[Federal Register Volume 60, Number 246 (Friday, December 22, 1995)]
[Proposed Rules]
[Pages 66531-66535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31006]



=======================================================================
-----------------------------------------------------------------------

[[Page 66532]]


DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[EE-35-95]
RIN 1545-AT82


Allocation of Accrued Benefits Between Employer and Employee 
Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that provide 
guidance on calculation of an employee's accrued benefit derived from 
the employee's contributions to a qualified defined benefit pension 
plan. These regulations are issued to reflect changes to the applicable 
law made by the Omnibus Budget Reconciliation Act of 1987 (OBRA '87) 
and the Omnibus Budget Reconciliation Act of 1989 (OBRA '89). OBRA '87 
and OBRA '89 amended the law to change the accumulation of employee 
contributions and the conversion of those accumulated contributions to 
employee-derived accrued benefits.

DATES: Written comments and requests for a public hearing must be 
received by March 21, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (EE-35-95), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (EE-35-95), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Janet A. 
Laufer, (202) 622-4606, concerning submissions, Michael Slaughter, 
(202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to regulations 
containing rules for computing an employee's accrued benefit derived 
from the employee's contributions to a qualified defined benefit 
pension plan. The proposed amendments reflect changes made to section 
411(c)(2) by the Omnibus Budget Reconciliation Act of 1987, Public Law 
100-203 (OBRA '87), and the Omnibus Budget Reconciliation Act of 1989, 
Public Law 101-239 (OBRA '89). OBRA '87 and OBRA '89 changed the 
interest rates used to accumulate an employee's contributions to normal 
retirement age. OBRA '89 also changed the manner in which the 
accumulated contributions are converted to an annual benefit payable at 
normal retirement age, and removed a limitation on the employee-derived 
accrued benefit contained in prior law.
    Section 411(c)(1) provides that an employee's accrued benefit 
derived from employer contributions as of any applicable date is the 
excess, if any, of the accrued benefit for the employee as of that date 
over the accrued benefit derived from contributions made by the 
employee as of that date. Section 411(c)(2)(B) provides that in the 
case of a defined benefit plan, the accrued benefit derived from 
contributions made by an employee as of any applicable date is the 
amount equal to the employee's contributions accumulated to normal 
retirement age using the interest rate(s) specified in section 
411(c)(2)(C), expressed as an actuarially equivalent annual benefit 
commencing at normal retirement age using an interest rate which would 
be used by the plan under section 417(e)(3), as of the determination 
date. If the employee-derived accrued benefit is determined with 
respect to a benefit other than an annual benefit in the form of a 
single life annuity (without ancillary benefits) commencing at normal 
retirement age, section 411(c)(3) requires that the employee-derived 
accrued benefit be the actuarial equivalent of the benefit determined 
under section 411(c)(2).
    Under section 411(c)(2)(C)(iii)(I), effective for plan years 
beginning after December 31, 1987, the interest rate used to accumulate 
an employee's contributions until the determination date is 120 percent 
of the Federal mid-term rate under section 1274 of the Internal Revenue 
Code (Code). For the period between the determination date and normal 
retirement age, section 411(c)(2)(C)(iii)(II) provides that the 
interest rate used to accumulate an employee's contributions is the 
interest rate which would be used under the plan under section 
417(e)(3) as of the determination date. As noted above, section 
411(c)(2)(B) provides that the interest rate which would be used under 
the plan under section 417(e)(3) as of the determination date also 
applies for purposes of converting the accumulated contributions to an 
annual benefit commencing at normal retirement age. The Retirement 
Protection Act of 1994, Public Law 103-465 (RPA '94) amended section 
417(e) to change the applicable interest rate under section 417(e)(3) 
and to specify the applicable mortality table under that section. 
Examples contained in Sec. 1.411(c)-1(c)(6) of these proposed 
regulations reflect a plan that has been amended to comply with the 
interest rate and mortality table specifications enacted in RPA '94.

