[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]
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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.
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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