton December 7, 1994 that are relevant indetermining actuarial equivalence under§ 415(b)(2)(E) would be used. In thiscase, the § 415(b)(2)(E) changes apply tobenefits accruing for all participantsunder the plan on and after January 1,1998. Consequently, the date the planamendment applying § 415(b)(2)(E)changes is made effective (within themeaning of Q&A–12) is January 1, 1998,and the final implementation date (basedon the later of the date the plan amend-ment is adopted or made effective) is De-cember 1, 1998.

Because the determination is beingmade in 1999, which is on or after thefinal implementation date, actuarialequivalence is determined taking into ac-count any amendments that affect the planrate and plan mortality table that areadopted or become effective after Decem-ber 7, 1994. However, in this case therehave been no amendments after Decem-ber 7, 1994, and the interest rate used forpurposes of this adjustment is the greaterof the plan rate for determining singlesums (6 percent) or 5 percent. The mor-tality table used is the plan mortality tablefor determining single sums (UP–1984Mortality Table). The equivalent annualbenefit is $75,242.

Next, the annual benefit payable at age60 that is actuarially equivalent to the por-tion of N’s total single-sum benefit of$950,000 that exceeds $797,264, or$152,736, is determined taking into ac-count the § 415(b)(2)(E) changes. For

this purpose, $152,736 is first convertedto an equivalent annual benefit using theplan rate (6 percent) and the plan mortal-ity table (UP–1984 Mortality Table). Onthis basis, the equivalent annual benefit is$14,415. The additional $152,736 is alsoconverted to an equivalent annual benefitusing the applicable interest rate (8 per-cent) and the applicable mortality table.On this basis, the equivalent annual bene-fit is $15,125. Under Plan B, the annualbenefit that is equivalent to $152,736 forpurposes of § 415 is the greater of$14,415 and $15,125, or $15,125. Thus,the annual benefit that is equivalent to thetotal single sum of $950,000 for purposesof § 415 is $15,125 plus $75,242, or$90,367.

Next, the age-adjusted dollar limit atage 60 is determined taking the§ 415(b)(2)(E) changes into account. As-suming that the § 415(b) dollar limitationeffective for the 1999 calendar year is$130,000, the age-adjusted dollar limit atage 60 is the lesser of the benefit that isactuarially equivalent to the age-adjusteddollar limit at age 62 ($104,000) com-puted using the plan rate and the planmortality table for making early retire-ment adjustments (5 percent andUP–1984 Mortality Table, respectively),or $89,588, and the benefit computedusing 5 percent and the applicable mortal-ity table, or $90,127. Thus, N’s age-ad-justed dollar limit at age 60 under Plan Bis the lesser of $89,588 and $90,127, or$89,588.

Because N’s total single-sum benefit isgreater than the single-sum old-law bene-fit and because the equivalent annual ben-efit ($90,367) exceeds the age-adjusteddollar limit ($89,588), N’s single-sumbenefit under Plan B must be limited to$942,130 ($797,264 + ($89,588 -$75,242) x 10.098) in order to satisfy the§ 415(b) limitations.

Example 2: The facts are the same as inExample 1, except that the plan providesthat the § 415(b)(2)(E) changes will applyto the total plan benefit, but that in anyevent the participant will receive no lessthan the old-law benefit, limited to the ex-tent provided in Q&A–15, in accordancewith Method 2.

Under Plan B’s terms, the § 415(b) lim-itations are applied to N’s benefit usingthe steps in Q&A–7 (as modified in ac-cordance with Q&A–8 for distributions

subject to § 417(e)(3)). Thus, the$950,000 single-sum benefit is first con-verted to an equivalent annual benefitusing the plan rate and plan mortalitytable for determining single sums (6 per-cent and UP–1984 Mortality Table, re-spectively). On this basis, the equivalentannual benefit is $89,656. The $950,000single-sum benefit is then converted to anequivalent annual benefit using the ap-plicable interest rate (8 percent) and theapplicable mortality table. On this basis,the equivalent annual benefit is $94,078.Under Plan B, the annual benefit that isequivalent to $950,000 for purposes of§ 415 is the greater of these two amounts,or $94,078.

As derived in Example 1 above, theage-adjusted dollar limit at age 60 is$89,588. Because the equivalent annualannuity ($94,078) exceeds this amountand because the total single-sum benefitexceeds the single-sum old-law benefit,the total single-sum benefit must be lim-ited to $904,660 ($89,588 x 10.098) inorder to satisfy the § 415(b) limitations.

Example 3: The facts are the same as inExample 1, except that the plan providesthat, in accordance with Method 3, a ben-efit is limited only to the extent necessaryto satisfy the § 415(b) limitations usingeither Method 1 or Method 2.

In the case of Participant N, the maxi-mum benefit that satisfies the § 415(b)limitations using Method 1 is $942,130,and the maximum benefit that satisfies the§ 415(b) limitations using Method 2 is$904,660. Thus, the maximum benefitthat satisfies the § 415(b) limitations de-termined in accordance with Method 3 is$942,130.

Q–15. Under what circumstances doesa participant’s old-law benefit changeafter the participant’s freeze date?

A–15. A participant’s old-law benefitcannot increase after the participant’sfreeze date. However, for any date afterthe participant’s freeze date, the partici-pant’s old-law benefit must be limited ifthe old-law limitations as of that later dateare less than the old-law benefit deter-mined as of the participant’s freeze date.For example, if, after the freeze date, an-nual additions are credited to a partici-pant’s account in an existing defined con-tribution plan of the same employer for alimitation year beginning beforeJanuary 1, 2000, increases in that partici-

January 12, 1998 12 1998–2 I.R.B.

pant’s defined contribution fraction couldresult in changes in the defined benefitfraction that would require a further limi-tation of the old-law benefit (dependingon the terms of the plans).

Similarly, on or after the final imple-mentation date, the determinations of ac-tuarial equivalence under § 415(b)(2)(E)that apply with respect to the old-law ben-efit must take into account any changes inplan terms that occur after Decem-ber 7, 1994, that are relevant in applyingthe old-law limitations. If the equivalentannual benefit determined in this mannerexceeds the age-adjusted dollar limit, theold-law benefit must be limited accord-ingly.

Finally, the old-law benefit is limited tothe extent that the total plan benefit deter-mined before applying § 415 under theplan is smaller than the old-law benefit.This could happen, for example, if theplan is amended to change the interestrate generally used to apply § 417(e)(3) ina way that would reduce a participant’stotal plan benefit, even if the amendmentoccurs after the participant’s freeze date.

Example 1: As of December 7, 1994,Plan C provided that single-sum distribu-tions were determined using the PBGCinterest rates and the UP-1984 MortalityTable. Plan C also provided that, for pur-poses of computing the § 415(b) limita-tions, an interest rate equal to the greaterof 5 percent or the applicable PBGC inter-est rate would be used with the UP–1984Mortality Table. Under Plan C, the§ 415(b) limitations are applied only afterthe otherwise determined benefit has beenadjusted for early retirement and for anyoptional form of benefit.

In order to reflect the § 417(e)(3)changes, Plan C is amended on January 1,1996, effective as of that date, to substi-tute the applicable interest rate and the ap-plicable mortality table for the originalplan rate and the UP-1984 MortalityTable, respectively, to compute single-sum benefits under the plan. These newprovisions are applied to all plan benefits(as determined before applying § 415under the plan), whether accrued beforeor after the amendment date.

Plan C is amended July 1, 1999, toapply the § 415(b)(2)(E) changes. PlanC’s terms as amended provide that the

§ 415(b)(2)(E) changes will not applyto any benefits accrued under the plan as

of December 31, 1999. Thus, the freezedate for all participants in the plan is De-cember 31, 1999, and the final implemen-tation date for Plan C is January 1, 2000.

Because the January 1, 1996 amend-ment applying the § 417(e)(3) changes iseffective before the freeze date, it will betaken into account in determining planbenefits before applying § 415. However,that amendment will not be taken into ac-count in applying the old-law limitationsto determine the old-law benefit until thefinal implementation date. Accordingly,in order to apply the old-law limitations todetermine the old-law benefit before thefinal implementation date, the interestrate used to convert a single-sum benefitto an actuarially equivalent straight lifeannuity is the greater of 5 percent and theoriginal plan rate.

Plan amendments made after Decem-ber 7, 1994, including the January 1, 1996amendment to use the applicable interestrate in determining equivalent singlesums for all accrued benefits, must betaken into account in applying the old-lawlimitations on or after the final implemen-tation date. Therefore, on or after thefinal implementation date, in determiningthe equivalent annual benefit under§ 415(b)(2)(B), the interest rate used isthe greater of 5 percent and the new planrate under the amendment (the applicableinterest rate). If the new plan rate exceedsthe greater of 5 percent and the originalplan rate, the old-law benefit, determinedas of the freeze date, might exceed theold-law limitations when those limitationsare applied on or after the final implemen-tation date. In such a case, the old-lawbenefit must be further limited in order toensure that the old-law benefit does notexceed the old-law limitations.

Example 2: The facts are the same as inExample 1, except that the freeze date fora Participant P is December 31, 1994.Participant P’s benefits are being deter-mined as of December 31, 1996. As a re-sult of the January 1, 1996 amendment,before applying § 415 under the plan, P’stotal plan benefit as of December 31,1996 (which includes accruals after thefreeze date) is smaller than P’s old-lawbenefit. Therefore, the old-law benefitmust be limited so that it does not exceedthe total plan benefit. Although, as de-scribed in Example 1, the January 1, 1996plan amendment is not taken into account

in applying the old-law limitations untilthe final implementation date of Janu-ary 1, 2000, the reduction in the total planbenefit resulting from the January 1, 1996amendment is taken into account immedi-ately for purposes of determining old-lawbenefits.

Example 3: As of December 7, 1994,Plan D provided that single-sum benefitswere determined using the lesser of 6 per-cent and the PBGC interest rate, and theUP–1984 Mortality Table. Plan D alsoprovided that for purposes of computingbenefit adjustments under § 415, an inter-est rate equal to the greater of 5 percentand the lesser of 6 percent or the PBGCinterest rate would be used with the UP-1984 Mortality Table.

In order to reflect the § 417(e)(3)changes, Plan D is amended on Decem-ber 1, 1996 to substitute the applicable in-terest rate and the applicable mortalitytable for the PBGC interest rate and theUP-1984 Mortality Table, respectively,but only with respect to benefits accruingafter December 31, 1996. Plan D isamended July 1, 1999 to apply the §415(b)(2)(E) changes. Plan D’s terms asamended provide that the § 415(b)(2)(E)changes will not apply to any benefits ac-crued under the plan as of December 31,1994. Thus, the final implementationdate for Plan D is July 1, 1999.

Because the amendment to reflect the§ 417(e)(3) changes only applies with re-spect to benefits accruing afterDecember 1, 1996, it has no effect on theplan rate and plan mortality table usedwith respect to benefits accrued underPlan D as of the freeze date (December 31,1994). Thus, even on or after the final im-plementation date, when the plan rate andplan mortality table must be determinedtaking into account plan amendmentsmade after December 7, 1994, the planrate and plan mortality table that are usedto apply the old-law limitations will be un-affected by the December 1, 1996 amend-ment to reflect the § 417(e)(3) changes,and the old-law benefit will not have to belimited because of that amendment.

(3) Plan Amendments and OperationalCompliance Issues

Q–16. How does an employer apply thetransitional rule of § 1449(d) of SBJPA toa plan that was amended on or before Au-gust 20, 1996, to apply § 767 of RPA ’94?

A–16. Section 1449(d) of SBJPA pro-

1998–2 I.R.B 13 January 12, 1998

vides that, if a plan amendment to applythe § 415(b)(2)(E) changes (originalamendment) was adopted or made effec-tive on or before August 20, 1996, the em-ployer could adopt another amendment(repealing amendment) to repeal the orig-inal amendment, and the original amend-ment would not be taken into account inapplying § 767(d)(3)(A) of RPA ’94 as re-vised by § 1449(a) of SBJPA. Pursuant tosection 7 of Rev. Proc. 97–41, an originalamendment is not taken into account inapplying § 767(d)(3)(A) of RPA ’94 as re-vised by § 1449(a) of SBJPA if a repeal-ing amendment is adopted on or beforethe last day of the plan’s remedial amend-ment period under § 401(b) for disquali-fying provisions under SBJPA and GATT.Thus, an employer adopting a repealingamendment to a plan has the same optionsfor that plan as an employer that has notmade any plan amendments to apply the§ 415(b)(2)(E) changes.

Q–17. When must qualified plans beamended to apply the § 415(b)(2)(E)changes?

A–17. Under section 6 of Rev.Proc. 97–41, plan amendments to applythe § 415(b)(2)(E) changes must beadopted by the last day of the plan’s reme-dial amendment period under § 401(b) fordisqualifying provisions under SBJPAand GATT. For plans other than govern-mental plans, section 6 of Rev. Proc. 97-41 extended the remedial amendment pe-riod to the last day of the first plan yearbeginning on or after January 1, 1999.For governmental plans, the remedialamendment period is extended to a laterdate.

Under section 9 of Rev. Proc. 97–41, ifa plan terminates prior to the date amend-ments otherwise must be adopted, theplan must be amended to conform to theapplicable § 415(b)(2)(E) changes in con-nection with that termination.

Q–18. Must a plan amendment to applythe § 415(b)(2)(E) changes conform theterms of the plan to the plan’s operationprior to the date the plan is amended?

A–18. No. Except as discussed below,an employer may amend its plan withinthe remedial amendment period describedin Q&A–17 to apply the § 415(b)(2)(E)changes in any manner permitted underthis revenue ruling (including an amend-ment to provide that the § 415(b)(2)(E)changes will not apply to certain bene-

fits), regardless of whether the amend-ment is consistent with the plan’s opera-tion prior to the date the plan is amended.However, this remedial amendment pe-riod is available only if, in accordancewith § 401(b) and the regulations thereun-der, all of the provisions of the planneeded to satisfy the qualification require-ments are in effect by the end of the reme-dial amendment period and have beenmade effective for all purposes for the en-tire period (that is, beginning with theRPA ’94 § 415 effective date). Thus, planoperations (including prior distributionsfrom the plan) must be changed to the ex-tent necessary to conform the operationsretroactively to the terms of the plan asretroactively amended for the § 415(b)-(2)(E) changes, including, for example,plan terms that implement the § 1449(b)revisions under Q&A-11.

The following are examples of planamendments that apply the § 415(b)(2)(E)changes and their effects on prior distrib-utions.

Example 1: Employer X maintains PlanE, a qualified defined benefit plan thatwas adopted and effective on January 1,1985. The plan year and the limitationyear for Plan E are the calendar year. Inmaking distributions for periods after Jan-uary 1, 1995, and before August 20, 1996,Employer X applied the § 415(b)(2)(E)changes, but did not reduce a participant’sbenefit below the participant’s accruedbenefit as of December 31, 1994.

Plan E is amended on Decem-ber 1, 1999, effective on January 1, 1995,to apply the § 415(b)(2)(E) changes. Theamendment further provides that the § 415(b)(2)(E) changes do not apply toany benefits accrued before Janu-ary 1, 2000, in accordance with Method 2of Q&A–14. Therefore, the amendmentto apply the § 415(b)(2)(E) changes ismade effective (within the meaning ofQ&A–12) on January 1, 2000, and Plan Ehas a final implementation date of Janu-ary 1, 2000.

Under § 767(d)(3)(A), determinationsunder § 415(b)(2)(E) with respect to old-law benefits made before January 1, 2000,are based on § 415(b)(2)(E) and planterms as in effect on December 7, 1994.Plan operations must be retroactively con-formed to the terms of the plan as retroac-tively amended. Therefore, distributionsmade from Plan E between January 1,

1995 and August 20, 1996 must be rede-termined to reflect the freeze date used inthe December 1, 1999 amendment.

Example 2: Employer Y maintains PlanF, a qualified defined benefit plan thatwas adopted and effective on January 1,1985. The plan year and the limitationyear for Plan F are the calendar year. Inmaking distributions for periods after Jan-uary 1, 1995, including distributions forperiods after August 20, 1996, EmployerY applied the § 415(b)(2)(E) changesusing § 415(b)(2)(E)(ii) as amended byRPA ’94, but did not take the § 1449(b)revisions into account.

Plan F is amended on Novem-ber 1, 1999, effective on January 1, 1995,to apply the § 415(b)(2)(E) changes. Theamendment provides, that for distribu-tions for periods after January 1, 1995,and on or before August 20, 1996, in thecase of a form of benefit subject to§ 417(e)(3), the applicable interest rate issubstituted for 5 percent in determiningthe age-adjusted dollar limits. For distrib-utions for periods after August 20, 1996,the amendment reflects the § 1449(b) re-visions. In accordance with Method 2 ofQ&A–14, the amendment further pro-vides that the benefits of any current orformer participant shall not be reducedbelow the participant’s accrued benefit asof December 31, 1994. Therefore, theamendment adopted November 1, 1999 toapply the § 415(b)(2)(E) changes is madeeffective (within the meaning ofQ&A–12) on January 1, 1995, and Plan Fhas a final implementation date of No-vember 1, 1999.