Explanation of Provisions

1. Conversion Calculation

    Prior to OBRA '89, section 411(c)(2)(B) specified that the 
conversion factor to be used for purposes of computing the employee-
derived accrued benefit was 10 percent for a straight life annuity 
commencing at normal retirement age of 65 (i.e., multiply the 
accumulated contributions by .10), and that for other normal retirement 
ages the conversion factor was to be determined in accordance with 
regulations prescribed by the Secretary. Section 1.411(c)-1(c)(2) of 
the existing regulations provides that for normal retirement ages other 
than age 65, the conversion factor shall be the factor as determined by 
the Commissioner.
    Rev. Rul. 76-47 (1976-1 C.B. 109) sets forth in tabular form the 
conversion factors to be used for determining the accrued benefit 
derived from employee contributions when the normal retirement age 
under the plan is other than age 65 or when the normal form of benefit 
is other than a single life annuity (without ancillary benefits). Rev. 
Rul 76-47 further provides that where no standard factor is available, 
a conversion factor must be determined using an interest rate of 5 
percent and the UP-1984 mortality table (without age setback).
    OBRA '89 deleted the ten percent conversion factor in section 
411(c)(2)(B) and replaced it with the requirement that the accumulated 
contributions at normal retirement age be expressed as an annual 
benefit commencing at normal retirement age using an interest rate 
which would be used under the plan under section 417(e)(3) (as of the 
determination date). This change was effective retroactively to the 
effective date of the OBRA '87 provision relating to section 
411(c)(2)(C) (the first day of the first plan year beginning after 
December 31, 1987).
    To reflect the OBRA '89 amendments, these proposed regulations 
define appropriate conversion factor with respect to an accrued benefit 
expressed in the form of an annual benefit that is nondecreasing for 
the life of the participant as the present value of an annuity in the 
form of that annual benefit commencing at normal retirement age at a 
rate of $1 per year. This amount is to be computed using the interest 
rate and mortality table 

[[Page 66533]]
which would be used under the plan under section 417(e)(3) and 
Sec. 1.417(e)-1T. To reflect the post-OBRA '89 conversion factor 
definition and to conform to common actuarial practice, these proposed 
regulations would change the multiplied by language in Sec. 1.411(c)-
1(c)(1) to divided by.

2. Accumulated Contributions

    As added by the Employee Retirement Income Security Act of 1974 
(ERISA), section 411(c)(2)(C) provided that employee contributions were 
to be accumulated using a standard interest rate of 5 percent for years 
beginning on or after the effective date of that section. OBRA '87 
changed the interest rate under section 411(c)(2)(C) to 120 percent of 
the applicable Federal mid-term rate under section 1274 for plan years 
after 1987. OBRA '89 again amended section 411(c)(2)(C) to provide that 
120 percent of the applicable Federal mid-term rate under section 1274 
is to be used for accumulating contributions only up to the 
determination date. For the period from the determination date to 
normal retirement age, the interest rate which would be used under the 
plan under section 417(e)(3) (as of the determination date) must be 
used for accumulating contributions for the period from the 
determination date to normal retirement age. Accordingly, these 
proposed regulations would amend paragraph (3) of Sec. 1.411(c)-1(c) to 
reflect those rates. As stated above, RPA '94 amended section 417(e)(3) 
to change the applicable interest rate. See Sec. 1.417(e)-1T.

3. Determination Date

    Section 1.411(c)-1(c)(5)(i) defines the term determination date for 
purposes of section 411(c)(2)(C)(iii), in a case in which a participant 
will receive his or her entire accrued benefit derived from employee 
contributions in any one of the following forms (described in paragraph 
(c)(5)(ii)): an annuity that is substantially nonincreasing, 
substantially nonincreasing installment payments for a fixed number of 
years, or a single sum distribution. In such a case, the term 
determination date means the date on which distribution of such benefit 
commences. For this purpose, an annuity that is nonincreasing except 
for automatic increases to reflect increases in the consumer price 
index is considered to be an annuity that is substantially 
nonincreasing.
    Thus, for example, for purposes of section 411(c)(2)(C)(iii), in 
the case of a distribution of the employee's entire accrued benefit (or 
the employee's entire employee-derived accrued benefit) in the form of 
a nonincreasing single life annuity payable commencing either at normal 
retirement age or at early retirement age, the determination date is 
the date the annuity commences. Similarly, in the case of a single sum 
distribution of accumulated employee contributions (i.e., employee 
contributions plus interest computed at or above the section 411(c) 
required rates) upon termination of employment with a deferred annuity 
benefit derived solely from employer contributions, the determination 
date is the date of distribution of the single sum of accumulated 
employee contributions.
    Alternatively, the plan may provide that the determination date is 
the annuity starting date, as defined in Sec. 1.401(a)-20, Q&A-10.
    Under Sec. 1.411(c)-1(c)(5)(iii) of these regulations, where a 
participant will receive a distribution that is not described in 
paragraph (c)(5)(i), the determination date will be as provided by the 
Commissioner.

