4.72.10 Single-Sum Distributions or Single-Sum Like Distributions

Manual Transmittal

December 08, 2020

Purpose

(1) This transmits revised IRM 4.72.10, Employee Plans Technical Guidance, Single-Sum Distribution or Single-Sum Like Distributions.

Material Changes

(1) Updated IRM 4.72.10.2.1, Examination Steps, to expand examples of plan provisions necessary to meet definitely determinable benefits requirements and the minimum present value requirement under IRC 417(e)(3).

(2) Updated IRM 4.72.10.3.1 (3) to provide Example of segment rates used.

(3) Updated IRM 4.72.10.3.2 (2), Example, for current year.

(4) Updated IRM 4.72.10.3.4, The Applicable Mortality Table, to add the applicable mortality tables for calendar years 2020 and 2021.

(5) Updated IRM 4.72.10.3.6, Special Rule for Hybrid Plans, to update provisions to reflect final regulations and to remove description of market rates of return that are not directly relevant to the calculation of single-sum distributions.

(6) Updated IRM 4.72.10.4.3, Examination Steps, to add a link to the audit tool used to estimate minimum present value and an example showing how to use it.

(7) Updated the IRM for editorial changes throughout.

Effect on Other Documents

This supersedes IRM 4.72.10, dated September 30, 2019.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(12-08-2020)

Eric D. Slack
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM helps Employee Plans (EP) specialists to examine defined benefit (DB) plans that permit single-sum distributions or other optional forms of benefits that are subject to IRC 417(e).

  2. Audience: Employee Plans examiners and other specialists

  3. Policy Owner: Director, Employee Plans

  4. Program Owner: Employee Plans

  5. Program Goal: To ensure continued compliance and qualification of DB plans subject to IRC 417(e).

Background

  1. This IRM addresses calculation requirements for an accrued benefit that is to be distributed from a DB plan in a form subject to IRC 417(e), and:

    1. Helps you determine the actuarial factors required for IRC 417(e).

    2. Gives examples of the required calculations.

    3. Discusses related issues under IRC 411(d)(6).

  2. The valuation rules under IRC 417(e)(3) are referenced in four Code sections:

    1. IRC 411(a)(11) notes that a participant must consent to the distribution of an accrued benefit if its present value exceeds a certain amount. For this section, you must calculate the present value according to IRC 417(e)(3).

    2. IRC 411(a)(13) states that a hybrid plan does not fail to meet the requirement of IRC 417(e)(3) solely because a participant’s present value of accrued benefit equals the balance in the hypothetical account or an accumulated percentage of the participant’s final average compensation.

    3. IRC 411(c)(2) states that the accrued benefit derived from an employee’s contributions equals the employee’s accumulated contributions expressed as an annual benefit at normal retirement age, adjusted using the IRC 417(e)(3) interest rate.

    4. IRC 415(b)(2)(E)(ii) requires plans to use specific interest rates (including the interest rates under IRC 417(e)(3)) and the mortality table under IRC 417(e)(3) to adjust IRC 415 limits for benefits being paid under certain forms that are subject to IRC 417(e)(3).

  3. For a DB plan to qualify under section 401(a), and except as noted under IRC 417, a plan must pay vested participants who don’t die before the annuity starting date their accrued benefit in the form of a QJSA (IRC 401(a)(11)).

  4. This IRM doesn’t apply to distributions paid as an annual benefit which increases or remains level during a participant’s life (or, for a qualified pre-retirement survivor annuity, during the life of the spouse), commonly referred to as a "non-decreasing life annuity."

  5. The requirement that the annual benefit not decrease doesn’t apply to either:

    1. A decrease solely because of the survivor annuitant’s death (but only if the benefit doesn’t decrease to less than 50% of the benefit paid before the survivor died).

    2. A Social Security supplement or qualified disability benefit being stopped or reduced. See 26 CFR 1.417(e)-1(d)(6).

  6. This IRM uses the term "single-sum" to mean any distribution that is paid in any form other than the exceptions described in IRM 4.72.10.1.1 (5) a) and IRM 4.72.10.1.1 (5) b), above. The following are examples of forms of payments subject to IRC 417(e)(3):

    1. Lump Sum - A single sum distribution.

    2. 10 Years Certain – 120 equal monthly installments with no life-contingent feature

    3. Social Security Level Income Option – An optional form of payment that a plan may offer participants who retire before their Social Security Normal Retirement Age (SSNRA). It’s combined with a participant’s Social Security benefit and lasts throughout their retirement.

  7. A single-sum distribution’s value may be affected by applying IRC 411(c) or IRC 415, but this IRM doesn’t address those additional IRC sections. See IRM 4.72.6, Employee Plans Technical Guidelines, IRC 415(b) and IRM 4.72.7, Employee Plans Technical Guidelines, Examination Guidelines for IRC 415(c) for information on IRC 415.