Plan operations (including distributionsmade from Plan F on or after the RPA ’94§ 415 effective date) must be retroactivelyconformed to the terms of the plan asretroactively amended. In this case, dis-tributions from Plan F made before theamendment conform to the terms of theplan except to the extent that distributionsfor periods after August 20, 1996 did notreflect the § 1449(b) revisions. Such dis-tributions will have to be redetermined.

Example 3: Employer Z maintains PlanG, a qualified defined benefit plan thatwas adopted and effective on January 1,1982. The plan year and limitation yearare the calendar year. Plan G is amendedon March 1, 1998, effective on January 1,1995, to apply the § 415(b)(2)(E)changes. The amendment provides that in

January 12, 1998 14 1998–2 I.R.B.

the case of participants who terminate be-fore February 1, 1998, the § 415(b)(2)(E)changes do not apply to benefits accruedbefore January 1, 1995, in accordancewith Method 2 of Q&A–14. The amend-ment further provides that in the case ofparticipants who have an hour of serviceon or after February 1, 1998, the § 415(b)-(2)(E) changes do not apply to benefitsaccrued before January 1, 1999, in accor-dance with Method 1 of Q&A–14. Inmaking distributions since Janu-ary 1, 1995, Employer Z applied the§ 415(b)(2)(E) changes, but did not re-duce the participant’s benefit below theparticipant’s accrued benefit as of Decem-ber 31, 1994.

Plan operations (including distributionsmade from Plan G on or after the RPA ’94§ 415 effective date) must be retroactivelyconformed to apply the plan terms asretroactively amended. In the case ofPlan G, distributions made for partici-pants who terminated prior toFebruary 1, 1998, will conform to theterms of the plan (except to the extent adistribution for a period after August 20,1996 might have reflected § 415(b)-(2)(E)(ii), as amended by RPA ’94, butbefore amendment by § 1449(b) ofSBJPA).

(4) Plan Funding

Q–19. May the § 415(b)(2)(E) changesbe taken into account for purposes of theminimum funding standards under § 412before the plan is amended to reflect thesechanges?

A–19. Except as provided under§ 412(c)(12) or by the Commissioner,changes in plan benefits that become ef-fective after the first day of the currentplan year may not be anticipated for pur-poses of § 412. See § 1.412(c)(3)–1(d)(1).

In the case of a plan that is operated inaccordance with the § 415(b)(2)(E)changes, the anticipation of a plan amend-ment applying the § 415(b)(2)(E) changesis hereby permitted for purposes of § 412until the final implementation date. Forpurposes of the preceding sentence, forplan years beginning before January 1,1997, the anticipated plan amendmentneed not reflect the amendments made to§ 415 of the Code or § 767 of RPA ’94 by§ 1449 of SBJPA. For plan years begin-ning on or after January 1, 1997, a plan

amendment applying the § 415(b)(2)(E)changes may be anticipated only if theplan amendment is permitted under thisrevenue ruling and only if it is describedin an attachment to a Schedule B ofForm 5500 for the plan year that is filedon or before the due date (including ex-tensions) for such Schedule B. The at-tachment must specify the extent to whichthe anticipated plan amendment providesthat the § 415(b)(2)(E) changes will notapply to participants’ old-law benefits (in-cluding, if applicable, any freeze dateunder Q&A–13 and method underQ&A–14). Note that if the § 415(b)(2)(E)changes are retroactively applied to allbenefits under the plan, this must be spec-ified in the attachment. In addition, oncea Schedule B of Form 5500 is filed for aplan year, the anticipated amendment, ifany, that was used in applying § 412 forthat year cannot be changed (for purposesof applying § 412 for that year).

If no such attachment is made toSchedule B of Form 5500 for a plan year,the employer may not anticipate the§ 415(b)(2)(E) changes for that plan yearand must determine the minimum fundingstandard using the terms of the plan.

Q–20. What are the implications of aplan being funded on the basis of planterms without taking the § 415(b)(2)(E)changes into account?

A–20. If an employer has not yetamended its plan to reflect the § 415(b)-(2)(E) changes, funding on the basis ofplan terms could result in a plan beingfunded based on benefits that exceed the§ 415(b) limitations. Because § 404(j)provides that benefits in excess of the§ 415(b) limitations may not be taken intoaccount in determining a deduction under§ 404, contributions that are made as a re-sult of benefits that are in excess of the§ 415 limits are nondeductible, regardlessof whether they are required under § 412.Thus, if an employer has not yet amendedits plan to apply the § 415(b)(2)(E)changes, the employer could be requiredto make nondeductible contributions tothe plan to satisfy the minimum fundingstandards, unless (in accordance withQ&A–19) a plan amendment to apply the§ 415(b)(2)(E) changes is anticipated.

However, for taxable years relating toplan years beginning prior to January 1,1997, the Service will not assert a viola-tion of § 404(j) merely because contribu-

tions are made in amounts necessary tosatisfy minimum funding standards calcu-lated based on the terms of the plan, pro-vided that the terms of the plan satisfyold-law limitations. The preceding sen-tence will not apply with respect to a planyear if a Schedule B of Form 5500 hasbeen filed for that plan year prior to Janu-ary 12, 1998, for which the minimumfunding standards have been calculatedby anticipating an amendment applyingthe § 415(b)(2)(E) changes.

(5) Miscellaneous

Q–21. Are the RPA ’94 § 415 effectivedate and the final implementation date fora plan affected by the date the § 417(e)(3)changes are made effective for the plan?

A–21. No. The RPA ’94 § 415 effectivedate applies regardless of when the§ 417(e)(3) changes are made effectivefor the plan. In addition, the final imple-mentation date for a plan may be differentfrom the date the § 417(e)(3) changes aremade effective for the plan.

Q–22. Must a plan provide a uniformfreeze date under Q&A–13 and a uniformmethod under Q&A–14 for all partici-pants?

A–22. No. A plan may provide differ-ent participant freeze dates underQ&A–13 or different methods underQ&A–14 for different participants in theplan. In addition, a plan may provide nofreeze date for some participants (that is,the § 415(b)(2)(E) changes apply to theentire accrued benefit of those partici-pants), while providing a freeze date forother participants. However, the avail-ability of a specific participant freeze dateunder Q&A–13 or method described inQ&A–14 is a benefit, right, or feature,which must satisfy the nondiscriminatoryavailability requirement of § 1.401(a)-(4)–4. Furthermore, in accordance withQ&A–11 of Notice 87–21, if a limitationunder § 415 may be applied in more thanone manner, the plan must specify themanner in which the limitation is to be ap-plied.

Q–23. Are fully insured plans that meetthe accrued benefit requirements of§ 411(b) by satisfying the requirements of§ 411(b)(1)(F) subject to the new require-ments under § 415(b)(2)(E) as amendedby RPA ’94 and SBJPA?

A–23. Yes, these plans are subject to allof the requirements of § 415.

1998–2 I.R.B 15 January 12, 1998

Q–24. How is the § 415(b) compensa-tion limitation adjusted for years begin-ning after December 31, 1994?

A–24. Section 415(d)(1)(B) providesthat the § 415(b) compensation limitationis adjusted annually for cost-of-living in-creases in the case of a participant whohas separated from service. Section732(b) of GATT changed the base periodfor computing the annual adjustments.

For a participant separating from ser-vice on or before December 31, 1994, the§ 415(b) compensation limitation for the1995 calendar year is computed by multi-plying the participant’s compensationlimitation, as adjusted under prior lawthrough the 1994 calendar year, by1.0217.

PAPERWORK REDUCTION ACT

The collection of information con-tained in this revenue ruling has been re-viewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number1545–1563.

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

The collection of information in thisrevenue ruling is in Q&A–19. This rev-enue ruling provides guidance on the lim-itations on benefits and contributionsunder § 415 of the Code and § 767 ofRPA ’94 as amended by § 1449 of SBJPA,including the various options that an em-ployer may elect when implementing theamendment. This information will beused in determining benefits taken intoaccount for purposes of the minimumfunding requirements for the plan. Thecollection of information is required to as-sure compliance with the minimum fund-ing requirements. The likely respondentsare businesses or other for-profit institu-tions, nonprofit institutions, and smallbusinesses or organizations.

The estimated total annual reportingburden is 35,000 hours.

The estimated annual burden per re-spondent varies from 15 minutes to 45minutes, depending on individual circum-stances, with an estimated average of 30minutes. The estimated number of re-spondents is 70,000.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Effect On Other Documents

Rev. Rul. 95–29, 1995–1 C.B. 81, ismodified and superseded.

Drafting Information

The principal authors of this revenueruling are John Heil and Martin Pippins ofthe Employee Plans Division. For furtherinformation regarding this revenue ruling,contact the Employee Plans Division’staxpayer assistance number at (202) 622-6076 (not a toll-free number) between thehours of 2:30 p.m. and 3:30 p.m., EasternTime, Monday through Thursday. Mr.Heil’s telephone number is (202) 622-7383 (also not a toll-free number). Mr.Pippins’ telephone number is (202) 622-6261 (also not a toll-free number).

Section 417.—Definitions andSpecial Rules for Purposes ofMinimum Survivor AnnuityRequirements26 CFR 1.417(e)–1: Restrictions and valuations ofdistributions from plans subject to §§ 401(a)(11)and 417.

Whether the applicable interest rate described in§ 417(e)(3) of the Code as applied for purposes of §415(b)(2)(E) is affected by the Small Business JobProtection Act of 1996, Pub. L. 104–188. See Rev.Rul. 98–1 page 5.

Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs


Section 482.—Allocation ofIncome and Deductions AmongTaxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—Special Rules forCredits and Deductions


Section 807.—Rules for CertainReserves


Insurance companies; interest ratetables. Prevailing state assumed interestrates are provided for the determination ofreserves under section 807 of the Code forcontracts isued in 1997 and 1998. Rev.Rul. 92–19 supplemented in part.

Rev. Rul. 98–2For purposes of § 807(d)(4) of the Inter-

nal Revenue Code, for taxable years be-ginning after December 31, 1996, this rul-ing supplements the schedules ofprevailing state assumed interest rates setforth in Rev. Rul. 92–19, 1992–1 C.B.227. This information is to be used by in-surance companies in computing their re-serves for (1) life insurance and supple-mentary total and permanent disabilitybenefits, (2) individual annuities and pureendowments, and (3) group annuities andpure endowments. As § 807(d)(2)(B) re-quires that the interest rate used to com-pute these reserves be the greater of (1) theapplicable federal interest rate, or (2) theprevailing state assumed interest rate, thetable of applicable federal interest rates inRev. Rul. 92–19 is also supplemented.

Following are supplements to schedulesA, B, C, and D to Part III of Rev. Rul.

January 12, 1998 16 1998–2 I.R.B.

92–19, providing prevailing state assumedinterest rates for insurance products withdifferent features issued in 1997 and 1998,and a supplement to the table in Part IV ofRev. Rul. 92–19, providing the applicablefederal interest rate under § 807(d) for

1997 and 1998. This ruling does not sup-plement Parts I and II of Rev. Rul. 92–19.

This is the sixth supplement to the inter-est rates provided in Rev. Rul. 92–19. Ear-lier supplements were published in Rev.Rul. 93–58, 1993–2 C.B. 241 (interest rates

for insurance products issued in 1992 and1993), Rev. Rul. 94–11, 1994–1 C.B. 196(1993 and 1994), Rev. Rul. 95– 4, 1995–1C.B. 141 (1994 and 1995), Rev. Rul. 96–2,1996–1 C.B. 141 (1995 and 1996), and Rev.Rul. 97–2, 1997–1 C.B. 8 (1996 and 1997).

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*

Schedule A

STATUTORY VALUATION INTEREST RATES BASED ON THE1980 AMENDMENTS TO THE NAIC STANDARD VALUATION LAW

A. Life insurance valuation:

Guarantee Duration(years) Calendar Year of Issue

1998

10 or fewer 5.50**

More than 10 5.25**but not more than 20

More than 20 4.50**

Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average—MonthlyAverage Corporates.

** As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interestrate to be used for this product under § 807 is 6.31 percent.

* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92-19 are those used in the Standard Valuation Law; the terms are defined in Rev. Rul.92–19.

Part III, Schedule B

STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO THE NAIC STANDARD VALUATION LAW

B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash set-tlement options and from guaranteed interest contracts with cash settlement options:

Calendar Year of Issue Valuation Interest Rate

1997 6.75*

Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average — MonthlyAverage Corporates. The terms used in this schedule are those used in the Standard Valuation Law as defined in Rev. Rul. 92–19.

*As this prevailing state assumed interest rate exceeds the applicable federal interest rate for 1997 of 6.33 percent, the prevailing state assumed interest rate of6.75 percent is to be used for this product under § 807.*

1998–2 I.R.B 17 January 12, 1998

Part III, Schedule D15—1997

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 1997 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options andthat are valued on a change in fund basis:

Cash Future Valuation Interest RateSettlement Interest Guarantee Duration For Plan TypeOptions? Guarantee? (years) A B C

Yes Yes 5 or fewer 7.50 7.00 5.50*More than 5, but not more than 10 7.25 7.00 5.50*More than 10, but not more than 20 6.75 6.50 5.25*More than 20 5.75* 5.75* 5.00*

Yes No 5 or fewer 7.75 7.25 5.75*More than 5, but not more than 10 7.50 7.25 5.75*More than 10, but not more than 20 7.00 6.75 5.50*More than 20 6.00* 6.00* 5.25*

Source: Rates calculated from the monthly averages, ending June 30, 1997, of Moody’s Corporate Bond Yield Average—MonthlyAverage Corporates.

*As the applicable federal interest rate for 1997 of 6.33 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under §807 is 6.33 percent.

Part III, Schedule C15 - 1997

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 1997 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:

Cash Future Valuation Interest RateSettlement Interest Guarantee Duration For Plan TypeOptions? Guarantee? (years) A B C

Yes Yes 5 or fewer 6.75 5.75* 5.25*More than 5, but not more than 10 6.50 5.75* 5.25*More than 10, but not more than 20 6.00* 5.25* 5.25*More than 20 5.25* 4.75* 4.75*

Yes No 5 or fewer 7.00 6.00* 5.50*More than 5, but not more than 10 6.75 6.00* 5.50*More than 10, but not more than 20 6.25* 5.50* 5.25* More than 20 5.25* 5.00* 5.00*

No Yes or No 5 or fewer 6.75 More than 5, but not more than 10 6.50

NOT APPLICABLEMore than 10, but not more than 20 6.00*More than 20 5.25*

Source: Rates calculated from the monthly averages, ending June 30, 1997 of Moody’s Corporate Bond Yield Average—MonthlyAverage Corporates.

*As the applicable federal interest rate for 1997 of 6.33 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under §807 is 6.33 percent.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 92–19 is supplemented by theaddition to Part III of that ruling of pre-vailing state assumed interest rates under §807 for certain insurance products issuedin 1997 and 1998 and is further supple-mented by an addition to the table in PartIV of Rev. Rul. 92–19 listing applicablefederal interest rates. Parts I and II of Rev.Rul. 92–19 are not affected by this ruling.


The principal author of this revenue rul-ing is Ann H. Logan of the Office of Assis-tant Chief Counsel (Financial Institutionsand Products). For further information re-garding this revenue ruling contact her on(202) 622-3970 (not a toll-free call).

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof January 1998. See Rev. Rul. 98–4, on this page.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate, andthe long-term exempt rate. For purposesof sections 1274, 1288, 382, and othersections of the Code, tables set forth therates for January 1998.

Rev. Rul. 98–4

This revenue ruling provides variousprescribed rates for federal income taxpurposes for January 1998 (the currentmonth.) Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month for

purposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-term ad-justed applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Table 5contains the federal rate for determiningthe present value of an annuity, an inter-est for life or for a term of years, or a re-mainder or a reversionary interest forpurposes of section 7520. Finally, Table6 contains the deemed rate of return fortransfers made during calendar year 1998to pooled income funds described in §642(c)(5) that have been in existence forless than 3 taxable years immediatelypreceding the taxable year in which thetransfer is made.

January 12, 1998 18 1998–2 I.R.B.

Part IV. Applicable Federal Interest Rates.

TABLE OF APPLICABLE FEDERAL INTEREST RATES FOR PURPOSES OF § 807

Year Interest Rate

1997 6.331998 6.31

Sources: Rev. Rul. 96–57, 1996–2 C.B. 82 for the 1997 rate and Rev. Rul. 97–50, 1997–49 I.R.B. 5 for the 1998 rate.