4. Elimination of Limitation on Employee-derived Accrued Benefit

    Prior to OBRA '89, section 411(c)(2)(E) of the Code limited the 
accrued benefit derived from employee contributions to the greater of 
(1) the employee's accrued benefit under the plan, or (2) the sum of 
the employee's mandatory contributions, without interest. Section 
7881(m)(1)(C) of OBRA '89 deleted that provision. Section 7881(m)(1)(D) 
of OBRA '89 added section 411(a)(7)(D) to the Code, which provides that 
the accrued benefit of an employee shall not be less than the amount 
determined under section 411(c)(2)(B) with respect to the employee's 
accumulated contributions. Accordingly, these proposed regulations 
delete the rule included in Sec. 1.411(c)-1(d) of the existing 
regulations, which reflects the pre-OBRA '89 rule.

5. Delegation of Authority

    Section 1.411(c)-1(d) of these proposed regulations provides that 
the Commissioner may prescribe additional guidance on calculating the 
accrued benefit derived from employer or employee contributions under a 
defined benefit plan.

Effective Date

    These amendments are proposed to be effective for plan years 
beginning on or after January 1, 1997. For example, assume that under a 
plan the employee's date of termination of employment is treated as the 
determination date, and distribution of the employee's entire employee-
derived accrued benefit (as determined under the terms of the plan then 
in effect) occurs or commences prior to the first day of the plan year 
beginning in 1997. In that case, with respect to interest credits under 
section 411(c)(2)(C)(iii) for plan years beginning after 1987, the 
Service will not treat the plan as having failed to satisfy the 
requirements of section 411(c), nor will it require that additional 
amounts be credited in the calculation of the employee-derived accrued 
benefit in order to satisfy the requirements of section 411(c) after 
final regulations become effective, merely because the date the 
employee's employment terminated was treated as the determination date, 
provided that interest is credited in accordance with section 
411(c)(2)(C)(iii)(I) for the period before the date the employee 
terminated employment and in accordance with section 
411(c)(2)(C)(iii)(II) thereafter.
    Once amendments to the regulations under Sec. 1.411(c)-1 are 
adopted in final form, the Service will obsolete or modify Rev. Rul. 
76-47, Rev. Rul. 78-202 (1978-2 C.B. 124) and Rev. Rul. 89-60 (1989-1 
C.B. 113) as necessary or appropriate.
    Taxpayers may rely on these proposed regulations for guidance 
pending the issuance of final regulations.

Special Analyses

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

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by a person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register. 

[[Page 66534]]


Drafting Information

    The principal author of these regulations is Janet A. Laufer, 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.411(c)-1 is amended by:
    1. Revising paragraphs (c)(1), (c)(2), and (c)(3), and by adding 
paragraphs (c)(5) and (c)(6).
    2. Revising paragraph (d).
    3. Adding paragraph (g).
    The additions and revisions read as follows:


Sec. 1.411(c)-1  Allocation of accrued benefits between employer and 
employee contributions.

