[Federal Register Volume 81, Number 175 (Friday, September 9, 2016)]
[Rules and Regulations]
[Pages 62359-62365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21393]
[[Page 62359]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9783]
RIN 1545-BJ55
Modifications to Minimum Present Value Requirements for Partial
Annuity Distribution Options Under Defined Benefit Pension Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations providing guidance
relating to the minimum present value requirements applicable to
certain defined benefit pension plans. These regulations change the
regulations regarding the minimum present value requirements for
defined benefit plan distributions to permit plans to simplify the
treatment of certain optional forms of benefit that are paid partly in
the form of an annuity and partly in a single sum or other more
accelerated form. These regulations affect participants, beneficiaries,
sponsors, and administrators of defined benefit pension plans.
DATES:
Effective date: These regulations are effective on September 9,
2016.
Applicability date: These regulations apply to distributions with
annuity starting dates in plan years beginning on or after on or after
January 1, 2017. In addition, a taxpayer can elect to apply these
regulations with respect to any earlier period.
FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu or Linda S. F. Marshall
at (202) 317-6700 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 417(e) of the Internal Revenue Code (Code).
These final regulations amend Sec. 1.417(e)-1 of the Treasury
regulations.
Section 401(a)(11) of the Code provides that, in order for a
defined benefit plan to qualify under section 401(a), and except as
provided under section 417, in the case of a vested participant who
does not die before the annuity starting date, the accrued benefit
payable to such participant must be provided in the form of a qualified
joint and survivor annuity (QJSA), as defined in section 417(b).
Section 417(e)(1) provides that a plan may provide that the present
value of a QJSA or a qualified preretirement survivor annuity (QPSA),
as defined in 417(c), will be immediately distributed if that present
value does not exceed the amount that can be distributed without the
participant's consent under section 411(a)(11). Section 417(e)(2)
provides that, if the present value of the QJSA or QPSA exceeds the
amount that can be distributed without the participant's consent under
section 411(a)(11), then a plan may immediately distribute the present
value of that annuity only if the participant and the spouse of the
participant (or if the participant has died, the surviving spouse)
consent in writing to the distribution.
Section 417(e)(3)(A) provides that the present value shall not be
less than the present value calculated by using the applicable
mortality table and the applicable interest rate.\1\ Section
417(e)(3)(B) and (C) define the terms ``applicable mortality table''
and ``applicable interest rate,'' respectively.
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\1\ Under section 411(a)(11)(B), the same applicable mortality
table and applicable interest rate are used for purposes of
determining whether the present value of a participant's
nonforfeitable accrued benefit exceeds the maximum amount that can
be immediately distributed without the participant's consent.
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Section 411(a)(13) of the Code, as added by section 701(b) of PPA
'06, provides that an ``applicable defined benefit plan,'' as defined
by section 411(a)(13)(C), is not treated as failing to meet the
requirements of section 417(e) with respect to accrued benefits derived
from employer contributions solely because the present value of a
participant's accrued benefit (or any portion thereof) may be, under
the terms of the plan, equal to the amount expressed as the
hypothetical account balance or as an accumulated percentage of such
participant's final average compensation.
Section 411(d)(6)(B) provides that a plan amendment that has the
effect of eliminating or reducing an early retirement benefit or a
retirement-type subsidy, or eliminating an optional form of benefit,
with respect to benefits attributable to service before the amendment
is treated as impermissibly reducing accrued benefits. However, the
last sentence of section 411(d)(6)(B) provides that the Secretary may
by regulations provide that section 411(d)(6)(B) does not apply to a
plan amendment that eliminates an optional form of benefit (other than
a plan amendment that has the effect of eliminating or reducing an
early retirement benefit or a retirement-type subsidy).
Final regulations under section 417 relating to the QJSA and QPSA
requirements were issued on August 22, 1988. The final regulations were
amended on April 3, 1998, to reflect changes enacted by the Uruguay
Round Agreements Act, Public Law 103-465 (108 Stat. 4809 (1994)).
Section 1.417(e)-1(d)(1) provides that a defined benefit plan
generally must provide that the present value of any accrued benefit
and the amount of any distribution, including a single sum, must not be
less than the amount calculated using the specified applicable interest
rate and the specified applicable mortality table. The present value of
any optional form of benefit cannot be less than the present value of
the accrued benefit determined in accordance with the preceding
sentence.
Section 1.417(e)-1(d)(6) provides an exception from the minimum
present value requirements of section 417(e) and Sec. 1.417(e)-1(d).
This exception applies to the amount of a distribution paid in the form
of an annual benefit that either does not decrease during the life of
the participant (or, in the case of a QPSA, the life of the
participant's spouse), or that decreases during the life of the
participant merely because of the death of the survivor annuitant (but
only if the reduction is to a level not below 50 percent of the annual
benefit payable before the death of such survivor annuitant) or the
cessation or reduction of Social Security supplements or qualified
disability benefits.