REV. RUL. 98–4 TABLE 1

Applicable Federal Rates (AFR) for January 1998

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-TermAFR 5.70% 5.62% 5.58% 5.56%

110% AFR 6.28% 6.18% 6.13% 6.10%120% AFR 6.85% 6.74% 6.68% 6.65%130% AFR 7.44% 7.31% 7.24% 7.20%

Mid-TermAFR 5.93% 5.84% 5.80% 5.77%

110% AFR 6.52% 6.42% 6.37% 6.34%120% AFR 7.13% 7.01% 6.95% 6.91%130% AFR 7.73% 7.59% 7.52% 7.47%150% AFR 8.95% 8.76% 8.67% 8.60%175% AFR 10.48% 10.22% 10.09% 10.01%

1998–2 I.R.B 19 January 12, 1998


Rates Under Section 382 for January 1998

Adjusted federal long-term rate for the current month 5.10%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.23%


Appropriate Percentages Under Section 42(b)(2) for January 1998

Appropriate percentage for the 70% present value low-income housing credit 8.41%

Appropriate percentage for the 30% present value low-income housing credit 3.61%


Rate Under Section 7520 for January 1998

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 7.2%


Deemed Rate for Transfers to New Pooled Income Funds

Deemed rate of return for transfers during 1998 to pooled income funds that have been in existence forless than 3 taxable years 7.2%

REV. RUL. 98–4 TABLE 1 — (continued)

Applicable Federal Rates (AFR) for January 1998


Annual Semiannual Quarterly Monthly

Long-TermAFR 6.13% 6.04% 6.00% 5.97%

110% AFR 6.75% 6.64% 6.59% 6.55%20% AFR 7.38% 7.25% 7.19% 7.14%130% AFR 8.00% 7.85% 7.77% 7.72%


Adjusted AFR for January 1998


Annual Semiannual Quarterly MonthlyShort-termadjusted AFR 3.86% 3.82% 3.80% 3.79%

Mid-termadjusted AFR 4.30% 4.25% 4.23% 4.21%

Long-termadjusted AFR 5.10% 5.04% 5.01% 4.99%

January 12, 1998 20 1998–2 I.R.B.

Section 1288.—Treatment ofOriginal Issue Discount on Tax-Exempt Obligations


Section 4161.—Imposition of Tax26 CFR 48.4161(b)-1: Imposition and rates of tax;bows and arrows.

Bows and arrows; taxable and non-taxable articles. An illustrative list of tax-able and nontaxable articles is providedfor use by manufacturers, producers, andimporters in determining their liability forthe manufacturers tax on archery equip-ment imposed by section 4161 of theCode. The list reflects changes to the taxon archery equipment made by the Tax-payer Relief Act of 1997. Rev. Rul 75–17supplemented and superseded.

Rev. Rul. 98–5This revenue ruling updates Rev. Rul.

75–17, 1975–1 C.B. 344, by revising theillustrative list of taxable and nontaxablearchery articles in that ruling. This rev-enue ruling provides guidance to manu-facturers, producers, and importers in de-termining their liability for themanufacturers excise tax on bows and ar-rows imposed by § 4161(b) of the InternalRevenue Code.

BACKGROUND

For sales prior to October 1, 1997, § 4161(b) imposed an 11 percent tax on thesale by the manufacturer, producer, or im-porter of any bow that had a draw weightof 10 pounds or more, any arrow that mea-sured 18 inches or more in overall length,or any arrow sold after September 30,1984, that measured less than 18 inches inoverall length but was suitable for use witha taxable bow, any part or accessory suit-able for inclusion in or attachment to a tax-able bow or arrow, and any quiver suitablefor use with taxable arrows.

For sales after September 30, 1997, § 4161(b), as amended by § 1433(a) of theTaxpayer Relief Act of 1997 (TRA-97),provides for the continued taxation of bows,bow parts and accessories, and quivers inthe same manner and at the same rate as be-fore amendment. However, § 4161(b), asamended, replaces the prior tax on arrows

and arrow parts and accessories with an ex-cise tax on arrow components. The new taxis imposed at the rate of 12.4 percent on thesale by the manufacturer, producer, or im-porter of arrow components. For this pur-pose, an arrow component is any shaft,point, nock, or vane of the type used in themanufacture of any arrow which after its as-sembly (A) measures 18 inches or more inoverall length, or (B) measures less than 18inches in overall length, but is suitable foruse with a taxable bow.

No tax is imposed under the former oramended § 4161(b) with respect to any ar-ticle taxable under § 4161(a) as sport fish-ing equipment, for example, bow fishingrods and reels.

Section 48.4161(b)–2(a)(1) of theManufacturers and Retailers Excise TaxRegulations defines the term “bows” asincluding all articles made of flexible ma-terials that are designed to be equippedwith a string and used for the propellingof arrows in the sport of archery (targetshooting), or in hunting or fishing.

Section 48.4161(b)–2(a)(2) defines theterm “arrows” as including all articles de-signed or constructed to be propelled by abow in the sport of archery (target shoot-ing), or in hunting or fishing. The overalllength of the arrow is to be measured fromthe point of the tip or arrowhead to the endof the arrow nock. In the case of arrowssold by the manufacturer without heads,tips, or nocks, the overall length is to in-clude the length of the shaft plus the lengthof the nock and head or tip that is normallyused with the particular type of arrow shaft.

(The following provisions of the regu-lations do not reflect the amendmentsmade to § 4161(b) by the TRA–97.)

Section 48.4161(b)–2(b)(1) defines theterm “parts and accessories” for bows andarrows as including all articles (other thanfishing reels) suitable for inclusion in orattachment to a taxable bow or arrow. Ex-amples of parts and accessories for bowsare bow handles, bow limbs, bowstrings,bowstring silencers, bow stabilizers, arrowrests, bow slings, bow sights, bow levels,bow tip protectors, brush buttons, camou-flaged bow covers, and all other articlesdesigned to be attached to or included in abow to assist in aiming or propelling anarrow, or to protect the bow while in use.Examples of parts and accessories for ar-rows are arrow shafts, nocks, tips, heads,head adapters, and feathers.

Under the provisions of § 48.4161(b)–2(b)(2), general purpose materials and arti-

cles that are not specifically designed to di-rectly improve the performance or appear-ance of bows or arrows, or to protect themwhile in use, are not considered to be partsand accessories for bows or arrows, eventhough such materials may be intended,after further processing, to be included in orattached to bows or arrows. An example ofa nontaxable article that is designed for usewith a bow, but is neither attached to a bow,nor serves a purpose directly related to theefficient use of a bow, is a carrying case fora bow. Examples of nontaxable generalpurpose materials or articles are glues andcements, feathers before they are preparedfor use with arrows, and bowstring threadbefore it is processed into bowstrings.Arrow shaft material is considered to be ataxable part for an arrow unless the manu-facturer, producer, or importer can establishthat the particular material is unsuitable foruse in the manufacture of taxable arrows.In addition, the term parts and accessoriesdoes not include articles in the nature of ex-pendable supplies, even though such arti-cles are designed to be applied to, or usedwith, bows or arrows. Examples of suchsupply materials are bowstring wax andarchery powder.

Section 48.4161(b)–2(c) defines theterm “quivers” as including all articles, ofwhatever material made, that are designedto contain, and to provide ready access to,taxable arrows during the time an archeris engaged in target shooting, hunting, orfishing. The term does not include anyarticle designed solely for storing ortransporting arrows during times whenthe arrows are not in use.

ILLUSTRATIVE LISTS

The Internal Revenue Service has de-termined that the articles listed below arebows, arrows, arrow components, or partsor accessories subject to the tax imposedby § 4161(b). The parts or accessoriessubject to the tax include replacementparts or accessories. A separate list of thearticles that the Service has determinednot to be subject to the tax imposed bythat section is also provided. The lists areillustrative and not all-inclusive.

ARTICLES SUBJECT TO TAX

Bows All bows that have a draw weight of 10

pounds or more, including laminatedcomposite bows; solid glass, wood, steel,etc., bows; and crossbows.

1998–2 I.R.B 21 January 12, 1998

Arrows(Prior to October 1, 1997)

All arrows (including bow fishing ar-rows), regardless of shaft material or thetype of head, that measure 18 inches ormore in overall length (including the tipor head, and nock), and all arrows soldafter September 30, 1984, that measureless than 18 inches in overall length butare suitable for use with a taxable bow.

Arrow Components(After September 30, 1997)

All shafts, points, nocks, or vanes ofthe type used in the manufacture of anyarrow which after its assembly (A) mea-sures 18 inches or more overall in length,or (B) measures less than 18 inches over-all in length, but is suitable for use with ataxable bow.

Bow and Arrow Sets Bow and arrow sets that contain any tax-

able article. When a set also contains non-taxable articles, the tax applies only to thatportion of the combination sale price prop-erly attributable to the taxable articles. SeeRev. Rul. 75–18, 1975–1 C.B. 345, whichprovides a method of determining the man-ufacturer’s tax base and computing the taxwhere taxable and nontaxable articles aresold as a unit at a single price.

Bow Parts and Accessories and Quivers Arrow holders (all items to be affixed to a

bow to hold an arrow in ready position)Arrow plates (whether fixed, adjustable,

spring loaded, etc.)Arrow rests (whether bow shelf or auxil-

iary type) Bow handlesBow handle sectionsBow levelsBow limbsBow saddles (including interchangeable

or replaceable bow grips) Bow sightsand bow sight extensions (includingparts and attachments therefor)

Bow silencing padsBow slingsBow stabilizers (all attachments and

weights for use on bows to affect stabi-lization, counterbalancing, or modifica-tion of weight distribution)

BowstringsBowstring silencersBow tip protectorsBrush buttonsCable guardsCable guard slides

Camouflaged bow covers (slip-over cloth,self-adhesive tape type, etc.)

Cushion nocksDraw checks (spring loaded clickers, mir-

rors, or any other device attached to abow or string to insure consistent draw length)

Draw stopsFinger protectors attached to a bowstringGrip formersKisser buttons (all items attached to a

bowstring to establish a consistent an-chor point)

Nocking points (all items attached to abowstring to establish arrow position-ing)

Quivers designed to provide ready accessto taxable arrows while an archer is en-gaged in target shooting, hunting, orfishing, regardless of material fromwhich constructed (including bowquivers designed to be attached to abow and ground quivers)

Release draw barsString peeps (all items attached to a bow-

string for use in sighting)

Arrow Parts and Accessories(Prior to October 1, 1997)

Arrow fletching (natural feathersprocessed for application to arrows orsynthetic feather substitutes)

Arrow nocks and insertsArrow points, tips, heads, adapters, and

insertsArrow shaftsArrow shaft materialBroadhead guide ringsBroadhead ringsFeather tracers

ARTICLES NOT SUBJECT TO TAXAccessory beltsArchery armguardsArchery powderArchery shooting finger tabsArchery shooting glovesArrow clips for tackle boxes and display

racksArrow cresting machines and replacement

parts thereforArrow cut-off and fabricating tools (and

replacement parts therefor)Arrow fletching jigs and toolsArrow lubesArrow pullersArrow shaft dip tanksArrow spine meters (and replacement

parts therefor)Arrow straighteners

Arrow tapering toolsBow and arrow racks designed solely for

the storage of bows and/or arrowsBow and arrow cases designed for the

transportation or storage of bows, ar-rows, and related equipment

Bowfishing lineBow squaresBow stringersBowstring jigsBowstring threadBowstring waxBow supports including ground bow

holders and standsBroadhead wrenchesElectronic trackersFeather burners and feather burner kits

(and replacement parts therefor)Feathers not prepared for use with arrowsFeather waterproofingFinger slingsGlues and cementsNocking point toolsPowder pouchesScore card holderShirt and blouse protectorsString holders and keepersString releasesString serversTargets and target accessories

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 75–17 is supplemented andsuperseded.


The principal author of this revenueruling is Theodore N. Margopulos of theOffice of the Assistant Chief Counsel(Passthroughs and Special Industries).For further information regarding thisrevenue ruling contact Mr. Margopuloson (202) 622-3130 (not a toll-free call).

Section 7520.—Valuation TablesThe adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof January 1998. See Rev. Rul. 98–4, page 18.

Section 7872.—Treatment ofLoans with Below-MarketInterest Rates


January 12, 1998 22 1998–2 I.R.B.

Simplified Exclusion Ratio

Notice 98–2I. Introduction

This notice replaces Notice 88–118,1988–2 C.B. 450, to reflect certainchanges to § 72 of the Internal RevenueCode of 1986 (the Code) made by theSmall Business Job Protection Act of1996, Pub. L. 104–188 (SBJPA) and bythe Taxpayer Relief Act of 1997, Pub. L.105-34 (TRA ‘97). Specifically, this no-tice describes the simplified method pro-vided by § 72(d)(1) for determining thetax-free and taxable portions of certainannuity payments made from qualifiedplans under § 401(a), employee annuitiesunder § 403(a), and annuity contractsunder § 403(b).

In general, this new method applies toan annuity if the annuity starting date isafter November 18, 1996. However, seeSection V below for a transition rule forannuities with annuity starting dates afterNovember 18, 1996 and before January 1,1997. Unlike the safe-harbor method inNotice 88–118, the simplified method isrequired by the Code (rather than op-tional) and distributees must use thismethod in order to comply with § 72(d) ofthe Code as amended by SBJPA and TRA‘97. Payors must also use this method toreport the taxable portion of the annuitypayments on Form 1099-R. The newmethod does not apply if the annuity start-ing date is on or before November 18,1996.

II. Background

Section 402(a)(1) provides that theamount actually distributed to any distrib-utee by an employees’ trust described in§ 401(a) which is exempt from tax under§ 501(a) shall be taxable to the distribu-tee, in the year in which distributed, under§ 72 (relating to annuities). Similarly,amounts distributed from employee annu-ity contracts under § 403(a) and annuitycontracts under § 403(b) are taxable to thedistributee (in the year in which distrib-uted) under § 72.

Section 72(b) provides that a portion ofthe annuity payments received in a tax-able year may be excluded from gross in-

come as a return of the distributee’s in-vestment according to an exclusion ratiodetermined at the annuity starting date.The numerator of this ratio is the em-ployee’s investment in the contract, andthe denominator is the expected return.

Section 72(e) provides rules relating tothe taxability of amounts not received asannuities. Section 1.72–11(f) of the In-come Tax Regulations provides rules forthe treatment of a single-sum withdrawalreceived on or after the annuity startingdate.

Notice 88–118 provided a simplifiedsafe harbor method for determining thetax-free portion and taxable portion ofcertain annuity payments made fromqualified plans under § 401(a), employeeannuities under § 403(a), and annuitycontracts under § 403(b). Under the safeharbor method of Notice 88-118, the ex-clusion ratio was determined by dividingthe distributee’s investment in the con-tract by an expected number of paymentsbased upon the distributee’s age. The re-sult represented the tax-free portion ofeach payment. This safe harbor methodcould be elected only if the distributee re-ceived monthly payments and did notapply to installment payments that werenot life contingent.

Section 1403 of SBJPA amended§ 72(d) of the Code to require the use of asimplified method of recovering the in-vestment in the contract for most annuitydistributions from qualified plans under§ 401(a), employee annuities under§ 403(a), and § 403(b) annuity contracts.The simplified method of § 72(d) is simi-lar to, but not the same as, the safe-harbormethod that was provided in Notice 88–118. Section 1403 of SBJPA also pro-vided a special rule where a single sum isreceived in connection with the com-mencement of annuity payments. In sucha case, the single- sum payment is treatedas if received before the annuity startingdate. Generally, the SBJPA changes to§ 72(d) of the Code apply to distributionswith annuity starting dates after Novem-ber 18, 1996.

Section 1075 of TRA ‘97 amended thesimplified method of recovering the in-vestment in the contract in § 72(d)(1)(B)of the Code to prescribe a different table

if the annuity is payable based on the livesof more than one individual. This newtable applies to distributions with annuitystarting dates after December 31, 1997.For annuities payable based on the life ofonly one individual, § 1075 of TRA ‘97made no changes in the applicable tableunder the simplified method described bySBJPA.

III. Simplified Method

A. General

The simplified method provided in§ 72(d) of the Code and this notice mustbe used by distributees to comply with§ 72, and by payors to report the taxableportion of annuity distributions on Form1099-R. If payments are made on a non-monthly basis, the simplified method ap-plies with appropriate adjustments. How-ever, this method does not apply if theannuitant is over age 75 and there are fiveor more years of guaranteed paymentsunder the annuity.

B. Excluded Amount

Under the simplified method, the dis-tributee recovers his or her investment inthe contract in level amounts over the ex-pected number of monthly payments de-termined from the tables below. The por-tion of each annuity payment that isexcluded from gross income by a distribu-tee for income tax purposes is a level dol-lar amount determined by dividing the in-vestment in the contract by the set numberof annuity payments from the tablesbelow.

Investment = Tax free portion ofExpected monthly annuity

Number of MonthlyPayments

C. Expected Number of Monthly Pay-ments

(1) Annuity Starting Dates After No-vember 18, 1996 and Before Janu-ary 1, 1998

Under the simplified method, for annu-ity starting dates beginning after Novem-ber 18, 1996 but before January 1, 1998,the total number of monthly annuity pay-ments expected to be received is based onthe primary annuitant’s age at the annuity

Part III. Administrative, Procedural, and Miscellaneous

1998–2 I.R.B 23 January 12, 1998

starting date. The same expected numberof payments applies to an annuitantwhether he or she is receiving a single lifeannuity or a joint and survivor annuity.The expected number of payments is setforth in the table below.