  8. Final regulations under Section 417 relating to QJSA and QPSA requirements were:

    1. Issued on August 22, 1988

    2. Amended on April 3, 1998, for the Uruguay Round Agreements Act, Public Law 103-465 changes.

    3. Further amended on September 9, 2016 to permit plans to simplify treating certain optional forms of benefit paid partly in the form of an annuity and partly in a single sum or other more accelerated form. The effective date applies to annuity starting dates in plan years beginning on or after January 1, 2017, but sponsor may elect to apply these regulations earlier.

Authority

  1. A plan is qualified if it meets the requirements of IRC 401(a) in form and operation.

  2. A trust is not a qualified trust under IRC 401 if the plan of which such trust is a part provides a present value of any accrued benefit and the amount of any distribution, including a single sum, that doesn’t meet IRC 417(e)(3) minimum requirements. Special rules apply to certain statutory hybrid plans, such as cash balance or pension equity plans (PEPs).

  3. The primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans (Policy Statement 4-119). EP examines plans to determine whether they meet the applicable qualification requirements in operation. IRM 1.2.1.5.36.

  4. The Director, Employee Plans has authority to enter into and approve a written agreement with any person involving their tax liability (Delegation Order 8-3 and IRM 1.2.2.9.3).

Responsibilities

  1. Agents examine a plan to determine if the plan:

    1. Meets IRC sections 401(a) and 501(a) qualification requirements. See IRM 4.71.1.3 and IRM 4.71.1.4.

    2. Filed all required tax and information returns. See IRM 4.71.1.14.

    3. Reported information and excise tax liabilities correctly. See IRM 4.71.1.4.

Acronyms and Terms

  1. The table lists commonly used acronyms and/or terms, and their definitions.

    Acronym/Term Definition
    Annuity Starting Date The date distributions begin
    Applicable Mortality Table The mortality table for the plan year determined per IRC 430(h)(3)(A) (issued in periodic notices – see IRM 4.72.10.3.4).
    Applicable Interest Rate The segment rates based on the corporate yield curve on the average of high quality bonds
    DB Defined benefit plan
    IRC Internal Revenue Code of 1986, as amended
    IRC 417 minimum The required minimum amount for a single sum or other IRC 417(e) distributions, which is the amount calculated using IRC 417(e) assumptions
    Lookback Month The month used to determine the applicable interest rate. Must be specified in the plan document and can be either the first, second, third, fourth or fifth full calendar month before the first day of the stability period
    PPA ‘06 Pension Protection Act of 2006
    QJSA Qualified joint and survivor annuity
    QPSA Qualified preretirement spousal annuity
    RPA ‘94 The Retirement Protection Act of 1994
    Segment Rates The three segment rates are defined in IRC 417(e)(3)(D) and 430(h)(2)(C).
    1. First Segment Rate: applies to benefits payable within 5 years of the annuity starting date.

    2. Second Segment Rate: applies to benefits payable within the 15-year period after the first segment rate period.

    3. Third Segment Rate: applies to benefits payable after the first two segment periods.

    Stability Period The length of time during which the plan uses the same applicable interest rate for calculating single sum distributions. Must be specified in the plan document and may be either one month, one quarter or one year

Definitely Determinable Benefits

  1. To be qualified under IRC 401(a), pension plans must provide that all benefits are definitely determinable. See 26 CFR 1.401-1(b)(1)(i), Rev. Rul. 72-97 and Rev. Rul. 69-427 and https://www.irs.gov/retirement-plans/definitely-determinable-benefits.

  2. For benefits to be definitely determinable, the plan must specify the assumptions (or objective standards) it uses to determine the benefits (clarified by Rev. Rul. 79-90). Plans may satisfy this requirement in several ways, including specifying one or more of the following:

    1. The actuarial assumptions (in other words, the interest rate and mortality table) it will use in the calculations.

    2. A procedure (not subject to employer discretion) by which it will determine the actuarial assumptions. Typically, plans do this by defining the interest rate by referencing publicly-known interest rates which results in actuarial factors that vary according to the publicly-known interest rates. Publicly-known rates include Treasury securities, PBGC published rates, and similar indices.

    3. A table of factors it will use to convert the normal form of benefit into an optional form of benefit.

  3. When a plan determines benefits based on actuarial assumptions, they aren’t considered definitely determinable unless the plan specifies the actuarial assumptions in a way that prevents employer discretion. IRS took this position in Rev. Rul. 79-90 and it was codified in IRC 401(a)(25) by the Retirement Equity Act of 1984 (REA).

