[Federal Register Volume 69, Number 114 (Tuesday, June 15, 2004)]
[Rules and Regulations]
[Pages 33288-33302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13475]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9130]
RIN 1545-BA60


Required Distributions From Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning required 
minimum distributions under section 401(a)(9) for defined benefit plans 
and annuity contracts providing benefits under qualified plans, 
individual retirement plans, and section 403(b) contracts. This 
document also contains a change to the separate account rules in the 
final regulations concerning

[[Page 33289]]

required minimum distributions for defined contribution plans. These 
final regulations provide the public with guidance necessary to comply 
with the law and will affect administrators of, participants in, and 
beneficiaries of qualified plans; institutions that sponsor and 
administer individual retirement plans, individuals who use individual 
retirement plans for retirement income, and beneficiaries of individual 
retirement plans; and employees for whom amounts are contributed to 
section 403(b) annuity contracts, custodial accounts, or retirement 
income accounts and beneficiaries of such contracts and accounts.

DATES: Effective Date: These regulations are effective June 15, 2004.
    Applicability Date: These regulations apply for purposes of 
determining required minimum distributions for calendar years beginning 
on or after January 1, 2003.

FOR FURTHER INFORMATION CONTACT: Cathy Vohs at (202) 622-6090.

SUPPLEMENTARY INFORMATION:

Background

    These final regulations amend 26 CFR part 1 relating to section 
401(a)(9). The regulations provide guidance on the minimum distribution 
requirements under section 401(a)(9) for plans qualified under section 
401(a) and for other arrangements that incorporate the section 
401(a)(9) rules by reference. The section 401(a)(9) rules are 
incorporated by reference in section 408(a)(6) and (b)(3) for 
individual retirement accounts and annuities (IRAs) (including Roth 
IRAs, except as provided in section 408A(c)(5)), section 403(b)(10) for 
section 403(b) annuity contracts, and section 457(d) for eligible 
deferred compensation plans.
    Section 401(a)(9) provides rules for distributions during the life 
of the employee in section 401(a)(9)(A) and rules for distributions 
after the death of the employee in section 401(a)(9)(B). Section 
401(a)(9)(A)(ii) provides that the entire interest of an employee in a 
qualified plan must be distributed, beginning not later than the 
employee's required beginning date, in accordance with regulations, 
over the life of the employee or over the lives of the employee and a 
designated beneficiary (or over a period not extending beyond the life 
expectancy of the employee and a designated beneficiary).
    Section 401(a)(9)(C) defines required beginning date for employees 
(other than 5-percent owners and IRA owners) as April 1 of the calendar 
year following the later of the calendar year in which the employee 
attains age 70\1/2\ or the calendar year in which the employee retires. 
For 5-percent owners and IRA owners, the required beginning date is 
April 1 of the calendar year following the calendar year in which the 
employee attains age 70\1/2\, even if the employee has not retired.
    Section 401(a)(9)(D) provides that (except in the case of a life 
annuity) the life expectancy of an employee and the employee's spouse 
that is used to determine the period over which payments must be made 
may be redetermined, but not more frequently than annually.
    Section 401(a)(9)(E) provides that the term designated beneficiary 
means any individual designated as a beneficiary by the employee.
    Section 401(a)(9)(F) provides that, under regulations prescribed by 
the Secretary, any amount paid to a child shall be treated as if it had 
been paid to the surviving spouse if such amount will be become payable 
to the surviving spouse upon such child reaching the age of majority 
(or other designated event permitted under regulations).
    Section 401(a)(9)(G) provides that any distribution required to 
satisfy the incidental death benefit requirement of section 401(a) is a 
required minimum distribution.
    Section 401(a)(9) also provides that, if the employee dies after 
distributions have begun, the employee's interest must be distributed 
at least as rapidly as under the method used by the employee.
    Section 401(a)(9) further provides that, if the employee dies 
before required minimum distributions have begun, the employee's 
interest must be either distributed (in accordance with regulations) 
over the life or life expectancy of the designated beneficiary with the 
distributions beginning no later than 1 year after the date of the 
employee's death, or distributed within 5 years after the death of the 
employee. However, under section 401(a)(9)(B)(iv), a surviving spouse 
may wait until the date the employee would have attained age 70\1/2\ to 
begin taking required minimum distributions.
    Comprehensive proposed regulations under section 401(a)(9) were 
first published in the Federal Register on July 27, 1987 (52 FR 28070) 
(EE-113-82). Those proposed regulations were amended in 1997 (62 FR 
67780) (REG-209463-82) to address the limited issue of the rules that 
apply when a trust is designated as an employee's beneficiary. 
Comprehensive proposed regulations were reproposed in the Federal 
Register on January 17, 2001 ((66 FR 3928) (REG-130477-00/REG-130481-
00)). The 2001 proposed regulations substantially revised and 
simplified the rules for defined contribution plans but maintained the 
basic structure for defined benefit plans and requested additional 
comments on the rules that should apply to those plans. With respect to 
annuity payments, the 2001 proposed regulations retained the basic 
structure of the 1987 proposed regulations and the preamble indicated 
that the IRS and Treasury were continuing to study these rules and 
specifically requested updated comments on current practices and issues 
relating to required minimum distributions from annuity contracts. 
Commentators on the 2001 proposed regulations provided information on 
the variety of annuity contracts being developed and available as 
insurance company products for purchase with separate accounts.
    Final and temporary regulations relating to required minimum 
distributions from qualified plans, individual retirement plans, and 
section 403(b) annuity contracts, custodial accounts, and retirement 
income accounts were published in the Federal Register on April 17, 
2002 (67 FR 18987). Proposed regulations that cross reference those 
temporary regulations were published in the Proposed Rules section of 
the Federal Register on April 17, 2002 ((67 FR 18834) (REG-108697-02)). 
The final and temporary regulations were effective with the 2003 
calendar year.
    The 2002 regulations finalized the rules for defined contribution 
plans and the basic rules regarding the determination of the required 
beginning date, determination of designated beneficiary and other 
general rules that apply to both defined benefit and defined 
contribution plans. The 2002 regulations also provided temporary 
regulations under Sec.  1.401(a)(9)-6T relating to minimum distribution 
requirements for defined benefit plans and annuity contracts purchased 
with an employee's account balance under a defined contribution plan. 
In response to the comments to the 2001 proposed regulations, the 
temporary regulations significantly expanded the situations in which 
annuity payments under annuity contracts purchased with an employee's 
benefit may provide for increasing payments, but this guidance was 
provided in proposed and temporary form rather than final form in order 
to give taxpayers an opportunity to comment on these changes.
    A public hearing was held on the temporary and proposed regulations 
on October 9, 2002. At the public hearing, and in comments on the 
temporary regulations, concerns were raised that

[[Page 33290]]

requiring compliance with certain of the rules in the temporary 
regulations in 2003 would not be appropriate. Many of the comments 
relate to restrictions on variable annuity payments, and certain other 
increasing annuity payments, set forth in A-1 of Sec.  1.401(a)(9)-6T. 
Commentators also requested additional guidance in applying the rule in 
A-12 of Sec.  1.401(a)(9)-6T that requires the entire interest under an 
annuity contract to include the actuarial value of other benefits (such 
as minimum survivor benefits) provided under the contract and that the 
rule requiring the inclusion of these values be delayed until the 
guidance is provided. Finally, commentators requested that special 
consideration be provided to governmental plans.
    In response to these comments and in order to provide adequate time 
to consider the issues raised, the IRS issued Notice 2003-2 (2003-1 
C.B. 257) which provided that, pending the issuance of further 
regulations, plans are permitted to satisfy certain requirements in the 
1987 or 2001 proposed regulations with respect to variable annuity 
payments in lieu of complying with the corresponding requirements in 
the 2002 temporary regulations, and that the entire interest under an 
annuity contract (including an annuity described in section 408(b) or 
section 403(b)) is permitted to be determined as the dollar amount 
credited to the employee or beneficiary without regard to the actuarial 
value of any other benefits (such as minimum survivor benefits) that 
will be provided under the contract. Notice 2003-2 also provided that, 
pending the issuance of further regulations under section 401(a)(9), 
governmental plans are only required to satisfy a reasonable and good 
faith interpretation of section 401(a)(9). Finally, Notice 2003-2 
provided that the transitional relief would continue at least through 
the year in which additional regulations are published, with a later 
effective date for certain governmental plans.
    In response to the comments received, these final regulations make 
a number of significant modifications to the proposed and temporary 
regulations and adopt the regulations as modified. They also make a 
minor modification to the rules in A-2 of Sec.  1.401(a)(9)-8 for 
separate accounts. These final regulations contain rules relating to 
minimum distribution requirements for defined benefit plans and annuity 
contracts purchased with an employee's account balance under a defined 
contribution plan. For purposes of this discussion of the background of 
the regulations in this preamble, as well as the explanation of 
provisions below, whenever the term employee is used, it is intended to 
include not only an employee but also an IRA owner.

Explanation of Provisions

Overview

    These final regulations retain the basic rules of the temporary 
regulations. For example, distributions of an employee's entire 
interest must be paid in the form of periodic annuity payments for the 
employee's or beneficiary's life (or the joint lives of the employee 
and beneficiary) or over a comparable period certain. The payments must 
be nonincreasing or only increase as provided in the regulations. As 
provided in the temporary regulations, the permitted increases under 
these final regulations include: adjustments to reflect increases in 
the cost of living; any increase in benefits pursuant to a plan 
amendment; a pop up in payments in the event of the death of the 
beneficiary or the divorce of the employee and spouse; or return of 
employee contributions upon an employee's death. In addition, for both 
annuity contracts purchased from insurance companies and annuities paid 
from section 401(a) qualified trusts, the regulations allow variable 
annuities and other regular increases, if certain conditions are 
satisfied. The regulations also allow changes in distribution form in 
certain circumstances.
    These regulations retain many rules from the temporary regulations 
without modification. These include, for example, rules regarding: the 
distribution of benefits that accrue after an employee's first 
distribution calendar year; the treatment of nonvested benefits; the 
actuarial increase to an employee's benefit that must be provided if 
the employee retires after the calendar year in which the employee 
attains age 70\1/2\; and benefits that commence in the form of an 
annuity prior to an employee's required beginning date.