Age of Primary ExpectedAnnuitant Number of Payments

55 and under 36056–60 31061–65 26066–70 210

71 and over 160

(2) Annuity Starting Dates After De-cember 31, 1997

For annuity starting dates beginningafter December 31, 1997, the table used todetermine the expected number of pay-ments depends on whether the paymentsare based on the life of more than one in-dividual. In the case of an annuitypayable based on the life of only one indi-vidual, the total number of monthly annu-ity payments expected to be received isbased on the annuitant’s age at the annuitystarting date. An annuity which ispayable over the life of one annuitant witha term certain feature is an annuity basedon the life of that individual. Similarly,an annuity which is payable over the lifeof one annuitant with a temporary annuitypayable to the annuitant’s child until thechild reaches an age specified in the plan(not more than age 25) is an annuity basedon the life of that individual. The ex-pected number of payments for an annuitybased on the life of one individual is setforth in the table below.

ExpectedAge of Annuitant Number of Payments

55 and under 36056–60 31061–65 26066–70 210

71 and over 160

In the case of an annuity payable basedon the life of more than one individual,the total number of monthly annuity pay-ments expected to be received is based onthe combined ages of the annuitants at theannuity starting date. If the annuity ispayable to a primary annuitant and morethan one survivor annuitant, the combinedages of the annuitants is the sum of the

age of the primary annuitant and theyoungest survivor annuitant. If the annu-ity is payable to more than one survivorannuitant but there is no primary annui-tant, the combined ages of the annuitantsis the sum of the age of the oldest survivorannuitant and the youngest survivor annu-itant. In addition, any survivor annuitantwhose entitlement to payments is contin-gent on an event other than the death ofthe primary annuitant is disregarded. Theexpected number of payments is set forthin the table below.

Combined Ages Expectedof Annuitants Number of Payments110 and under 410111–120 360121–130 310131–140 260

141 and over 210

(3) Term Certain Annuities WithoutLife Contingencies

In the case of an annuity that does notdepend in whole or in part on the life ex-pectancy of one or more individuals, theexpected number of payments is the num-ber of monthly annuity payments underthe contract.

D. Investment in the Contract

The investment in the contract is de-fined under § 72(c)(1) as the aggregatepremiums or other consideration paid(generally, the aggregate amount of after-tax contributions made to the plan), re-duced by amounts received before the an-nuity starting date that were excludedfrom gross income. In addition,§ 72(c)(2) provides that the investment inthe contract must be adjusted to reflect thevalue of any refund feature. Under§ 72(d)(1)(C), as amended by SBJPA, forpurposes of the simplified method, the in-vestment in the contract is determinedwithout regard to the adjustment for anyrefund feature as described in § 72(c)(2).

In certain cases, the investment in thecontract could be increased by any deathbenefit exclusion that is allowed under§ 101(b) if the employee death benefitsare paid to a survivor in the form of an an-nuity, other than as a joint and survivorannuity. Section 101(b) was repealed by§ 1402 of SBJPA effective with respect todecedents dying after August 20, 1996.

Accordingly, in the case of decedentsdying after August 20, 1996, survivingbeneficiaries no longer are permitted toincrease the investment in the contract bythe death benefit exclusion.

E. Application of Excluded Amount

The dollar amount determined above,as of the annuity starting date, will be ex-cluded from each monthly annuity pay-ment, even where the amount of the annu-ity payments change. For example, theamount to be excluded from each annuitypayment determined at the annuity start-ing date remains constant, even if theamount of the annuity payments increasesdue to cost of living increases, or de-creases in the case of a reduced survivorannuity after death of one of the annui-tants.

If the amount to be excluded from eachpayment is greater than the amount of theannuity payment (e.g., because of de-creased survivor payments), then each an-nuity payment will be completely ex-cluded from gross income until the entireinvestment is recovered. For those dis-tributees with annuity starting dates afterDecember 31, 1986, annuity payments re-ceived after the investment is recovered(generally, after the expected number ofpayments has been received) are fully in-cludible in gross income. If annuity pay-ments cease by reason of death, a deduc-tion for the unrecovered investment in thecontract, if any, is allowed on the distribu-tee’s last income tax return.

Where two or more annuitants are re-ceiving payments at the same time, eachannuitant will exclude from each annuitypayment a pro-rata portion of this amountdetermined according to a ratio, the nu-merator of which is the amount of thebeneficiary’s annuity payment, and thedenominator of which is the total amountof the monthly annuity payments to allbeneficiaries.

F. Adjustments for Non-Monthly Payments

In the case where annuity payments arenot made on a monthly basis, under§ 72(d)(1)(F) of the Code, an adjustmentmust be made to take into account the pe-riod on the basis of which such paymentsare made. One way to make this adjust-ment is to determine the number of ex-

January 12, 1998 24 1998–2 I.R.B.

pected payments by dividing the applica-ble expected number of months in the ap-plicable table above by the number ofmonths in each period. Another way (theresult of which is equivalent to the firstway) is to determine the tax-free portionof a monthly payment using the applica-ble expected number of months from theapplicable table above and then multiplythe resulting dollar amount per month bythe number of months in each period.

G. Examples

The application of the simplifiedmethod is illustrated by the following ex-amples. In all examples, the investmentin the contract is stated as the employee’safter-tax contributions and with no adjust-ment for the refund feature.

(i) Example 1

Upon retirement, Employee A, age 65,begins receiving retirement benefits in theform of a joint and 50 percent survivor an-nuity to be paid for the joint lives of A andA’s spouse, age 64. A’s annuity startingdate is January 1, 1997. A made $26,000

of after-tax contributions to the plan andhas received no distributions prior to theannuity starting date. A will receive amonthly retirement benefit of $1,000, andA’s spouse will receive a monthly survivorbenefit of $500 upon A’s death.

A’s investment in the contract is$26,000. Because the annuity startingdate is prior to January 1, 1998, the ex-pected number of monthly payments fora distributee who is age 65 is 260. Thetax-free portion of each $1,000 monthlyannuity payment to A is $100, deter-mined by dividing A’s investment($26,000) by the expected number ofpayments (260).

$26,000 investment = $100 return of260 monthly payments investment per month

Upon A’s death, if A has not recoveredthe full $26,000 investment, A’s spousewill also exclude $100 from each $500monthly annuity payment.

Any annuity payments received afterthe 260 monthly payments have beenmade will be fully includible in gross in-

come. If A and A’s spouse die before 260monthly payments have been made, a de-duction is allowed for the last income taxreturn in the amount of the unrecoveredinvestment.

(ii) Example 2

Upon retirement, Employee B, age 65,begins receiving retirement benefits inthe form of a joint and 50 percent sur-vivor annuity to be paid for the joint livesof B and B’s spouse, age 64. B’s annuitystarting date is January 1, 1998. B con-tributed $26,000 to the plan, and has re-ceived no distributions prior to the annu-ity starting date. B will receive amonthly retirement benefit of $1,000 permonth, and B’s spouse will receive amonthly survivor benefit of $500 uponB’s death.

B’s investment in the contract is$26,000. The expected number ofmonthly payments is 310 for two distribu-tees whose combined ages are 129. Thetax-free portion of each $1,000 monthlyannuity payment to B is $83.87, deter-mined by dividing B’s investment

($26,000) by the expected number of pay-ments (310).

$26,000 investment = $83.87 return of310 monthly payments investment per month

Upon B’s death, if B has not recoveredthe full $26,000 investment, B’s spousewill also exclude $83.87 from each $500monthly annuity payment.

Any annuity payments received after the310 monthly payments have been madewill be fully includible in gross income. IfB and B’s spouse die before 310 monthlypayments have been made, a deduction isallowed for the last income tax return inthe amount of the unrecovered investment.

(iii) Example 3.

Upon retirement, Employee C, age 66,begins receiving retirement benefits in theform of a joint and 50 percent survivorannuity to be paid for the joint lives of Cand C’s spouse, age 65. C’s annuity start-ing date is January 1, 1997. C contributed$42,000 to the plan, and has received nodistributions prior to the annuity starting

date. C will receive a quarterly retirementbenefit of $6,000, and C’s spouse will re-ceive a quarterly survivor benefit of$3,000 upon C’s death.

C’s investment in the contract is$42,000. Because the annuity startingdate is prior to January 1, 1998, the ex-pected number of monthly payments for adistributee who is age 66 is 210. BecauseC’s annuity is paid quarterly, the appro-priate adjustment is to divide the expectednumber of payments (210) by the numberof months in the period (3), which equals70. Thus, the tax-free portion of each$6,000 quarterly annuity payment to C is$600, determined by dividing C’s invest-ment ($42,000) by the expected numberof quarterly payments (70).

$42,000 investment = $600 return of70 quarterly payments investment per quarter

Alternatively, the appropriate adjust-ment can be made by dividing $42,000 by210 and multiplying the resulting $200per month by the number of months in theperiod, three (3), which equals a $600 re-turn of investment per quarter.

(iv) Example 4.

Upon retirement, Employee D, age 57,begins receiving retirement benefits in theform of a joint and 50 percent survivorannuity to be paid for the joint lives of Dand D’s spouse, age 57. D contributed$31,000 to the plan. D’s annuity startingdate is July 1, 1998. On D’s annuity start-ing date, in connection with receiving thefirst annuity payment, D receives a sin-gle-sum payment of $10,000. Had thesingle-sum payment of $10,000 been re-ceived prior to D’s annuity starting date,then under the rules of § 72(e), $2,000would have been considered as a recoveryof D’s investment in the contract. D willreceive a monthly retirement benefit of$1,500 per month, and D’s spouse will re-ceive a monthly survivor benefit of $750upon D’s death.

Because the $10,000 is treated as if re-ceived before the annuity starting date, Dwill include $8,000 in income as a resultof the single-sum payment ($10,000minus $2,000) and for purposes of deter-mining the tax-free portion of each annu-

$42,000 investment3

3 months = $600 return of210 monthly payments per quarter investment per quarter

1998–2 I.R.B 25 January 12, 1998

ity payment, D’s investment in the con-tract is $29,000 (the after-tax contribu-tions to the plan minus the $2,000 portionof the single-sum payment representingthe recovery of D’s investment in the con-tract). The expected number of monthlypayments for two annuitants whose com-bined ages are 114 is 360. The tax-freeportion of each $1,500 monthly annuitypayment to D is $80.56, determined by di-viding D’s investment ($29,000) by theexpected number of payments (360).

$29,000 investment = $80.56 return of360 monthly payments investment per month

Upon D’s death, if D has not recoveredthe full $29,000 investment, D’s spousewill also exclude $80.56 from each $750monthly annuity payment.

Any annuity payments received afterthe 360 monthly payments have beenmade will be fully includible in gross in-come. If D and D’s spouse die before 360monthly payments have been made, a de-duction is allowed for the last income tax

return in the amount of the unrecoveredinvestment.

IV. Effective Date

The simplified method described in thisnotice is generally effective for annuitieswith annuity starting dates after Novem-ber 18, 1996. For annuity starting datesafter December 31, 1997, if the annuity ispayable based on the lives of more thanone individual, the simplified methodbased on the combined ages of the annui-tants is to be used.

V. Transition Rule

Some payors and distributees may havecontinued to use the law in effect prior toSBJPA (including the safe-harbor methodcontained in Notice 88–118) for annuitystarting dates after November 18, 1996and before January 1, 1997. This noticecontains a transition rule for these payorsand distributees.

Under this transition rule, for annuitieswith annuity starting dates after Novem-ber 18, 1996 and before January 1, 1997,the law in effect prior to SBJPA (includ-ing the methodology contained in Notice

88–118) may be used to determine thetaxable and tax-free portions of annuitypayments received in 1996 and 1997. Ac-cordingly, under this transition rule, pay-ors are not to re-issue Forms 1099-R for1996 (and 1997, if applicable), and dis-tributees are not to file amended incometax returns for 1996 (and 1997, if applica-ble), solely because they failed to takeinto account the changes to § 72(d) of theCode made by SBJPA.

However, under this transition rule, apayor who reports the taxable portion of an-nuity payments on Form 1099-R must de-termine the taxable and tax-free portion ofannuity payments using the transitionmethod described below. The transitionmethod must be applied to annuity pay-ments made on and after January 1, 1998.However, payors may choose to apply thetransition method for annuity paymentsmade on an earlier date (for example, pay-ments made on and after January 1, 1997).Under the transition method, the tax-freeportion of each annuity payment made on

and after the transition date is determined bydividing the remaining investment in thecontract by the remaining number of ex-pected payments. The remaining invest-ment in the contract is the distributee’s orig-inal investment in the contract as of theannuity starting date, minus the amount ofthe investment in the contract treated as re-covered after the annuity starting date andprior to the transition date. The remainingnumber of expected monthly payments isthe total number of expected monthly pay-ments as of the annuity starting date (as de-termined by the table in section III(C)(1) ofthis notice) minus the number of paymentsmade prior to the transition date. Where thepayor does not report the taxable portion ofannuity payments on Form 1099-R, a dis-tributee who uses the transition rule mustdetermine the taxable and tax-free portionsof annuity payments using the transitionmethod described in this paragraph.

(i) Example of Transition Rule

Assume the same facts as in Example 1except that A’s annuity starting date is De-cember 1, 1996. The tax-free portion ofeach $1,000 monthly annuity payment to

A was determined under Notice 88-118.This tax-free portion was $108.33, calcu-lated as follows.

$26,000 investment = $108.33 return of240 monthly payments investment

The $108.33 was treated as tax-free forthe 1996 return. Under the transition rule,this treatment for 1996 is allowed. How-ever, the taxable and tax-free portionsmust be redetermined using the transitionmethod with a transition date of January1, 1998, or earlier.

Assume that A uses January 1, 1997 asthe transition date. For annuity paymentsreceived after December 31, 1996, deter-mine the tax-free portion of each $1,000annuity payment by dividing the remain-ing investment in the contract by the re-maining number of expected payments asof the transition date, determined in accor-dance with § 72(d) and this notice. Ac-cordingly, the tax-free portion of each$1,000 payment received in 1997 and lateryears is $99.97, determined as follows.

Under this method, the total amount ofannuity payments that is tax-free is $26,000.

VI. Effect on Other Documents

Notice 88–118 is obsoleted.

Drafting 1`

The principal author of this notice isTodd Newman of the Employee Plans Di-vision. For further information please con-tact the Employee Plans Division’s tax-payer assistance telephone service betweenthe hours of 2:30 p.m. and 3:30 p.m. East-ern time, Monday through Thursday on(202) 622-6076 (not a toll-free call). Mr.Newman’s telephone number is (202) 622-6262 (also not a toll-free call).

SIMPLE IRA Plan Guidance

Notice 98–4

PURPOSE

This notice modifies and supersedesNotice 97–6, 1997–2 I.R.B. 26, relating toSIMPLE IRA Plans described in § 408(p)

25,891.67 ($26,000 minus $108.33) = $99.97 return of 259 payments (260 minus 1) investment

January 12, 1998 26 1998–2 I.R.B.

of the Internal Revenue Code. The ques-tions and answers contained in this noticereflect technical corrections made by theTaxpayer Relief Act of 1997, Pub. L.105–34 (“TRA 97”). This notice alsoamends the answers to certain questionsin Notice 97–6 in order to reflect the is-suance of Form 5304-SIMPLE (Not Sub-ject to the Designated Financial Institu-tion Rules) and provides a transitionperiod for the use of Form 5305-SIMPLE(for Use With a Designated Financial In-stitution) for a SIMPLE IRA Plan thatdoes not use a designated financial insti-tution.

BACKGROUND

Section 1421 of the Small Business JobProtection Act of 1996, Pub. L. 104–188(“SBJPA”) established a simplified tax-favored retirement plan for small employ-ers (a “SIMPLE IRA Plan”) under§ 408(p) of the Code. Contributionsunder a SIMPLE IRA Plan are made to in-dividual retirement accounts or annuities(“SIMPLE IRAs”) that are establishedpursuant to the SIMPLE IRA Planadopted by the employer.

Section 1601(d)(1) of TRA 97amended § 1421 of SBJPA, making tech-nical changes to the statutory require-ments for SIMPLE IRA Plans.

Notice 97–6 was issued on December23, 1996, and provided guidance, in theform of questions and answers, on SIM-PLE IRA Plans.

On October 31, 1996, the Internal Rev-enue Service issued Form 5305-SIMPLE,a model form that may be used by an em-ployer to establish a SIMPLE IRA Planwith a designated financial institution,and on December 30, 1996, the Serviceissued 5304-SIMPLE, a model form thatmay be used by an employer to establish aSIMPLE IRA Plan without using a desig-nated financial institution. Notice 97–6contained instructions for modifyingForm 5305-SIMPLE for an employer thatdid not want to use a designated financialinstitution but that wanted to use a Ser-vice-approved model form to establish aSIMPLE IRA Plan. Form 5304-SIMPLEis now available for this purpose.

On November 25, 1997, the Depart-ment of Labor (“DOL”) issued a finalrule, consistent with the statements inQ&A G–5 of Notice 97–6, amending 29CFR 2510.3–102, relating to the defini-

tion of “plan assets” under Title I of theEmployee Retirement Income SecurityAct of 1974 (“ERISA”), to harmonizethose Title I rules with the rules for salaryreduction contributions to SIMPLE IRAPlans under § 408(p) of the Code.

