[Federal Register Volume 63, Number 66 (Tuesday, April 7, 1998)]
[Rules and Regulations]
[Pages 16895-16902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8981]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8768]
RIN 1545-AT27
Valuation of Plan Distributions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations that
provide guidance to employers in determining the present value of an
employee's benefit under a qualified defined benefit pension plan, for
purposes of the applicable consent rules and for purposes of
determining the amount of a distribution made in any form other than
certain nondecreasing annuity forms. These regulations are issued to
reflect changes to the applicable law made by the Retirement Protection
Act of 1994 (RPA '94), which is part of the Uruguay Round Agreements
Act of 1994. RPA '94 amended the law to change the interest rate, and
to specify the mortality table, for the purposes described above. These
regulations affect employers that maintain qualified defined benefit
pension plans, and participants and beneficiaries in those plans.
DATES: Effective date: These regulations are effective April 3, 1998.
Applicability date: These regulations apply to plan years beginning
after December 31, 1994, except as provided in Sec. 1.417(e)-1(d) (8)
and (9).
FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, (202) 622-6030
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 417(e). Section 417(e) was amended by the
Retirement Protection Act of 1994 (RPA '94). On April 5, 1995,
temporary regulations (TD 8591) under section 417(e) were published in
the Federal Register (60 FR 17216). A notice of proposed rulemaking
(EE-12-95), cross-referencing the temporary regulations, was published
in the Federal Register (60 FR 17286) on the same day. The temporary
regulations provide guidance related to the determination of the
present value of an employee's benefit under a qualified defined
benefit pension plan in accordance with the rules of section 417(e)(3).
After consideration of the public comments received regarding the
temporary and proposed regulations, the temporary regulations are
replaced and the proposed regulations are adopted as revised by this
Treasury decision.
Section 417(e)(3) sets forth rules to be used in determining the
present value of an employee's benefit under a qualified defined
benefit pension plan, for purposes of the applicable consent rules and
for purposes of determining the amount of a distribution. The rules of
section 417(e)(3) are also relevant to the application of section
411(a)(11) and section 415(b). Section 411(a)(11) provides that a
participant's benefit with a present value that exceeds a statutory
threshold can be immediately distributed to a participant only with the
participant's consent. The level of this statutory threshold was
changed from $3,500 to $5,000 by the Taxpayer Relief Act of 1997,
effective for plan years beginning after August 5, 1997. Under section
411(a)(11)(B), as amended by RPA '94, the present value of a
participant's benefit is calculated using the rules of section
417(e)(3).
Section 415(b) limits the maximum benefit that can be provided
under a qualified defined benefit plan. Under section 415(b)(2)(E)(ii),
as amended by RPA '94, the minimum interest rate permitted to be used
for certain purposes to determine compliance with the limit under
section 415(b) is the applicable interest rate as defined in section
417(e)(3). Because the rules of section 417(e)(3) affect the
application of sections 411(a)(11)(B) and 415(b)(2)(E)(ii), the
guidance provided by these regulations is relevant to the application
of those provisions.
Explanation of provisions
Section 417(e) restricts the ability of certain qualified
retirement plans to distribute a participant's benefit under the plan
without the consent of the participant and, in many cases, the
participant's spouse. The application of these restrictions is
determined based on the present value of the participant's benefit.
Prior to amendments made by RPA '94, section 417(e)(3) restricted the
interest rate to be used under a plan to calculate the present value of
a participant's benefit, but did not impose any restrictions on the
mortality table to be used for that purpose. Section 767 of
[[Page 16896]]
RPA '94 modified section 417(e)(3) to provide that the present value of
a participant's benefit is not less than the present value calculated
by using the applicable mortality table and the applicable interest
rate.
In general, comments received on the proposed and temporary
regulations were favorable. Thus, the final regulations retain the
general structure and substance of the proposed and temporary
regulations.
Applicable mortality table
The applicable mortality table under section 417(e)(3) is defined
as the table prescribed by the Secretary based on the prevailing
commissioners' standard table (described in section 807(d)(5)(A)) used
to determine reserves for group annuity contracts issued on the date as
of which present value is being determined (without regard to any other
subparagraph of section 807(d)(5)). Currently, the prevailing
commissioners' standard table is the 1983 Group Annuity Mortality
Table. See Rev. Rul. 92-19 (1992-1 C.B. 227). These regulations retain
the provision in the temporary regulation that the applicable mortality
table as described above is to be prescribed by the Commissioner in
revenue rulings, notices or other guidance published in the Internal
Revenue Bulletin. The mortality table currently prescribed by the
Commissioner is set forth in Rev. Rul. 95-6 (1995-1 C.B. 80), and is
based on a fixed blend of 50 percent of the male mortality rates and 50
percent of the female mortality rates from the 1983 Group Annuity
Mortality Table.