Incidental Benefit Requirement

    The basic purpose of the incidental benefit rule is to ensure that 
the payments under the annuity are primarily to provide retirement 
benefits to the employee. These final regulations retain the basic rule 
in the temporary regulations that, if distributions commence under a 
distribution option that is in the form of a joint and survivor annuity 
where the beneficiary is not the employee's spouse, the incidental 
benefit requirement will not be satisfied unless the payments to the 
beneficiary as a percentage of the payments to the employee do not 
exceed the percentage provided in the table in the regulations. The 
percentage is based on the number of years that the employee's age 
exceeds the beneficiary's age, and the percentage decreases as the 
difference between the ages increases. This reflects the fact that the 
greater the number of years younger a beneficiary is than the employee, 
the greater the number of years of expected payments that will be made 
to the beneficiary after the death of the employee. Under the table in 
the temporary regulations, a plan may not provide a 100 percent 
survivor benefit to an employee's nonspouse beneficiary under a joint 
and survivor annuity if the beneficiary is more than 10 years younger 
than the employee. Some commentators suggested that an adjustment to 
the table is appropriate if the employee commences distributions before 
70\1/2\. This is because, in such a case, more payments are expected to 
be made while the employee is alive.
    In response to these comments, the final regulations provide that, 
if an employee's annuity starting date is at an age younger than age 
70, an adjustment is made to the employee/beneficiary age difference. 
This adjusted employee/beneficiary age difference is determined by 
decreasing the age difference by the number of years the employee is 
younger than age 70 at the annuity starting date. The effect of this 
change is to permit a higher percentage after an employee's death for 
employees who commence benefits at earlier ages. Thus, for an employee 
age 55 at the time of the employee's annuity starting date, a joint and 
100 percent survivor annuity can be provided if the survivor is not 
more than 25 years younger than the employee.

Increasing Annuities (Including Acceleration and Cost-of-Living 
Increases)

    These final regulations clarify that a plan may provide an annual 
increase that does not exceed the increase in an eligible cost-of-
living index for a 12-month period ending in the year during which the 
increase occurs or the prior year. An eligible cost-of-living index is 
a consumer price index (CPI) issued by the Bureau of Labor Statistics 
and based on prices of all items (or all items excluding food and 
energy), including an index for a population of consumers (such as 
urban consumers or urban wage earners and clerical workers) or 
geographic area or areas (such as a given metropolitan area or state).
    Under these regulations, a plan may provide for annual cost-of-
living increases, or may provide for less frequent cost-of-living 
increases that are

[[Page 33291]]

cumulative since the most recent increase (or the employee's annuity 
starting date, if later), as long as there is no actuarial increase to 
reflect having not provided increases in the interim years.
    For a plan that provides annual increases, but provides a ceiling 
on the annual increase, and thus does not allow a full cost-of-living 
increase in some years, the plan may allow an unused portion of the 
cost-of-living increase to be provided in a subsequent year when the 
ceiling exceeds the increase in the CPI for that year and still treat 
the increase in that subsequent year as an increase that does not 
exceed an eligible cost-of-living index.
    Finally, a plan can provide for annuity payments with a percentage 
adjustment based on the increase in compensation for the position held 
by the employee at the time of retirement. However, in the case of a 
nongovernmental plan, this form of adjustment is only permitted if it 
is provided under the terms of the plan as in effect on April 17, 2002.
    In addition to these permitted increases in the amount of annuity 
payments, the final regulations retain the rules in the temporary 
regulations allowing an annuity purchased from an insurance company 
with an employee's account balance under a defined contribution plan to 
provide for variable and increasing payments and clarify that these 
rules apply to an annuity contract purchased from an insurance company 
by a qualified trust for a defined benefit plan. For an annuity 
contract purchased from an insurance company, these final regulations 
retain the rule that the total expected future payments (disregarding 
any payment increases) as of the annuity starting date must exceed the 
premium being annuitized. This rule insures that annuity payments start 
at a high enough amount to prevent inappropriate deferral.
    In response to comments asking for more flexibility in the rules 
relating to changes in distribution amounts from an annuity contract 
purchased from an insurance company, the final regulations replace the 
rule permitting partial and complete withdrawals with a broader rule 
permitting all types of acceleration. The final regulations allow any 
method that retains the same rate of increase in future payments but 
results in the total future expected payments under the annuity 
(disregarding any future payment increases and including the amount of 
any payment made as a result of the acceleration) being decreased, 
thereby allowing acceleration in the form of a shorter period as well 
as through withdrawals. In addition, the requirement that a total 
withdrawal option be available has been eliminated.
    These final regulations also permit defined benefit plans under a 
qualified trust to provide variable or fixed-rate increasing annuities 
paid directly from the trust, but the control in the regulations on the 
rate of increase for these annuities is different. For these annuities, 
increases in payments solely to reflect better-than-assumed investment 
performance are permitted but only if the assumed interest rate for 
calculating the initial level of payments is at least 3 percent. 
Alternatively, fixed rate increases may be provided but only if the 
rate of increase is less than 5 percent. Paralleling the payment of the 
undistributed premium at death, the regulations allow a payment at 
death to the extent that the payments after annuitization are less than 
the present value of the employee's accrued benefit as of the annuity 
starting date calculated using the applicable interest and morality 
under section 417(e).
    The rule allowing an acceleration of payments under an annuity has 
not been extended to annuity payments from a qualified trust. However, 
as noted below, such plans are permitted to allow changes in form of 
distribution in certain specific circumstances as described below. In 
addition, if distribution is in the form of a joint and survivor 
annuity, the final regulations allow the survivor to convert the 
survivor annuity into a lump sum upon the death of the employee.

Permitted Changes in Form of Distribution

    Some commentators requested that employees and beneficiaries be 
permitted to change the form of future distributions in response to 
changed circumstances, such as upon retirement or death. In response to 
these comments, the regulations allow an employee or beneficiary to 
change the form of future distributions in a number of circumstances 
provided certain conditions are satisfied. First, if distribution is in 
the form of a period certain only annuity (i.e., an annuity with no 
life contingency), the individual may change the form of distribution 
prospectively at any time. The employee or beneficiary also is 
permitted to change the form of distribution prospectively upon an 
employee's actual retirement or upon plan termination, regardless of 
the form of annuity payments before retirement or plan termination. In 
addition, an employee may change to a qualified joint and survivor 
annuity in connection with marriage.
    In order to make these changes, the future payments must satisfy 
section 401(a)(9) (as though payments first commenced on the new 
annuity starting date, treating the actuarial value of the remaining 
payments as the employee's or beneficiary's entire interest). As a 
condition to changes in the form of distribution, whether under a 
period certain only annuity or a life contingent annuity, the stream of 
payments from the employee's original annuity starting date (both the 
payments before and after the change in form) must satisfy section 415 
using the interest rate assumption and applicable mortality table in 
effect as of the annuity starting date. In addition, the end point of 
the new period certain, if any, may not be later the end point 
available at the original annuity starting date. Furthermore, the plan 
must treat an individual electing a new form of distribution under 
these rules as having a new annuity starting date for purposes of 
sections 415 and 417. Thus, the payments under the new form must 
satisfy section 415 as of its new annuity starting date based on the 
applicable interest rate and applicable mortality table for that date, 
taking into account prior payments. Although not stated, for plans 
subject to section 411, any form of distribution or change in the form 
of distribution must not result in an impermissible forfeiture of 
benefits.
    A number of commentators requested that the final regulations 
provide the rule in prior proposed regulations that allowed minimum 
distributions from a defined benefit plan to be calculated using the 
rule for defined contribution plans in Sec.  1.401(a)(9)-5. The primary 
argument for allowing this level of flexibility in calculating 
distribution amounts from year to year is to allow employees to adjust 
to changed circumstances. The rules in these final regulations allowing 
a change in distribution form upon retirement or plan termination, and 
at any time when distribution is in the form of a term certain only, 
address this need.

Value of Guarantees in Determining Account Value Prior to Annuitization

    The final regulations retain the basic rule in the temporary 
regulations that, before annuitization, the defined contribution plan 
rules apply. For this purpose, an employee's entire interest under an 
annuity contract is the dollar amount credited to the employee or 
beneficiary under the contract plus the actuarial value of any 
additional benefits (such as survivor benefits in excess of the account 
balance) that will be provided under the contract. A number of 
commentators requested guidance on how this actuarial value is

[[Page 33292]]

calculated and indicated that, in certain circumstances it would be 
appropriate to disregard this additional value.
    The IRS and Treasury believe that it is generally appropriate to 
reflect the value of additional benefits under an annuity contract, 
just as the fair market value of all assets generally must be reflected 
in valuing an account balance under a defined contribution plan. 
However, in response to these comments, the final regulations allow the 
additional benefits to be disregarded when there is a pro-rata 
reduction in the additional benefits for any withdrawal, provided the 
actuarial present value of the additional benefits is not more than 20 
percent of the account balance. An example is provided that illustrates 
an acceptable method of determining the value of an additional benefit 
that is a guaranteed death benefit. In addition, an exception is 
provided for an additional benefit in the form of a guaranteed return 
of premiums upon death.

Certain Payments to Children

    The final regulations provide rules governing when, pursuant to 
section 401(a)(9)(F), payment of an employee's accrued benefit to a 
child may be treated as if such payments were made to a surviving 
spouse. Under the final regulations, payments under a defined benefit 
plan or annuity contract that are made to an employee's child until 
such child reaches the age of majority (or dies, if earlier) may be 
treated, for purposes of section 401(a)(9), as if such payments were 
made to the surviving spouse, provided they become payable to the 
surviving spouse upon cessation of the payments to the child. In 
addition, for this purpose, a child may be treated as having not 
reached the age of majority if the child has not completed a specified 
course of education and is under the age of 26, or so long as the child 
is disabled.

Governmental Plans

    A number of commentators raised concerns that governmental plans 
offer annuity distribution options that are not permitted under the 
temporary regulations. Most of the suggestions made by commentators on 
behalf of governmental plans were incorporated into the final 
regulations, such as expanding the list of acceptable COLAs; permitting 
lump sum distributions to beneficiaries; and providing for pop-up 
payments to a surviving spouse after the cessation of payments to a 
child.
    Nevertheless, some substantive changes recommended by or on behalf 
of governmental plans were not made in the final regulations. In light 
of the difficulties a governmental plan faces in changing its plan 
terms (e.g., in some states, the state constitution does not allow 
elimination of existing distribution options) and the public oversight 
of such plans, these final regulations provide a grandfather rule under 
which, in the case of an annuity distribution option provided under the 
terms of a governmental plan as in effect on April 17, 2002, the plan 
will not fail to satisfy section 401(a)(9) merely because the annuity 
payments do not satisfy the requirements set forth in these 
regulations. However, a grandfathered distribution option must satisfy 
the statutory requirements of section 401(a)(9), based on a reasonable 
and good faith interpretation of that section.
    This grandfather rule only applies to existing plan provisions. 
Otherwise, the regulations provide that annuity payments under 
governmental plans within the meaning of section 414(d) must satisfy 
the rules for nongovernmental plans. Thus, any new distribution option 
in a governmental plan or change in a distribution option must comply 
with the rules applicable to nongovernmental plans under these final 
regulations.

Separate Accounts Under Defined Contribution Plans

    Several comments have been received raising administrative concerns 
with the rule in the final regulations applicable to defined 
contribution plans that recognizes separate accounts for purposes of 
section 401(a)(9) only after the separate account is actually 
established. In particular, concerns have been raised that, for 
employees who die late in a calendar year, it is nearly impossible to 
set up separate accounts by the end of the year so that they can be 
used to determine required minimum distributions for the year after 
death. In response to these comments the regulations have been modified 
to provide that if separate accounts, determined as of an employee's 
date of death, are actually established by the end of the calendar year 
following the year of an employee's death, the separate accounts can be 
used to determine required minimum distributions for the year following 
the year of the employee's death. Under the separate account rules, 
post-death investment experience must be shared on a pro-rata basis 
until the date on which the separate accounts are actually established.