Sections 204(g) and 205(g) of the Employee Retirement Income
Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as
amended (ERISA), contain rules that are parallel to Code sections
411(d)(6) and 417(e), respectively. Under section 101 of Reorganization
Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has
interpretive jurisdiction over the subject matter addressed in these
regulations for purposes of ERISA, as well as the Code. Thus, these
regulations apply for purposes of the Code and the corresponding
provisions of ERISA.
In the case of a defined benefit plan that offers a single-sum
distribution or other form of accelerated distribution as an optional
form of benefit in addition to the required QJSA, many participants
have been reluctant to elect lifetime payments to insure against
unexpected longevity, choosing instead an accelerated distribution form
in order to maximize their liquidity. However, participants who elect a
single sum or other accelerated form of distribution may face greater
challenges in protecting against the risk of outliving their retirement
savings. The Treasury Department and the IRS believe that
[[Page 62360]]
many participants are better served by having the opportunity to elect
to receive a portion of their retirement benefits in annuity form
(which provides financial protection against unexpected longevity)
while receiving accelerated payments for the remainder of their
benefits to provide increased liquidity during retirement.
In order to permit plans to simplify the treatment of certain
optional forms of benefit that are paid partly in the form of an
annuity and partly in a more accelerated form, the IRS issued proposed
regulations under section 417(e)(3) (77 FR 5454) on February 3, 2012,
that would have modified existing final regulations regarding the
minimum present value requirements for defined benefit plan
distributions. A number of comments were received on the proposed
regulations, and a public hearing was held on June 1, 2012. After
consideration of the comments received, the Treasury Department and the
IRS are issuing these final regulations to adopt the rules set forth in
the proposed regulations with modifications in response to the comments
received.
Explanation of Provisions
Treatment of Bifurcated Accrued Benefits
In order to facilitate the payment of benefits partly in the form
of an annuity and partly as a single sum (or other accelerated form),
this document amends the regulations under section 417(e) to permit
plans to simplify the treatment of certain optional forms of benefit
that are paid to a participant partly in the form of an annuity that is
excepted from the minimum present value requirements of section
417(e)(3) pursuant to Sec. 1.417(e)-1(d)(6) and partly in a more
accelerated form. Like the proposed regulations, these final
regulations provide rules under which the participant's accrued benefit
can be bifurcated so that the minimum present value requirements of
section 417(e)(3) and Sec. 1.417(e)-1(d) apply to only the portion of
the participant's accrued benefit that is paid in an accelerated form.
The proposed regulations would have provided for three different
approaches to bifurcating the accrued benefit so that the minimum
present value requirements apply to only a portion of the accrued
benefit. Under the first approach in the proposed regulations, a plan
could have provided for two separate portions of the accrued benefit
that were determined without regard to any election of optional form of
benefit and permitted a participant to select different distribution
options with respect to each of those portions of the accrued benefit.
Under the second approach, a plan could have provided for proportionate
benefits with respect to each distribution option equal to the pro rata
portion of the amount of the distribution that would be determined if
that distribution option had been applied to the entire accrued
benefit. Finally, under the third approach, a plan could have provided
for a specified amount to be distributed as a single sum, but only if
the plan satisfied a minimum benefit requirement with respect to the
distribution that was not paid in a single sum.
Commenters generally supported the adoption of the rules in the
proposed regulations, but raised several specific issues. Several
commenters stated that it was sometimes difficult to determine which
approach for bifurcating the accrued benefit applied to a particular
plan design. These commenters suggested that certain plan designs
appeared to fit within more than one approach, while other plan designs
that were consistent with the intent of the proposed regulations did
not seem to fit within any approach. In response to comments received,
the rules providing for the bifurcation of the accrued benefit have
been simplified and clarified in these final regulations.
The final regulations combine the first two bifurcation approaches
from the proposed regulations into a single, more broadly applicable
rule. Under the rule in these final regulations, a plan is permitted to
explicitly bifurcate the accrued benefit so that the plan provides that
the requirements of Sec. 1.417(e)-1(d) apply to a specified portion of
a participant's accrued benefit as if that portion were the
participant's entire accrued benefit. This rule does not impose any
requirements with respect to the distribution options for the remaining
portion of the accrued benefit.
An alternative rule is provided in the final regulations under
which a plan that distributes a specified single-sum amount to a
participant satisfies the requirements of Sec. 1.417(e)-1(d) with
respect to that payment, provided the remaining portion of the
participant's accrued benefit satisfies a minimum requirement. This
rule is essentially the same as the third bifurcation approach from the
proposed regulations. Under this alternative rule, the portion of the
participant's accrued benefit, expressed in the normal form of benefit
under the plan and commencing at normal retirement age (or at the
current date, if later), that is not settled by the single-sum payment
must be no less than the excess of: (1) The participant's total accrued
benefit expressed in that form; over (2) the annuity payable in that
form that is actuarially equivalent to the single-sum payment,
determined using the applicable interest rate and the applicable
mortality table. Thus, the portion of the participant's accrued benefit
that is settled by the payment of a specified single-sum amount is
implicitly determined as the actuarial equivalent of that single-sum
amount.