Applicable interest rate
Under section 417(e)(3), the applicable interest rate is defined as
the annual rate of interest on 30-year Treasury securities for the
month before the date of distribution or such other time as the
Secretary may by regulations prescribe. These regulations retain the
rule in the temporary regulations that the applicable interest rate for
a month is the annual interest rate on 30-year Treasury securities as
specified by the Commissioner for that month. The Commissioner
publishes this interest rate for each month by notice, after the end of
the month. Currently, this interest rate is the interest rate published
in Federal Reserve releases G.13 and H.15 as the average yield on 30-
year Treasury Constant Maturities for the month.
The interest rate on 30-year Treasury Constant Maturities published
monthly in Federal Reserve releases G.13 and H.15 can also be obtained
by telephone from the Public Information Department of the Federal
Reserve Bank of New York at (212) 720-6130 (not a toll-free number), or
from the Federal Reserve Board of Governors' Internet site at http://
www.bog.frb.fed.us/releases. Information regarding subscriptions to
Federal Reserve releases G.13 and H.15 can be obtained from the
Publications Department of the Federal Reserve Board of Governors at
(202) 452-3244 (not a toll-free number).
Time for determining applicable interest rate
Section 417(e)(3)(A)(ii)(II) provides that the applicable interest
rate for distributions made during a month is the annual rate of
interest on 30-year Treasury securities for the month before the date
of distribution or such other time as the Secretary may by regulations
prescribe. As an alternative to this monthly change in the applicable
interest rate, the temporary regulations permitted selection of a plan
quarter or a plan year as a stability period during which the
applicable interest rate remains constant, thereby permitting plans to
offer greater benefit stability than is provided by the statutory rule.
One commentator suggested adding a calendar year and a calendar quarter
as additional alternative stability periods for the applicable interest
rate, and another suggested adding a plan half-year. The IRS and
Treasury have weighed the usefulness of the additional proposed
stability periods for taxpayers against the additional complexity that
would be added to the regulation, and have added a calendar year and a
calendar quarter as additional alternative stability periods.
These regulations retain the rule in the temporary regulations that
the applicable interest rate for the stability period may be determined
as the 30-year Treasury rate for any one of the five calendar months
preceding the first day of the stability period. Permitting this
``lookback'' of up to five months provides added flexibility and gives
plan administrators and participants more time to comply with
applicable notice and election requirements using the actual interest
rate (instead of an estimate).
Several commentators suggested that regulations permit an average
of lookback month interest rates to be used, in lieu of the interest
rate for a single lookback month, to minimize interest rate
fluctuations. These regulations adopt this suggestion, and permit an
average interest rate based on consecutive permitted lookback months to
be used for this purpose.
Several commentators suggested that a plan be allowed to provide
for different applicable interest rates for each portion of the plan
that independently meets the requirements of sections 410(b) and
401(a)(26). The IRS and Treasury have determined, however, that there
is insufficient basis for adopting a definition of a ``plan'' that is
different from the general definition set forth in Sec. 1.414(l)-
1(b)(1).
Exceptions from the requirements of section 417(e)(3)
The temporary regulations provided an exception from the
requirements of section 417(e)(3) and Sec. 1.417(e)-1T(d) for the
amount of a distribution under a nondecreasing annuity payable for a
period not less than the life of the participant or, in the case of a
QPSA, the life of the surviving spouse. For purposes of this exception,
a nondecreasing annuity included a QJSA, a QPSA, and an annuity that
decreased merely because of the cessation or reduction of Social
Security supplements or qualified disability payments (as defined in
section 411(a)(9)). This exception was identical to the exception
provided under former final regulations. Several commentators pointed
out that this exception did not cover several other types of annuity
forms of distribution that were nondecreasing during the life of the
participant, and suggested that the regulations be changed to provide
additional exceptions for these additional annuity forms of
distribution.