Effective Date

    As provided in the temporary and proposed regulations, these final 
regulations apply for purposes of determining required minimum 
distributions for calendar years beginning on or after January 1, 2003. 
However, in order to fulfill the commitment in Notice 2003-2 to allow 
plans to continue to use certain provisions from the pre-existing 
proposed regulations and to provide plan sponsors sufficient time to 
make any adjustments in their plans needed to comply with these 
regulations, a distribution from a defined benefit plan or annuity 
contract for calendar years 2003, 2004, and 2005 will not fail to 
satisfy section 401(a)(9) merely because the payments do not satisfy 
the rules in these final regulations, provided the payments satisfy 
section 401(a)(9) based on a reasonable and good faith interpretation 
of the provisions of section 401(a)(9). For a plan that satisfies the 
parallel provisions of the 1987 proposed regulations, the 2001 proposed 
regulations, the 2002 temporary and proposed regulations, or these 
final regulations, a distribution will be deemed to satisfy a 
reasonable good faith interpretation of section 401(a)(9).
    For governmental plans, this reasonable good faith standard extends 
to the end of the calendar year that contains the 90th day after the 
opening of the first legislative session of the legislative body with 
the authority to amend the plan that begins on or after June 15, 2004, 
if such 90th day is later than December 31, 2005.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Because Sec.  
1.401(a)(9)-6 imposes no new collection of information on small 
entities, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the proposed regulations preceding these 
regulations were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal authors of these regulations are Marjorie Hoffman and 
Cathy A. Vohs of the Office of the Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel

[[Page 33293]]

from the IRS and Treasury participated in the development of these 
regulations.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entry for ``Sec.  1.401(a)(9)-6T'' and adding an entry in numerical 
order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec.  1.401(a)(9)-6 is also issued under 26 U.S.C. 401(a)(9). * 
* *


0
Par. 2. Remove Sec.  1.401(a)(9)-6T'' and replace it with Sec.  
1.401(a)(9)-6'' each time it is used in the sections listed below:

Sec.  1.401(9)-0
Sec.  1.401(a)(9)-1 A-2(b)
Sec.  1.401(a)(9)-2 A-1(c)
Sec.  1.401(a)(9)-2 A-5
Sec.  1.401(a)(9)-2 A-6(a)
Sec.  1.401(a)(9)-3 A-1(a)
Sec.  1.401(a)(9)-3 A-1(b)
Sec.  1.401(a)(9)-3 A-6
Sec.  1.401(a)(9)-4 A-4(a)
Sec.  1.401(a)(9)-5 A-1(e)
Sec.  1.401(a)(9)-8 A-2(a)(3)
Sec.  1.401(a)(9)-8 A-6(b)(2)
Sec.  1.401(a)(9)-8 A-7
Sec.  1.401(a)(9)-8 A-8
Sec.  1.403(b)-3 A-1(c)(3)
Sec.  1.408-8 A-1(a)
Sec.  1.408-8 A-1(b)
Sec.  54.4974-2 A-3(a)
Sec.  54.4974-2 A-4(b)(2)(i)


0
Par. 3. Section 1.401(a)(9)-6 is added to read as follows:


Sec.  1.401(a)(9)-6  Required minimum distributions for defined benefit 
plans and annuity contracts.

    Q-1. How must distributions under a defined benefit plan be paid in 
order to satisfy section 401(a)(9)?
    A-1. (a) General rules. In order to satisfy section 401(a)(9), 
except as otherwise provided in this section, distributions of the 
employee's entire interest under a defined benefit plan must be paid in 
the form of periodic annuity payments for the employee's life (or the 
joint lives of the employee and beneficiary) or over a period certain 
that does not exceed the maximum length of the period certain 
determined in accordance with A-3 of this section. The interval between 
payments for the annuity must be uniform over the entire distribution 
period and must not exceed one year. Once payments have commenced over 
a period, the period may only be changed in accordance with A-13 of 
this section. Life (or joint and survivor) annuity payments must 
satisfy the minimum distribution incidental benefit requirements of A-2 
of this section. Except as otherwise provided in this section (such as 
permitted increases described in A-14 of this section), all payments 
(whether paid over an employee's life, joint lives, or a period 
certain) also must be nonincreasing.
    (b) Life annuity with period certain. The annuity may be a life 
annuity (or joint and survivor annuity) with a period certain if the 
life (or lives, if applicable) and period certain each meet the 
requirements of paragraph (a) of this A-1. For purposes of this 
section, if distributions are permitted to be made over the lives of 
the employee and the designated beneficiary, references to a life 
annuity include a joint and survivor annuity.
    (c) Annuity commencement. (1) Annuity payments must commence on or 
before the employee's required beginning date (within the meaning of A-
2 of Sec.  1.401(a)(9)-2). The first payment, which must be made on or 
before the employee's required beginning date, must be the payment 
which is required for one payment interval. The second payment need not 
be made until the end of the next payment interval even if that payment 
interval ends in the next calendar year. Similarly, in the case of 
distributions commencing after death in accordance with section 
401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or 
before the date determined under A-3(a) or (b) (whichever is 
applicable) of Sec.  1.401(a)(9)-3, must be the payment which is 
required for one payment interval. Payment intervals are the periods 
for which payments are received, e.g., bimonthly, monthly, semi-
annually, or annually. All benefit accruals as of the last day of the 
first distribution calendar year must be included in the calculation of 
the amount of annuity payments for payment intervals ending on or after 
the employee's required beginning date.
    (2) This paragraph (c) is illustrated by the following example:

    Example. A defined benefit plan (Plan X) provides monthly 
annuity payments of $500 for the life of unmarried participants with 
a 10-year period certain. An unmarried, retired participant (A) in 
Plan X attains age 70\1/2\ in 2005. In order to meet the 
requirements of this paragraph, the first monthly payment of $500 
must be made on behalf of A on or before April 1, 2006, and the 
payments must continue to be made in monthly payments of $500 
thereafter for the life and 10-year period certain.

    (d) Single sum distributions. In the case of a single sum 
distribution of an employee's entire accrued benefit during a 
distribution calendar year, the amount that is the required minimum 
distribution for the distribution calendar year (and thus not eligible 
for rollover under section 402(c)) is determined using either the rule 
in paragraph (d)(1) or the rule in paragraph (d)(2) of this A-1.
    (1) The portion of the single sum distribution that is a required 
minimum distribution is determined by treating the single sum 
distribution as a distribution from an individual account plan and 
treating the amount of the single sum distribution as the employee's 
account balance as of the end of the relevant valuation calendar year. 
If the single sum distribution is being made in the calendar year 
containing the required beginning date and the required minimum 
distribution for the employee's first distribution calendar year has 
not been distributed, the portion of the single sum distribution that 
represents the required minimum distribution for the employee's first 
and second distribution calendar years is not eligible for rollover.
    (2) The portion of the single sum distribution that is a required 
minimum distribution is permitted to be determined by expressing the 
employee's benefit as an annuity that would satisfy this section with 
an annuity starting date as of the first day of the distribution 
calendar year for which the required minimum distribution is being 
determined, and treating one year of annuity payments as the required 
minimum distribution for that year, and not eligible for rollover. If 
the single sum distribution is being made in the calendar year 
containing the required beginning date and the required minimum 
distribution for the employee's first distribution calendar year has 
not been made, the benefit must be expressed as an annuity with an 
annuity starting date as of the first day of the first distribution 
calendar year and the payments for the first two distribution calendar 
years would be treated as required minimum distributions, and not 
eligible for rollover.
    (e) Death benefits. The rule in paragraph (a) of this A-1, 
prohibiting increasing payments under an annuity applies to payments 
made upon the death of an employee. However, for purposes of this 
section, an ancillary death benefit described in this paragraph (e) may 
be disregarded in applying that rule. Such an ancillary death benefit 
is excluded in determining

[[Page 33294]]

an employee's entire interest and the rules prohibiting increasing 
payments do not apply to such an ancillary death benefit. A death 
benefit with respect to an employee's benefit is an ancillary death 
benefit for purposes of this A-1 if--
    (1) It is not paid as part of the employee's accrued benefit or 
under any optional form of the employee's benefit; and
    (2) The death benefit, together with any other potential payments 
with respect to the employee's benefit that may be provided to a 
survivor, satisfy the incidental benefit requirement of Sec.  1.401-
1(b)(1)(i).
    (f) Additional guidance. Additional guidance regarding how 
distributions under a defined benefit plan must be paid in order to 
satisfy section 401(a)(9) may be issued by the Commissioner in revenue 
rulings, notices, or other guidance published in the Internal Revenue 
Bulletin. See Sec.  601.601(d)(2)(ii)(b) of this chapter.
    Q-2. How must distributions in the form of a life (or joint and 
survivor) annuity be made in order to satisfy the minimum distribution 
incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the 
distribution component of the incidental benefit requirement of Sec.  
1.401-1(b)(1)(i)?
    A-2. (a) Life annuity for employee. If the employee's benefit is 
paid in the form of a life annuity for the life of the employee 
satisfying section 401(a)(9) without regard to the MDIB requirement, 
the MDIB requirement of section 401(a)(9)(G) will be satisfied.
    (b) Joint and survivor annuity, spouse beneficiary. If the 
employee's sole beneficiary, as of the annuity starting date for 
annuity payments, is the employee's spouse and the distributions 
satisfy section 401(a)(9) without regard to the MDIB requirement, the 
distributions to the employee will be deemed to satisfy the MDIB 
requirement of section 401(a)(9)(G). For example, if an employee's 
benefit is being distributed in the form of a joint and survivor 
annuity for the lives of the employee and the employee's spouse and the 
spouse is the sole beneficiary of the employee, the amount of the 
periodic payment payable to the spouse would not violate the MDIB 
requirement if it was 100 percent of the annuity payment payable to the 
employee, regardless of the difference in the ages between the employee 
and the employee's spouse.
    (c) Joint and survivor annuity, nonspouse beneficiary--(1) 
Explanation of rule. If distributions commence under a distribution 
option that is in the form of a joint and survivor annuity for the 
joint lives of the employee and a beneficiary other than the employee's 
spouse, the minimum distribution incidental benefit requirement will 
not be satisfied as of the date distributions commence unless under the 
distribution option, the annuity payments to be made on and after the 
employee's required beginning date will satisfy the conditions of this 
paragraph (c). The periodic annuity payment payable to the survivor 
must not at any time on and after the employee's required beginning 
date exceed the applicable percentage of the annuity payment payable to 
the employee using the table in paragraph (c)(2) of this A-2. The 
applicable percentage is based on the adjusted employee/beneficiary age 
difference. The adjusted employee/beneficiary age difference is 
determined by first calculating the excess of the age of the employee 
over the age of the beneficiary based on their ages on their birthdays 
in a calendar year. Then, if the employee is younger than age 70, the 
age difference determined in the previous sentence is reduced by the 
number of years that the employee is younger than age 70 on the 
employee's birthday in the calendar year that contains the annuity 
starting date. In the case of an annuity that provides for increasing 
payments, the requirement of this paragraph (c) will not be violated 
merely because benefit payments to the beneficiary increase, provided 
the increase is determined in the same manner for the employee and the 
beneficiary.
    (2) Table.