  4. Pension plans that permit employer discretion to deny the availability of an IRC 411(d)(6) protected benefit violate the definitely determinable requirements of IRC 401(a), including the requirement under IRC 401(a)(25) that actuarial assumptions must be specified in the plan in a way which prevents employer discretion. See 26 CFR 1.411(d)-4, Q&A 4.

  5. Hybrid pension plans (such as cash balance plans) may use a special rule to determine the present value of accrued benefits. See IRM 4.72.10.3.6, Special Rule for Hybrid Plans. For plan benefits to be definitely determinable using the special hybrid plan rule, the plan terms must specify that the present value of accrued benefit equals the amount of a participant’s hypothetical account or an accumulated percentage of the participant’s final average compensation.

Examination Steps

  1. Verify the plan has a definite benefit formula that isn’t subject to employer discretion.

  2. Determine whether the plan defines all 417(e) optional forms of payment as not less than the present value of a participant’s accrued benefit based on the 417(e) applicable interest and mortality rates (except for benefits that meet the special rules for hybrid plan formulas; see IRM 4.72.10.3.6).

  3. Determine whether the plan specifies actuarial assumptions it uses to determine plan benefits in a way that precludes employer discretion. Check the plan for either:

    • Specific language for the interest rate and mortality assumptions it uses to determine the present value of the accrued benefit.

    • Objective standards it uses to determine benefits, such as a table of factors.

  4. Verify that the plan specifies which form of benefit it uses (commonly known as the normal form of payment) as the basis for the amount of single-sum distributions when it offers optional forms of benefits that are subsidized. When determining an optional form of benefit, the requirements of IRC 417(e) may sometimes override the plan’s definition of actuarial equivalence.

    Example 1 A qualified DB plan with a normal retirement age of 65 offers early retirement benefits for participants who retire as early as age 55. The plan also provides optional single-sum distributions, and states that the amount of the single-sum distribution equals the present value of the participant’s benefits using specified interest rates that meet the requirements of IRC 417(e)(3). However, from this description, it is unclear whether the amount of the single-sum distribution is based on the normal retirement benefit or the early retirement benefit. Unless language is added to remove this uncertainty, the plan may fail to be definitely determinable, because the present value of the early retirement benefit may be different from the present value of the accrued benefit. Even if the plan removes this uncertainty, the requirements of IRC 417(e) may override the plan’s definition of actuarial equivalence as shown under Example 2 below.
    Example 2 A qualified DB plan offers optional lump sum benefits. For employees eligible for early retirement, the plan states that the lump sum benefit is the larger of:
    1. The present value of the immediate annuity commencing at the participant’s early retirement date calculated using the plan’s general basis for actuarial equivalence -- the applicable mortality table and 7%, and

    2. The present value of the participant’s deferred annuity commencing at normal retirement age using the applicable mortality table and the applicable interest rate.


    The above language does not satisfy the requirement under IRC 417(e)(3). Under 26 CFR 1.417(e)-1(d)(1), the applicable interest rate and mortality table must be used to determine the minimum value of any benefit that is valued. Thus, in order for the above plan to be qualified, a third value would need to be considered in this scenario – the present value of the early retirement benefit using the applicable interest rate and applicable mortality table. The lump sum benefit would then be the largest of the three calculations.

Minimum Present Value of Accrued Benefits Under IRC 417(e)(3)

  1. The amount a plan pays as a single-sum distribution can’t be less than the present value of the participant’s accrued benefit. The present value of any optional form of payment under the plan can’t be less than the actuarial equivalent of the participant’s normal retirement benefit. See 26 CFR 1.417(e)- 1(d)(1). For this comparison, the participant’s accrued benefit is expressed as an annual benefit commencing at normal retirement age. See IRC 411(a)(7).

  2. A hybrid plan (such as a cash balance plan) may use a special rule to determine the present value of a participant’s accrued benefit. See IRM 4.72.10.3.6, Special Rule for Hybrid Plans. Specifically, a DB plan as defined in IRC 411(a)(13) may define the present value of the participant’s accrued benefit under a lump sum-based formula as the current hypothetical account balance or an accumulated percentage of the participant’s final average compensation, and therefore does not have to use the 417(e) applicable interest and mortality rates to calculate a lump sum or other 417(e) distribution.

  3. IRC 417(e)(3) provides rules for determining the present value of accrued benefits for any plan not eligible to use the special hybrid plan rule. The present value can’t be less than the present value calculated using the applicable interest rate and the applicable mortality table, each as described in this section. The Retirement Protection Act of 1994 (RPA ‘94), as amended by PPA ’06 enacted these requirements.

  4. Also apply these rules when determining whether spousal consent is required for a distribution. See IRC 417(e)(1) and (2) and 26 CFR 1.417(e)-1(b).