The IRS and Treasury have determined that it is appropriate to
provide additional exceptions for these benefit forms. Accordingly,
under the final regulations, section 417(e)(3) and Sec. 1.417(e)-1(d)
do not apply to the amount of a distribution paid in the form of an
annual benefit that does not decrease during the life of the
participant, or, in the case of a QPSA, the life of the participant's
spouse; or that decreases during the life of the participant merely
because of the death of the survivor annuitant (but only if the
reduction is to a level not below 50% of the annual benefit payable
before the death of the survivor annuitant) or merely because of the
cessation or reduction of Social Security supplements or qualified
disability benefits. Also, under Q&A-2 of Rev. Rul. 98-1 (1998-2 I.R.B.
1), the interest rate prescribed by section 415(b)(2)(E)(ii) does not
apply to these forms of benefit.
Effective dates
These regulations generally apply to plan years beginning after
December 31, 1994.
[[Page 16897]]
Under section 417(e)(3)(B) and these regulations, the general
effective date for the RPA '94 rules is delayed for certain plans until
the first plan year that begins after December 31, 1999, unless an
employer takes earlier action. The delayed effective date applies to a
plan adopted and in effect before December 8, 1994, if the provisions
of the plan in effect on December 7, 1994, met the requirements of
section 417(e)(3) as in effect on December 7, 1994. For such a plan,
the determination of whether a distribution made before the first day
of the first plan year that begins after December 31, 1999, satisfies
section 417(e) is made under the provisions of the plan in effect on
December 7, 1994, if the annuity starting date for the distribution
occurs before the date a plan amendment applying both the applicable
mortality table and the applicable interest rate rules added by RPA '94
is adopted or, if later, is made effective. Thus, under section
417(e)(3)(B) and these regulations, a plan that was adopted and in
effect before December 8, 1994, and the provisions of which, as in
effect on December 7, 1994, met the requirements of section 417(e)(3)
as in effect on that date, cannot be amended to provide a different
method of calculating the present value of a distribution under section
417(e)(3) effective before the date a plan amendment applying both the
applicable mortality table and the applicable interest rate rules added
by RPA '94 is adopted or, if later, is made effective.
One commentator inquired whether, where a plan is spun off from
another plan during the optional delayed effective date period, both
plans are required to be amended to apply the applicable mortality
table and the applicable interest rate rules added by RPA '94 effective
on the same date. Because these rules apply on a plan by plan basis,
the plans are not required to be amended effective on the same date.
One other commentator suggested that the regulations be changed to
permit a plan to provide for different optional delayed effective dates
for each separate benefit structure that independently meets the
requirements of section 401(a)(4). Section 417(e)(3)(B) requires a
single effective date for a plan amendment applying the applicable
mortality table and the applicable interest rate rules added by RPA
'94. Therefore, this suggestion is inconsistent with the statute. Of
course, a plan amendment that applies the applicable mortality table
and the applicable interest rate rules added by RPA '94 may provide for
temporary or permanent use of interest and mortality assumptions for
specified participant groups that result in larger distributions than
the minimum required under these RPA '94 rules, provided that other
qualification requirements (such as section 401(a)(4)) are satisfied.
These regulations restate the rules applicable to plan years
beginning before January 1, 1995, without substantive change. Those
pre-1995 rules also apply to later plan years, to the extent that the
application of the RPA '94 rules is delayed as described above.
In addition, section 767(d)(1) of RPA '94 permits an employer to
elect to accelerate the effective date of the RPA '94 rules, and hence
these regulations, in order to apply the RPA '94 rules to distributions
with annuity starting dates occurring after December 7, 1994, in plan
years beginning before January 1, 995. An employer that makes a plan
amendment applying the applicable mortality table and the applicable
interest rate rules of these regulations is treated as making this
election as of the date the plan amendment is adopted or, if later, is
made effective.
Relationship with section 411(d)(6)
Section 411(d)(6) provides that a plan does not satisfy the
requirements of section 411 if the accrued benefit of a participant is
decreased by a plan amendment. In general, a plan amendment that
changes the interest rate or the mortality assumptions used for
purposes of determining the amount of any accrued benefit in any
preexisting optional form is subject to section 411(d)(6). Consistent
with both the temporary regulations and the prior final regulations,
these regulations provide limited section 411(d)(6) relief for certain
plan amendments that change the time for determining the applicable
interest rate. A plan amendment that changes the time for determining
the applicable interest rate will not be treated as violating section
411(d)(6) if each distribution made until one year after the later of
the effective date or the adoption date of the amendment is calculated
using the time for determining the applicable interest rate as provided
before or after the amendment, whichever produces the larger benefit.