* * * * *
    (c) Accrued benefit derived from mandatory employee contributions 
to a defined benefit plan--(1) General Rule. In the case of a defined 
benefit plan (as defined in section 414(j)), the accrued benefit 
derived from contributions made by an employee under the plan as of any 
applicable date in the form of an annual benefit commencing at normal 
retirement age and nondecreasing for the life of the participant is 
equal to the amount of the employee's accumulated contributions 
(determined under paragraph (c)(3) of this section) divided by the 
appropriate conversion factor with respect to that form of benefit 
(determined under paragraph (c)(2) of this section). Paragraph (e) of 
this section provides rules for actuarial adjustments where the benefit 
is to be determined in a form other than the form described in this 
paragraph (c)(1).
    (2) Appropriate conversion factor. For purposes of this paragraph, 
with respect to a form of annual benefit commencing at normal 
retirement age described in paragraph (c)(1), the term appropriate 
conversion factor means the present value of an annuity in the form of 
that annual benefit commencing at normal retirement age at a rate of $1 
per year, computed using an interest rate and mortality table which 
would be used under the plan under section 417(e)(3) and Sec. 1.417(e)-
1T (as of the determination date).
    (3) Accumulated contributions. For purposes of section 411(c) and 
this section, the term accumulated contributions means the total of--
    (i) All mandatory contributions made by the employee (determined 
under paragraph (c)(4) of this section);
    (ii) Interest (if any) on such contributions, computed at the rate 
provided by the plan to the end of the last plan year to which section 
411(a)(2) does not apply (by reason of the applicable effective dates);
    (iii) Interest on the sum of the amounts determined under 
paragraphs (c)(3)(i) and (ii) of this section compounded annually at 
the rate of 5 percent per annum from the beginning of the first plan 
year to which section 411(a)(2) applies (by reason of the applicable 
effective date) to the beginning of the first plan year beginning after 
December 31, 1987;
    (iv) Interest on the sum of the amounts determined under paragraphs 
(c)(3)(i) through (iii) of this section compounded annually at 120 
percent of the Federal mid-term rate(s) (as in effect under section 
1274(d) of the Internal Revenue Code for the first month of a plan 
year) for the period beginning with the first plan year beginning after 
December 31, 1987 and ending on the determination date; and
    (v) Interest on the sum of the amounts determined under paragraphs 
(c)(3)(i) through (iv) of this section compounded annually, using an 
interest rate which would be used under the plan under section 
417(e)(3) and Sec. 1.417(e)-1T (as of the determination date), from the 
determination date to the date on which the employee would attain 
normal retirement age.
* * * * *
    (5) Determination date--(i) For purposes of section 411(c) and this 
section, in a case in which a participant will receive his or her 
entire accrued benefit derived from employee contributions in any one 
of the forms described in paragraph (c)(5)(ii), the term determination 
date means the date on which distribution of such benefit commences. 
Alternatively, in such a case, the plan may provide that the 
determination date is the annuity starting date with respect to that 
benefit, as defined in Sec. 1.401(a)-20, Q&A-10.
    (ii) Paragraph (c)(5)(i) applies to the following forms: an annuity 
that is substantially nonincreasing (e.g., an annuity that is 
nonincreasing except for automatic increases to reflect increases in 
the consumer price index), substantially nonincreasing installment 
payments for a fixed number of years, or a single sum distribution.
    (iii) In a case in which a participant will receive a distribution 
that is not described in paragraph (c)(5)(i), the determination date 
will be as provided by the Commissioner.
    (6) Examples.

    (i) Facts. (A) In the following examples, Employer X maintains a 
qualified defined benefit plan that required mandatory employee 
contributions for 1987 and prior years, but not for years after 
1987. The plan year is the calendar year. The plan provides for a 
normal retirement age of 65 and for 100 percent vesting in the 
employer-derived portion of a participant's accrued benefit after 5 
years of service.
    (B) The terms of the plan provide that the normal form of 
benefit is a level monthly amount commencing at normal retirement 
age and payable for the life of the participant. A plan participant 
who elects not to receive benefits in the form of the qualified 
joint and survivor annuity provided by the plan may elect to receive 
a single-sum distribution of the present value of his or her accrued 
benefit upon termination of employment.
    (C) As of January 1, 1995, the plan was amended to provide that, 
for purposes of computing actuarially equivalent benefits, the 
single sum is calculated using the unisex version of the 1983 GAM 
mortality table (as provided in Revenue Ruling 95-6 (1995-1 C.B. 
80)), and interest at the rate equal to the annual rate of interest 
on 30-year Treasury securities for the first calendar month 
preceding the first day of the plan year during which the annuity 
starting date occurs.
    (D) Under the plan, employee contributions are accumulated at 3 
percent interest for plan years beginning before 1976, 5 percent 
interest for plan years beginning after 1975 and before 1988, and 
interest at 120 percent of the Federal mid-term rate (as in effect 
under section 1274(d) for the first month of the plan year) for plan 
years beginning after 1987 until the determination date. Under the 
plan, the determination date is defined as the annuity starting 
date. For the period from the determination date until the date on 
which the employee attains normal retirement age, interest is 
credited at the interest rate which would be used under the plan 
under section 417(e)(3) as of the determination date.
    (E) A, an unmarried participant, terminates employment with X on 
January 1, 1997 at age 56 with 15 years of service. As of December 
31, 1987, A's total accumulated mandatory employee contributions to 
the plan, including interest compounded annually at 5 percent for 
plan years beginning after 1975 and before 1988, equaled $3,021. A 
receives his or her accrued benefit in the form of an annual single 
life annuity commencing at normal retirement age. A's annuity 
starting date is January 1, 2006, and therefore the determination 
date is January 1, 2006. 