------------------------------------------------------------------------
                                                             Applicable
       Adjusted employee/beneficiary age difference          percentage
------------------------------------------------------------------------
10 years or less..........................................           100
11........................................................            96
12........................................................            93
13........................................................            90
14........................................................            87
15........................................................            84
16........................................................            82
17........................................................            79
18........................................................            77
19........................................................            75
20........................................................            73
21........................................................            72
22........................................................            70
23........................................................            68
24........................................................            67
25........................................................            66
26........................................................            64
27........................................................            63
28........................................................            62
29........................................................            61
30........................................................            60
31........................................................            59
32........................................................            59
33........................................................            58
34........................................................            57
35........................................................            56
36........................................................            56
37........................................................            55
38........................................................            55
39........................................................            54
40........................................................            54
41........................................................            53
42........................................................            53
43........................................................            53
44 and greater............................................            52
------------------------------------------------------------------------

    (3) Example. This paragraph (c) is illustrated by the following 
example:

    Example. Distributions commence on January 1, 2003 to an 
employee (Z), born March 1, 1937, after retirement at age 65. Z's 
daughter (Y), born February 5, 1967, is Z's beneficiary. The 
distributions are in the form of a joint and survivor annuity for 
the lives of Z and Y with payments of $500 a month to Z and upon Z's 
death of $500 a month to Y, i.e., the projected monthly payment to Y 
is 100 percent of the monthly amount payable to Z. Accordingly, 
under A-10 of this section, compliance with the rules of this 
section is determined as of the annuity starting date. The adjusted 
employee/beneficiary age difference is calculated by taking the 
excess of the employee's age over the beneficiary's age and 
subtracting the number of years the employee is younger than age 70. 
In this case, Z is 30 years older than Y and is commencing benefit 5 
years before attaining age 70 so the adjusted employee/beneficiary 
age difference is 25 years. Under the table in paragraph (c)(2) of 
this A-2, the applicable percentage for a 25-year adjusted employee/
beneficiary age difference is 66 percent. As of January 1, 2003 (the 
annuity starting date) the plan does not satisfy the MDIB 
requirement because, as of such date, the distribution option 
provides that, as of Z's required beginning date, the monthly 
payment to Y upon Z's death will exceed 66 percent of Z's monthly 
payment.

    (d) Period certain and annuity features. If a distribution form 
includes a period certain, the amount of the annuity payments payable 
to the beneficiary need not be reduced during the period certain, but 
in the case of a joint and survivor annuity with a period certain, the 
amount of the annuity payments payable to the beneficiary must satisfy 
paragraph (c) of this A-2 after the expiration of the period certain.
    (e) Deemed satisfaction of incidental benefit rule. Except in the 
case of distributions with respect to an employee's benefit that 
include an ancillary death benefit described in paragraph A-1(e) of 
this section, to the extent the incidental benefit requirement of Sec.  
1.401-1(b)(1)(i) requires a distribution, that requirement is deemed to 
be satisfied if distributions satisfy the minimum distribution 
incidental benefit requirement of this A-2. If the employee's benefits 
include an ancillary death benefit described in paragraph A-1(e) of 
this section, the benefits (including the ancillary death

[[Page 33295]]

benefit) must be distributed in accordance with the incidental benefit 
requirement described in Sec.  1.401-1(b)(1)(i) and the benefits 
(excluding the ancillary death benefit) must also satisfy the minimum 
distribution incidental benefit requirement of this A-2.
    Q-3. How long is a period certain under a defined benefit plan 
permitted to extend?
    A-3. (a) Distributions commencing during the employee's life. The 
period certain for any annuity distributions commencing during the life 
of the employee with an annuity starting date on or after the 
employee's required beginning date generally is not permitted to exceed 
the applicable distribution period for the employee (determined in 
accordance with the Uniform Lifetime Table in A-2 of Sec.  1.401(a)(9)-
9) for the calendar year that contains the annuity starting date. See 
A-10 of this section for the rule for annuity payments with an annuity 
starting date before the required beginning date. However, if the 
employee's sole beneficiary is the employee's spouse, the period 
certain is permitted to be as long as the joint life and last survivor 
expectancy of the employee and the employee's spouse, if longer than 
the applicable distribution period for the employee, provided the 
period certain is not provided in conjunction with a life annuity under 
A-1(b) of this section.
    (b) Distributions commencing after the employee's death. (1) If 
annuity distributions commence after the death of the employee under 
the life expectancy rule (under section 401(a)(9)(B)(iii) or (iv)), the 
period certain for any distributions commencing after death cannot 
exceed the applicable distribution period determined under A-5(b) of 
Sec.  1.401(a)(9)-5 for the distribution calendar year that contains 
the annuity starting date.
    (2) If the annuity starting date is in a calendar year before the 
first distribution calendar year, the period certain may not exceed the 
life expectancy of the designated beneficiary using the beneficiary's 
age in the year that contains the annuity starting date.
    Q-4. Will a plan fail to satisfy section 401(a)(9) merely because 
distributions are made from an annuity contract which is purchased from 
an insurance company?
    A-4. A plan will not fail to satisfy section 401(a)(9) merely 
because distributions are made from an annuity contract which is 
purchased with the employee's benefit by the plan from an insurance 
company, as long as the payments satisfy the requirements of this 
section. If the annuity contract is purchased after the required 
beginning date, the first payment interval must begin on or before the 
purchase date and the payment required for one payment interval must be 
made no later than the end of such payment interval. If the payments 
actually made under the annuity contract do not meet the requirements 
of section 401(a)(9), the plan fails to satisfy section 401(a)(9). See 
also A-14 of this section permitting certain increases under annuity 
contracts.
    Q-5. In the case of annuity distributions under a defined benefit 
plan, how must additional benefits that accrue after the employee's 
first distribution calendar year be distributed in order to satisfy 
section 401(a)(9)?
    A-5. (a) In the case of annuity distributions under a defined 
benefit plan, if any additional benefits accrue in a calendar year 
after the employee's first distribution calendar year, distribution of 
the amount that accrues in the calendar year must commence in 
accordance with A-1 of this section beginning with the first payment 
interval ending in the calendar year immediately following the calendar 
year in which such amount accrues.
    (b) A plan will not fail to satisfy section 401(a)(9) merely 
because there is an administrative delay in the commencement of the 
distribution of the additional benefits accrued in a calendar year, 
provided that the actual payment of such amount commences as soon as 
practicable. However, payment must commence no later than the end of 
the first calendar year following the calendar year in which the 
additional benefit accrues, and the total amount paid during such first 
calendar year must be no less than the total amount that was required 
to be paid during that year under A-5(a) of this section.
    Q-6. If a portion of an employee's benefit is not vested as of 
December 31 of a distribution calendar year, how is the determination 
of the required minimum distribution affected?
    A-6. In the case of annuity distributions from a defined benefit 
plan, if any portion of the employee's benefit is not vested as of 
December 31 of a distribution calendar year, the portion that is not 
vested as of such date will be treated as not having accrued for 
purposes of determining the required minimum distribution for that 
distribution calendar year. When an additional portion of the 
employee's benefit becomes vested, such portion will be treated as an 
additional accrual. See A-5 of this section for the rules for 
distributing benefits which accrue under a defined benefit plan after 
the employee's first distribution calendar year.
    Q-7. If an employee (other than a 5-percent owner) retires after 
the calendar year in which the employee attains age 70\1/2\, for what 
period must the employee's accrued benefit under a defined benefit plan 
be actuarially increased?
    A-7. (a) Actuarial increase starting date. If an employee (other 
than a 5-percent owner) retires after the calendar year in which the 
employee attains age 70\1/2\, in order to satisfy section 
401(a)(9)(C)(iii), the employee's accrued benefit under a defined 
benefit plan must be actuarially increased to take into account any 
period after age 70\1/2\ in which the employee was not receiving any 
benefits under the plan. The actuarial increase required to satisfy 
section 401(a)(9)(C)(iii) must be provided for the period starting on 
the April 1 following the calendar year in which the employee attains 
age 70\1/2\, or January 1, 1997, if later.
    (b) Actuarial increase ending date. The period for which the 
actuarial increase must be provided ends on the date on which benefits 
commence after retirement in an amount sufficient to satisfy section 
401(a)(9).
    (c) Nonapplication to plan providing same required beginning date 
for all employees. If, as permitted under A-2(e) of Sec.  1.401(a)(9)-
2, a plan provides that the required beginning date for purposes of 
section 401(a)(9) for all employees is April 1 of the calendar year 
following the calendar year in which the employee attains age 70\1/2\ 
(regardless of whether the employee is a 5-percent owner) and the plan 
makes distributions in an amount sufficient to satisfy section 
401(a)(9) using that required beginning date, no actuarial increase is 
required under section 401(a)(9)(C)(iii).
    (d) Nonapplication to governmental and church plans. The actuarial 
increase required under this A-7 does not apply to a governmental plan 
(within the meaning of section 414(d)) or a church plan. For purposes 
of this paragraph, the term church plan means a plan maintained by a 
church for church employees, and the term church means any church (as 
defined in section 3121(w)(3)(A)) or qualified church-controlled 
organization (as defined in section 3121(w)(3)(B)).
    Q-8. What amount of actuarial increase is required under section 
401(a)(9)(C)(iii)?
    A-8. In order to satisfy section 401(a)(9)(C)(iii), the retirement 
benefits payable with respect to an employee as of the end of the 
period for actuarial increases (described in A-7 of this section) must 
be no less than: the

