The IRS on Sept. 8 issued TD 9783, which contains final regulations that modify minimum present value requirements for partial annuity distribution options under defined benefit plans.
TD 9783, which amends Internal Revenue Code Section 417(e) and Treas. Reg. §1.417(e)-1, affects DB plan participants, beneficiaries, sponsors and administrators.
TD 9783 provides guidance regarding the minimum present value requirements applicable to certain DB plans. These regulations change the regulations regarding the minimum present value requirements for DB 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.
To facilitate the payment of benefits partly as an annuity and partly as a single sum (or other accelerated form), these final regulations amend the regulations under Code Section 417(e) to permit plans to simplify the treatment of certain optional forms of benefit that are paid to a participant:
These final regulations also provide rules under which the participant’s accrued benefit can be bifurcated so that the minimum present value requirements of Code Section 417(e)(3) and Treas. Reg. §1.417(e)-1(d) apply to only the portion of the participant’s accrued benefit that is paid in an accelerated form.
Under these final regulations, a plan may explicitly bifurcate the accrued benefit so that the plan provides that the requirements of Treas. Reg. §1.417(e)-1(d) apply to a specified portion of a participant’s accrued benefit as if that portion were the entire accrued benefit. This does not impose any requirements regarding the distribution options for the remaining portion of the accrued benefit.
The final regulations also provide an alternative rule under which a plan that distributes a specified single-sum amount to a participant satisfies the requirements of Treas. Reg. §1.417(e)-1(d) regarding that payment, provided the remaining portion of the participant’s accrued benefit satisfies a minimum requirement.
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 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 regarding 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 Code Section 417(e)(3) and Treas. Reg. §1.417(e)-1(d), even if the distribution options have the same annuity starting date.
Dates
These regulations are will be effective on the date they are published in the Federal Register. They will apply to distributions with annuity starting dates in plan years beginning on or after Jan. 1, 2017; however, they can be applied before that date.
TD 9783, which amends Internal Revenue Code Section 417(e) and Treas. Reg. §1.417(e)-1, affects DB plan participants, beneficiaries, sponsors and administrators.
TD 9783 provides guidance regarding the minimum present value requirements applicable to certain DB plans. These regulations change the regulations regarding the minimum present value requirements for DB 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.
To facilitate the payment of benefits partly as an annuity and partly as a single sum (or other accelerated form), these final regulations amend the regulations under Code Section 417(e) to permit plans to simplify the treatment of certain optional forms of benefit that are paid to a participant:
- partly as an annuity that is excepted from the minimum present value requirements of Section 417(e)(3) pursuant to Treas. Reg. §1.417(e)-1(d)(6); and
- partly in a more accelerated form.
These final regulations also provide rules under which the participant’s accrued benefit can be bifurcated so that the minimum present value requirements of Code Section 417(e)(3) and Treas. Reg. §1.417(e)-1(d) apply to only the portion of the participant’s accrued benefit that is paid in an accelerated form.
Under these final regulations, a plan may explicitly bifurcate the accrued benefit so that the plan provides that the requirements of Treas. Reg. §1.417(e)-1(d) apply to a specified portion of a participant’s accrued benefit as if that portion were the entire accrued benefit. This does not impose any requirements regarding the distribution options for the remaining portion of the accrued benefit.
The final regulations also provide an alternative rule under which a plan that distributes a specified single-sum amount to a participant satisfies the requirements of Treas. Reg. §1.417(e)-1(d) regarding that payment, provided the remaining portion of the participant’s accrued benefit satisfies a minimum requirement.
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 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 regarding 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 Code Section 417(e)(3) and Treas. Reg. §1.417(e)-1(d), even if the distribution options have the same annuity starting date.
Dates
These regulations are will be effective on the date they are published in the Federal Register. They will apply to distributions with annuity starting dates in plan years beginning on or after Jan. 1, 2017; however, they can be applied before that date.
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