The regulations provide a number of rules of operation that apply
to one or both of the rules for bifurcating the accrued benefit. In
particular, the regulations provide that if a participant selects
different distribution options with respect to two separate portions of
the participant's accrued benefit that were determined under the rules
in these regulations, then the two different distribution options are
treated as two separate optional forms of benefit for purposes of
applying the requirements of section 417(e)(3) and Sec. 1.417(e)-1(d),
even if the distribution options have the same annuity starting date.
Thus, if one of those separate optional forms of benefit is exempt from
the requirement to use the section 417(e)(3) assumptions, the plan is
required to apply the section 417(e)(3) assumptions only to the other
optional form of benefit. This would permit a plan to use its usual
annuity equivalence factors for the annuity portion (rather than being
required to make a special calculation of the annuity portion using the
section 417(e)(3) assumptions). The approach set forth in these
regulations is simpler than applying the section 417(e)(3) assumptions
to the entire optional form of benefit, and yields an intuitive result
that is consistent with plan sponsor and participant expectations.
The regulations provide that explicit bifurcation must be used in
specified cases. One such case is the situation in which a plan has
been amended to eliminate an optional form of benefit (but, in
accordance with section 411(d)(6), retains the optional form of benefit
with respect to benefits accrued as of the applicable amendment date).
Commenters indicated that it was unclear which bifurcation approach
would apply to this situation under the proposed regulations. In
response to these comments, the final regulations specify that if the
amount of a distribution in an optional form of benefit to which Sec.
1.417(e)-1(d) applies is determined by reference to the portion of a
participant's accrued benefit as of the applicable amendment date, then
the plan is not permitted to use the alternative rule under which the
amount of the benefit that is settled by the single-sum payment is
implicitly
[[Page 62361]]
determined but could use the explicit bifurcation rule in order to
avoid application of section 417(e) to both optional forms of benefit.
The implicit bifurcation rule also is not available in a situation in
which a single-sum distribution is available to settle a participant's
entire accrued benefit and the plan permits a portion of the benefit to
be paid as a lump sum.
Under the regulations, if a plan provides for an early retirement
benefit, a retirement-type subsidy, an optional form of benefit, or an
ancillary benefit, that applies only to a portion of a participant's
accrued benefit, and the plan provides for an accelerated form of
distribution that settles some, but not all, of the participant's
accrued benefit, then the plan must specify which portion of the
participant's total accrued benefit is settled by that distribution.
This is necessary in order to determine the extent to which the early
retirement benefit, retirement-type subsidy, optional form of benefit,
or ancillary benefit applies with respect to the remaining portion of
the accrued benefit. For example, if a plan had one set of early
retirement factors that applied to the accrued benefit as of December
31, 2005, but a different set of early retirement factors that applied
to benefit accruals earned after that date, and the plan provides for a
single-sum distribution that settles only a portion of a participant's
accrued benefit, then the plan must specify which portion of the
accrued benefit is settled by that distribution (in order to determine
which early retirement factors apply to the remaining portion of the
accrued benefit).
The regulations provide for limited section 411(d)(6) relief in the
case of a plan that, for plan years beginning before January 1, 2017,
uses the section 417(e)(3) applicable interest rate and applicable
mortality table to calculate the amount of a distribution that is made
to settle a portion of the accrued benefit if, pursuant to these final
regulations, the requirements of section 417(e)(3) need not apply to
the distribution. In such a case, section 411(d)(6) is not violated
solely because, in accordance with these final regulations, the plan is
amended on or before December 31, 2017, to provide that the amount of
the distribution described in the preceding sentence to which the
requirements of section 417(e)(3) need not apply is determined for an
annuity starting date on or after the applicable amendment date (within
the meaning of Sec. 1.411(d)-3(g)(4)) using the same actuarial
assumptions that would apply to calculate the amount of a distribution
in that same form of benefit if the participant elected to receive the
entire accrued benefit in that form.
The final regulations include a number of examples in order to
illustrate the bifurcation rules of the regulations and the rules of
operation with respect to these rules.
Effective/Applicability Date
These regulations are effective on September 9, 2016.
The changes under these regulations apply to distributions with
annuity starting dates in plan years beginning on or after January 1,
2017. However, taxpayers may apply these rules to earlier periods.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because the regulation does not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, the proposed regulations preceding these final 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 Neil S. Sandhu and
Linda S. F. Marshall, Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and the Treasury Department participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.417(e)-1 is amended by:
0
1. Redesignating paragraph (d)(1) as paragraph (d)(1)(i) and revising
the heading of the newly redesignated paragraph (d)(1)(i).
0
2. Adding a heading for paragraph (d)(1).
0
3. In the first sentence of newly redesignated paragraph (d)(1)(i),
removing ``A defined benefit plan'' and adding ``Except as provided in
section 411(a)(13) and the regulations thereunder, a defined benefit
plan'' in its place.
0
4. Adding paragraph (d)(1)(ii).
0
5. Revising paragraph (d)(7), the heading for paragraph (d)(8), and
paragraph (d)(8)(i).