[[Page 33296]]

actuarial equivalent of the employee's retirement benefits that would 
have been payable as of the date the actuarial increase must commence 
under paragraph (a) of A-7 of this section if benefits had commenced on 
that date; plus the actuarial equivalent of any additional benefits 
accrued after that date; reduced by the actuarial equivalent of any 
distributions made with respect to the employee's retirement benefits 
after that date. Actuarial equivalence is determined using the plan's 
assumptions for determining actuarial equivalence for purposes of 
satisfying section 411.
    Q-9. How does the actuarial increase required under section 
401(a)(9)(C)(iii) relate to the actuarial increase required under 
section 411?
    A-9. In order for any of an employee's accrued benefit to be 
nonforfeitable as required under section 411, a defined benefit plan 
must make an actuarial adjustment to an accrued benefit, the payment of 
which is deferred past normal retirement age. The only exception to 
this rule is that generally no actuarial adjustment is required to 
reflect the period during which a benefit is suspended as permitted 
under section 203(a)(3)(B) of the Employee Retirement Income Security 
Act of 1974 (ERISA) (88 Stat. 829). The actuarial increase required 
under section 401(a)(9)(C)(iii) for the period described in A-7 of this 
section is generally the same as, and not in addition to, the actuarial 
increase required for the same period under section 411 to reflect any 
delay in the payment of retirement benefits after normal retirement 
age. However, unlike the actuarial increase required under section 411, 
the actuarial increase required under section 401(a)(9)(C)(iii) must be 
provided even during any period during which an employee's benefit has 
been suspended in accordance with ERISA section 203(a)(3)(B).
    Q-10. What rule applies if distributions commence to an employee on 
a date before the employee's required beginning date over a period 
permitted under section 401(a)(9)(A)(ii) and the distribution form is 
an annuity under which distributions are made in accordance with the 
provisions of A-1 of this section?
    A-10. (a) General rule. If distributions commence to an employee on 
a date before the employee's required beginning date over a period 
permitted under section 401(a)(9)(A)(ii) and the distribution form is 
an annuity under which distributions are made in accordance with the 
provisions of A-1 of this section, the annuity starting date will be 
treated as the required beginning date for purposes of applying the 
rules of this section and Sec.  1.401(a)(9)-2. Thus, for example, the 
designated beneficiary distributions will be determined as of the 
annuity starting date. Similarly, if the employee dies after the 
annuity starting date but before the required beginning date determined 
under A-2 of Sec.  1.401(a)(9)-2, after the employee's death, the 
remaining portion of the employee's interest must continue to be 
distributed in accordance with this section over the remaining period 
over which distributions commenced. The rules in Sec.  1.401(a)(9)-3 
and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
    (b) Period certain. If, as of the employee's birthday in the year 
that contains the annuity starting date, the age of the employee is 
under 70, the following rule applies in applying the rule in paragraph 
(a) of A-3 of this section. The applicable distribution period for the 
employee is the distribution period for age 70, determined in 
accordance with the Uniform Lifetime Table in A-2 of Sec.  1.401(a)(9)-
9, plus the excess of 70 over the age of the employee as of the 
employee's birthday in the year that contains the annuity starting 
date.
    (c) Adjustment to employee/beneficiary age difference. See A-
2(c)(1) of this section for the determination of the adjusted employee/
beneficiary age difference in the case of an employee whose age on the 
annuity starting date is less than 70.
    Q-11. What rule applies if distributions commence to the surviving 
spouse of an employee over a period permitted under section 
401(a)(9)(B)(iii)(II) before the date on which distributions are 
required to commence and the distribution form is an annuity under 
which distributions are made as of the date distributions commence in 
accordance with the provisions of A-1 of this section.
    A-11.If distributions commence to the surviving spouse of an 
employee over a period permitted under section 401(a)(9)(B)(iii)(II) 
before the date on which distributions are required to commence and the 
distribution form is an annuity under which distributions are made as 
of the date distributions commence in accordance with the provisions of 
A-1 of this section, distributions will be considered to have begun on 
the actual commencement date for purposes of section 
401(a)(9)(B)(iv)(II). Consequently, in such case, A-5 of Sec.  
1.401(a)(9)-3 and section 401(a)(9)(B)(ii) and (iii) will not apply 
upon the death of the surviving spouse as though the surviving spouse 
were the employee. Instead, the annuity distributions must continue to 
be made, in accordance with the provisions of A-1 of this section, over 
the remaining period over which distributions commenced.
    Q-12. In the case of an annuity contract under an individual 
account plan that has not yet been annuitized, how is section 401(a)(9) 
satisfied with respect to the employee's or beneficiary's entire 
interest under the annuity contract for the period prior to the date 
annuity payments so commence?
    A-12. (a) General rule. Prior to the date that an annuity contract 
under an individual account plan is annuitized, the interest of an 
employee or beneficiary under that contract is treated as an individual 
account for purposes of section 401(a)(9). Thus, the required minimum 
distribution for any year with respect to that interest is determined 
under Sec.  1.401(a)(9)-5 rather than this section. See A-1 of Sec.  
1.401(a)(9)-5 for rules relating to the satisfaction of section 
401(a)(9) in the year that annuity payments commence and A-2(a)(3) of 
Sec.  1.401(a)(9)-8.
    (b) Entire interest. For purposes of applying the rules in Sec.  
1.401(a)(9)-5, the entire interest under the annuity contract as of 
December 31 of the relevant valuation calendar year is treated as the 
account balance for the valuation calendar year described in A-3 of 
Sec.  1.401(a)(9)-5. The entire interest under an annuity contract is 
the dollar amount credited to the employee or beneficiary under the 
contract plus the actuarial present value of any additional benefits 
(such as survivor benefits in excess of the dollar amount credited to 
the employee or beneficiary) that will be provided under the contract. 
However, paragraph (c) of this A-12 describes certain additional 
benefits that may be disregarded in determining the employee's entire 
interest under the annuity contract. The actuarial present value of any 
additional benefits described under this A-12 is to be determined using 
reasonable actuarial assumptions, including reasonable assumptions as 
to future distributions, and without regard to an individual's health.
    (c) Exclusions. (1) The actuarial present value of any additional 
benefits provided under an annuity contract described in paragraph (b) 
of this A-12 may be disregarded if the sum of the dollar amount 
credited to the employee or beneficiary under the contract and the 
actuarial present value of the additional benefits is no more than 120 
percent of the dollar amount credited to the employee or beneficiary 
under the

[[Page 33297]]

contract and the contract provides only for the following additional 
benefits:
    (i) Additional benefits that, in the case of a distribution, are 
reduced by an amount sufficient to ensure that the ratio of such sum to 
the dollar amount credited does not increase as a result of the 
distribution, and
    (ii) An additional benefit that is the right to receive a final 
payment upon death that does not exceed the excess of the premiums paid 
less the amount of prior distributions.
    (2) If the only additional benefit provided under the contract is 
the additional benefit described in paragraph (c)(1)(ii) of this A-14, 
the additional benefit may be disregarded regardless of its value in 
relation to the dollar amount credited to the employee or beneficiary 
under the contract.
    (3) The Commissioner in revenue rulings, notices, or other guidance 
published in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of 
this chapter) may provide additional guidance on additional benefits 
that may be disregarded.
    (d) Examples. The following examples, which use a 5 percent 
interest rate and the Mortality Table provided in Rev. Rul. 2001-62 
(2001-2 C.B. 632), illustrate the application of the rules in this A-
12:

    Example 1. (i) G is the owner of a variable annuity contract 
(Contract S) under an individual account plan which has not been 
annuitized. Contract S provides a death benefit until the end of the 
calendar year in which the owner attains the age of 84 equal to the 
greater of the current Contract S notional account value (dollar 
amount credited to G under the contract) and the largest notional 
account value at any previous policy anniversary reduced 
proportionally for subsequent partial distributions (High Water 
Mark). Contract S provides a death benefit in calendar years after 
the calendar year in which the owner attains age 84 equal to the 
current notional account value. Contract S provides that assets 
within the contract may be invested in a Fixed Account at a 
guaranteed rate of 2 percent. Contract S provides no other 
additional benefits.
    (ii) At the end of 2008, when G has an attained age of 78 and 9 
months the notional account value of Contract S (after the 
distribution for 2008 of 4.93% of the notional account value as of 
December 31, 2007) is $550,000, and the High Water Mark, before 
adjustment for any withdrawals from Contract S in 2008 is 
$1,000,000. Thus, Contract S will provide additional benefits (i.e. 
the death benefits in excess of the notional account value) through 
2014, the year S turns 84. The actuarial present value of these 
additional benefits at the end of 2008 is determined to be $84,300 
(15 percent of the notional account value). In making this 
determination, the following assumptions are made: on the average, 
deaths occur mid-year; the investment return on his notional account 
value is 2 percent per annum; and minimum required distributions 
(determined without regard to additional benefits under the Contract 
S) are made at the end of each year. The following table summarizes 
the actuarial methodology used in determining the actuarial present 
value of the additional benefit.

----------------------------------------------------------------------------------------------------------------
                                                    End-of-year                                     End-of-year
                                  Death  benefit     notional         Average     Withdrawal  at     notional
              Year                  during  year  account before     notional       end of year   account  after
                                                    withdrawal        account                        withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................      $1,000,000  ..............  ..............  ..............        $550,000
2009............................     \1\ 950,739    \2\ $561,000    \3\ $555,500     \4\ $28,205         532,795
2010............................         901,983         543,451         538,123          28,492         514,959
2011............................         853,749         525,258         520,109          28,769         496,490
2012............................         806,053         506,419         501,454          29,034         477,385
2013............................         758,916         486,933         482,159          29,287         457,645
2014............................         712,356         466,798         462,222          29,525        437,273
----------------------------------------------------------------------------------------------------------------
\1\ $1,000,000 death benefit reduced 4.93 percent for withdrawal during 2008.
\2\ Notional account value at end of prior year (after distribution) increased by 2 percent return for year.
\3\ Average of $550,000 notional account value at end of prior year (after distribution) and $561,000 notional
  account value at end of current year (before distribution).
\4\ December 31, 2008 notional account (before distribution) divided by uniform lifetime table age 79 factor of
  19.5.


----------------------------------------------------------------------------------------------------------------
                                                                                                    Discounted
                                                   Survivorship      Interest        Mortality      additional
                      Year                         to start  of    discount  to    rate  during      benefits
                                                       year        end  of 2008        year         within year
----------------------------------------------------------------------------------------------------------------
2008............................................  ..............  ..............  ..............  ..............
2009............................................         1.00000          .97590      \5\ .04426          17,070
2010............................................          .95574      \6\ .92943          .04946      \7\ 15,987
2011............................................      \8\ .90847          .88517          .05519          14,807
2012............................................          .85833          .84302          .06146          13,546
2013............................................          .80558          .80288          .06788          12,150
2014............................................          .75090          .76464          .07477          10,739
                                                                                                 ---------------
                                                  ..............  ..............  ..............        $84,300
----------------------------------------------------------------------------------------------------------------
\5\ One-quarter age 78 rate plus three-quarters age 79 rate.
\6\ Five percent discounted 18 months (1.05[caret](-1.5)).
\7\ Blended age 79/age 80 mortality rate (.04946) multiplied by the $363,860 excess of death benefit over the
  average notional account value (901,983 less 538,123) multiplied by .95574 probability of survivorship to the
  start of 2010 multiplied by 18 month interest discount of .92943.
\8\ Survivorship to start of preceding year (.95574) multiplied by probability of survivorship during prior year
  (1-.04946).

    (iii) Because Contract S provides that, in the case of a 
distribution, the value of the additional death benefit (which is 
the only additional benefit available under the contract) is reduced 
by an amount that is at least proportional to the reduction in the 
notional account value and, at age 78 and 9 months, the sum of the 
notional account value (dollar amount credited to the employee under 
the contract) and the actuarial present value of the additional 
death benefit is no more than 120 percent of the notional account 
value, the exclusion under paragraph (c)(2) of this A-12 is 
applicable for 2009. Therefore, for purposes

[[Page 33298]]

of applying the rules in Sec.  1.401(a)(9)-5, the entire interest 
under Contract S may be determined as the notional account value 
(i.e. without regard to the additional death benefit).
    Example 2. (i) The facts are the same as in (Example 1 except 
that the notional account value is $450,000 at the end of 2008. In 
this instance, the actuarial present value of the death benefit in 
excess of the notional account value in 2008 is determined to be 
$108,669 (24 percent of the notional account value). The following 
table summarizes the actuarial methodology used in determining the 
actuarial present value of the additional benefit.