The Applicable Interest Rate

  1. For plan years beginning on or after January 1, 2008, the applicable interest rate is the adjusted first, second, and third segment rates for the month before the date of distribution, or another time that the Secretary provides in regulations.

    1. Plans may use alternate dates under the stability period rules in IRM 4.72.10.3.2, to identify the applicable rates. See Rev. Rul. 2007-67.

    2. The segment rates are applied under rules similar to the rules under IRC 430(h)(2)(C), but to determine the minimum present value under IRC 417, the segment rates are determined without considering the 24-month averaging period per IRC 430(h)(2)(D)(i) or the segment rate stabilization rules under IRC 430(h)(2)(C)(iv).

  2. Notice 2007-81; 2007-44 IRB 899 specifies how to determine the adjusted segment rates the plan uses to determine minimum present values under IRC 417(e)(3).

  3. When determining the present value of an annuity stream, take into account the timing of each annuity payment based on the assumed commencement date. To determine the interest rate used to value that payment:

    1. The first segment rate applies to benefits payable within five years after the annuity starting date (i.e., the date of the single-sum payment).

    2. The second segment rate applies to benefits payable within the 15-year period after the first segment period.

    3. The third segment rate applies to benefits payable after the first two segment periods.

      Example:

      For a lump sum payable on 1/1/2020, the segment rates used would be as shown below:
      For benefits payable in 2020 - 2024: 1st segment rate
      For benefits payable in 2025 – 2039: 2nd segment rate
      For benefits payable in 2040 and later: 3rd segment rate

  4. Use these two factors for the time to determine the applicable interest rate (26 CFR 1.417(e)-1(d)(4) as adopted under RPA ’94):

    1. Stability Period – the length of time during which the plan will use the same set of segment rates to determine the value of single-sum distributions.

    2. Lookback Month – the month (or months) before the annuity starting date which the plan uses as the reference point for setting the applicable interest rate.

  5. Plan designers may choose from many combinations of available stability periods and lookback months. The plan’s chosen method, however, must apply uniformly to all plan participants.

  6. The time (stability period/lookback month) for determining the applicable interest rate continues to apply for plan years beginning on or after January 1, 2008, even though PPA ’06 changed the basis for determining the applicable interest rate. See Rev. Rul. 2007-67 which held that the rules of 26 CFR 1.417(e)-1(d)(4) continue to apply.

  7. Each month, the IRS publishes a notice that lists the segment rates plans must use for the applicable interest rate for the month just ended. The segment rates are also shown on the IRS website. Note that these rates are different from the rates used to calculate the single-employer minimum funding requirement.

The Stability Period

  1. The stability period is the length of time during which the plan will use the same set of segment rates for determining the value of all single-sum distributions for IRC 417(e)(3) purposes which have annuity starting dates within the stability period.

  2. The plan document must specify the stability period. It may be either one month, one quarter, or one year.

    1. If the stability period is either a quarter or a year, the period can be either a calendar period or a plan period.

    2. If the stability period is a month, then the plan must use a calendar month.

      Note:

      See 26 CFR 1.417(3)-1(d)(4)(ii).

      Example: Plan A’s plan year begins on January 15 and ends on the subsequent January 14. Plan A may use any of the following stability periods for a distribution for which the annuity starting date is in February 2020:
      Plan year: January 15, 2020 to January 14, 2021
      Calendar year: January 1, 2020 to December 31, 2020
      Plan quarter: January 15, 2020 to April 14, 2020
      Calendar quarter: January 1, 2020 to March 31, 2020
      Calendar month: February 1, 2020 to February 28, 2020

  3. In contrast, a stability period of January 15, 2020 to February 14, 2020 wouldn’t be permissible, because plans must use a calendar month for any stability period which is less than a quarter of a year.

The Lookback Month

  1. The lookback month defines the month that the plan uses as the reference point for setting the applicable interest rate.

    1. The plan document must specify the lookback month.

    2. The lookback month is either the first, second, third, fourth or fifth full calendar month before the first day of the stability period that contains the annuity starting date for the distribution. 26 CFR 1.417(e)-1(d)(4)(iii).

      Example:

      Plan A has a stability period that runs from January 15, 2020 through April 14, 2020, (which, for this plan, is a plan quarter). Plan A defines the lookback month as the third full calendar month preceding the first day of the stability period. For this stability period, the lookback month is October 2019, (the third full calendar month before January 15, 2020).

The Applicable Mortality Table

  1. The applicable mortality table is a table based on the mortality table specified for the plan year under IRC 430(h)(3)(A) (not considering subparagraphs (C) or (D)) as modified by the Secretary (IRC 417(e)(3)(B) as amended by PPA ’06).