0
6. Adding paragraph (d)(8)(v).
The additions and revisions read as follows:
Sec. 1.417(e)-1 Restrictions and valuations of distributions from
plans subject to sections 401(a)(11) and 417.
* * * * *
(d) Present value requirement--(1) General rule--(i) Defined
benefit plans. * * *
(ii) Defined contribution plans. Because the accrued benefit under
a defined contribution plan equals the account balance, a defined
contribution plan is not subject to the requirements of this paragraph
(d), regardless of whether the requirements of section 401(a)(11) apply
to the plan.
* * * * *
(7) Application to portion of a participant's benefit--(i) In
general. This paragraph (d)(7) provides rules under which the
requirements of this paragraph (d) apply to the distribution of only a
portion of a participant's accrued benefit. Paragraph (d)(7)(ii) of
this section provides rules for how a participant's accrued benefit may
be bifurcated into separate components for purposes of applying this
paragraph (d). Paragraph (d)(7)(iii) of this section provides rules of
application. Paragraph (d)(7)(iv) of this section provides certain
limited section 411(d)(6) relief, and paragraph (d)(7)(v) of this
section provides examples of the application of the rules of this
paragraph (d)(7).
(ii) Bifurcation of accrued benefit--(A) Explicit plan-specified
bifurcation. A plan is permitted to provide that the requirements of
this paragraph (d) apply to a specified portion of a participant's
accrued benefit as if that portion were the participant's entire
accrued benefit. For example, a plan is permitted to provide that a
distribution in the form of a single-sum payment described in this
paragraph (d)(7)(ii)(A) is made to settle a specified percentage of the
participant's accrued benefit. As another example, a plan is permitted
to provide
[[Page 62362]]
that a distribution in the form of a single-sum payment described in
this paragraph (d)(7)(ii)(A) is made to settle the accrued benefit
derived from contributions made by an employee. In both examples, the
distribution must satisfy the requirements of this paragraph (d) with
respect to the specified portion of the accrued benefit, and the
remaining portion of the accrued benefit (the participant's total
accrued benefit less the portion of the accrued benefit settled by the
single-sum payment) can be paid in some other form of distribution that
is available under the plan.
(B) Distribution of specified amount. A plan that provides for a
distribution of a single-sum payment that is not described in paragraph
(d)(7)(ii)(A) of this section satisfies the requirements of this
paragraph (d) with respect to that distribution if the portion of the
participant's accrued benefit, expressed in the normal form of benefit
under the plan and commencing at normal retirement age (or at the
current date, if later), that is not settled by the distribution is no
less than the excess of--
(1) The participant's total accrued benefit expressed in that form;
over
(2) The annuity payable in that form that is actuarially equivalent
to the single-sum payment, determined using the applicable interest
rate and the applicable mortality table.
(iii) Rules of operation--(A) Multiple distribution options. If a
participant selects different distribution options with respect to two
separate portions of the participant's accrued benefit that were
determined in accordance with paragraph (d)(7)(ii) of this section,
then the two different distribution options are treated as two separate
optional forms of benefit for purposes of applying the requirements of
section 417(e)(3) and this paragraph (d), even if the distribution
options have the same annuity starting date. Thus, if the exception
from the requirements of section 417(e)(3) and this paragraph (d) that
is contained in paragraph (d)(6) of this section applies to one of
those optional forms of benefit, then this paragraph (d) applies only
to the other optional form of benefit.
(B) Repeated application of rule. If a participant's accrued
benefit has been bifurcated in accordance with paragraph (d)(7)(ii) of
this section, then the provisions of paragraph (d)(7)(ii) of this
section may be applied again to bifurcate the remaining accrued
benefit.
(C) Requirement to use explicit plan-specified bifurcation in
certain cases--(1) Section 411(d)(6)--protected optional form. If the
amount of a distribution in an optional form of benefit to which this
paragraph (d) applies is determined by reference to the portion of a
participant's accrued benefit as of the applicable amendment date for
an amendment that eliminates that optional form of benefit (but, in
accordance with section 411(d)(6), retains the optional form of benefit
with respect to benefits accrued as of the applicable amendment date),
then the plan must provide for explicit bifurcation of the accrued
benefit as described in paragraph (d)(7)(ii)(A) of this section.
(2) Single-sum available with respect to entire accrued benefit. If
a plan provides that a single-sum distribution is available to settle a
participant's entire accrued benefit, then, in order to also provide
for a distribution in the form of a single-sum payment that settles
only a portion of a participant's accrued benefit, the plan must
provide for explicit bifurcation of the accrued benefit as described in
paragraph (d)(7)(ii)(A) of this section.
(D) Application of different factors to different portions of the
accrued benefit. If a plan provides for an early retirement benefit, a
retirement-type subsidy, an optional form of benefit, or an ancillary
benefit, that applies only to a portion of a participant's accrued
benefit, and the plan provides for a distribution that settles some,
but not all, of the participant's accrued benefit, then the plan must
specify which portion of the participant's total accrued benefit is
settled by that distribution. For example, if a plan had one set of
early retirement factors that applied to the accrued benefit as of
December 31, 2005, but a different set of early retirement factors that
applied to benefit accruals earned after that date, and the plan
provides for a single-sum distribution that settles only a portion of a
participant's accrued benefit, then the plan must specify which portion
of the accrued benefit is settled by that distribution (in order to
determine which early retirement factors apply to the remaining portion
of the accrued benefit).