----------------------------------------------------------------------------------------------------------------
                                                    End-of-year
                                                     notional         Average                       End-of-year
              Year                Death  benefit      account        notional     Withdrawal  at     notional
                                    during  year      before          account       end of year   account  after
                                                    withdrawal                                       withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................      $1,000,000  ..............  ..............  ..............        $450,000
2009............................         950,739        $459,000        $454,500         $23,077         435,923
2010............................         901,983         444,642         440,282          23,311         421,330
2011............................         853,749         429,757         425,543          23,538         406,219
2012............................         806,053         414,343         410,281          23,755         390,588
2013............................         758,916         398,399         394,494          23,962         374,437
2014............................         712,356         381,926         378,181          24,157         357,768
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                                                                    Discounted
                                                   Survivorship      Interest        Mortality      additional
                      Year                         to start  of    discount  to    rate  during      benefits
                                                       year        end  of 2008        year         within year
----------------------------------------------------------------------------------------------------------------
2008............................................  ..............  ..............  ..............  ..............
2009............................................         1.00000          .97590          .04426         $21,432
2010............................................          .95574          .92943          .04946          20,286
2011............................................          .90847          .88517          .05519          19,004
2012............................................          .85833          .84302          .06146          17,601
2013............................................          .80558          .80288          .06788          15,999
2014............................................          .75090          .76464          .07477          14,347
                                                                                                 ---------------
                                                  ..............  ..............  ..............        $108,669
----------------------------------------------------------------------------------------------------------------

    (ii) Because the sum of the notional account balance and the 
actuarial present value of the additional death benefit is more than 
120 percent of the notional account value, the exclusion under 
paragraph (b)(1) of this A-12 does not apply for 2009. Therefore, 
for purposes of applying the rules in Sec.  1.401(a)(9)-5, the 
entire interest under Contract S must include the actuarial present 
value of the additional death benefit.

    Q-13: When can an annuity payment period be changed?
    A-13. (a) In general. An annuity payment period may be changed in 
accordance with the provisions set forth in paragraph (b) of this A-13 
or in association with an annuity payment increase described in A-14 of 
this section.
    (b) Reannuitization. If, in a stream of annuity payments that 
otherwise satisfies section 401(a)(9), the annuity payment period is 
changed and the annuity payments are modified in association with that 
change, this modification will not cause the distributions to fail to 
satisfy section 401(a)(9) provided the conditions set forth in 
paragraph (c) of this A-13 are satisfied, and either--
    (1) The modification occurs at the time that the employee retires 
or in connection with a plan termination;
    (2) The annuity payments prior to modification are annuity payments 
paid over a period certain without life contingencies; or
    (3) The annuity payments after modification are paid under a 
qualified joint and survivor annuity over the joint lives of the 
employee and a designated beneficiary, the employee's spouse is the 
sole designated beneficiary, and the modification occurs in connection 
with the employee becoming married to such spouse.
    (c) Conditions. In order to modify a stream of annuity payments in 
accordance with paragraph (b) of this A-13, the following conditions 
must be satisfied--
    (1) The future payments under the modified stream satisfy section 
401(a)(9) and this section (determined by treating the date of the 
change as a new annuity starting date and the actuarial present value 
of the remaining payments prior to modification as the entire interest 
of the participant);
    (2) For purposes of sections 415 and 417, the modification is 
treated as a new annuity starting date;
    (3) After taking into account the modification, the annuity stream 
satisfies section 415 (determined at the original annuity starting 
date, using the interest rates and mortality tables applicable to such 
date); and
    (4) The end point of the period certain, if any, for any modified 
payment period is not later than the end point available under section 
401(a)(9) to the employee at the original annuity starting date.
    (d) Examples. For the following examples in this A-13, assume that 
the Applicable Interest Rate throughout the period from 2005 through 
2008 is 5 percent and throughout 2009 is 4 percent, the Applicable 
Mortality Table throughout the period from 2005 to 2009 is the table 
provided in Rev. Rul. 2001-62 (2001-C.B. 632) and the section 415 limit 
in 2005 at age 70 for a straight life annuity is $255,344:

    Example 1. (i) A participant (D), who has 10 years of 
participation in a frozen defined benefit plan (Plan W), attains age 
70\1/2\ in 2005. D is not retired and elects to receive 
distributions from Plan W in the form of a straight life (i.e. level 
payment) annuity with annual payments of $240,000 per year beginning 
in 2005 at a date when D has an attained age of 70. Plan W offers 
non-retired employees in pay status the opportunity to modify their 
annuity payments due to an associated change in the payment period 
at retirement. Plan W treats the date of the change in payment 
period as a new annuity starting date for the purposes of sections 
415 and 417. Thus, for example, the plan provides a new qualified 
and joint survivor annuity election and obtains spousal consent.

[[Page 33299]]

    (ii) Plan W determines modifications of annuity payment amounts 
at retirement such that the present value of future new annuity 
payment amounts (taking into account the new associated payment 
period) is actuarially equivalent to the present value of future 
pre-modification annuity payments (taking into account the pre-
modification annuity payment period). Actuarial equivalency for this 
purpose is determined using the Applicable Interest Rate and the 
Applicable Mortality Table as of the date of modification.
    (iii) D retires in 2009 at the age of 74 and, after receiving 
four annual payments of $240,000, elects to receive his remaining 
distributions from Plan W in the form of an immediate final lump sum 
payment (calculated at 4 percent interest) of $2,399,809.
    (iv) Because payment of retirement benefits in the form of an 
immediate final lump sum payment satisfies (in terms of form) 
section 401(a)(9), the condition under paragraph (c)(1) of this A-13 
is met.
    (v) Because Plan W treats a modification of an annuity payment 
stream at retirement as a new annuity starting date for purposes of 
sections 415 and 417, the condition under paragraph (c)(2) of this 
A-13 is met.
    (vi) After taking into account the modification, the annuity 
stream determined as of the original annuity starting date consists 
of annual payments beginning at age 70 of $240,000, $240,000, 
$240,000, $240,000, and $2,399,809. This benefit stream is 
actuarially equivalent to a straight life annuity at age 70 of 
$250,182, an amount less than the section 415 limit determined at 
the original annuity starting date, using the interest and mortality 
rates applicable to such date. Thus, the condition under paragraph 
(c)(3) of this A-13 is met.
    (vii) Thus, because a stream of annuity payments in the form of 
a straight life annuity satisfies section 401(a)(9), and because 
each of the conditions under paragraph (c) of this A-13 are 
satisfied, the modification of annuity payments to D described in 
this example meets the requirements under paragraph (c)(1) of this 
A-13.
    Example 2. The facts are the same as in Example 1 except that 
the straight life annuity payments are paid at a rate of $250,000 
per year and after D retires the lump sum payment at age 75 is 
$2,499,801. Thus, after taking into account the modification, the 
annuity stream determined as of the original annuity starting date 
consists of annual payments beginning at age 70 of $250,000, 
$250,000, $250,000, $250,000, and $2,499,801. This benefit stream is 
actuarially equivalent to a straight life annuity at age 70 of 
$260,606, an amount greater than the section 415 limit determined at 
the original annuity starting date, using the interest and mortality 
rates applicable to such date. Thus, the lump sum payment to D fails 
to satisfy the condition under paragraph (c)(3) of this A-13. 
Therefore, the lump sum payment to D fails to meet the requirements 
of this A-13 and thus fails to satisfy the requirements of section 
401(a)(9).
    Example 3. (i) A participant (E), who has 10 years of 
participation in a frozen defined benefit plan (Plan X), attains age 
70\1/2\ and retires in 2005 at a date when his attained age is 70. E 
elects to receive annual distributions from Plan X in the form of a 
27 year period certain annuity (i.e., a 27 year annuity payment 
period without a life contingency) paid at a rate of $37,000 per 
year beginning in 2005 with future payments increasing at a rate of 
4 percent per year (i.e., the 2006 payment will be $38,480, the 2007 
payment will be $40,019 and so on). Plan X offers participants in 
pay status whose annuity payments are in the form of a term-certain 
annuity the opportunity to modify their payment period at any time 
and treats such modifications as a new annuity starting date for the 
purposes of sections 415 and 417. Thus, for example, the plan 
provides a new qualified and joint survivor annuity election and 
obtains spousal consent.
    (ii) Plan X determines modifications of annuity payment amounts 
such that the present value of future new annuity payment amounts 
(taking into account the new associated payment period) is 
actuarially equivalent to the present value of future pre-
modification annuity payments (taking into account the pre-
modification annuity payment period). Actuarial equivalency for this 
purpose is determined using 5 percent and the Applicable Mortality 
Table as of the date of modification.
    (iii) In 2008, E, after receiving annual payments of $37,000, 
$38,480, and $40,019, elects to receive his remaining distributions 
from Plan W in the form of a straight life annuity paid with annual 
payments of $92,133 per year.
    (iv) Because payment of retirement benefits in the form of a 
straight life annuity satisfies (in terms of form) section 
401(a)(9), the condition under paragraph (c)(1) of this A-13 is met.
    (v) Because Plan X treats a modification of an annuity payment 
stream at retirement as a new annuity starting date for purposes of 
sections 415 and 417, the condition under paragraph (c)(2) of this 
A-13 is met.
    (vi) After taking into account the modification, the annuity 
stream determined as of the original annuity starting date consists 
of annual payments beginning at age 70 of $37,000, $38,480, $40,019, 
and a straight life annuity beginning at age 73 of $92,133. This 
benefit stream is equivalent to a straight life annuity at age 70 of 
$82,539, an amount less than the section 415 limit determined at the 
original annuity starting date, using the interest and mortality 
rates applicable to such date. Thus, the condition under paragraph 
(c)(3) of this A-13 is met.
    (vii) Thus, because a stream of annuity payments in the form of 
a straight life annuity satisfies section 401(a)(9), and because 
each of the conditions under paragraph (c) of this A-13 are 
satisfied, the modification of annuity payments to E described in 
this example meets the requirements of this A-13.