CHANGES TO NOTICE 97–6

This notice modifies Q&As B–3, C–1and H–2 to reflect technical correctionsmade by TRA 97; Q&A G–5 to reflect theamendment to the DOL plan asset regula-tions; and Q&As E–4, G–1, H–1 and K–3to reflect the issuance of Form 5304-SIM-PLE. A new Q&A, K–4, is added to pro-vide a transition period for employersusing Form 5305-SIMPLE as modified inaccordance with Notice 97–6 for a SIM-PLE IRA Plan that does not use a desig-nated financial institution. In addition,this notice makes certain stylistic changesto the Q&As as published in Notice 97–6,including substituting the term “SIMPLEIRA Plan” for “SIMPLE plan.”

TABLE OF CONTENTS

A. SIMPLE IRA PLANS IN GENERALB. EMPLOYERS THAT CAN ESTAB-

LISH SIMPLE IRA PLANSC. EMPLOYEE ELIGIBILITY TO PAR-

TICIPATE IN A SIMPLE IRA PLAND. SIMPLE IRA PLAN CONTRIBU-

TIONSE. EMPLOYEE ELECTIONSF. VESTING REQUIREMENTSG. EMPLOYER ADMINISTRATIVE

AND NOTIFICATION REQUIRE-MENTS

H. TRUSTEE ADMINISTRATIVE RE-QUIREMENTS

I. TAX TREATMENT OF SIMPLEIRA PLANS

J. EXCEPTION FOR USE OF DESIG-NATED FINANCIAL INSTITUTION

K. SIMPLE IRA PLAN ESTABLISH-MENT

QUESTIONS AND ANSWERS

A. SIMPLE IRA PLANS IN GENERALQ. A–1: What is a SIMPLE IRA Plan?A. A–1: A SIMPLE IRA Plan is a writ-

ten arrangement established under§ 408(p) of the Code that provides a sim-plified tax-favored retirement plan forsmall employers. If an employer estab-lishes a SIMPLE IRA Plan, each em-ployee may choose whether to have theemployer make payments as contributions

under the SIMPLE IRA Plan or to receivethese payments directly in cash. An em-ployer that chooses to establish a SIM-PLE IRA Plan must make either matchingcontributions or nonelective contribu-tions. All contributions under a SIMPLEIRA Plan are made to SIMPLE IRAs.

Q. A–2: Can contributions made undera SIMPLE IRA Plan be made to any typeof IRA?

A. A–2: Contributions under a SIM-PLE IRA Plan may only be made to aSIMPLE IRA, not to any other type ofIRA. A SIMPLE IRA is an individual re-tirement account described in § 408(a), oran individual retirement annuity describedin § 408(b), to which the only contribu-tions that can be made are contributionsunder a SIMPLE IRA Plan and rolloversor transfers from another SIMPLE IRA.

Q. A–3: Can a SIMPLE IRA Plan bemaintained on a fiscal year basis?

A. A–3: A SIMPLE IRA Plan mayonly be maintained on a calendar yearbasis. Thus, for example, employer eligi-bility to establish a SIMPLE IRA Plan(see Q&As B–1 through B–5) and SIM-PLE IRA Plan contributions (see Q&AsD–1 through D–6) are determined on acalendar-year basis.

B. EMPLOYERS THAT CAN ESTABLISH SIMPLE IRA PLANS

Q. B–1: Can any employer establish aSIMPLE IRA Plan?

A. B–1: SIMPLE IRA Plans may beestablished only by employers that had nomore than 100 employees who earned$5,000 or more in compensation duringthe preceding calendar year (the “100-em-ployee limitation”). See Q&As C–4 andC–5 for the definition of compensation.For purposes of the 100-employee limita-tion, all employees employed at any timeduring the calendar year are taken into ac-count, regardless of whether they are eli-gible to participate in the SIMPLE IRAPlan. Thus, employees who are exclud-able under the rules of § 410(b)(3) or whohave not met the plan’s minimum eligibil-ity requirements must be taken into ac-count. Employees also include self-em-ployed individuals described in§ 401(c)(1) who received earned incomefrom the employer during the year.

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

1998–2 I.R.B 27 January 12, 1998

A. B–2: An employer that previouslymaintained a SIMPLE IRA Plan is treatedas satisfying the 100-employee limitationfor the 2 calendar years immediately fol-lowing the calendar year for which it lastsatisfied the 100-employee limitation.However, if the failure to satisfy the 100-employee limitation is due to an acquisi-tion, disposition or similar transaction in-volving the employer, then the 2-yeargrace period will apply only in accor-dance with rules similar to the rules of§ 410(b)(6)(C)(i).

Q. B–3: Can an employer make contri-butions under a SIMPLE IRA Plan for acalendar year if it maintains another qual-ified plan?

A. B–3: Generally, an employer cannotmake contributions under a SIMPLE IRAPlan for a calendar year if the employer, ora predecessor employer, maintains a quali-fied plan (other than the SIMPLE IRAPlan) under which any of its employees re-ceives an allocation of contributions (in thecase of a defined contribution plan) or hasan increase in a benefit accrued or treatedas an accrued benefit under § 411(d)(6) (inthe case of a defined benefit plan) for anyplan year beginning or ending in that cal-endar year. In applying these rules, trans-fers, rollovers or forfeitures are disre-garded, except to the extent forfeituresreplace otherwise required contributions.For purposes of this Q&A B–3, “qualifiedplan” means a plan, contract, pension ortrust described in § 219(g)(5) and includesa plan qualified under § 401(a), a qualifiedannuity plan described in § 403(a), an an-nuity contract described in § 403(b), a planestablished for employees of a State, a po-litical subdivision or by an agency or in-strumentality of any State or political sub-division (other than an eligible deferredcompensation plan described in § 457(b)),a simplified employee pension (“SEP”) de-scribed in § 408(k), a trust described in§ 501(c)(18) and a SIMPLE IRA Plan de-scribed in § 408(p).

However, an employer can make con-tributions under a SIMPLE IRA Plan for acalendar year even though it maintainsanother qualified plan if either:

(1) The other qualified plan maintainedby the employer covers only employeesdescribed in paragraph (1) of Q&A C–1(i.e., employees covered under a collectivebargaining agreement for which retire-ment benefits were the subject of good

faith bargaining) and the SIMPLE IRAPlan excludes these employees.

(2) The other qualified plan is main-tained by the employer during the calen-dar year in which an acquisition, disposi-tion or similar transaction occurs (or thefollowing calendar year); the require-ments of this Q&A B–3 would have beensatisfied if the transaction had not oc-curred (and thus the employer maintain-ing the SIMPLE IRA Plan had remained aseparate employer); and only individualswho would have been employees of that“separate” employer are eligible to partic-ipate in the SIMPLE IRA Plan.

Q. B–4: Are tax-exempt employersand governmental entities permitted tomaintain SIMPLE IRA Plans?

A. B–4: Yes. Excludable contributionsmay be made to the SIMPLE IRA of em-ployees of tax-exempt employers andgovernmental entities on the same basisas contributions may be made to employ-ees of other eligible employers.

Q. B–5: Do the employer aggregationand leased employee rules apply for pur-poses of the SIMPLE IRA Plan rulesunder § 408(p)?

A. B–5: For purposes of applying theSIMPLE IRA Plan rules under § 408(p),certain related employers (trades or busi-nesses under common control) are treatedas a single employer. These related em-ployers include controlled groups of cor-porations under § 414(b), partnerships orsole proprietorships under common con-trol under § 414(c), and affiliated servicegroups under § 414(m). In addition,leased employees described in § 414(n)are treated as employed by the employer.

Example: Individual P owns BusinessA, a computer rental agency, that has 80employees who received more than$5,000 in compensation in 1996. Individ-ual P also owns Business B, which repairscomputers and has 60 employees who re-ceived more than $5,000 in compensationin 1996. Individual P is the sole propri-etor of both businesses. Section 414(c)provides that the employees of partner-ships and sole proprietorships that areunder common control are treated as em-ployees of a single employer. Thus, forpurposes of the SIMPLE IRA Plan rules,all 140 employees are treated as em-ployed by Individual P. Therefore, nei-ther Business A nor Business B is eligibleto establish a SIMPLE IRA Plan for 1997.

C. EMPLOYEE ELIGIBILITY TOPARTICIPATE IN A SIMPLE IRAPLAN

Q. C–1: Which employees of an em-ployer must be eligible to participateunder the SIMPLE IRA Plan?

A. C–1: If an employer establishes aSIMPLE IRA Plan, all employees of theemployer who received at least $5,000 incompensation from the employer duringany 2 preceding calendar years (whetheror not consecutive) and who are reason-ably expected to receive at least $5,000 incompensation during the calendar year,must be eligible to participate in the SIM-PLE IRA Plan for the calendar year.

An employer, at its option, may ex-clude from eligibility employees de-scribed in § 410(b)(3). These employeesare:

(1) Employees who are included in aunit of employees covered by an agree-ment that the Secretary of Labor finds tobe a collective bargaining agreement be-tween employee representatives and oneor more employers, if there is evidencethat retirement benefits were the subjectof good faith bargaining between suchemployee representatives and such em-ployer or employers;

(2) In the case of a trust established ormaintained pursuant to an agreement thatthe Secretary of Labor finds to be a col-lective bargaining agreement between airpilots represented in accordance withTitle II of the Railway Labor Act and oneor more employees, all employees notcovered by that agreement; and

(3) Employees who are nonresidentaliens and who received no earned in-come (within the meaning of § 911(d)(2))from the employer that constitutes incomefrom sources within the United States(within the meaning of § 861(a)(3)).

Moreover, during the calendar year inwhich an acquisition, disposition or simi-lar transaction occurs (or the followingcalendar year), an employer may excludefrom eligibility all of the employees whowould not have been eligible if the trans-action had not occurred (and thus the em-ployer maintaining the SIMPLE IRA Planhad remained a separate employer). Seeparagraph (2) of Q&A B–3 for circum-stances in which exclusion of these em-ployees would be required.

As noted in Q&A B–5, the employeraggregation and leased employee rules

January 12, 1998 28 1998–2 I.R.B.

apply for purposes of § 408(p). Thus, forexample, if two related employers mustbe aggregated under the rules of § 414(b),all employees of either employer who sat-isfy the eligibility criteria must be al-lowed to participate in the SIMPLE IRAPlan.

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

A. C–2: An employer may impose lessrestrictive eligibility requirements byeliminating or reducing the prior yearcompensation requirements, the currentyear compensation requirements, or both,under its SIMPLE IRA Plan. For exam-ple, the employer could allow participa-tion for employees who received $3,000in compensation during any precedingcalendar year. However, the employercannot impose any other conditions onparticipating in a SIMPLE IRA Plan.

Q. C–3: May an employee participatein a SIMPLE IRA Plan if he or she alsoparticipates in a plan of a different em-ployer for the same year?

A. C–3: An employee may participatein a SIMPLE IRA Plan even if he or shealso participates in a plan of a differentemployer for the same year. However,the employee’s salary reduction contribu-tions are subject to the limitations of§ 402(g), which provides an aggregatelimit on the exclusion for elective defer-rals for any individual. Similarly, an em-ployee who participates in a SIMPLEIRA Plan and an eligible deferred com-pensation plan described in § 457(b) issubject to the limitations described in§ 457(c). An employer that establishes aSIMPLE IRA Plan is not responsible formonitoring compliance with either ofthese limitations.

Q. C–4: What definition of compensa-tion applies for purposes of the SIMPLEIRA Plan rules in the case of an individualwho is not a self-employed individual?

A. C–4: For purposes of the SIMPLEIRA Plan rules, in the case of an individ-ual who is not a self-employed individual,compensation means the amount de-scribed in § 6051(a)(3) (wages, tips, andother compensation from the employersubject to income tax withholding under§ 3401(a)), and amounts described in§ 6051(a)(8), including elective contribu-tions made under a SIMPLE IRA Plan,and compensation deferred under a § 457plan. For purposes of applying the 100-

employee limitation, and in determiningwhether an employee is eligible to partici-pate in a SIMPLE IRA Plan (i.e., whetherthe employee had $5,000 in compensationfor any 2 preceding years), an employee’scompensation also includes the em-ployee’s elective deferrals under a§ 401(k) plan, a salary reduction SEP anda § 403(b) annuity contract.

Q. C–5: What definition of compensa-tion applies for purposes of the SIMPLEIRA Plan rules in the case of a self-em-ployed individual?

A. C–5: For purposes of the SIMPLEIRA Plan rules, in the case of a self-em-ployed individual, compensation meansnet earnings from self-employment deter-mined under § 1402(a), prior to subtract-ing any contributions made under theSIMPLE IRA Plan on behalf of the indi-vidual.

D. SIMPLE IRA PLAN CONTRIBUTIONS

Q. D–1: What contributions must anemployer make under a SIMPLE IRAPlan?

A. D–1: If an employer establishes aSIMPLE IRA Plan, it must make salaryreduction contributions, as described inQ&A D–2, to the extent elected by em-ployees. In addition, the employer mustmake employer matching contributions,as described in Q&As D–4 and D–5, oremployer nonelective contributions, asdescribed in Q&A D–6. These are theonly contributions that may be madeunder a SIMPLE IRA Plan.

Q. D–2: What is a salary reductioncontribution?

A. D–2: A salary reduction contribu-tion is a contribution made pursuant to anemployee’s election to have an amountcontributed to his or her SIMPLE IRA,rather than have the amount paid directlyto the employee in cash. An employeemust be permitted to elect to have salaryreduction contributions made at the levelspecified by the employee, expressed as apercentage of compensation for the year.Additionally, an employer may permit anemployee to express the level of salary re-duction contributions as a specific dollaramount. An employer may not place anyrestrictions on the amount of an em-ployee’s salary reduction contributions(e.g., by limiting the contribution percent-age), except to the extent needed to com-

ply with the annual limit on the amount ofsalary reduction contributions describedin Q&A D–3.

Q. D–3: What is the annual limit onthe amount of salary reduction contribu-tions under a SIMPLE IRA Plan?

A. D–3: For 1997 (and for 1998), themaximum annual amount of salary reduc-tion contributions that can be made on be-half of any employee under a SIMPLEIRA Plan is $6,000. This amount will beadjusted by the Service to reflect anychanges in the cost of living.

Q. D–4: What employer matching con-tribution is generally required under aSIMPLE IRA Plan?

A. D–4: Under a SIMPLE IRA Plan,an employer is generally required to makea contribution on behalf of each eligibleemployee in an amount equal to the em-ployee’s salary reduction contributions,up to a limit of 3 percent of the em-ployee’s compensation for the entire cal-endar year.

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

A. D–5: The 3-percent limit on match-ing contributions is permitted to be re-duced for a calendar year at the electionof the employer, but only if:

(1) The limit is not reduced below 1percent;

(2) The limit is not reduced for morethan 2 years out of the 5-year period thatends with (and includes) the year forwhich the election is effective; and

(3) Employees are notified of the re-duced limit within a reasonable period oftime before the 60-day election periodduring which employees can enter intosalary reduction agreements. See Q&AE–1.

For purposes of applying the rule de-scribed in paragraph (2) of this Q&AD–5, in determining whether the limitwas reduced below 3 percent for a year,any year before the first year in which anemployer (or a predecessor employer)maintains a SIMPLE IRA Plan will betreated as a year for which the limit was 3percent. If an employer chooses to makenonelective contributions for a year (seeQ&A D–6), that year also will be treatedas a year for which the limit was 3 per-cent.

Q. D–6: May an employer make non-elective contributions instead of matchingcontributions?

1998–2 I.R.B 29 January 12, 1998

A. D–6: As an alternative to makingmatching contributions under a SIMPLEIRA Plan (as described in Q&A D–4 andD–5), an employer may make nonelectivecontributions equal to 2 percent of eacheligible employee’s compensation for theentire calendar year. The employer’s non-elective contributions must be made foreach eligible employee regardless ofwhether the employee elects to makesalary reduction contributions for the cal-endar year. The employer may, but is notrequired to, limit nonelective contribu-tions to eligible employees who have atleast $5,000 (or some lower amount se-lected by the employer) of compensationfor the year.

For purposes of the 2-percent nonelec-tive contribution, the compensation takeninto account must be limited to theamount of compensation that may betaken into account under § 401(a)(17) forthe year. The § 401(a)(17) limit for 1997(and for 1998) is $160,000. This amountwill be adjusted by the Service for subse-quent years to reflect changes in the costof living.

An employer may substitute the 2-per-cent nonelective contribution for thematching contribution for a year, only if:

(1) Eligible employees are notified thata 2-percent nonelective contribution willbe made instead of a matching contribu-tion; and

(2) This notice is provided within areasonable period of time before the 60-day election period during which employ-ees can enter into salary reduction agree-ments. See Q&A E–1.

E. EMPLOYEE ELECTIONS

Q. E–1: When must an employee begiven the right to enter into a salary re-duction agreement?

A. E–1: During the 60-day period im-mediately preceding January 1 of a calen-dar year (i.e., November 2 to December31 of the preceding calendar year), an eli-gible employee must be given the right toenter into a salary reduction agreementfor the calendar year, or to modify a prioragreement (including reducing theamount subject to this agreement to $0).However, for the year in which the em-ployee becomes eligible to make salaryreduction contributions, the period duringwhich the employee may enter into asalary reduction agreement or modify a

prior agreement is a 60-day period that in-cludes either the date the employee be-comes eligible or the day before that date.For example, if an employer establishes aSIMPLE IRA Plan effective as of July 1,1997, each eligible employee becomes el-igible to make salary reduction contribu-tions on that date and the 60-day periodmust begin no later than July 1 and cannotend before June 30, 1997.