    Applicable Mortality Table for Calendar Year Public Guidance
    2008 Rev. Rul. 2007-67, 2007-2 CB 1047
    2009 – 2013 Notice 2008-85, 2008-42 IRB 905
    2014 and 2015 Notice 2013-49, 2013-32 IRB 127
    2016 Notice 2015-53, 2015-33 IRB 190
    2017 Notice 2016-50, 2016-38 IRB 371
    2018 Notice 2017-60, 2017-43 IRB 365
    2019 Notice 2018-02, 2018-2 IRB 281
    2020 Notice 2019-26, 2019-15 IRB 943
    2021 Notice 2019-67, 2019-52 IRB 1510
    The method for determining the mortality tables was updated effective in 2018, and subsequent plan years are determined and published the same way as the applicable mortality table for that year.

  2. In general, the applicable mortality table for a year applies to distributions with annuity starting dates that occur during stability periods that begin during the calendar year in which the applicable mortality table applies.

Alternative Actuarial Factors

  1. IRC 417(e)(3) and associated regulations prescribe rules for determining the minimum amount (subject to the requirements of IRC 415 and IRC 411(c)) that a participant may receive as a single-sum distribution or other IRC 417(e) distributions. See IRM 4.72.10.1.1 (6). For examples of distributions for which these rules do not apply, see IRM 4.72.10.1.1 (4). Nothing in the statute or regulation prevents a plan from specifying actuarial factors for single-sum distributions that are more generous than those required by the statute (as long as using them satisfies IRC 415 and other qualification requirements such as IRC 401(a)(4)).

  2. If a plan specifies an actuarial basis for calculating the value of a single-sum distribution that is different from IRC 417(e)(3), then the plan must further provide that the amounts paid to the participant won’t be less than the amounts calculated under IRC 417(e)(3).

    1. This means that the plan must specify an applicable interest rate and an applicable mortality table per IRC 417(e)(3), even if it uses other actuarial factors.

    2. This requirement also implies that the plan must calculate the value of a participant’s distribution using the specified applicable interest rate and applicable mortality table, simply to verify that the plan’s actuarial factors produce a greater distribution.

Special Rule for Hybrid Plans

  1. A hybrid pension plan is a DB plan under which some or all of a participant’s accrued benefit is calculated as the balance of a hypothetical account maintained for the participant (generally referred to as a "cash balance plan" ) or as an accumulated percentage of the participant’s final average compensation (generally referred to as a "pension equity plan" ).

    1. The regulations use the term statutory hybrid plan, which is a DB plan that contains a statutory hybrid formula. See 26 CFR 1.411(a)(13)-1(d)(5).

    2. A statutory hybrid formula is a benefit formula that is either a lump sum-based benefit formula or a formula that isn’t a lump sum-based benefit formula but that has an effect similar to one. See 26 CFR 1.411(a)(13)-1(d)(4)(i).

  2. If a hybrid plan defines the present value of a participant’s accrued benefit as the amount expressed as the balance of the participant’s hypothetical account or as an accumulated percentage of the participant’s final average compensation, it obtains relief from what was known as a "whipsaw" calculation. Under a “whipsaw” calculation the hypothetical account balance is projected to normal retirement age, converted to an annuity based on the plan’s assumptions, and then the IRC 417(e)(3) present value of that deferred benefit is calculated as of the determination date, which may result in a lump sum in excess of the hypothetical account balance. See IRC 411(a)(13)(A) and 26 CFR 1.411(a)(13)-1(b)(1). This “whipsaw” relief is not available if the formula is not a “lump sum-based” formula. Effective for distributions in plan years that begin on or after January 1, 2017, this means that:

    1. The lump sum is equal to the balance of the participant’s hypothetical account or accumulated percentage of the participant’s final average compensation, and

    2. As of the date of the distribution, either the accrued benefit payable at normal retirement age or the benefit payable at retirement is actuarially equivalent to the current balance in the participant’s hypothetical account or the current accumulated percentage of the participant’s final average compensation, using reasonable actuarial assumptions. See 26 CFR 1.411(a)(13)-1(d)(3)(i).

  3. The relief only applies to the portion of the benefit that is determined under a lump sum-based formula. For instance, if a hybrid plan provides benefits equal to the greater of a benefit under a lump sum-based formula and a benefit under another type of formula, the single-sum distribution is calculated as the greater of (a) the accumulated benefit under the lump sum-based formula and (b) the present value of the accrued benefit under the other formula calculated using the applicable interest rate and applicable mortality table under IRC 417(e)(3). See 26 CFR 1.411(a)(13)-1(b)(4)(ii).

  4. The plan must use reasonable assumptions or factors (but does not have to use 417(e) applicable interest and mortality rates) to determine the present value of accrued benefits for any other distributions subject to IRC 417(e) that are calculated on a lump sum-based formula, such as: 10-year periodic payments with no life annuity payments after the 10th year. A Social Security leveling option.