(iv) Limited section 411(d)(6) anti-cutback relief. This paragraph
(d)(7)(iv) applies in the case of a plan that, for plan years beginning
before January 1, 2017, uses the section 417(e)(3) applicable interest
rate and applicable mortality table to calculate the amount of a
distribution that is made to settle a portion of the accrued benefit
if, pursuant to this paragraph (d)(7), the requirements of section
417(e)(3) and this paragraph (d) need not apply to the distribution. In
such a case, section 411(d)(6) is not violated merely because, in
accordance with this paragraph (d)(7), the plan is amended on or before
December 31, 2017, to provide that the amount of a distribution
described in the preceding sentence is determined for an annuity
starting date on or after the applicable amendment date (within the
meaning of Sec. 1.411(d)-3(g)(4)) using the same actuarial assumptions
that apply to calculate the amount of a distribution in the same form
of benefit that is made to settle the participant's entire accrued
benefit.
(v) Examples. The following examples illustrate the rules of this
paragraph (d)(7). Unless otherwise indicated, these examples are based
on the following assumptions: The taxpayers elect to apply the rules of
this paragraph (d)(7) in 2016; each plan is a noncontributory defined
benefit plan with a calendar-year plan year and a normal retirement age
of age 65; a one-year stability period coinciding with the calendar
year and a two-month lookback are used for determining the applicable
interest rate; and all participant elections are made with proper
spousal consent. The November 2015 segment rates are 1.76%, 4.15% and
5.13%.
Example 1. (i) Plan A offers a number of optional forms of
payment, including a qualified joint and survivor annuity and a
single-sum payment. The single-sum payment is equal to the present
value of the participant's immediate benefit (but not less than the
present value of the participant's accrued benefit payable at normal
retirement age) using the applicable interest and mortality rates
under section 417(e)(3). The amount of the joint and survivor
annuity is determined using plan factors that are not based on the
applicable interest and mortality rates under section 417(e)(3).
Plan A permits a participant to elect to receive a percentage of the
accrued benefit as a single sum and the remainder in any annuity
form provided under the plan, with the amount of the single-sum
payment determined by multiplying the amount that would be payable
if the entire benefit were paid as a single sum by the percentage of
the accrued benefit settled by the single-sum payment.
(ii) Participant S retires at age 62 in 2016, with an accrued
benefit of $1,000 per month payable as a straight life annuity at
normal retirement age. Participant S is eligible for an unreduced
early retirement benefit and can therefore collect a straight life
annuity benefit of $1,000 per month beginning immediately.
Alternatively, Participant S can elect to receive the benefit in
other forms, including a single-sum payment of $168,516 (based on
the applicable interest and mortality rates under section 417(e),
which are the November 2015 segment rates and the 2016 applicable
mortality table), or a 100% joint and survivor annuity of $850 per
month (based on the plan's actuarial equivalence factors).
Participant S elects to receive 25% of the accrued benefit in the
form of a single-sum payment and the remaining 75% of the
[[Page 62363]]
accrued benefit as a 100% joint and survivor annuity.
(iii) Participant S receives a single-sum payment with respect
to 25% of the accrued benefit. Accordingly, this single-sum payment
is equal to 25% of the full single-sum amount, or $42,129. The
remaining portion of the accrued benefit is 75% of the total accrued
benefit, or $750 per month payable as a straight life annuity at
normal retirement age.
(iv) To settle the remaining portion of the accrued benefit, in
addition to the single-sum payment of $42,129, Participant S
receives a 100% joint and survivor annuity in the amount of $637.50
per month, which is determined by applying the plan's unreduced
early retirement and actuarial equivalence factors to the remaining
portion of the accrued benefit of $750 per month payable as a
straight life annuity at normal retirement age. The joint and
survivor annuity benefit is not subject to the minimum present value
requirements of section 417(e)(3) because it is treated as a
separate optional form of benefit under paragraph (d)(7)(iii)(A) of
this section.
Example 2. (i) Plan B is a contributory defined benefit plan
that permits a participant to elect a single sum distribution equal
to the participant's employee contributions, accumulated with
interest, with the remainder payable as an annuity. Plan B provides
that the probability of death before normal retirement age is not
taken into account for purposes of determining actuarial equivalence
between the single-sum payment and an annuity at normal retirement
age. Based on the applicable mortality table for 2016 and the
November 2015 segment rates, the deferred annuity factor at age 60
for lifetime payments commencing at age 65 (determined without
taking mortality before age 65 into account) is 10.209.