During these 60-day periods, employ-ees have the right to modify their salaryreduction agreements without restrictions.In addition, for the year in which an em-ployee becomes eligible to make salaryreduction contributions, the employeemust be able to commence these contribu-tions as soon as the employee becomes el-igible, regardless of whether the 60-dayperiod has ended.

Q. E–2: Can a SIMPLE IRA Plan pro-vide additional or longer election periods?

A. E–2: Nothing precludes a SIMPLEIRA Plan from providing additional orlonger periods for permitting employeesto enter into salary reduction agreementsor to modify prior agreements. For exam-ple, a SIMPLE IRA Plan can provide a90-day election period instead of the 60-day period described in Q&A E–1. Simi-larly, in addition to the 60-day period de-scribed in Q&A E–1, a SIMPLE IRA Plancan provide quarterly election periodsduring the 30 days before each calendarquarter.

Q. E–3: Does an employee have theright to terminate a salary reductionagreement outside a SIMPLE IRA Plan’snormal election period?

A. E–3: An employee must be giventhe right to terminate a salary reductionagreement for a calendar year at any timeduring the year. A SIMPLE IRA Planmay provide that an employee who termi-nates a salary reduction agreement at anytime other than the periods described inQ&A E–1 or E–2 is not eligible to resumeparticipation until the beginning of thenext calendar year.

Q. E–4: Must an employer allow anemployee to select the financial institu-tion to which the employer will make allSIMPLE IRA Plan contributions on be-half of the employee?

A. E–4: Generally, under § 408(p), anemployer must permit an employee to se-lect the financial institution for the SIM-PLE IRA to which the employer will

make all contributions on behalf of theemployee. The employee must communi-cate to the employer the name of the fi-nancial institution selected and any addi-tional information necessary to facilitatetransmittal of the contribution to that in-stitution. The Model Salary ReductionAgreement on page 3 of Form 5304-SIM-PLE can be used for this purpose. Alter-natively, under the exception described inQ&A J–1, an employer may require thatall contributions on behalf of employeesbe made to a specified designated finan-cial institution.

F. VESTING REQUIREMENTS

Q. F–1: Must contributions under aSIMPLE IRA Plan be nonforfeitable?

A. F–1: Yes. All contributions under aSIMPLE IRA Plan must be fully vestedand nonforfeitable when made.

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

A. F–2: Yes. An employer may not re-quire an employee to retain any portion ofthe contributions in his or her SIMPLEIRA or otherwise impose any withdrawalrestrictions.

G. EMPLOYER ADMINISTRATIVEAND NOTIFICATION REQUIREMENTS

Q. G–1: What notification require-ments apply to employers?

A. G–1: An employer must notify eachemployee, immediately before the em-ployee’s 60-day election period describedin Q&A E–1, of the employee’s opportu-nity to enter into a salary reduction agree-ment or to modify a prior agreement. Ifapplicable, this notification must disclosean employee’s ability to select the finan-cial institution that will serve as thetrustee of the employee’s SIMPLE IRA asdescribed in Q&A E–4. In the case of aSIMPLE IRA Plan established usingForm 5304-SIMPLE (Not Subject to theDesignated Financial Institution Rules),the employer may use the Model Notifi-cation to Eligible Employees on page 3 ofthe form to disclose to each employee theemployee’s right to select the financial in-stitution that will serve as the trustee ofthe employee’s SIMPLE IRA as describedin Q&A E–4. The notification must alsoinclude the summary description de-scribed in Q&A H–1. In the case of a

January 12, 1998 30 1998–2 I.R.B.

SIMPLE IRA Plan established usingForm 5304-SIMPLE (Not Subject to theDesignated Financial Institution Rules) orForm 5305-SIMPLE (for Use With a Des-ignated Financial Institution), the sum-mary description requirement may be sat-isfied by providing a completed copy ofpages 1 and 2 of the form that reflects theterms of the employer’s plan (includingthe materials provided by the trustee forcompletion of Article VI).

Q. G–2: May the notifications regard-ing a reduced matching contribution (de-scribed in Q&A D–5) and a nonelectivecontribution in lieu of a matching contri-bution (described in Q&A D–6) be pro-vided at the same time as the notificationof an employee’s opportunity to enter intoa salary reduction agreement and the sum-mary description?

A. G–2: Yes. An employer is deemedto provide the notification regarding a re-duced matching contribution or a non-elective contribution in lieu of a matchingcontribution within a reasonable period oftime before the 60-day election period if,immediately before the 60-day electionperiod, this notification is included withthe notification of an employee’s opportu-nity to enter into a salary reduction agree-ment.

Q. G–3: What reporting penaltiesunder the Code apply if an employer failsto provide one or more of the required no-tices?

A. G–3: If the employer fails to provideone or more of the required notices de-scribed in Q&A G–1, the employer will beliable, under the Code, for a penalty of$50 per day until the notices are provided.If the employer shows that the failure wasdue to reasonable cause, the penalty willnot be imposed. To the extent that eachemployee is permitted to select the trusteefor his or her SIMPLE IRA pursuant toQ&A E–4, and is so notified in accordancewith Q&A G–1, and the information withrespect to the trustee (the name and ad-dress of the trustee and its withdrawal pro-cedures) is not available at the time theemployer is required to provide the sum-mary description, the employer is deemedto have shown reasonable cause for failureto provide this information to eligible em-ployees, but only if the employer sees to itthat this information is provided to theemployee as soon as administratively fea-sible once the trustee has been selected.

Q. G–4: What if an eligible employeeis unwilling or unable to establish a SIM-PLE IRA?

A. G–4: If an eligible employee who isentitled to a contribution under a SIMPLEIRA Plan is unwilling or unable to estab-lish a SIMPLE IRA with any financial in-stitution prior to the date on which thecontribution is required to be made to theSIMPLE IRA of the employee underQ&A G–5 or G–6, an employer may exe-cute the necessary documents to establisha SIMPLE IRA on the employee’s behalfwith a financial institution selected by theemployer.

Q. G–5: When must an employer makesalary reduction contributions under aSIMPLE IRA Plan?

A. G–5: The employer must makesalary reduction contributions to the fi-nancial institution maintaining the SIM-PLE IRA no later than the close of the 30-day period following the last day of themonth in which amounts would otherwisehave been payable to the employee incash. The Department of Labor has indi-cated that most SIMPLE IRA Plans arealso subject to Title I of ERISA, andunder Department of Labor regulations, at29 CFR 2510.3–102, salary reductioncontributions to these plans must be madeto the SIMPLE IRA as of the earliest dateon which the contributions can reasonablybe segregated from the employer’s gen-eral assets, but in no event later than the30-day deadline described above.

Q. G–6: When must an employer makematching and nonelective contributionsunder a SIMPLE IRA Plan?

A. G–6: Matching and nonelective em-ployer contributions must be made to thefinancial institution maintaining the SIM-PLE IRA no later than the due date for fil-ing the employer’s income tax return, in-cluding extensions, for the taxable yearthat includes the last day of the calendaryear for which the contributions aremade.

H. TRUSTEE ADMINISTRATIVE REQUIREMENTS

Q. H–1: What information must aSIMPLE IRA trustee provide to an em-ployer?

A. H–1: (1) Summary description.Each year, a SIMPLE IRA trustee mustprovide the employer sponsoring theSIMPLE IRA Plan with a summary de-

scription containing the following infor-mation:

(a) The name and address of the em-ployer and the trustee.

(b) The requirements for eligibility forparticipation.

(c) The benefits provided with respectto the arrangement.

(d) The time and method of makingemployee elections with respect to thearrangement.

(e) The procedures for, and effects of,withdrawals (including rollovers) fromthe arrangement.

(2) Timing. Each trustee must providethe summary description to the employerearly enough to allow the employer tomeet its notification obligation describedin Q&A G–1. However, a trustee is notrequired to provide the summary descrip-tion prior to agreeing to be a trustee of aSIMPLE IRA under the SIMPLE IRAPlan.

(3) Penalties. Each trustee that fails toprovide the employer with one or moresummary descriptions incurs a $50penalty, under § 6693(c) of the Code, foreach day the failures continue, unless thetrustee shows that the failures are due toreasonable cause. To the extent that theemployer or a trustee provides the infor-mation described in paragraphs (1)(a)through (e) of this Q&A H–1 within thetime period prescribed in Q&A G–1 to theemployee for whom the SIMPLE IRA isestablished, the trustee of that SIMPLEIRA is deemed to have shown reasonablecause for failure to provide that informa-tion to the employer. For example, if, inaccordance with Q&A G–1, an employerwho uses a designated financial institu-tion provides, to all eligible employees ina SIMPLE IRA Plan, its name and ad-dress, the information described in para-graphs (1)(a) through (d) of this Q&AH–1, and the effects of withdrawal, andthe trustee provides its name and addressand its procedures for withdrawal to eacheligible employee for whom a SIMPLEIRA is established with the trustee underthe SIMPLE IRA Plan, the trustee will bedeemed to have shown reasonable causefor failing to provide the employer the in-formation described in paragraphs (1)(a)through (e) of this Q&A H–1.

(4) Use of model forms as the summarydescription. In the case of a SIMPLEIRA Plan established using Form 5304-

1998–2 I.R.B 31 January 12, 1998

SIMPLE (Not Subject to the DesignatedFinancial Institution Rules) or Form5305-SIMPLE (for Use With a Desig-nated Financial Institution), a trustee maysatisfy this obligation by providing anemployer (and/or the employee in thecase of Form 5304-SIMPLE) with a cur-rent copy of Form 5304-SIMPLE or Form5305-SIMPLE, the instructions, the infor-mation required for completion of ArticleVI, and the name and address of the fi-nancial institution. The trustee shouldprovide guidance to the employer (and theemployee, if Form 5304-SIMPLE is pro-vided directly to the employee) concern-ing the need for the employer to completethe first two pages of Form 5304-SIM-PLE or Form 5305-SIMPLE in accor-dance with its plan’s terms and to distrib-ute completed copies to eligibleemployees.

(5) Transfer SIMPLE IRAs. The trusteeof a transfer SIMPLE IRA is not requiredto provide the summary description de-scribed in the preceding paragraph. ASIMPLE IRA is a transfer SIMPLE IRA ifit is not a SIMPLE IRA to which the em-ployer has made contributions under theSIMPLE IRA Plan.

Q. H–2: What information must aSIMPLE IRA trustee provide to partici-pants in the SIMPLE IRA Plan?

A. H–2: Within 31 days after the closeof each calendar year, a SIMPLE IRAtrustee must provide each individual onwhose behalf an account is maintainedwith a statement of the individual’s ac-count balance as of the close of that calen-dar year and the account activity duringthat calendar year. A trustee who fails toprovide individuals with this statement in-curs a $50 penalty, under the Code, foreach day the failure continues, unless thetrustee shows that the failure is due to rea-sonable cause. The trustee must also pro-vide any other information required to befurnished to IRA holders (e.g., disclosurestatements for individual retirement plansas referred to in § 1.408–6 of the regula-tions).

Q. H–3: What information must aSIMPLE IRA trustee provide to the Ser-vice?

A. H–3: Section 408(i) requires thetrustee of an individual retirement accountto make reports regarding these accounts tothe Service. Form 5498, Individual Retire-ment Arrangement Information, has been

modified to require that the amount of con-tributions to a SIMPLE IRA, rollover con-tributions, and the fair market value of theaccount be reported, and that contributionsto a SIMPLE IRA be identified as such. Atrustee who fails to file these reports incursa $50 penalty under the Code for each fail-ure, unless it is shown that the failure is dueto reasonable cause.

Q. H–4: Are distributions from a SIM-PLE IRA required to be reported on Form1099–R?

A. H–4: Pursuant to § 6047 of theCode and § 35.3405–1 of the regulations,the payor of a designated distributionfrom an IRA must report the distributionon Form 1099–R. A distribution from aSIMPLE IRA is a designated distributionfrom an IRA and thus must be reported onForm 1099–R. The Service has revisedForm 1099–R, Distributions From Pen-sions, Annuities, Retirement or Profit-sharing Plans, IRAs, Insurance Contracts,Etc., to reflect the requirements that applyto SIMPLE IRAs. The penalty, under theCode, for failure to report a designateddistribution from an IRA (including aSIMPLE IRA) is determined under sec-tions 6721–6724.

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

A. H–5: Yes. A SIMPLE IRA trustee isrequired to report on Form 1099–Rwhether a distribution to a participant oc-curred during the 2-year period describedin Q&A I–2. A trustee is permitted to pre-pare this report on the basis of its ownrecords with respect to the SIMPLE IRAaccount. A trustee may, but is not re-quired to, take into account other ade-quately substantiated information regard-ing the date on which an individual firstparticipated in any SIMPLE IRA Planmaintained by the individual’s employer.See Q&A I–2 on the effect of distribu-tions within this 2-year period.

I. TAX TREATMENT OF SIMPLE IRAPLANS

Q. I–1: What are the tax consequencesof SIMPLE IRA Plan contributions?

A. I–1: Contributions to a SIMPLEIRA are excludable from federal incometax and not subject to federal income taxwithholding. Salary reduction contribu-

tions to a SIMPLE IRA are subject to taxunder the Federal Insurance ContributionsAct (“FICA”), the Federal Unemploy-ment Tax Act (“FUTA”), and the RailroadRetirement Act (“RRTA”), and must bereported on Form W–2, Wage and TaxStatement. Matching and nonelectivecontributions to a SIMPLE IRA are notsubject to FICA, FUTA, or RRTA taxes,and are not required to be reported onForm W–2.

Q. I–2: What are the tax consequenceswhen amounts are distributed from aSIMPLE IRA?

A. I–2: Generally, the same tax resultsapply to distributions from a SIMPLEIRA as to distributions from a regular IRA(i.e., an IRA described in § 408(a) or (b)).However, a special rule applies to a pay-ment or distribution received from a SIM-PLE IRA during the 2-year period begin-ning on the date on which the individualfirst participated in any SIMPLE IRAPlan maintained by the individual’s em-ployer (the “2-year period”).

Under this special rule, if the additionalincome tax on early distributions under§ 72(t) applies to a distribution within this2-year period, § 72(t)(6) provides that therate of additional tax under this specialrule is increased from 10 percent to 25percent. If one of the exceptions to appli-cation of the tax under § 72(t) applies(e.g., for amounts paid after age 591⁄2,after death, or as part of a series of sub-stantially equal payments), the exceptionalso applies to distributions within the 2-year period and the 25-percent additionaltax does not apply.

Q. I–3: Are there any special rolloverrules that apply to a distribution from aSIMPLE IRA?

A. I–3: Section 408(d)(3)(G) providesthat the rollover provisions of § 408(d)(3)apply to a distribution from a SIMPLEIRA during the 2-year period described inQ&A I–2 only if the distribution is paidinto another SIMPLE IRA. Thus, a distri-bution from a SIMPLE IRA during that 2-year period qualifies as a rollover contri-bution (and thus is not includable in grossincome) only if the distribution is paidinto another SIMPLE IRA and satisfiesthe other requirements of § 408(d)(3) fortreatment as a rollover contribution.

Q. I–4: Can an amount be transferredfrom a SIMPLE IRA to another IRA in atax-free trustee-to-trustee transfer?

January 12, 1998 32 1998–2 I.R.B.

A. I–4: During the 2-year period de-scribed in Q&A I–2, an amount in a SIM-PLE IRA can be transferred to anotherSIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this 2-year pe-riod, an amount is paid from a SIMPLEIRA directly to the trustee of an IRA that isnot a SIMPLE IRA, the payment is neithera tax-free trustee-to-trustee transfer nor arollover contribution; the payment is a dis-tribution from the SIMPLE IRA and acontribution to the other IRA that does notqualify as a rollover contribution. Afterthe expiration of the 2-year period, anamount in a SIMPLE IRA can be trans-ferred in a tax-free trustee-to-trustee trans-fer to an IRA that is not a SIMPLE IRA.

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

A. I–5: The 2-year period described inQ&A I–2 begins on the first day on whichcontributions made by the individual’semployer are deposited in the individual’sSIMPLE IRA.

Q. I–6: Do the qualification rules of§ 401(a) apply to contributions under aSIMPLE IRA Plan?

A. I–6: None of the qualification rulesof § 401(a) apply to SIMPLE IRA Plans.For example, the § 415 and 416 rules donot apply to contributions under a SIM-PLE IRA Plan. Similarly, the § 401(a)-(17) limit does not apply to salary reduc-tion contributions and matchingcontributions. However, as noted inQ&A D–6, the amount of compensationthat may be taken into account for pur-poses of the 2-percent nonelective contri-bution is limited to the amount that maybe taken into account under § 401(a)(17)for the year.