  5. Note that the IRC 415 limit must be applied to single-sum distributions and other distributions in a form subject to IRC 417(e)(3) using the specified interest rates and mortality rates under IRC 415(b)(2)(E)(ii), even if they are eligible for “whipsaw” relief. See 26 CFR 1.415(b)-1(c)(3).

Information Needed for Calculating the Single-Sum Distribution

  1. You need various facts and factors to determine the amount of a single-sum distribution. Some of these must be in the plan document; others are unique to the participant receiving the distribution.

Plan-Specific Information

  1. Identify the way in which the plan defines a participant’s accrued benefit. Specifically, identify whether the plan defines some or all of the participant’s accrued benefit in a way that is characterized as a hybrid plan eligible for special rules, as described in IRM 4.72.10.3.6, Special Rule for Hybrid Plans.

  2. Identify the actuarial factors (the interest rate and mortality table) the plan uses for distributions. These factors are usually in the plan’s definition section under "Actuarial Equivalence" or "Present Value," or in the accrued benefits or distributions section. If the plan doesn’t specify rates or standards, it may fail the qualification requirements. See IRM 4.72.10.2, Definitely Determinable Benefits.

  3. If a plan uses factors for distributions different from those under IRC 417(e), determine the plan’s procedure for choosing the applicable interest rate and the applicable mortality table to ensure it satisfies the minimum present value requirement of IRC 417(e). See IRM 4.72.10.3, Minimum Present Value of Accrued Benefits Under IRC 417(e)(3).

  4. Some plans use two interest rates, one for the post-retirement period and one for the pre-retirement period. In either case, distributions can’t be less than the minimum present value as determined using the single applicable interest rate (in other words, the single set of segment interest rates) per IRC 417(e).

  5. The plan terms must specify the form of benefit upon which the single-sum distribution is based. This will generally be the normal form of benefit under the plan. Also, find the age at which the benefit is presumed payable.

    Example:

    If a plan permits participants to receive a single-sum distribution at an age earlier than the plan’s normal retirement age, there might be a question as to whether the amount of the distribution is based on an annuity beginning immediately at the participant’s attained age, or a deferred annuity that would not have begun until the participant reached the plan’s normal retirement age. To avoid confusion, the plan must specify how the single sum is calculated but the single sum amount must be at least as great as the present value of the annuity payable to the participant at the plan’s normal retirement age.

Participant-Specific Information

  1. Review the plan document for the specified annuity starting date for a distribution.

  2. Determine the participant’s attained age as of the annuity starting date (and, if appropriate, the attained age of the spouse).

  3. Determine the accrued benefit in the form of benefit that will be the basis of the single-sum distribution using the plan formula and the participant’s employment history as well as considering the IRC 415 and IRC 411(c) requirements.

  4. You don’t need to know the participant’s gender to calculate the minimum distribution under IRC 417(e) because the applicable mortality table under IRC 417(e) is a unisex table.

Examination Steps

  1. Assemble information in IRM 4.72.10.4.1, Plan-Specific Information and IRM 4.72.10.4.2, Participant-Specific Information for each or a representative sample size of single-sum or other 417(e) distributions the plan made during the plan year audited.

  2. Determine whether the single-sum distribution amounts were at least as great as the amounts required by IRC 417(e). If the plan uses alternative factors that produce a single-sum distribution different the minimum amount required under IRC 417(e), verify that the plan paid the participant the greater of the amount determined under IRC 417(e) and the plan’s alternative factors. (However, see the special rules for hybrid plans under section 4.72.10.3.6 of this IRM.

  3. Contact your field actuary if you don’t have the required software for the required actuarial calculations and spreadsheets. Because the applicable interest rate is a set of percentages expressed in basis points (such as, a percentage with two decimal places), and because the mortality basis is updated each year, it’s not practical to keep a collection of actuarial factors for each different applicable interest rate and mortality table.

  4. Make sure the amount paid didn’t exceed the maximum allowable under IRC 415. See IRM 4.72.6, Employee Plans Technical Guidelines, IRC 415(b).

    Example:

    By using the 417 audit tool available at the link below, the following input will calculate the present value of a monthly accrued benefit deferred to age 65 but payable at current age of 45 with a 2019 distribution year, no pre-retirement mortality and a lookback month of December 2018 for the segment rates (when segment rates were 3.38%, 4.32%, and 4.69%). The minimum IRC 417(e)(3) present value of a monthly benefit of $1,000 commencing at age 65 is $ 62,178.24 as of 1/1/2019 with a current age of 45. https://organization.ds.irsnet.gov/sites/tegekm/KL/EP/Forms/Defined%20Benefit%20Plans%20%20Audit%20Tools.aspx

    Calendar Year Mortality Table (2008, 2009, etc) 2019
    PreRetirement Mortality (yes or no) no
    1st segment rate 3.38%
    2nd segment rate 4.32%
    3rd segment rate 4.69%
    Retirement Age: 65.000
    Current Age: 45.000
    Benefit $1,000.00
    Benefit payable monthly (M) or annually (A) M
    Annual Lump Sum Factor 5.18152
    Lump Sum $62,178.24

Effective Dates and Prior Law

  1. Generally, the rules under IRC 417(e) are effective for distributions with annuity starting dates in plan years beginning in or after 2008.