(ii) Participant T retires at age 60 in 2016 with an accrued
benefit of $1,500 per month payable as a straight life annuity
commencing at normal retirement age. For benefits commencing at age
60, Plan B provides for an early retirement reduction factor of 75%
and an actuarial equivalence factor of 98% for adjusting a straight
life annuity to a 10-year certain and life annuity, neither of which
is based on the applicable interest and mortality rates under
section 417(e)(3). Participant T's benefit commencing at age 60 in
the form of a 10-year certain and life annuity would be $1,500 x 75%
x 98% = $1,102.50 per month. Participant T elects to receive a
single sum payment of $32,000 equal to T's accumulated contributions
with interest, and the remainder as a 10-year certain and life
annuity.
(iii) The single-sum payment elected by Participant T is a
distribution that is determined by reference to Participant T's
contributions and interest, and not by reference to a specified
portion of the participant's accrued benefit. Therefore, the single-
sum payment is not described in paragraph (d)(7)(ii)(A) of this
section. In order to satisfy paragraph (d)(7)(ii)(B) of this
section, the portion of the participant's accrued benefit that is
not settled by the single-sum payment must be no less than the
excess of (A) the participant's total accrued benefit over (B) the
annuity that is actuarially equivalent to the single-sum payment,
(determined using the applicable interest and mortality rates under
section 417(e)(3) as applicable), both expressed in the normal form
of benefit commencing at normal retirement age. The amount of that
actuarially equivalent annuity is determined by dividing Participant
T's single-sum payment of $32,000 by the deferred annuity factor for
lifetime payments commencing at age 65 under the terms of Plan B
(10.209, not considering mortality for the deferral period) and
dividing by 12 for an actuarially equivalent monthly benefit
commencing at age 65 of $261.21. Thus, in order to satisfy paragraph
(d)(7)(ii)(B) of this section, the remaining portion of T's accrued
benefit must be at least $1,238.79 per month ($1,500.00-$261.21)
payable as a straight life annuity at normal retirement age.
(iv) Based on Plan B's early retirement and optional form
factors applied to the remaining portion, the annuity benefit
payable to Participant T in the form of a 10-year certain and life
annuity beginning at age 60 cannot be less than $910.51 per month
($1,238.79 x 75% x 98%). Participant T receives this in addition to
the single-sum payment of $32,000. The 10-year certain and life
benefit is not subject to the minimum present value requirements of
section 417(e)(3) because it is treated as a separate optional form
of benefit under paragraph (d)(7)(iii)(A) of this section.
(v) If, instead, Plan B's terms had provided for a single-sum
payment equal to the present value of the participant's employee-
provided accrued benefit as determined under section 411(c)(3), then
the plan is determining the single-sum payment as the present value
of a specified portion of the accrued benefit. In such a case, the
plan is using explicit bifurcation as described in paragraph
(d)(7)(ii)(A) of this section and the single-sum payment would have
to be set equal to the present value, determined under Plan B's
terms, of T's employee-provided accrued benefit (which may or may
not be equal to T's accumulated contributions and interest,
depending on the plan's terms). The remaining annuity benefit
payable to Participant T would have been based on an accrued benefit
equal to $1,500 per month minus the amount of T's employee-provided
accrued benefit.
Example 3. (i) The facts are the same as in Example 2 of this
paragraph (d)(7)(v), except that Plan B also offers a single-sum
payment option with respect to a participant's entire benefit. The
single-sum payment is determined as the present value of the
participant's early retirement benefit (but no less than the present
value of the participant's accrued benefit) using the applicable
interest and mortality rates under section 417(e)(3). Based on the
applicable mortality table for 2016 and the November 2015 segment
rates, the immediate annuity factor for lifetime payments commencing
at age 60 is 14.632. Under the terms of the plan, the early
retirement benefit payable as a straight life annuity to Participant
T at age 60 with respect to T's full accrued benefit is $1,125
($1,500 x 75%), and the corresponding single-sum amount payable to T
is $1,125 x 14.632 x 12 = $197,532. (Note that this amount is larger
than the age-60 present value of T's accrued benefit without taking
mortality before age 65 into account, $1,500 x 10.209 x 12 =
$183,762.) Participant T elects to receive a partial single-sum
payment of $32,000, equal to T's accumulated contributions with
interest and to take the remaining accrued benefit in the form of a
10-year certain and life annuity commencing at age 60.
(ii) Because the plan also provides for a single-sum payment
option with respect to a participant's entire benefit, pursuant to
paragraph (d)(7)(iii)(C)(2) of this section the partial single-sum
payment must be determined pursuant to the explicit bifurcation
rules of paragraph (d)(7)(ii)(A) of this section.
(iii) The portion of the participant's accrued benefit that is
settled by the single-sum payment of $32,000 is determined as the
amount that bears the same ratio to the total accrued benefit as
that single-sum payment bears to the single-sum payment with respect
to the entire accrued benefit (($32,000 / $197,532) x $1,500), which
is $243 per month payable as a straight life annuity at normal
retirement age. Thus, the remaining portion of the accrued benefit
is $1,257.00 per month payable as a straight life annuity at normal
retirement age.