For this purpose, all other plan provisions must be applied as in
effect after the amendment.
Section 767(d)(2) of RPA '94 provides that a participant's accrued
benefit is not considered to be reduced in violation of section
411(d)(6) merely because the benefit is determined in accordance with
the applicable interest rate rules and the applicable mortality table
rules of section 417(e)(3)(A), as amended by RPA '94. These regulations
provide that an amendment replacing an interest rate used for purposes
of section 417(e)(3) qualifies for this section 411(d)(6) relief if the
interest rate replaced is the Pension Benefit Guaranty Corporation
(PBGC) interest rate or a rate based on the PBGC interest rate.
Pursuant to suggestions made by several commentators, these regulations
clarify that the interest rates that may be replaced pursuant to this
section 411(d)(6) relief include an interest rate based on the average
of the PBGC interest rates over a specified period. In addition,
pursuant to suggestions made by two commentators, the final regulations
clarify the relationship between the various types of section 411(d)(6)
relief under the regulations, and provide some additional flexibility
to employers in determining how to transition between the PBGC interest
rate and the applicable interest rate and applicable mortality table,
where the transition is combined with a change in the time for
determining the interest rate.
One commentator asked whether the section 411(d)(6) relief for plan
amendments adopting the applicable mortality table and the applicable
interest rate rules applies with respect to terminated vested
participants. Because the section 411(d)(6) relief provided under
section 767(d)(2) of RPA '94 applies in the same manner with respect to
active and terminated participants, the regulations likewise do not
distinguish terminated vested participants from other participants in
this regard.
Several commentators requested that the regulations be amended to
provide unconditional section 411(d)(6) relief for plan amendments
adopting the applicable interest rate and applicable mortality table
rules of RPA '94 regardless of changes in the time for determining the
applicable interest rate. The IRS and Treasury have determined that
providing some additional flexibility to employers in determining how
to transition between the PBGC interest rate and the applicable
interest rate and applicable mortality table, as discussed above, where
the transition is combined with a change in the time for determining
the interest rate, strikes an appropriate balance between the practical
concerns of employers and the rights of participants.
These regulations further provide that, where a plan provided for
the use of an interest rate not based on the PBGC interest rate
prescribed by section 417(e)(3) as in effect before amendments made by
RPA '94, a plan amendment
[[Page 16898]]
that eliminates the use of that interest rate and the associated
mortality table may result in a reduction of a participant's accrued
benefit, which would violate the requirements of section 411(d)(6). Two
commentators suggested that final regulations provide section 411(d)(6)
relief for plan amendments that eliminate the use of an interest rate
not based on the PBGC interest rate, for plan amendments that adopt the
applicable interest rate and applicable mortality table rules of RPA
'94. Another commentator requested that final regulations provide for
similar section 411(d)(6) relief, but only for mandatory distributions
that are permitted pursuant to the rules of section 411(a)(11). The IRS
and Treasury have determined that section 767(d)(2) of RPA '94 does not
support a grant of section 411(d)(6) relief with respect to plan
amendments eliminating interest rates that are not based on the PBGC
interest rate.
These regulations provide examples of the application of section
411(d)(6) and the special rule of section 767(d)(2) of RPA '94,
including an example illustrating the use of a phase-in that provides
for a smoother transition from the plan's former terms to the new
rules. In addition, these regulations provide section 411(d)(6) relief
for certain plan amendments that eliminate use of the applicable
interest rate and the applicable mortality table with respect to
distribution forms that are newly excepted from the application of
section 417(e)(3) by these regulations.
The PBGC has advised the IRS and Treasury that it has not made any
decision at this time on whether it will continue to calculate and
publish the relevant interest rates after the year 2000. Therefore, in
amending plans to comply with these regulations, employers should not
rely on the continued determination and publication of these rates by
the PBGC beyond the year 2000.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the notice of proposed
rulemaking preceding the regulations was issued prior to March 29,
1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these regulations was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Information: The principal author of these regulations is
Linda S. F. Marshall, Office of the Associate Chief Counsel (Employee
Benefits and Exempt Organizations). However, other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.417(e)-1 also issued under 26 U.S.C.
417(e)(3)(A)(ii)(II). * * *
Par. 2. In Sec. 1.417(e)-1, paragraph (d) is revised to read as
follows:
Sec. 1.417(e)-1 Restrictions and valuations of distributions from
plans subject to sections 401(a)(11) and 417.