  2. The special rules for hybrid plan for calculating benefits are effective for distributions made after August 17, 2006. See (IRC 411(a)(13)(A)). Certain restrictions on hybrid plans eligible for “whipsaw” relief are effective for plan years beginning on or after January 1, 2017. See CFR 26 1.411(a)(13)-1(d)(3)(i) and section 4.72.10.3.6 of this IRM for more information.

  3. IRC 417(e) requirements effective before PPA ’06 are in this IRM’s prior version, in regulations and other guidance referenced in this IRM.

IRC 411(d)(6) Relief

  1. With very few exceptions, plan amendments can’t reduce a participant’s accrued benefit (IRC 411(d)(6)). When determining whether a participant’s accrued benefit is reduced, consider all plan provisions which directly or indirectly affect the accrued benefit computation. Plan provisions that indirectly affect the computation of a participant’s accrued benefits include the plan’s actuarial factors for determining optional or early retirement benefits. See 26 CFR 1.411(d)-3(b).

  2. The first plan amendment to make the applicable interest rate and applicable mortality rates comply with the IRC 417(e)(3) rules effective for plan years beginning on or after January 1, 2008, won’t violate IRC 411(d)(6) despite any reduction in either:

    • Accrued benefits

    • Any distribution with an annuity starting date in a 2008 plan year or subsequent year

      Note:

      This exemption from IRC 411(d)(6) applies only if the accrued benefits or distribution are reduced because of substituting the modified segment rates and mortality rates for the pre-PPA ’06 applicable interest and mortality rates for the same period. See Rev. Rul. 2007-67.

  3. If a plan sponsor amends the plan to change the time for determining the interest rate (for example, it modifies the stability period or the look back month), even if the plan sponsor adopts this amendment at the same time as the PPA 06 interest rate amendment, the amendment is subject to IRC 411(d)(6). However, IRC 411(d)(6) isn’t violated if both:

    1. The plan sponsor adopts the amendment before its effective date, and

    2. For the one-year period after the amendment’s effective date, the plan uses as an interest rate, determined under either: the pre-amendment timing rule or the post-amendment timing rule, whichever produces the larger distribution (26 CFR 1.417(e)-1(d)(10)(ii)).

  4. If a plan amendment substitutes the modified segment rates for a rate that isn’t the applicable interest rate in force immediately before the 2008 effective date of PPA ’06 (the 30-year Treasury rate), then the amendment must satisfy IRC 411(d)(6).

  5. A plan amendment to incorporate the applicable mortality table under IRC 417(e)(3) by reference won’t violate IRC 411(d)(6) despite any reduction in accrued benefits or distributions with an annuity starting date in the 2008 or subsequent year.

    Note:

    This exemption from IRC 411(d)(6) applies only if the reduction in accrued benefits or distribution is caused by substituting the applicable mortality table for the prior applicable mortality table under IRC 417(e)(3). See Rev. Rul. 2007-67.

  6. The PPA ’06 relief for IRC 411(d)(6) applies to an amendment that provides a participant the greater of the amount calculated using either:

    1. The pre- PPA ’06 applicable mortality table and applicable interest rate.

    2. The post-PPA ’06 applicable mortality table and applicable interest rate, even if the pre-PPA ’06 applicable interest rate and/or pre-PPA ’06 applicable mortality table apply only for a specific time (as long as the plan sponsor adopted the amendment during the PPA ’06 amendment period).

  7. However, for a particular plan provision, the PPA’06 relief applies only to the first plan amendment that implements the post-PPA ’06 applicable interest rate and/or post-PPA ’06 applicable mortality table.

    1. Don’t treat any subsequent amendment about the provision as adopted "pursuant to" statutory provisions under PPA ’06, and therefore, granted PPA ’06 relief.

    2. Disregard amendments adopted on or before June 30, 2008, to determine whether an amendment that implements the post-PPA ’06 applicable interest rate and/or post-PPA ’06 applicable mortality table for a particular plan provision is the first PPA ’06 amendment. See Notice 2008-30; 2008-12 IRB 638, Q&A 17

  8. The IRC 411(d)(6) relief only applies to the minimum present values determined under IRC 417(e)(3). Any plan amendment that affects a distribution protected under IRC 411(d)(6), must meet the IRC 411(d)(6) provisions on its own, even if it allows for a larger distribution than the minimum distribution required under IRC 417(e)(3).

