4.72.10 Single-Sum Distributions

Manual Transmittal

September 21, 2017

Purpose

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

Background

This IRM provides guidance for defined benefit plans that provide single-sum distributions or other benefits subject to IRC 417(e). This guidance addresses determining the actuarial factors plans must use under IRC 417(e) and shows the required calculations.

Material Changes

(1) Updated and retitled IRM 4.72.10.1, Overview and Scope, to Program Scope and Objectives

(2) Added IRM 4.72.10.1.1, Background.

(3) Added IRM 4.72.10.1.2, Authority.

(4) Added IRM 4.72.10.1.3, Responsibilities.

(5) Added IRM 4.72.10.1.4, Definitions and Acronyms.

(6) Updated Example 3 in IRM 4.72.10.3.2.

(7) Updated Example 4 in IRM 4.72.10.3.3.

(8) Revised paragraph (1) of IRM 4.72.10.3.4, The Applicable Mortality Table, to add the applicable mortality table for calendar year 2017.

(9) Added IRM 4.72.10.7, Partial Annuity Distribution Options.

(10) Added IRM 4.72.10.7.1, Examinations Steps.

Effect on Other Documents

This supersedes IRM 4.72.10, dated September 14, 2016.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(09-21-2017)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

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

    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 meets the requirement of IRC 417(e)(3) even though the present value of the accrued benefit of a participant 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 contribution equals the employee’s accumulated contribution expressed as an annual benefit at normal retirement age, adjusted using the IRC 417(e)(3) interest rate.

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

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

  4. This IRM doesn’t apply to distributions paid in the form of 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 percent of the benefit paid before the survivor died).

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

  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 (7) and IRM 4.72.10.1.1 (8) below.

    1. A benefit paid in the form of 10 annual installments (with no life- contingent feature) is considered a "single-sum distribution."

  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 Code 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 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.

  9. The effective date applies to annuity starting dates in plan years beginning on or after January 1, 2017. In addition, plan sponsor may elect to apply these regulations to an earlier period.

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.

  3. Policy Statement 4-119 states that the primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans. EP examines plans to determine whether they meet the applicable qualification requirements in operation. IRM 1.2.13.1.36

  4. Delegation Order 8-3 gives the Director, Employee Plans, authority to enter into and approve a written agreement with any person relating to their tax liability. IRM 1.2.47.4(5)

Responsibilities

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

    1. Meets the qualification requirements of IRC sections 401(a) and 501(a). 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 specified in IRC 430(h)(3)(A)
    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 A single sum distribution must not be less than the amount calculated using IRC 417(e) assumptions
    Lookback Month The month the applicable interest rate is determined. 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  
    1. The three segment rates are defined in IRC 417(e)(3)(D) and 430(h)(2)(C).

    2. First Segment Rate: applies to benefits payable within 5 years of commencement.

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

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

    Stability Period The length of time during which the plan will use 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.

  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 any of these ways by defining actuarial equivalence by specifying:

    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: i.) Treasury securities and ii.) PBGC published rates

    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 violates 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 the present value of a participant’s accrued benefit in a way that’s eligible for the special hybrid plan rule.

  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:

    1. Specific language for the interest rate and mortality assumptions it uses to determine the accrued benefit.

    2. 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 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) and IRC 415 may sometimes override the plan’s definition of actuarial equivalence.

    Example: Plan A, a defined benefit plan has a normal retirement benefit of a straight life annuity that begins when the participant reaches normal retirement age (65). Plan A also has an early retirement benefit payable as a straight-life annuity beginning at or after age 55. Participants who elect early retirement may elect a single-sum distribution. Plan A specifies the actuarial assumptions it uses for this calculation in a way that precludes employer discretion. From this description, it’s unclear whether the amount of the single-sum distribution is based on the normal retirement benefit or the early retirement benefit. Unless it adds language that removes this uncertainty, Plan A might fail the requirement that benefits be definitely determinable for several reasons.
    1. The single-sum calculation using a subsidized early retirement benefit may be different than the single- sum calculation using the normal retirement benefit.

    2. Even if the annual benefit is reduced for early retirement, the factors the plan uses to reduce the annual benefit for early retirement may be different from the factors it uses to calculate the amount of the single-sum distribution at early retirement.

    3. The IRC 415 limits may cause the single-sum early- retirement benefit to be less than that calculated under normal plan provisions.

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 defined benefit plan as defined in IRC 411(a)(13) must define the present value of the participant’s accrued benefit as the current hypothetical account balance or an accumulated percentage of the participant’s final average compensation.

  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 prescribed by the Secretary in regulations.

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

    2. The segment rates are applied under rules similar to IRC 430(h)(2)(C), rules, but to determine the minimum present value under IRC 417, the segment rates are determined not considering the 24-month averaging period per IRC 430(h)(2)(D)(i).

    3. A transition rule phases in using segment rates over five years (IRC 417(e)(3)(D)(iii)). See IRC 417(e)(3)(C) and IRC 417(e)(3)(D).

  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 of commencement.

    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.

  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 interest rate 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 gives the segment rates plans must use for the applicable interest rate for the month just ended.