* * * * *
(d) Present value requirement--(1) General rule. A defined benefit
plan must provide that the present value of any accrued benefit and the
amount (subject to sections 411(c)(3) and 415) of any distribution,
including a single sum, must not be less than the amount calculated
using the applicable interest rate described in paragraph (d)(3) of
this section (determined for the month described in paragraph (d)(4) of
this section) and the applicable mortality table described in paragraph
(d)(2) of this section. The present value of any optional form of
benefit cannot be less than the present value of the normal retirement
benefit determined in accordance with the preceding sentence.
The same rules used for the plan under this paragraph (d) must also
be used to compute the present value of the benefit for purposes of
determining whether consent for a distribution is required under
paragraph (b) of this section.
(2) Applicable mortality table. The applicable mortality table is
the mortality table based on the prevailing commissioners' standard
table (described in section 807(d)(5)(A)) used to determine reserves
for group annuity contracts issued on the date as of which present
value is being determined (without regard to any other subparagraph of
section 807(d)(5)), that is prescribed by the Commissioner in revenue
rulings, notices, or other guidance published in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter). The
Commissioner may prescribe rules that apply in the case of a change to
the prevailing commissioners' standard table (described in section
807(d)(5)(A)) used to determine reserves for group annuity contracts,
in revenue rulings, notices, or other guidance published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter).
(3) Applicable interest rate--(i) General rule. The applicable
interest rate for a month is the annual interest rate on 30-year
Treasury securities as specified by the Commissioner for that month in
revenue rulings, notices or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(ii) Example. This example illustrates the rules of this paragraph
(d)(3):
Example. Plan A is a calendar year plan. For its 1995 plan year,
Plan A provides that the applicable mortality table is the table
described in Rev. Rul. 95-6 (1995-1 C.B. 80), and that the
applicable interest rate is the annual interest rate on 30-year
Treasury securities as specified by the Commissioner for the first
full calendar month preceding the calendar month that contains the
annuity starting date. Participant P is age 65 in January 1995,
which is the month that contains P's annuity starting date. P has an
accrued benefit payable monthly of $1,000 and has elected to receive
a distribution in the form of a single sum in January 1995. The
annual interest rate on 30-year Treasury securities as published by
the Commissioner for December 1994 is 7.87 percent. To satisfy the
requirements of section 417(e)(3) and this paragraph (d), the single
sum received by P may not be less than $111,351.
(4) Time for determining interest rate--(i) General rule. Except as
provided in paragraph (d)(4)(iv) or (v) of this section, the applicable
interest rate to be used for a distribution is the rate determined
under paragraph (d)(3) of this section for the applicable lookback
month. The applicable lookback month for a distribution is the lookback
month (as described in paragraph (d)(4)(iii) of this section) for the
month (or other longer stability period described in paragraph
(d)(4)(ii) of this section) that contains the annuity starting date for
the distribution. The time and method for determining the applicable
interest rate for each participant's distribution must be determined in
a consistent manner that is applied uniformly to all participants in
the plan.
[[Page 16899]]
(ii) Stability period. A plan must specify the period for which the
applicable interest rate remains constant. This stability period may be
one calendar month, one plan quarter, one calendar quarter, one plan
year, or one calendar year.
(iii) Lookback month. A plan must specify the lookback month that
is used to determine the applicable interest rate. The lookback month
may be the first, second, third, fourth, or fifth full calendar month
preceding the first day of the stability period.
(iv) Permitted average interest rate. A plan may apply the rules of
paragraph (d)(4)(i) of this section by substituting a permitted average
interest rate with respect to the plan's stability period for the rate
determined under paragraph (d)(3) of this section for the applicable
lookback month for the stability period. For this purpose, a permitted
average interest rate with respect to a stability period is an interest
rate that is computed by averaging the applicable interest rates
determined under paragraph (d)(3) of this section for two or more
consecutive months from among the first, second, third, fourth, and
fifth calendar months preceding the first day of the stability period.
For this paragraph (d)(4)(iv) to apply, a plan must specify the manner
in which the permitted average interest rate is computed.
(v) Additional determination dates. The Commissioner may prescribe,
in revenue rulings, notices or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b)), other times that a
plan may provide for determining the applicable interest rate.
(vi) Example. This example illustrates the rules of this paragraph
(d)(4):
Example. Employer X maintains Plan A, a calendar year plan.