Examination Steps

  1. Determine if a plan amendment eliminates any optional forms of benefit, such as a single-sum distribution option.

  2. Make sure all optional forms of payments that are subject to IRC 417(e)(3), for example, 5, 10 or 15 year-certain option, Social Security level income option, were at least as great as the amount based on the applicable interest rate and the applicable mortality table.

  3. Check whether the plan amended the actuarial assumptions it uses to compute accrued benefits. If yes, determine whether the amendment complies with IRC 411(d)(6). In general, an increase in the interest rate results in a decrease in the amount of the present value. This then results in a reduced accrued benefit and violates IRC 411(d)(6). Also, review the amendment’s effective date and adoption date changing the actuarial assumptions, and determine if the amendment satisfies IRC 411(d)(6).

Partial Annuity Distribution Options

  1. The IRS amended the 417(e) regulations on the minimum present value requirements for DB plan distributions. The regulations 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.

  2. A new regulation section, 1.417(e)-1(d)(7), expressly allows a plan to permit bifurcated benefits. There are two methods and some operational rules.

  3. The first method is an explicit plan-specified bifurcation. A plan can permit the IRC 417(e)(3) regulations to apply to a specified portion of a participant’s accrued benefit as if that portion were the participant’s entire accrued benefit.

    1. This could be a percentage of the accrued benefit, or a design–based portion, such as the cash balance portion of an accrued benefit, the employee-provided accrued benefit, or the portion of the accrued benefit transferred from another plan.

    2. The remaining portion of the benefit can be paid in any form permitted under the plan terms, and the remaining portion does not have to be determined using the applicable interest rate or mortality table unless it is paid in a form that is subject to the minimum present value requirements of IRC 417(e)(3).

  4. The second method is an implicit bifurcation of the accrued benefit. This method applies if the plan provides a distribution of a single sum payment that is not based on a specified portion of the accrued benefit as defined in explicit bifurcation. Under this method, the portion of the remaining accrued benefit payable in annuity form can’t be less than the participant’s total accrued benefit expressed in that annuity form less the actuarial equivalent value of the lump sum expressed in that form determined using IRC 417(e) factors.

    Example:

    A plan provision that allows up to a set dollar amount, such as $10,000, to be paid in a single sum.

    Example:

    A plan provision that states that the participant can choose a lump sum equal to the value of their employee contributions plus interest.

  5. Bifurcated benefits can be bifurcated again. The regulations state that if a participant selects different distribution options for 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 IRC 417(e)(3) and 26 CFR 1.417(e)-1(d), even if the distribution options have the same annuity starting date.

  6. Certain situations must use the explicit method:

    1. If plan amendments eliminate an optional form of benefit. The plan must explicitly split the accrued benefit based on the grandfathered portion of the benefit versus the remaining accrued benefit.

    2. If the entire benefit is available in a single-sum distribution, but the plan offers the option of settling just a portion with a single-sum payment.

  7. Plans must specify how to determine which portion of a benefit is settled by a distribution if the plan offers partial settlements and provides different early retirement factors, retirement-type subsidies, optional forms of benefit, or ancillary benefits that apply only to a portion of the participant’s accrued benefit. Otherwise, the plan would not be definitely determinable because it would not be clear which factors and other provisions would apply to the remaining portion of the benefit.

  8. The revised regulation applies to distributions with annuity starting dates in plan years beginning on or after January 1, 2017; however, taxpayers may elect to apply the new rules to earlier periods.

    1. The new rule can reduce the amount of the benefit received (if the plan already provided for bifurcation of the benefit but applied the IRC 417(e)(3) applicable interest and mortality rates to both portions of the benefit), so the revised regulation provides limited relief from the anti-cutback rule of section 411(d)(6).

    2. A plan has until December 31, 2017 to make amendments to use the revised rules for existing accrued benefits without any IRC 411(d)(6) issues.

Examination Steps

  1. Check plan provisions and see if all components are defined properly (stability period and look back month) and that the Applicable Interest Rates are three segment rates that comply with the rules. Then make sure the lump sums or other optional forms that are subject to IRC 417 are calculated using the correct segment rates as defined in the plan.

  2. Review plans that offer early retirement benefits, retirement-type subsidies, optional forms or ancillary benefits on only a portion of the accrued benefit. They may need to incorporate provisions that describe how the plan will apply those provisions to the remaining benefit.

  3. Determine if a plan amendment for partial annuity distribution was adopted by December 31, 2017, if the plan wishes to take advantage of the limited anti-cutback relief.