(iv) Based on Plan B's early retirement and optional form
factors applied to the remaining portion, the annuity benefit
payable to Participant T in the form of a 10-year certain and life
annuity beginning at age 60 is $923.90 per month ($1,257 x 75% x
98%). Participant T receives this benefit in addition to the single
sum payment of $32,000. The 10-year certain and life benefit is not
subject to the minimum present value requirements of section
417(e)(3) because it is treated as a separate optional form of
benefit under paragraph (d)(7)(iii)(A) of this section.
Example 4. (i) Plan C was amended to freeze benefits under a
traditional defined benefit formula as of December 31, 2016, and to
provide benefits under a cash balance formula beginning January 1,
2017. The plan provides that participants may elect separate
distribution options for the portion of the benefit accrued under
the traditional formula as of December 31, 2016, and the portion of
the benefit earned under the cash balance formula. Furthermore, the
plan provides that a participant may elect to receive a single-sum
payment only with respect to the portion of the benefit earned under
the cash balance formula.
(ii) In accordance with paragraph (d)(7)(ii)(A) of this section,
Plan C provides for an explicitly bifurcated accrued benefit because
the portion of the accrued benefit settled by a distribution is
determined separately for the portion under the traditional formula
and the portion under the cash balance formula. As provided under
paragraph (d)(7)(iii)(A) of this section, a single-sum payment under
the cash balance formula and a distribution option under the
traditional formula are treated as two separate optional forms of
benefit for purposes of applying the provisions of the plan
implementing the requirements of
[[Page 62364]]
section 417(e)(3) and this paragraph (d). Therefore, whether a
participant elects to receive a single-sum payment of the portion of
the benefit earned under the cash balance formula does not affect
whether the distribution elected with respect to the portion of the
benefit earned as of December 31, 2016, is subject to the minimum
present value requirements of section 417(e)(3).
Example 5. (i) The facts are the same as in Example 4 of this
paragraph (d)(7)(v), except that Plan C also permits a participant
to elect, with respect to the cash balance portion of the benefit,
to receive a percentage of that portion as a single sum and the
remainder in any annuity form provided under the plan, with the
amount of the single-sum payment determined by multiplying the
amount that would be payable if the entire cash balance portion were
paid as a single sum by the percentage of the cash balance portion
settled by the single-sum payment. Participant W retires at age 65,
with an accrued benefit under the traditional defined benefit
formula (earned as of December 31, 2016) of $500 per month payable
as a straight life annuity at normal retirement age and a cash
balance hypothetical account balance of $45,000. Based on Plan C's
actuarial equivalence factors, Participant W's accrued benefit
derived from the cash balance hypothetical account is $320 per
month, payable as a straight life annuity at normal retirement age.
Participant W elects to receive \1/3\ or $15,000 of the current
hypothetical account balance in the form of a single sum and to
receive the remainder of the total accrued benefit as a straight
life annuity.
(ii) Under the analysis set forth in Example 4 of this paragraph
(d)(7)(v), Plan C provides for an explicitly bifurcated accrued
benefit with respect to the traditional defined benefit portion and
the cash balance portion because the portion of the accrued benefit
settled by a distribution is determined separately for the portion
under the traditional formula and the portion under the cash balance
formula. As provided under paragraph (d)(7)(iii)(A) of this section,
a single-sum payment under the cash balance formula and a
distribution option under the traditional formula are treated as two
separate optional forms of benefit for purposes of applying the
provisions of the plan implementing the requirements of section
417(e)(3) and this paragraph (d). Thus, a separate distribution
option may be chosen for each of these two portions, and section
417(e)(3) applies separately to each portion.
(iii) In accordance with paragraph (d)(7)(ii)(A) of this
section, Plan C also provides for an explicitly bifurcated accrued
benefit with respect to the cash balance benefit because the plan
provides that a distribution in the form of a single-sum payment is
made to settle a specified percentage of the cash balance benefit.
As provided under paragraph (d)(7)(iii)(A) of this section, the
single-sum payment and the annuity selected by Participant W with
respect to the cash balance benefit are treated as two separate
optional forms of benefit for purposes of applying the provisions of
the plan implementing the requirements of section 417(e)(3) and this
paragraph (d). Thus, in accordance with paragraph (d)(7)(ii)(A) of
this section, \1/3\ of the cash balance hypothetical account is
settled by the distribution paid out as a single sum (that is,
$15,000 / $45,000). After the single-sum payment, the remaining
portion of the accrued benefit derived from the cash balance account
is \2/3\ of the initial accrued benefit derived from the cash
balance account, or a straight life annuity at normal retirement age
of $213.33 per month (\2/3\ x $320).
(iv) To settle the remaining portion of the entire accrued
benefit (the portion of the benefit attributable to service as of
December 31, 2016 plus the remaining portion of the cash balance
benefit), Participant W receives a monthly life annuity of $713.33
per month payable as a straight life annuity at normal retirement
age (equal to the $500 straight life annuity at normal retirement
age earned as of December 31, 2016 plus the remaining benefit
derived from the cash balance portion of a straight life annuity
payable at normal retirement age of $213.33 per month). Participant
W's election to receive a single-sum payment of part of the benefit
earned under the cash balance formula does not affect whether the
remainder of Participant W's distribution is subject to the minimum
present value requirements of section 417(e)(3).