  8. In response to historically low interest rates that increased minimum funding costs, The Moving Ahead for Progress in the 21st Century Act (MAP-21) enacted IRC 430(h)(2)(C)(iv), which stabilizes the interest rates plans use to determine their minimum funding obligations under IRC 430. The Highway and Transportation Funding Act of 2014 (HAFTA), enacted on August 8, 2014, extended the interest rate extension period. Determine the segment rates used for IRC 417(e)(3) by disregarding this stabilization rule. See IRC 417(e)(3)(C) and (D).

The Stability Period

  1. The stability period is the length of time during which the plan will use the same interest rate 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 2017:
      Plan year: January 15, 2017 to January 14, 2018
      Calendar year: January 1, 2017 to December 31,2017
      Plan quarter: January 15, 2017 to April 14, 2017
      Calendar quarter: January 1, 2017 to March 31, 2017
      Calendar month: February 1, 2017 to February 28, 2017
  3. In contrast, a stability period of January 15, 2017 to February 14, 2017 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 (or months) before the annuity starting date, which 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, 2018 through April 14, 2018 (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 2017 (the third full calendar month before January 15, 2018).

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).

    1. Rev. Rul. 2007-67 gives the applicable mortality table to use to determine minimum present value under IRC 417(e)(3) for calendar year 2008.

    2. Notice 2008-85;2008-42 IRB 905 gives the applicable mortality tables for calendar years 2009 through 2013.

    3. Notice 2013-49; 2013-32 IRB 127 gives the applicable mortality tables for calendar years 2014 and 2015.

    4. Notice 2015-53; 2015-33 IRB 190 gives the applicable mortality tables for calendar year 2016.

    5. Notice 2016-50; 2016-38 IRB 371 gives the applicable mortality tables for calendar year 2017.

    6. Subsequent plan years are determined and published the same way as the applicable mortality table for 2008.

  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 to 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. See IRM 4.72.10.1.1 (6), Background, for examples of distributions for which these rules do not apply. 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 defined benefit 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 defined benefit plan that contains a statutory hybrid formula. See 26 CFR 1.411(a)(13)-1(d)(5).

    2. A statutory hybrid formula means 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. A hybrid plan must define 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. Doing so, it obtains "whipsaw relief" where the hypothetical account balance is projected to normal retirement age and then discounted back to the determination date, which may result in a lump sum in excess of the hypothetical account balance. These plans are referred to in IRC 411(a)(13) as statutory defined benefit plans. See IRC 411(a)(13)(A) and 26 CFR 1.411(a)(13)-1(b)(1)

  3. Cash balance plans or pension equity plans don’t meet the age nondiscrimination requirement under IRC 411(b)(1)(H) unless their plan terms state that the interest crediting rate for any plan year doesn’t exceed a market rate of return. See IRC 411(b)(5)(B).

    Note:

    The elimination of the whipsaw issue isn’t directly linked to complying with these interest rate standards, but failing to comply with the interest rate standards may result in plan disqualification due to not complying with IRC 411(b)(1)(H).

  4. An interest crediting rate isn’t in excess of a market rate of return if the plan terms state that the interest credit for each plan year is determined using one of the following:

    1. The interest rate on long-term investment grade corporate bonds, which is the third segment rate in IRC 417(e)(3)(D) or IRC 430(h)(2)(c)(iii). See 26 CFR 1.411(b)(5)-1(d)(3).

    2. A combination of the yields on Treasury bonds and corporate bonds and their associated margins. See 26 CFR 1.411(b)(5)-1(d)(4).

    3. Actual return on plan assets or the rate of return on annuity contracts. See 26 CFR 1.411(b)(5)-1(d)(5).

  5. The plan must use the IRC 417(e)(3) assumptions or factors to determine the present value of accrued benefits for any other distributions subject to IRC 417(e), such as:

    1. 10 year periodic payments with no life annuity payments after the 10th year.

    2. A social security leveling option (not a Qualified Social Security Supplement, described in 26 CFR 1.401(a)(4)-12).

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 (in other words, 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 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 single-sum distribution 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 greater than the minimum amount required under IRC 417(e), verify that the plan paid the participant the greater amount.

  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), it’s not practical to keep a collection of actuarial factors for each different applicable interest rate.

  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)

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)).

  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. 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. A plan amendment to determine the applicable interest rate under 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 for the pre-PPA ’06 applicable interest 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.

    2. For the one-year period following the effective date of the amendment, 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 (in other words, 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 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. PPA ’06 also provided relief for the QJSA requirement and IRC 417(e)(3) valuation requirement. See Notice 2008-30, Q&A 16.

  9. 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. Check whether the plan amended its 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 defined benefit 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 accrue 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. This doesn’t impose any requirements for the distribution option for the remaining portion of the accrued benefit.

  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.

  5. Under the implicit bifurcation 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.

  6. 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.

  7. Certain situations must use the explicit method:

    1. Plan amendments that 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.

  8. Plans must specify 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.

  9. 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 so the revised regulation provides limited relief from the anti-cutback rule of section 411(d)(6).

    2. A plan has until the end of 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 plan operations and determine whether changes are necessary to comply.

  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 determine the applicability of those provisions to the remaining benefit.

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