    Q-14. Are annuity payments permitted to increase?
    A-14. (a) General rules. Except as otherwise provided in this 
section, all annuity payments (whether paid over an employee's life, 
joint lives, or a period certain) must be nonincreasing or increase 
only in accordance with one or more of the following --
    (1) With an annual percentage increase that does not exceed the 
percentage increase in an eligible cost-of-living index as defined in 
paragraph (b) of this A-14 for a 12-month period ending in the year 
during which the increase occurs or the prior year;
    (2) With a percentage increase that occurs at specified times 
(e.g., at specified ages) and does not exceed the cumulative total of 
annual percentage increases in an eligible cost-of-living index as 
defined in paragraph (b) of this A-14 since the annuity starting date, 
or if later, the date of the most recent percentage increase. However, 
in cases providing such a cumulative increase, an actuarial increase 
may not be provided to reflect the fact that increases were not 
provided in the interim years;
    (3) To the extent of the reduction in the amount of the employee's 
payments to provide for a survivor benefit, but only if there is no 
longer a survivor benefit because the beneficiary whose life was being 
used to determine the period described in section 401(a)(9)(A)(ii) over 
which payments were being made dies or is no longer the employee's 
beneficiary pursuant to a qualified domestic relations order within the 
meaning of section 414(p);
    (4) To pay increased benefits that result from a plan amendment;
    (5) To allow a beneficiary to convert the survivor portion of a 
joint and survivor annuity into a single sum distribution upon the 
employee's death; or
    (6) To the extent increases are permitted in accordance with 
paragraph (c) or (d) of this A-14.
    (b) (1) For purposes of this A-14, an eligible cost-of-living index 
means an index described in paragraphs (b)(2), (b)(3), or (b)(4) of 
this A-14.
    (2) A consumer price index that is based on prices of all items (or 
all items excluding food and energy) and issued by the Bureau of Labor 
Statistics, including an index for a specific population (such as urban 
consumers or urban wage earners and clerical workers) and an index for 
a geographic area or areas (such as a given metropolitan area or 
state).
    (3) A percentage adjustment based on a cost-of-living index 
described in paragraph (b)(2) of this A-14, or a fixed percentage if 
less. In any year when the cost-of-living index is lower than the fixed 
percentage, the fixed percentage may be treated as an increase in an 
eligible cost-of-living index, provided it does not exceed the sum of:

[[Page 33300]]

    (i) The cost-of-living index for that year, and
    (ii) The accumulated excess of the annual cost-of-living index from 
each prior year over the fixed annual percentage used in that year 
(reduced by any amount previously utilized under this paragraph 
(b)(3)(ii)).
    (4) A percentage adjustment based on the increase in compensation 
for the position held by the employee at the time of retirement, and 
provided under either the terms of a governmental plan within the 
meaning of section 414(d) or under the terms of a nongovernmental plan 
as in effect on April 17, 2002.
    (c) Additional permitted increases for annuity payments under 
annuity contracts purchased from insurance companies. In the case of 
annuity payments paid from an annuity contract purchased from an 
insurance company, if the total future expected payments (determined in 
accordance with paragraph (e)(3) of this A-14) exceed the total value 
being annuitized (within the meaning of paragraph (e)(1) of this A-14) 
, the payments under the annuity will not fail to satisfy the 
nonincreasing payment requirement in A-1(a) of this section merely 
because the payments are increased in accordance with one or more of 
the following --
    (1) By a constant percentage, applied not less frequently than 
annually;
    (2) To provide a final payment upon the death of the employee that 
does not exceed the excess of the total value being annuitized (within 
the meaning of paragraph (e)(1) of this A-14) over the total of 
payments before the death of the employee;
    (3) As a result of dividend payments or other payments that result 
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if actuarial gain is measured no less frequently than 
annually and the resulting dividend payments or other payments are 
either paid no later than the year following the year for which the 
actuarial experience is measured or paid in the same form as the 
payment of the annuity over the remaining period of the annuity 
(beginning no later than the year following the year for which the 
actuarial experience is measured); and
    (4) An acceleration of payments under the annuity (within the 
meaning of paragraph (e)(4) of this A-14).
    (d) Additional permitted increases for annuity payments from a 
qualified trust. In the case of annuity payments paid under a defined 
benefit plan qualified under section 401(a) (other than annuity 
payments under an annuity contract purchased from an insurance company 
that satisfy paragraph (c) of this section), the payments under the 
annuity will not fail to satisfy the nonincreasing payment requirement 
in A-1(a) of this section merely because the payments are increased in 
accordance with one of the following--
    (1) By a constant percentage, applied not less frequently than 
annually, at a rate that is less than 5 percent per year;
    (2) To provide a final payment upon the death of the employee that 
does not exceed the excess of the actuarial present value of the 
employee's accrued benefit (within the meaning of section 411(a)(7)) 
calculated as the annuity starting date using the applicable interest 
rate and the applicable mortality table under section 417(e) (or, if 
greater, the total amount of employee contributions) over the total of 
payments before the death of the employee; or
    (3) As a result of dividend payments or other payments that result 
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if--
    (i) Actuarial gain is measured no less frequently than annually;
    (ii) The resulting dividend payments or other payments are either 
paid no later than the year following the year for which the actuarial 
experience is measured or paid in the same form as the payment of the 
annuity over the remaining period of the annuity (beginning no later 
than the year following the year for which the actuarial experience is 
measured);
    (iii) The actuarial gain taken into account is limited to actuarial 
gain from investment experience;
    (iv) The assumed interest used to calculate such actuarial gains is 
not less than 3 percent; and
    (v) The payments are not increasing by a constant percentage as 
described in paragraph (d)(1) of this A-14.
    (e) Definitions. For purposes of this A-14, the following 
definitions apply--
    (1) Total value being annuitized means--
    (i) In the case of annuity payments under a section 403(a) annuity 
plan or under a deferred annuity purchased by a section 401(a) trust, 
the value of the employee's entire interest (within the meaning of A-12 
of this section) being annuitized (valued as of the date annuity 
payments commence);
    (ii) In the case of annuity payments under an immediate annuity 
contract purchased by a trust for a defined benefit plan qualified 
under section 401(a), the amount of the premium used to purchase the 
contract; and
    (iii) In the case of a defined contribution plan, the value of the 
employee's account balance used to purchase an immediate annuity under 
the contract.
    (2) Actuarial gain means the difference between an amount 
determined using the actuarial assumptions (i.e., investment return, 
mortality, expense, and other similar assumptions) used to calculate 
the initial payments before adjustment for any increases and the amount 
determined under the actual experience with respect to those factors. 
Actuarial gain also includes differences between the amount determined 
using actuarial assumptions when an annuity was purchased or commenced 
and such amount determined using actuarial assumptions used in 
calculating payments at the time the actuarial gain is determined.
    (3) Total future expected payments means the total future payments 
expected to be made under the annuity contract as of the date of the 
determination, calculated using the Single Life Table in A-1 of Sec.  
1.401(a)(9)-9 (or, if applicable, the Joint and Last Survivor Table in 
A-3 of in Sec.  1.401(a)(9)-9) for annuitants who are still alive, 
without regard to any increases in annuity payments after the date of 
determination, and taking into account any remaining period certain.
    (4) Acceleration of payments means a shortening of the payment 
period with respect to an annuity or a full or partial commutation of 
the future annuity payments. An increase in the payment amount will be 
treated as an acceleration of payments in the annuity only if the total 
future expected payments under the annuity (including the amount of any 
payment made as a result of the acceleration) is decreased as a result 
of the change in payment period.
    (f) Examples. Paragraph (c) of this A-14 is illustrated by the 
following examples:

    Example 1. Variable annuity. A retired participant (Z1) in 
defined contribution plan X attains age 70 on March 5, 2005, and 
thus, attains age 70\1/2\ in 2005. Z1 elects to purchase annuity 
Contract Y1 from Insurance Company W in 2005. Contract Y1 is a 
single life annuity contract with a 10-year period certain. Contract 
Y1 provides for an initial annual payment calculated with an assumed 
interest rate (AIR) of 3 percent. Subsequent payments are determined 
by multiplying the prior year's payment by a fraction the numerator 
of which is 1 plus the actual return on the separate account assets 
underlying Contract Y1 since the preceding payment and the 
denominator of which is 1 plus the AIR during that period. The value 
of Z1's account balance in Plan X at the time of purchase is 
$105,000, and the purchase price of Contract Y1 is $105,000. 
Contract Y1 provides Z1 with an initial payment of

[[Page 33301]]

$7,200 at the time of purchase in 2005. The total future expected 
payments to Z1 under Contract Y1 are $122,400, calculated as the 
initial payment of $7,200 multiplied by the age 70 life expectancy 
of 17 provided in the Single Life Table in A-1 of Sec.  1.401(a)(9)-
9. Because the total future expected payments on the purchase date 
exceed the total value used to purchase Contract Y1 and payments may 
only increase as a result of actuarial gain, with such increases, 
beginning no later than the next year, paid in the same form as the 
payment of the annuity over the remaining period of the annuity, 
distributions received by Z1 from Contract Y1 meet the requirements 
under paragraph (c)(3) of this A-14.
    Example 2. Participating annuity. A retired participant (Z2) in 
defined contribution plan X attains age 70 on May 1, 2005, and thus, 
attains age 70\1/2\ in 2005. Z2 elects to purchase annuity Contract 
Y2 from Insurance Company W in 2005. Contract Y2 is a participating 
single life annuity contract with a 10-year period certain. Contract 
Y2 provides for level annual payments with dividends paid in a lump 
sum in the year after the year for which the actuarial experience is 
measured or paid out levelly beginning in the year after the year 
for which the actuarial gain is measured over the remaining lifetime 
and period certain, i.e., the period certain ends at the same time 
as the original period certain. Dividends are determined annually by 
the Board of Directors of Company W based upon a comparison of 
actual actuarial experience to expected actuarial experience in the 
past year. The value of Z2's account balance in Plan X at the time 
of purchase is $265,000, and the purchase price of Contract Y2 is 
$265,000. Contract Y2 provides Z2 with an initial payment of $16,000 
in 2005. The total future expected payments to Z2 under Contract Y2 
are calculated as the annual initial payment of $16,000 multiplied 
by the age 70 life expectancy of 17 provided in the Single Life 
Table in A-1 of Sec.  1.401(a)(9)-9 for a total of $272,000. Because 
the total future expected payments on the purchase date exceeds the 
total value used to purchase Contract Y2 and payments may only 
increase as a result of actuarial gain, with such increases, 
beginning no later than the next year, paid in the same form as the 
payment of the annuity over the remaining period of the annuity, 
distributions received by Z2 from Contract Y2 meet the requirements 
under paragraph (c)(3) of this A-14.
    Example 3. Participating annuity with dividend accumulation. The 
facts are the same as in Example 2 except that the annuity provides 
a dividend accumulation option under which Z2 may defer receipt of 
the dividends to a time selected by Z2. Because the dividend 
accumulation option permits dividends to be paid later than the end 
of the year following the year for which the actuarial experience is 
measured or as a stream of payments that only increase as a result 
of actuarial gain, with such increases beginning no later than the 
next year, paid in the same form as the payment of the annuity over 
the remaining period of the annuity in Example 2, the dividend 
accumulation option does not meet the requirements of paragraph 
(c)(3) of this A-14. Neither does the dividend accumulation option 
fit within any of the other increases described in paragraph (c) of 
this A-14. Accordingly, the dividend accumulation option causes the 
contract, and consequently any distributions from the contract, to 
fail to meet the requirements of this A-14 and thus fail to satisfy 
the requirements of section 401(a)(9).
    Example 4. Participating annuity with dividends used to purchase 
additional death benefits. The facts are the same as in Example 2 
except that the annuity provides an option under which actuarial 
gain under the contract is used to provide additional death benefit 
protection for Z2. Because this option permits payments as a result 
of actuarial gain to be paid later than the end of the year 
following the year for which the actuarial experience is measured or 
as a stream of payments that only increase as a result of actuarial 
gain, with such increases beginning no later than the next year, 
paid in the same form as the payment of the annuity over the 
remaining period of the annuity in Example 2, the option does not 
meet the requirements of paragraph (c)(3) of this A-14. Neither does 
the option fit within any of the other increases described in 
paragraph (c) of this A-14. Accordingly, the addition of the option 
causes the contract, and consequently any distributions from the 
contract, to fail to meet the requirements of this A-14 and thus 
fail to satisfy the requirements of section 401(a)(9).
    Example 5. Annuity with a fixed percentage increase. A retired 
participant (Z3) in defined contribution plan X attains age 70\1/2\ 
in 2005. Z3 elects to purchase annuity contract Y3 from Insurance 
Company W. Contract Y3 is a single life annuity contract with a 20-
year period certain (which does not exceed the maximum period 
certain permitted under A-3(a) of this section) with fixed annual 
payments increasing 3 percent each year. The value of Z3's account 
balance in Plan X at the time of purchase is $110,000, and the 
purchase price of Contract Y3 is $110,000. Contract Y3 provides Z3 
with an initial payment of $6,000 at the time of purchase in 2005. 
The total future expected payments to Z3 under Contract Y3 are 
$120,000, calculated as the initial annual payment of $6,000 
multiplied by the period certain of 20 years. Because the total 
future expected payments on the purchase date exceed the total value 
used to purchase Contract Y3 and payments only increase as a 
constant percentage applied not less frequently than annually, 
distributions received by Z3 from Contract Y3 meet the requirements 
under paragraph (c)(1) of this A-14.
    Example 6. Annuity with excessive increases. The facts are the 
same as in Example 5 except that the initial payment is $5,400 and 
the annual rate of increase is 4 percent. In this example, the total 
future expected payments are $108,000, calculated as the initial 
payment of $5,400 multiplied by the period certain of 20 years. 
Because the total future expected payments are less than the total 
value of $110,000 used to purchase Contract Y3, distributions 
received by Z3 do not meet the requirements under paragraph (c) of 
this A-14 and thus fail to meet the requirements of section 
401(a)(9).
    Example 7. Annuity with full commutation feature. (i) A retired 
participant (Z4) in defined contribution Plan X attains age 78 in 
2005. Z4 elects to purchase Contract Y4 from Insurance Company W. 
Contract Y4 provides for a single life annuity with a 10 year period 
certain (which does not exceed the maximum period certain permitted 
under A-3(a) of this section) with annual payments. Contract Y4 
provides that Z4 may cancel Contract Y4 at any time before Z4 
attains age 84, and receive, on his next payment due date, a final 
payment in an amount determined by multiplying the initial payment 
amount by a factor obtained from Table M of Contract Y4 using the 
Y4's age as of Y4's birthday in the calendar year of the final 
payment. The value of Z4's account balance in Plan X at the time of 
purchase is $450,000, and the purchase price of Contract Y4 is 
$450,000. Contract Y4 provides Z4 with an initial payment in 2005 of 
$40,000. The factors in Table M are as follows:

