IRS Issues Final Rule on Requirements for Partial
Annuities in DB Plans
Rather than a single-sum payment, the IRS believes
many participants are better served by having the opportunity to
elect to receive a portion of their retirement benefits in
annuity form while receiving accelerated payments for the
remainder of their benefits. By
Rebecca Moore Editors@plansponsor com | September 09, 2016
The Internal Revenue Service (IRS) has issued a
final rule modifying minimum present value requirements for
partial annuity distribution options under defined benefit (DB)
plans.
In its regulation, the IRS says that in the case of
a DB plan that offers a single-sum distribution or other form of
accelerated distribution as an optional form of benefit in
addition to the required qualified joint and survivor annuity
(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 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 facilitate the payment of benefits
partly in the form of an annuity and partly as a single sum (or
other accelerated form), the final rule 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 sections 1.417(e)–1(d)(6) and partly in a more accelerated
form. The final regulation provides rules under which the
participant’s accrued benefit can be bifurcated so that the
minimum present value requirements of section 417(e)(3) and
sections 1.417(e)–1(d) apply to only the portion of the
participant’s accrued benefit that is paid in an accelerated
form.
In addition to rules provided in proposed
regulations, 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
sections 1.417(e)-1(d) with respect to 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 at the current date, if later), that is not
settled by the single-sum payment must be no less than the excess
of: The participant’s total accrued benefit expressed in that
form; over 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 final rule also includes a number of examples to
illustrate the bifurcation rules and rules of operation.
The rule is effective September 9, 2016, and applies
to distributions with annuity starting dates in plan years
beginning on or after January 1, 2017. Click Here to
continue reading
Alert No. 2016-PEB-21 September
7, 2016
IRS Extends Current Mortality Table Basis through
2017
The Internal Revenue Service (IRS) announced on
September 2 that the current mortality table basis for defined
benefit pension plans will be extended through 2017. Click Here to
read full alert (PDF)