Q. I–7: What rules apply to an em-ployer’s ability to deduct contributionsunder a SIMPLE IRA Plan?

A. I–7: Pursuant to § 404(m), contribu-tions under a SIMPLE IRA Plan are de-ductible in the taxable year of the em-ployer with or within which the calendaryear for which contributions were madeends (without regard to the limitations of§ 404(a)). For example, if an employerhas a June 30 taxable year end, contribu-tions under the SIMPLE IRA Plan for thecalendar year 1997 (including contribu-tions made in 1997 before June 30, 1997)are deductible in the taxable year endingJune 30, 1998. Contributions will betreated as made for a particular taxable

year if they are made on account of thattaxable year and are made by the due date(including extensions) prescribed by lawfor filing the return for the taxable year.

J. EXCEPTION FOR USE OF DESIGNATED FINANCIALINSTITUTION

Q. J–1: Can an employer designate aparticular financial institution to which allcontributions under the SIMPLE IRAPlan will be made?

A. J–1: Yes. In accordance with§ 408(p)(7), instead of making SIMPLEIRA Plan contributions to the financial in-stitution selected by each eligible em-ployee (see Q&A E–4), an employer mayrequire that all contributions on behalf ofall eligible employees under the SIMPLEIRA Plan be made to SIMPLE IRAs at aparticular financial institution if the fol-lowing requirements are met: (1) the em-ployer and the financial institution agreethat the financial institution will be a des-ignated financial institution under§ 408(p)(7) (“DFI”) for the SIMPLE IRAPlan; (2) the financial institution agreesthat, if a participant so requests, the partic-ipant’s balance will be transferred withoutcost or penalty to another SIMPLE IRA(or, after the 2-year period described inQ&A I–2, to any IRA) at a financial insti-tution selected by the participant; and (3)each participant is given written notifica-tion describing the procedures underwhich, if a participant so requests, the par-ticipant’s balance will be transferred with-out cost or penalty to another SIMPLEIRA (or, after the 2-year period describedin Q&A I–2, to any IRA) at a financial in-stitution selected by the participant.

This Q&A J–1 is illustrated by the fol-lowing examples:

Example 1: A representative of Finan-cial Institution L approaches Employer Bconcerning the establishment of a SIM-PLE IRA Plan. Employer B agrees to es-tablish a SIMPLE IRA Plan for its eligibleemployees. Employer B would prefer toavoid writing checks to more than one fi-nancial institution on behalf of employ-ees, and is interested in making all contri-butions under the SIMPLE IRA Plan to asingle financial institution. Employer Band Financial Institution L agree that Fi-nancial Institution L will be a DFI and Fi-nancial Institution L agrees that, if a par-

ticipant so requests, it will transfer theparticipant’s balance, without cost orpenalty, to another SIMPLE IRA (or, afterthe 2-year period described in Q&A I–2,to any IRA) at a financial institution se-lected by the participant. A SIMPLE IRAis established for each participating em-ployee of Employer B at Financial Institu-tion L. Each participant is provided witha written description of how and when theparticipant may direct that the partici-pant’s balance attributable to contribu-tions made to Financial Institution L betransferred without cost or penalty to aSIMPLE IRA (or, after the 2-year perioddescribed in Q&A I–2, to any IRA) at an-other financial institution selected by theparticipant. Financial Institution L is aDFI, and Employer B may require that allcontributions on behalf of all eligible em-ployees be made to SIMPLE IRAs at Fi-nancial Institution L.

Example 2: A representative of Finan-cial Institution M approaches Employer Cconcerning the establishment of a SIM-PLE IRA Plan. Employer C invites Fi-nancial Institution M to make a presenta-tion on its investment options forSIMPLE IRAs to Employer C’s employ-ees. Each eligible employee receives no-tification that the employer must permitthe employee to select which financial in-stitution will serve as the trustee of theemployee’s SIMPLE IRA (see Q&AG–1). All eligible employees of Em-ployer C voluntarily select Financial In-stitution M to serve as the trustee of theSIMPLE IRAs to which Employer C willmake all contributions on behalf of theemployees. Financial Institution M is nota DFI merely because all eligible employ-ees of Employer C selected Financial In-stitution M to serve as the trustee of theirSIMPLE IRAs and Employer C conse-quently makes all contributions to Finan-cial Institution M. Therefore, FinancialInstitution M is not required to transferSIMPLE IRA balances without cost orpenalty.

Example 3: Assume the same facts asExample 2, except that Employee X andEmployee Y, who made salary reductionelections, failed to establish SIMPLEIRAs to receive SIMPLE IRA Plan contri-butions on their behalf before the firstdate on which Employer C is required tomake a contribution to their SIMPLEIRAs. Employer C establishes SIMPLE

1998–2 I.R.B 33 January 12, 1998

IRAs at Financial Institution M for theseemployees and contributes the amount re-quired to their accounts. Financial Insti-tution M is not a DFI merely because Em-ployer C establishes SIMPLE IRAs onbehalf of Employee X and Employee Ywhile all other employees voluntarily se-lect Financial Institution M to serve as thetrustee of the SIMPLE IRAs to whichEmployer C will make contributions ontheir behalf.

Q. J–2: May the time and manner inwhich a participant may transfer his or herbalance without cost or penalty be limitedwithout violating the requirements of§ 408(p)(7)?

A. J–2: Yes. Section 408(p)(7) will notbe violated merely because a participantis given only a reasonable period of timeeach year in which to transfer his or herbalance without cost or penalty. A partici-pant will be deemed to have been given areasonable period of time in which totransfer his or her balance without cost orpenalty if, for each calendar year, the par-ticipant has until the end of the 60-day pe-riod described in Q&A E–1 to request totransfer, without cost or penalty, his or herbalance attributable to SIMPLE IRA Plancontributions for the calendar year fol-lowing that 60-day period (or, for the yearin which an employee becomes eligible tomake salary reduction contributions, forthe balance of that year) and subsequentcalendar years.

If the time or manner in which a partic-ipant may transfer his or her balance with-out cost or penalty is limited, any suchlimitation must be disclosed as part of thewritten notification described in Q&AJ–1. In the case of a SIMPLE IRA Planestablished using Form 5305-SIMPLE, ifthe summary description requirement isbeing satisfied by providing a completedcopy of pages one and two of Form 5305-SIMPLE, Article VI (Procedures forWithdrawal) must contain a clear expla-nation of any such limitation.


Example 1: Employer A first estab-lishes a SIMPLE IRA Plan effective Janu-ary 1, 1998, and intends to make all con-tributions to Financial Institution M,which has agreed to serve as a DFI. Forthe 1998 calendar year, Employer A pro-vides the 60-day election period describedin Q&A E–1 beginning November 2,

1997, and notifies each participant that heor she may request that his or her balanceattributable to future contributions betransferred from Financial Institution Mto a SIMPLE IRA at a financial institutionthat the participant selects. The notifica-tion states that the transfer will be madewithout cost or penalty if the participantcontacts Financial Institution M prior toJanuary 1, 1998. For the 1998 calendaryear, the requirements of § 408(p)(7) willnot be violated merely because partici-pants are given only a 60-day period inwhich to request to transfer their balanceswithout cost or penalty.

Example 2: Assume the same facts asExample 1. Participant X does not re-quest a transfer of her balance by Decem-ber 31, 1997, but requests a transfer of hercurrent balance to another SIMPLE IRAon July 1, 1998. Participant X’s currentbalance would not be required to be trans-ferred without cost or penalty becauseParticipant X did not request such a trans-fer prior to January 1, 1998. However,during the 60-day period preceding the1999 calendar year, Participant X may re-quest a transfer, without cost or penalty,of her balance attributable to contribu-tions made for the 1999 calendar yearand, if she so elects, for all future calendaryears (but not her balance attributable tocontributions for the 1998 calendar year).

Example 3: Assume the same facts asExample 1. Under the terms of the SIM-PLE IRA Plan, Participant Y becomes aneligible employee on June 1, 1998, and,for Participant Y, the 60-day period de-scribed in Q&A E–1 begins on that date.For the 1998 calendar year, Participant Ywill be deemed to have been given a rea-sonable amount of time in which to re-quest to transfer, without cost or penalty,his balance attributable to contributionsfor the balance of the 1998 calendar yearif Financial Institution M allows such arequest to be made prior to July 31, 1998.

Q. J–3: Is there a limit on the fre-quency with which a participant’s balancemust be transferred without cost orpenalty?

A. J–3: In order to satisfy § 408(p)(7),if a participant acts, within applicable rea-sonable time limits, if any, to request atransfer of his or her balance, the partici-pant’s balance must be transferred on areasonably frequent basis. A participant’sbalance will be deemed to be transferred

on a reasonably frequent basis if it istransferred on a monthly basis.

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

A. J–4: In order to satisfy § 408(p)(7),a participant’s balance must be transferredin a trustee-to-trustee transfer directly to aSIMPLE IRA (or, after the 2-year perioddescribed in Q&A I–2, to any IRA) at thefinancial institution specified by the par-ticipant.

A transfer is deemed to be made with-out cost or penalty if no liquidation, trans-action, redemption or termination fee, orany commission, load (whether front-endor back-end) or surrender charge, or simi-lar fee or charge is imposed with respectto the balance being transferred. A trans-fer will not fail to be made without cost orpenalty merely because contributions thata participant has elected to have trans-ferred without cost or penalty are requiredto be invested in one specified investmentoption until transferred, even though a va-riety of investment options are availablewith respect to contributions that partici-pants have not elected to transfer.


Example 1: Financial Institution Qagrees to be a DFI for the SIMPLE IRAPlan maintained by Employer D. Em-ployer D provides the 60-day election pe-riod described in Q&A E–1 beginning onNovember 2 of each year and each partic-ipant is notified that he or she may re-quest, before the end of the 60-day period,a transfer of his or her future contribu-tions from Financial Institution Q withoutcost or penalty to a SIMPLE IRA (or,after the 2-year period described in Q&AI–2, to any IRA) at a financial institutionselected by the participant. The notifica-tion states that a participant’s contribu-tions that are to be transferred withoutcost or penalty will be invested in a speci-fied investment option and will be trans-ferred to the financial institution selectedby the participant on a monthly basis.

Financial Institution Q offers variousinvestment options to account holders ofSIMPLE IRA accounts, including invest-ment options with a sales charge. Anyparticipant who does not elect to have hisor her balance transferred to another fi-nancial institution may invest the contri-butions made on his or her behalf in anyinvestment option available to account

January 12, 1998 34 1998–2 I.R.B.

holders of SIMPLE IRA accounts at Fi-nancial Institution Q. However, contribu-tions that a participant has elected to havetransferred are automatically invested,prior to transfer, in a specified investmentoption that has no sales charge. The re-quirement that a participant’s balance betransferred without cost or penalty willnot be violated merely because contribu-tions that have been designated to betransferred pursuant to a participant’selection are automatically invested in onespecified investment option and trans-ferred on a monthly basis to the financialinstitution selected by the participant.

Example 2: Assume the same facts asin Example 1. Financial Institution Qgenerally charges its IRA accounts a rea-sonable annual administration fee. Finan-cial Institution Q also charges this annualadministration fee with respect to SIM-PLE IRA accounts, including SIMPLEIRA accounts from which balances mustbe transferred in accordance with partici-pants’ transfer elections. The requirementthat participants balances be transferredwithout cost or penalty will not be vio-lated merely because a reasonable annualadministration fee is charged to SIMPLEIRA accounts from which balances mustbe transferred in accordance with partici-pants’ transfer elections.

Q. J–5: Is the “without cost or penalty”requirement violated if a DFI charges anemployer for a participant’s transfer of hisor her balance?

A. J–5: The “without cost or penalty”requirement of § 408(p)(7) is not violatedmerely because a DFI charges an em-ployer an amount that takes into accountthe financial institution’s responsibility totransfer balances upon a participant’s re-quest or otherwise charges an employerfor a transfer requested by a participant,provided that the charge is not passedthrough to the participant who requeststhe transfer.

K. SIMPLE IRA PLAN ESTABLISHMENT

Q. K–1: Must an employer establish aSIMPLE IRA Plan on January 1?

A. K–1: An existing employer mayestablish a SIMPLE IRA Plan effectiveon any date between January 1 and Octo-ber 1 of a year beginning after December31, 1996, provided that the employer (or

any predecessor employer) did not previ-ously maintain a SIMPLE IRA Plan.This requirement does not apply to a newemployer that comes into existence afterOctober 1 of the year the SIMPLE IRAPlan is established if the employer estab-lishes the SIMPLE IRA Plan as soon asadministratively feasible after the em-ployer comes into existence. If an em-ployer (or predecessor employer) previ-ously maintained a SIMPLE IRA Plan,the employer may establish a SIMPLEIRA Plan effective only on January 1 of ayear.

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

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

Q. K–3: Has the Service issued modelforms that an employer can use to estab-lish a SIMPLE IRA Plan?

A. K–3: Yes. On October 31, 1996,the Service issued Form 5305-SIMPLE(for Use With a Designated Financial In-stitution), which is a form that may beused by an employer establishing a SIM-PLE IRA Plan with a financial institutionthat is a DFI. On December 30, 1996, theService issued Form 5304-SIMPLE (NotSubject to the Designated Financial Insti-tution Rules), which is the model formthat may be used by an employer to estab-lish a SIMPLE IRA Plan that does not usea DFI.

Q. K–4: How long may an employeruse the modified Form 5305-SIMPLE(for Use With a Designated Financial In-stitution)?

A. K–4: An employer that establishedor establishes a SIMPLE IRA Plan (thatdoes not use a DFI) by using Form 5305-SIMPLE (for Use With a Designated Fi-nancial Institution) as modified in accor-dance with Q&A K–3 as it originallyappeared in Notice 97–6 may continue touse that modified form through the end of1998. The Service has not approved theuse of the modified form beyond 1998.Consequently, such an employer thatmakes contributions for a calendar yearafter 1998 must adopt one of the twomodel forms (Form 5304-SIMPLE orForm 5305-SIMPLE) or an approved pro-totype SIMPLE IRA Plan in order to rely

on Service-approved SIMPLE IRA Plansfor 1999 and future years. For purposesof Q&As E–4, G–1 and H–1 of this no-tice, the modified Form 5305-SIMPLE istreated as a Form 5304-SIMPLE (NotSubject to the Designated Financial Insti-tution Rules).

EFFECT ON OTHER DOCUMENTS

This notice modifies and supersedesNotice 97–6.

PAPERWORK REDUCTION ACT

The collection of information con-tained in this notice has been reviewedand approved by the Office of Manage-ment and Budget (OMB) in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number 1545-1502.

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

The collection of information in thisnotice is in the sections headed “EM-PLOYEE ELECTIONS” and “EM-PLOYER ADMINISTRATIVE ANDNOTIFICATION REQUIREMENTS.”This information is required to assurecompliance with the new provisions ofthe Small Business Job Protection Act of1996. The collection of information is re-quired to obtain a benefit. The likely re-spondents are individuals, businesses orother for-profit institutions, and not-for-profit institutions.

The estimated total annual reportingburden is 75,000 hours. The estimatedannual burden per recordkeeper is 15minutes. The estimated number of re-spondents is 300,000. The estimated an-nual frequency of responses is on occa-sion.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.


The principal author of this notice isRoger Kuehnle of the Employee Plans Di-vision. For further information regarding

1998–2 I.R.B 35 January 12, 1998

this notice, please contact the EmployeePlans Division’s taxpayer assistance tele-phone service at (202) 622-6074/6075(not toll-free numbers), between the hoursof 1:30 and 3:30 p.m. Eastern Time, Mon-day through Thursday.

Rev. Proc. 98–10

26 CFR 601.201: Rulings and determination letters.(Also, Part I, § 412.)

Section 1. Purpose and Scope

This revenue procedure modifies Rev.Proc. 95–51, 1995–2 C.B. 431, whichprovides approval to change the fundingmethod (actuarial cost method) used for adefined benefit pension plan. Specifi-cally, this revenue procedure modifies § 3of Rev. Proc. 95–51 to provide approvalto change the asset valuation method toone of three additional methods and toprovide approval for certain changes invaluation software. This revenue proce-dure also clarifies and modifies other pro-visions of Rev. Proc. 95–51.

Section 2. Background

.01 Section 412(c)(5)(A) of the Inter-nal Revenue Code, as amended, and §302(c)(5)(A) of the Employee Retire-ment Income Security Act of 1974(ERISA), as amended, state that if thefunding method of a plan is changed, thenew funding method shall become effec-tive only if the change is approved by theSecretary.

.02 Section 1.412(c)(2)–1 of the In-come Tax Regulations generally providesthat a change in the actuarial valuationmethod used to value the assets of a plan isa change in funding method that requiresapproval under § 412(c)(5) of the Code.

.03 Rev. Proc. 95–51 provides ap-proval for certain changes in fundingmethod. Section 3 of Rev. Proc. 95–51provides approval for changes to 14 spe-cific methods including three asset valua-tion methods. Section 4 of Rev. Proc. 95–51 provides four special approvals forchanges. Section 5 of Rev. Proc. 95–51provides rules relating to the establish-ment and maintenance of amortizationbases upon changing methods. Section 6of Rev. Proc. 95–51 provides restrictionsunder the revenue procedure.

Section 3. Additional Approvals underRev. Proc. 95–51

.01 Section 3 of Rev. Proc. 95–51 (Ap-proval for Specified Changes) is modifiedby adding the following:

.15 Approval 15. Approval is grantedfor a change in asset valuation method tothe smoothed market value (without phase-in) described below, or to any alternativeformulation that is algebraically equivalentto this smoothed value. The asset valuedetermined under the method will be ad-justed to be no greater than 120% and noless than 80% of the fair market value de-fined in § 1.412(c)(2)–1(c).