------------------------------------------------------------------------
                    Age at final payment                        Factor
------------------------------------------------------------------------
79.........................................................         10.5
80.........................................................         10.0
81.........................................................          9.5
82.........................................................          9.0
83.........................................................          8.5
84.........................................................          8.0
------------------------------------------------------------------------

    (ii) The total future expected payments to Z4 under ContractY4 
are $456,000, calculated as the initial payment of 40,000 multiplied 
by the age 78 life expectancy of 11.4 provided in the Single Life 
Table in A-1 of Sec.  1.401(a)(9)-9. Because the total future 
expected payments on the purchase date exceed the total value being 
annuitized (i.e., the $450,000 used to purchase Contract Y4), the 
permitted increases set forth in paragraph (c) of this A-14 are 
available. Furthermore, because the factors in Table M are less than 
the life expectancy of each of the ages in the Single Life Table 
provided in A-1 of Sec.  1.401(a)(9)-9, the final payment is always 
less than the total future expected payments. Thus, the final 
payment is an acceleration of payments within the meaning of 
paragraph (c)(4) of this A-14.
    (iii) As an illustration of the above, if Participant Z4 were to 
elect to cancel Contract Y4 on the day before he was to attain age 
84, his contractual final payment would be $320,000. This amount is 
determined as $40,000 (the annual payment amount due under Contract 
Y4) multiplied by 8.0 (the factor in Table M for the next payment 
due date, age 84). The total future expected payments under Contract 
Y4 at age 84 before the final payment is $324,000, calculated as the 
initial payment amount multiplied by 8.1, the age 84 life expectancy 
provided in the Single Life Table in A-1 of Sec.  1.401(a)(9)-9. 
Because $320,000 (the total future expected payments under the 
annuity contract, including the amount of the final payment) is less 
than $324,000 (the total future expected payments under the annuity 
contract, determined before the election), the final payment is an 
acceleration of payments within the meaning of paragraph (c)(4) of 
this A-14.

[[Page 33302]]

    Example 8. Annuity with partial commutation feature. (i) The 
facts are the same as in Example 7 except that the annuity provides 
Z4 may request, at any time before Z4 attains age 84, an ad hoc 
payment on his next payment due date with future payments reduced by 
an amount equal to the ad hoc payment divided by the factor obtained 
from Table M (from Example 7) corresponding to Z4's age at the time 
of the ad hoc payment. Because, at each age, the factors in Table M 
are less than the corresponding life expectancies in the Single Life 
Table in A-1 of Sec.  1.401(a)(9)-9, total future expected payments 
under Contract Y4 will decrease after an ad hoc payment. Thus, ad 
hoc distributions received by Z4 from Contract Y4 will satisfy the 
requirements under paragraph (c)(4) of this A-4.
    (ii) As an illustration of paragraph (i) of this Example 8, if 
Z4 were to request, on the day before he was to attain age 84, an ad 
hoc payment of $100,000 on his next payment due date, his 
recalculated annual payment amount would be reduced to $27,500. This 
amount is determined as $40,000 ( the amount of Z4's next annual 
payment) reduced by $12,500 (his $100,000 ad hoc payment divided by 
the Table M factor at age 84 of 8.0). Thus, Z4's total future 
expected payments after the ad hoc payment (and including the ad hoc 
payment) are equal to $322,750 ($100,000 plus $27,500 multiplied by 
the Single Life Table value of 8.1). Note that this $322,750 amount 
is less than the amount of Z4's total future expected payments 
before the ad hoc payment ($324,000, determined as $40,000 
multiplied by 8.1), and the requirements under paragraph (c)(4) of 
this A-4 are be satisfied.
    Example 9. Annuity with excessive increases. (i) A retired 
participant (Z5) in defined contribution plan X attains age 70\1/2\ 
in 2005. Z5 elects to purchase annuity Contract Y5 from Insurance 
Company W in 2005 with a premium of $1,000,000. Contract Y5 is a 
single life annuity contract with a 20-year period certain. Contract 
Y5 provides for an initial payment of $200,000, a second payment one 
year from the time of purchase of $40,000, and 18 succeeding annual 
payments each increasing at a constant percentage rate of 4.5 
percent from the preceding payment.
    (ii) Contract Y5 fails to meet the requirements of section 
401(a)(9) because the total future expected payments without regard 
to any increases in the annuity payment, calculated as $200,000 in 
year one and $40,000 in each of years two through twenty, is only 
$960,000 (i.e., an amount that does not exceed the total value used 
to purchase the annuity).

    Q-15: Are there special rules applicable to payments made under a 
defined benefit plan or annuity contract to a surviving child?
    A-15: Yes, pursuant to section 401(a)(9)(F), payments under a 
defined benefit plan or annuity contract that are made to an employee's 
child until such child reaches the age of majority (or dies, if 
earlier) may be treated, for purposes of section 401(a)(9), as if such 
payments were made to the surviving spouse to the extent they become 
payable to the surviving spouse upon cessation of the payments to the 
child. For purposes of the preceding sentence, a child may be treated 
as having not reached the age of majority if the child has not 
completed a specified course of education and is under the age of 26. 
In addition, a child who is disabled within the meaning of section 
72(m)(7) when the child reaches the age of majority may be treated as 
having not reached the age of majority so long as the child continues 
to be disabled. Thus, when payments described in this paragraph A-15 
become payable to the surviving spouse because the child attains the 
age of majority, recovers from a disabling illness, dies, or completes 
a specified course of education, there is not an increase in benefits 
under A-1 of this section. Likewise, the age of child receiving such 
payments is not taken into consideration for purposes of the minimum 
incidental benefit requirement of A-2 of this section.
    Q-16: Will a governmental plan within the meaning of section 414(d) 
fail to satisfy section 401(a)(9) if annuity payments under the plan do 
not satisfy this section?
    A-16: (a) Except as provided in paragraph (b) of this A-16, annuity 
payments under a governmental plan within the meaning of section 414(d) 
must satisfy this section.
    (b) In the case of an annuity distribution option provided under 
the terms of a governmental plan as in effect on April 17, 2002, the 
plan will not fail to satisfy section 401(a)(9) merely because the 
annuity payments do not satisfy the requirements A-1 through A-15 of 
this section, provided the distribution option satisfies section 
401(a)(9) based on a reasonable and good faith interpretation of the 
provisions of section 401(a)(9).
    Q-17: What are the rules for determining required minimum 
distributions for defined benefit plans and annuity contracts for 
calendar years 2003, 2004, and 2005?
    A-17: A distribution from a defined benefit plan or annuity 
contract for calendar years 2003, 2004, and 2005 will not fail to 
satisfy section 401(a)(9) merely because the payments do not satisfy A-
1 through A-16 of this section, provided the payments satisfy section 
401(a)(9) based on a reasonable and good faith interpretation of the 
provisions of section 401(a)(9). For governmental plans, this 
reasonable good faith standard extends to the end of the calendar year 
that contains the 90th day after the opening of the first legislative 
session of the legislative body with the authority to amend the plan 
that begins on or after June 15, 2004, if such 90th day is later than 
December 31, 2005.


Sec.  1.401(a)(9)-6T  [Removed]

0
Par. 4. Section 1.401(a)(9)-6T is removed.

0
Par. 5. In Sec.  1.401(a)(9)-8 A-2, the first sentence in paragraph 
(a)(2) is revised to read as follows:


Sec.  1.401(a)(9)-8  Special rules.

* * * * *
    A-2(a) * * *
    (2) If the employee's benefit in a defined contribution plan is 
divided into separate accounts and the beneficiaries with respect to 
one separate account differ from the beneficiaries with respect to the 
other separate accounts of the employee under the plan, for years 
subsequent to the calendar year containing the date as of which the 
separate accounts were established, or date of death if later, such 
separate account under the plan is not aggregated with the other 
separate accounts under the plan in order to determine whether the 
distributions from such separate account under the plan satisfy section 
401(a)(9). * * *
* * * * *

    Approved: June 1, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-13475 Filed 6-14-04; 8:45 am]
BILLING CODE 4830-01-P