Example 6. (i) Plan D permits participants to elect a single-sum
payment of up to $10,000 with the remaining benefit payable in the
form of an annuity. Participant X retires in 2016 at age 55 with an
accrued benefit of $1,000 per month payable as a straight life
annuity at normal retirement age. Participant X is eligible for an
unreduced early retirement benefit of $1,000 per month payable as a
straight life annuity. Alternatively, based on Plan D's definition
of actuarial equivalence (which is not based on the applicable
interest and mortality rates under section 417(e)(3)), Participant X
can receive an immediate benefit in the form of a 100% joint and
survivor annuity of $800 per month. Participant X elects to receive
a single-sum payment of $10,000, with the balance of the benefit
payable as a 100% joint and survivor annuity beginning at age 55.
Based on the applicable mortality table for 2016 and the November
2015 segment rates, the deferred annuity factor at age 55 for
lifetime payments commencing at age 65 is 7.602.
(ii) Plan D provides for a single-sum distribution of a portion
of the participant's accrued benefit but, because the plan initially
specifies the amount of the single-sum distribution (rather than the
portion of the accrued benefit that is being settled by that
distribution), Plan D is described in paragraph (d)(7)(ii)(B) of
this section. As provided under paragraph (d)(7)(iii)(A) of this
section, the single-sum payment and the joint-and-survivor annuity
selected by Participant X are treated as two separate optional forms
of benefit for purposes of applying the provisions of the plan
implementing the requirements of section 417(e)(3) and this
paragraph (d).
(iii) A straight life annuity of $109.62 per month payable at
normal retirement age is actuarially equivalent to the $10,000
single-sum payment, determined using the applicable mortality table
for 2016 and the November 2015 segment rates ($10,000 / 12 / 7.602).
Therefore, pursuant to paragraph (d)(7)(ii)(B) of this section, in
order to satisfy this paragraph (d) the remaining portion of the
accrued benefit after the single-sum payment of $10,000 must be no
less than $890.38 per month payable as a straight life annuity at
normal retirement age ($1,000.00-$109.62).
(iv) Based on Plan D's early retirement and optional form
factors, in order to satisfy this paragraph (d), the annuity benefit
payable to Participant X in the form of a 100% joint-and-survivor
annuity beginning at age 55 must be no less than $712.30 per month
($890.38 x .8). Participant X receives this benefit in addition to
the single sum payment of $10,000. The joint and survivor annuity
benefit is not subject to the minimum present value requirements of
section 417(e)(3) because it is treated as a separate optional form
of benefit under paragraph (d)(7)(iii)(A) of this section.
Example 7. (i) Plan E provides for an unreduced early retirement
benefit for participants who have met certain age and service
requirements. Prior to amendment, Plan E permitted participants to
elect a single-sum payment equal to the present value of the
participant's unreduced early retirement benefit, determined using
the applicable interest rate and applicable mortality table under
section 417(e)(3). Plan E did not permit participants to elect a
single-sum payment with respect to only a portion of their benefits.
Effective December 31, 2012, Plan E was amended to eliminate the
single-sum payment with respect to benefits accrued after that date.
(ii) Participant Y retires on December 31, 2016, at age 60,
after meeting Plan E's age and service requirements for an unreduced
early retirement benefit. Participant Y's accrued benefit is $1,000
per month payable as a straight life annuity commencing at normal
retirement age, of which $800 per month was accrued as of December
31, 2012. Participant Y elects to take a single-sum payment based on
the benefit accrued as of December 31, 2012, with the remainder paid
as a lifetime annuity commencing at age 60. Based on the applicable
mortality table for 2016 and the November 2015 segment rates, the
immediate annuity factor for lifetime payments commencing at age 60
is 14.632, so Y's single-sum payment is $800 x 12 x 14.632 =
$140,467.20.
(iii) In accordance with paragraph (d)(7)(iii)(C)(1) of this
section, Plan E provides for explicit bifurcation of the accrued
benefit as described in paragraph (d)(7)(ii)(A) of this section.
Therefore, Participant Y must receive an annuity of $200 earned
after December 31, 2012 in addition to the single-sum payment of
$140,467. Plan E is not permitted to use the approach described in
paragraph (d)(7)(ii)(B) of this section to reduce or eliminate the
$200 annuity earned after December 31, 2012.
(8) Effective/applicability date--(i) In general. Except as
otherwise provided in this paragraph (d)(8), this paragraph (d) applies
to distributions with annuity
[[Page 62365]]
starting dates in plan years beginning on or after January 1, 1995.
* * * * *
(v) Effective date for special rules applicable to the payment of a
portion of a participant's benefit. Paragraph (d)(7) of this section
applies to distributions with annuity starting dates in plan years
beginning on or after January 1, 2017. However, taxpayers may elect to
apply the rules of paragraph (d)(7) of this section to earlier periods.
* * * * *
John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: August 3, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-21393 Filed 9-8-16; 8:45 am]
BILLING CODE 4830-01-P