[[Page 66535]]

    (ii) Annuity at Normal Retirement Age--Determination of 
Employee-Derived and Total Plan Vested Accrued Benefit.
    Example 1.
    For purposes of this example, it is assumed that A's total 
accrued benefit under the plan in the normal form of benefit 
commencing at normal retirement age is $2,949 per year. A's benefit, 
as of January 1, 2006, would be determined as follows:
    (1) Determine A's total accrued benefit in the form of an annual 
single life annuity commencing at normal retirement age under the 
plan's formula ($2,949 per year payable at age 65).
    (2) Determine A's accumulated contributions with interest to 
January 1, 1997. As of December 31, 1987, A's accumulated 
contributions with interest under the plan provisions were $3,021. 
A's employee contributions are accumulated from December 31, 1987 to 
January 1, 1997 using 120 percent of the Federal mid-term rate under 
section 1274(d). This rate is 10.61 percent for 1988, 11.11 percent 
for 1989, 9.57 percent for 1990, 9.78 percent for 1991, 8.10 percent 
for 1992, 7.63 percent for 1993, 6.40 percent for 1994, and 9.54 
percent for 1995. It is assumed for purposes of this example that 
120 percent of the Federal mid-term rate is 7.00 percent for each 
year between 1996 and 2006, and that the 30-year Treasury rate for 
December 2005 is 8.00 percent. Thus, A's contributions accumulated 
to January 1, 1997, equal $6,480.
    (3) Determine A's accumulated contributions with interest to 
normal retirement age (January 1, 2006) using, for the 1996 plan 
year and for years until normal retirement age, 120 percent of the 
Federal mid-term rate under section 1274(d), which is assumed to be 
7.00 percent ($11,913).
    (4) Determine the accrued annual annuity benefit derived from 
A's contributions by dividing A's accumulated contributions 
determined in paragraph (3) of this Example 1 by the plan's 
appropriate conversion factor. The plan's appropriate conversion 
factor at age 65 is 9.196, and the accrued benefit derived from A's 
contributions would be $11,913 - 9.196 = $1,295.
    (5) Determine the accrued benefit derived from employer 
contributions as the excess, if any, of the employee's accrued 
benefit under the plan over the accrued benefit derived from 
employee contributions ($2,949-$1,295=$1,654 per year).
    (6) Determine the vested percentage of the accrued benefit 
derived from employer contributions under the plan's vesting 
schedule (100 percent).
    (7) Determine the vested accrued benefit derived from employer 
contributions by multiplying the accrued benefit derived from 
employer contributions by the vested percentage ($1,654  x  100 
percent = $1,654 per year).
    (8) Determine A's vested accrued benefit in the form of an 
annual single life annuity commencing at normal retirement age by 
adding the accrued benefit derived from employee contributions and 
the vested accrued benefit derived from employer contributions, the 
sum of paragraphs (4) and (7) of this Example 1 ($1,295 + $1,654 = 
$2,949 per year).
    Example 2.
    This example assumes the same facts as Example 1 except that A's 
total accrued benefit under the plan in the normal form of benefit 
commencing at normal retirement age is $1,000 per year. A's benefit, 
as of January 1, 2006, would be determined as follows:
    (1) Determine A's total accrued benefit in the form of an annual 
single life annuity commencing at normal retirement age under the 
plan's formula ($1,000 per year payable at age 65).
    (2) Determine A's accumulated contributions with interest to 
January 1, 1997 ($6,480 from paragraph 2 of Example 1).
    (3) Determine A's accumulated contributions with interest to 
normal retirement age (January 1, 2006) ($11,913 from paragraph 3 of 
Example 1).
    (4) Determine the accrued annual annuity benefit derived from 
A's contributions by dividing A's accumulated contributions 
determined in paragraph (3) of this Example 2 by the plan's 
appropriate conversion factor ($1,295 from paragraph 4 of Example 
1).
    (5) Determine the accrued benefit derived from employer 
contributions as the excess, if any, of the employee's accrued 
benefit under the plan over the accrued benefit derived from 
employee contributions. Because the accrued benefit derived from 
employee contributions ($1,295) is greater than the employee's 
accrued benefit under the plan ($1,000), the accrued benefit derived 
from employer contributions is zero, and A's vested accrued benefit 
in the form of an annual single life annuity commencing at normal 
retirement age is $1,295 per year.

    (d) Delegation to Commissioner. The Commissioner may prescribe 
additional guidance on calculating the accrued benefit derived from 
employee contributions under a defined benefit plan through publication 
in the Internal Revenue Bulletin of revenue rulings, notices, or other 
documents (see Sec. 601.601(d)(2) of this chapter).
* * * * *
    (g) Effective date. Paragraphs (c)(1), (c)(2), (c)(3), (c)(5), 
(c)(6) and (d) of this section are effective for plan years beginning 
on or after January 1, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-31006 Filed 12-21-95; 8:45 am]
BILLING CODE 4830-01-U