Under this method, the actuarial valueof assets is equal to the market value ofassets less a decreasing fraction (i.e.,(n–1)/n, (n–2)/n, etc., where n equals thenumber of years in the smoothing period)of the gain or loss for each of the preced-ing n-1 years. The stated smoothing pe-riod may not exceed five (5) plan years.

Under this method, a gain or loss for ayear is determined by calculating the dif-ference between the expected value of theassets for the year and the market value ofthe assets at the valuation date. The ex-pected value of the assets for the year isthe market value of the assets at the valua-tion date for the prior year brought for-ward with interest at the valuation interestrate to the valuation date for the currentyear plus contributions minus benefit dis-bursements, all adjusted with interest atthe valuation rate to the valuation date forthe current year. If the expected value isless than the market value, the differenceis a gain. Conversely, if the expectedvalue is greater than the market value, thedifference is a loss.

For example, if the smoothing period isfive years, the actuarial value of the assetswill be the market value of the plan’s as-sets, with gains subtracted or losses addedat the rates described as follows:

(i) 4/5 of the prior year’s gain or loss(ii) 3/5 of the second preceding year’s

gain or loss(iii) 2/5 of the third preceding year’s

gain or loss(iv) 1/5 of the fourth preceding year’s

gain or loss.16 Approval 16. Approval is granted

for a change in asset valuation method tothe smoothed market value (with phase-in) described below, or to any alternative

formulation that is algebraically equiva-lent to this smoothed value. The assetvalue determined under the method willbe adjusted to be no greater than 120%and no less than 80% of the fair marketvalue defined in § 1.412(c)(2)–1(c).

In the first year this method is used theactuarial value of assets is equal to themarket value as of the valuation date. Ineach subsequent year, the smoothed valueis calculated in the same manner as in Ap-proval 15, except that the only gains orlosses recognized are those occurring inthe year of the change and in later years.The stated smoothing period may not ex-ceed five (5) plan years.

.17 Approval 17. Approval is grantedfor a change in asset valuation method tothe average value (as defined in§ 1.412(c)(2)–1(b)(7)), modified to usethe alternative phase-in as describedbelow, or to any alternative formulationthat is algebraically equivalent to this av-erage. The asset value determined underthe method will be adjusted to be nogreater than 120% and no less than 80%of the fair market value defined in§ 1.412(c)(2)–1(c).

In the first year this method is used, theactuarial value of assets is equal to themarket value. In the second year, the av-erage value is calculated in the same man-ner as in Approval 11, except that the av-eraging period is two years. In the thirdyear, the average value is calculated in thesame manner as in Approval 11, exceptthat the averaging period is three years.This process continues until the stated av-eraging period (not to exceed five years)is reached..02 Section 4 of Rev. Proc. 95-51 (Spe-cial Approvals) is modified to add a new§ 4.05 as follows:

.05 Approval for Change in ValuationSoftware

(1) Approval is granted for a change inmethod that results from a change in valu-ation software where all the conditions setforth in paragraphs (2) through (8) are sat-isfied. Note that certain changes in valua-tion software may not constitute changesin funding method. For example, the up-date of the valuation software to incorpo-rate the actual social security taxablewage base for the current year is not achange in funding method. Also, if all ofthe results of each specific computationare the same after the change in valuation

January 12, 1998 36 1998–2 I.R.B.

software, there is no change in fundingmethod.

(2) There has been a modification tothe computations in the valuation soft-ware or a different valuation software sys-tem has been used. Examples of modifi-cations to the computations in thevaluation software include a change fromcommutation functions to direct calcula-tion of actuarial values, changes in therounding conventions or changes to cor-rect errors or inefficiencies in the compu-tations. Examples of using a differentvaluation software system include achange in the spreadsheet software (e.g.,Lotus 1-2-3 to Excel) or a change in theactuarial software vendor.

(3) The underlying method is un-changed and is consistent with the infor-mation contained in the prior actuarialvaluation reports and prior Schedules B ofForm 5500.

(4) The modification to the computa-tions in the valuation software or the useof a different valuation software system isdesigned to produce results that are noless accurate than the results producedprior to the modification or change.

(5) The net charge to the funding stan-dard account for the year does not differfrom the net charge that would result ifthe valuation software had not beenchanged (all other factors being held con-stant) by more than two percent (2%).

(6) A change in valuation software re-quiring approval was not made for theprior plan year.

(7) Section 4.04 (Approval forTakeover Plans) of this revenue procedureis not applicable to the change.

(8) The effect of the change in methodis treated in the same manner as an expe-rience gain or loss, unless the actuarial as-sumptions are being changed, in whichcase the effect of the change in method istreated as part of the effect of the changein assumptions.

Section 4. Clarifications and Modifications of Rev. Proc. 95–51

.01 Section 3.11 of Rev. Proc. 95–51 isclarified to read as follows:

.11 Approval 11. Approval is grantedfor a change in asset valuation method tothe average value as defined in§ 1.412(c)(2)–1(b)(7) (which does nothave a phase-in), or to any alternative for-

mulation that is algebraically equivalentto this average value. The asset value de-termined under the method will be ad-justed to be no greater than 120% and noless than 80% of the fair market value de-fined in § 1.412(c)(2)–1(c).

For example, under § 1.412(c)(2)–1(b)(7), if the averaging period is fiveyears, the average value is based on thefair market value of assets in the currentyear and the adjusted values of assets forthe prior four years as provided in§ 1.412(c)(2)–1(b)(8). An alternative for-mulation which is algebraically equivalentto this method is one in which the averagevalue of assets is equal to the fair marketvalue on the valuation date, minus de-creasing fractions (4/5, 3/5, 2/5 and 1/5, inthis example) of the appreciation and de-preciation of the assets in each of the fourpreceding years. The stated averaging pe-riod may not exceed five (5) plan years..02 Section 3.11 of Rev. Proc. 95-51 isclarified to read as follows:

.12 Approval 12. Approval is grantedfor a change in asset valuation method tothe average value (as defined in§ 1.412(c)(2)–1(b)(7)), modified to use thephase-in described below, or to any alter-native formulation that is algebraicallyequivalent to this average value. The assetvalue determined under the method willbe adjusted to be no greater than 120%and no less than 80% of the fair marketvalue defined in § 1.412(c)(2)–1(c).

In the first year this method is used, theaverage value is calculated as in Approval11, except that the adjusted values for allbut the most recent prior year are replacedby the adjusted value for the most recentprior year. In the second year, the averageis calculated as in Approval 11, exceptthat the values for all but the most recenttwo prior years are replaced by the ad-justed value for the second most recentprior year. This process is continued untilvalues for all prior years in the averagingperiod are phased in. The stated averag-ing period may not exceed five (5) planyears. .03 Section 4.02(1) of Rev. Proc. 95-51 ismodified to read as follows:

(1) If a plan uses an individual aggre-gate funding method and an individualnormal cost becomes negative for a par-ticipant, approval is granted to re-allocateexcess assets to other participants in pro-portion to the present value of accrued

benefits, or in proportion to the accruedliability determined under the immediategain funding method described in § 3.01,§ 3.08 (only if the normal cost for a par-ticipant is determined as a level percent ofcompensation under the plan’s method),or § 3.09 (only if the normal cost for aparticipant is determined as a level dollaramount under the plan’s method) or inproportion to the allocated adjusted assetsprior to the reallocation. For this purpose,excess assets are defined as the excess, ifany, of the assets currently allocated tothe participant over the present value ofthe participant’s future benefits..04 Section 4.04(3) of Rev. Proc. 95–51is modified to read as follows:

(3) The method used by the new actu-ary is substantially the same as themethod used by the prior actuary, and isconsistent with the information containedin the prior actuarial valuation reports orprior Schedules B of Form 5500. Also,the method used by the new actuary mustbe applied to the prior year (using the as-sumptions of the prior actuary) and theabsolute value of each resulting differ-ence in normal cost, accrued liability (ifdirectly computed under the method) andactuarial value of assets, that is attribut-able to the change in cost method, doesnot exceed five percent (5%) of the re-spective amounts calculated by the prioractuary for that year..05 Section 5.01(2) (Creation of a Fund-ing Method Change Base) of Rev. Proc.95-51 is modified to read as follows:

Except in the case of a change to afunding method described in § 3.02,§ 3.03, § 3.04, or § 3.05, all existing basesshall be maintained and an amortizationbase shall be established equal to the dif-ference between the unfunded accrued li-ability under the new method and anamount equal to (A) the net sum of theoutstanding balances of all amortizationbases (including, when the precedingmethod was an immediate gain method,the gain or loss base for the immediatelypreceding period), treating credit bases asnegative bases, less (B) the credit balance(or plus the funding deficiency), if any, inthe funding standard account, less (C) thesum of (i) any existing accumulation ofadditional funding charges for prior planyears due to § 412(l), (ii) any existing ac-cumulation of additional interest chargesdue to late or unpaid quarterly install-

1998–2 I.R.B 37 January 12, 1998

ments for prior plan years and (iii) any ex-isting accumulation of additional interestcharges due to the amortization of priorfunding waivers (which sum can be foundon the Schedule B, for example, in 1997on Line 9q(4)), all adjusted for interest atthe valuation rate to the valuation date inthe plan year for which the change ismade. If this difference is a positive ornegative number, the resulting base willbe a charge base or a credit base, respec-tively. In the case of a change to a fund-ing method described in § 3.02, § 3.03,§ 3.04, or § 3.05, (a) the bases describedin paragraph (1) must be maintained, and(b) all amortization bases other than thosedescribed in paragraph (1) shall be con-sidered fully amortized..06 Section 5.01 of Rev. Proc. 95–51 ismodified by adding the following:

(5) If the funding method is beingchanged in accordance with the approvalprovided in § 4.01 (Approval to Antici-pate Scheduled Benefit Increases), nobase is established due solely to thechange in method. The entire increase inunfunded liability resulting from anticipa-tion of benefit increases scheduled to takeeffect during the term of the collectivebargaining agreement currently applica-ble to the plan is treated as resulting froma plan amendment and the base estab-lished in the funding standard account isamortized over a 30-year period. .07 Section 6.01(2) of Rev. Proc. 95–51(Administrator Approval) is modified toread as follows:

(2) This revenue procedure does notapply unless the plan administrator

(within the meaning of § 414(g)) or an au-thorized representative of the plan spon-sor indicates as part of the series Form5500 for the plan year for which thechange is effective that the plan adminis-trator or plan sponsor agrees to the changein funding method. However, in the caseof a change in funding method describedin § 4.01 (Approval to Anticipate Sched-uled Benefit Increases), the plan adminis-trator or authorized representative doesnot need to agree to the request..08 Section 6.02(3)(c) of Rev. Proc.95–51 (Four-year limitation on changes)is clarified and modified to read as fol-lows:

(c) The funding method is beingchanged in a way not described in (a) or(b), and a funding method change (otherthan a change for which approval is pro-vided by § 4 of this revenue procedure, ora change described in (a) or (b)) was madein any of the four (4) preceding plan years.

Section 5. Effective Date

.01 In general, this revenue procedureis effective for plan years commencing onor after January 1, 1997.

.02 For plan years beginning in 1997,§ 4.04(3) of Rev. Proc. 95–51 may be ap-plied as originally issued or as modifiedby § 4.04 of this revenue procedure.

.03 The modification made by § 4.05of this revenue procedure to § 5.01(2) ofRev. Proc. 95–51 (Creation of a fundingmethod change base) is effective only forplan years commencing on or after Janu-ary 1, 1998.

.04 If the funding method for the plan

was changed in accordance with § 4.01 ofRev. Proc. 95–51 (Approval to anticipatescheduled benefit increases) as originallyissued and the amortization period for theamortization base established as a resultof the method change was 10 years, theplan sponsor may either, (1) retain the 10year period, or (2) file an amended Sched-ule B for the year of the change and forany subsequent years reflecting a 30 yearamortization period for such base.

Section 6. Effect on Other RevenueProcedures

Rev. Proc. 95–51 is clarified and modi-fied.

Section 7. Comments RequestedConcerning Mergers

The Service requests written commentsconcerning potential standard proceduresthat can be used for a change in fundingmethod in connection with a plan spin-offor merger. Comments and informationshould be sent to: Commissioner of theInternal Revenue Service, Attention:CP:E:EP:A:1, Washington, DC 20224.

Drafting Information

The principal author of this revenueprocedure is Todd Newman of the Em-ployee Plans Division. For further infor-mation regarding this revenue procedure,call (202) 622-6076 between 2:30 and3:30 Eastern time (not a toll free number)Monday through Thursday. Mr. New-man’s number is (202) 622-6262 (also nota toll free number).

January 12, 1998 38 1998–2 I.R.B.January 12, 1998 38 1998–2 I.R.B.

Employee Plans; ExaminationGuidelines

Announcement 98–1The Internal Revenue Service has de-

veloped proposed examination guidelinesfor employee plans examiners to usewhen examining issues relating to em-ployer deductions under § 404 of the In-ternal Revenue Code and the minimumfunding standards under § 412. Theguidelines provide technical backgroundand guidance as to issues that should beconsidered during an examination. Theguidelines are not intended to be all inclu-sive, and may be modified based on spe-cific issues encountered by the examinersduring an examination.

As with earlier examination guidelines,the Service is seeking public commentson the proposed guidelines before theyare finalized for the Internal RevenueManual.

Copies of these guidelines have beenmade available to the tax reporting ser-vices. The guidelines are also availablefrom the Service. Requests for a copy ofthe examination guidelines may be sub-mitted in writing to the following address:

Internal Revenue ServiceAssistant Commissioner (Employee

Plans and Exempt Organizations)Attention: CP:E:EP:FC Room 2236 Washington, DC 20224Written comments on the guidelines

may be submitted to theabove address on or before April 13,

1998 to the above address.

Items of General Interest

Form 8023 To Replace Form8023–A

Announcement 98–2

New Form 8023, Election Under Sec-tion 338 for Corporations Making Quali-

fied Stock Purchases, is available. It re-places Form 8023–A, Corporate Quali-fied Stock Purchases. Taxpayers can usenew Form 8023 to make elections undersection 338 of the Internal Revenue Codewith respect to any qualified stock pur-chase (“QSP”) (as defined at section338(d)(3)) occurring after 1996. For elec-tions under section 338 with respect toany QSP occurring during 1997, taxpay-ers may use either the new Form 8023 orthe old Form 8023–A. New Form 8023can be downloaded from the Internet orthe Internal Revenue Information Ser-vices, using a computer and modem, orordered by telephone, as shown below.

Deletions from Cumulative Listof Organizations Contributionsto Which are Deductible UnderSection 170 of the Code

Announcement 98–3The names of organizations that no

longer qualify as organizations describedin section 170(c)(2) of the Internal Rev-enue Code of 1986 are listed below.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an orga-

nization ceases to qualify under section170(c)(2) if the organizaion has nottimely filed a suit for declaratory judg-ment under section 7428 and if the con-tributor (1) had knowledge of the revoca-tion of the ruling or determination letter,(2) was aware that such revocation wasimminent, or (3) was in part responsiblefor or was aware of the activities or omis-sions of the organization that broughtabout this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on January 12, 1998,and would end on the date the court firstdetermines that the organization is not de-scribed in section 170(c)(2) as more par-ticularly set forth in section 7428 (c)(1).For individual contributors, the maximumdeduction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that werethe basis for revocation.Bainbridge Women’s Club

Richmond, VAThere to Care, Inc.

Toledo, OH

Part IV. Items of General Interest

Request by— Number or Address

Internet: World Wide Web www.irs.ustreas.govFTP ftp.irs.ustreas.govTelnet iris.irs.ustreas.gov

Computer and 703-321-8020modem (modem settings are N,

8, 1)

Telephone 800-TAX-FORM(800-829-3676)

1998–2 I.R.B 39 January 12, 1998

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Proc..—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

January 12, 1998 40 1998–2 I.R.B.

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1997–27 through1997–52 will be found in Internal Revenue Bulletin1998–1, dated January 5, 1998.

Numerical Finding List1

Bulletin 1998–1

Revenue Procedures:

98–1, 1998–1 I.R.B. 198–2, 1998–1 I.R.B. 7498–3, 1998–1 I.R.B. 10098–4, 1998–1 I.R.B. 11398–5, 1998–1 I.R.B. 15598–6, 1998–1 I.R.B. 18398–7, 1998–1 I.R.B. 22298–8, 1998–1 I.R.B. 225

1998–2 I.R.B 41 January 12, 1998

Finding List of Current Action onPreviously Published Items1

Bulletin 1998–1

Revenue Procedures:

97–1Superseded by98–1, 1998–1 I.R.B. 7










1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1997–27 through 1997–52 will be found in InternalRevenue Bulletin 1998–1, dated January 5, 1998.

January 12, 1998 42 1998–2 I.R.B.

Notes

INTERNAL REVENUE BULLETINThe Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold

on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent ofDocuments when their subscriptions must be renewed.

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WE WELCOME COMMENTS ABOUT THEINTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, wewould be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.