Employer X wishes to amend Plan A so that the applicable interest
rate will remain fixed for each plan quarter, and so that the
applicable interest rate for distributions made during each plan
quarter can be determined approximately 80 days before the beginning
of the plan quarter. To comply with the provisions of this paragraph
(d)(4), Plan A is amended to provide that the applicable interest
rate is the annual interest rate on 30-year Treasury securities as
specified by the Commissioner for the fourth calendar month
preceding the first day of the plan quarter during which the annuity
starting date occurs.
(5) Use of alternative interest rate and mortality table. If a plan
provides for use of an interest rate or mortality table other than the
applicable interest rate or the applicable mortality table, the plan
must provide that a participant's benefit must be at least as great as
the benefit produced by using the applicable interest rate and the
applicable mortality table. For example, if a plan provides for use of
an interest rate of 7% and the UP-1984 Mortality Table (see
Sec. 1.401(a)(4)-12, Standard mortality table) in calculating single-
sum distributions, the plan must provide that any single-sum
distribution is calculated as the greater of the single-sum benefit
calculated using 7% and the UP-1984 Mortality Table and the single-sum
benefit calculated using the applicable interest rate and the
applicable mortality table.
(6) Exceptions. This paragraph (d) (other than the provisions
relating to section 411(d)(6) requirements in paragraph (d)(10) of this
section) does not apply to the amount of a distribution paid in the
form of an annual benefit that--
(i) Does not decrease during the life of the participant, or, in
the case of a QPSA, the life of the participant's spouse; or
(ii) Decreases during the life of the participant merely because
of--
(A) The death of the survivor annuitant (but only if the reduction
is to a level not below 50% of the annual benefit payable before the
death of the survivor annuitant); or
(B) The cessation or reduction of Social Security supplements or
qualified disability benefits (as defined in section 411(a)(9)).
(7) Defined contribution plans. Because the accrued benefit under a
defined contribution plan equals the account balance, a defined
contribution plan is not subject to the requirements of this paragraph
(d), even though it is subject to section 401(a)(11).
(8) Effective date--(i) In general. This paragraph (d) is effective
for distributions with annuity starting dates in plan years beginning
after December 31, 1994.
(ii) Optional delayed effective date of Retirement Protection Act
of 1994 (RPA '94)(108 Stat. 5012) rules for plans adopted and in effect
before December 8, 1994. For a plan adopted and in effect before
December 8, 1994, the application of the rules relating to the
applicable mortality table and applicable interest rate under
paragraphs (d)(2) through (4) of this section is delayed to the extent
provided in this paragraph (d)(8)(ii), if the plan provisions in effect
on December 7, 1994, met the requirements of section 417(e)(3) and
Sec. 1.417(e)-1(d) as in effect on December 7, 1994 (as contained in 26
CFR part 1 revised April 1, 1995). In the case of a distribution from
such a plan with an annuity starting date that precedes the optional
delayed effective date described in paragraph (d)(8)(iv) of this
section, and that precedes the first day of the first plan year
beginning after December 31, 1999, the rules of paragraph (d)(9) of
this section (which generally apply to distributions with annuity
starting dates in plan years beginning before January 1, 1995) apply in
lieu of the rules of paragraphs (d)(2) through (4) of this section. The
interest rate under the rules of paragraph (d)(9) of this section is
determined under the provisions of the plan as in effect on December 7,
1994, reflecting the interest rate or rates published by the Pension
Benefit Guaranty Corporation (PBGC) and the provisions of the plan for
determining the date on which the interest rate is fixed. The above
described interest rate or rates published by the PBGC are those
determined by the PBGC (for the date determined under those plan
provisions) pursuant to the methodology under the regulations of the
PBGC for determining the present value of a lump sum distribution on
plan termination under 29 CFR part 2619 that were in effect on
September 1, 1993 (as contained in 29 CFR part 2619 revised July 1,
1994).
(iii) Optional accelerated effective date of RPA '94 rules. This
paragraph (d) is also effective for a distribution with an annuity
starting date after December 7, 1994, during a plan year beginning
before January 1, 1995, if the employer elects, on or before the
annuity starting date, to make the rules of this paragraph (d)
effective with respect to the plan as of the optional accelerated
effective date described in paragraph (d)(8)(iv) of this section. An
employer is treated as making this election by making the plan
amendments described in paragraph (d)(8)(iv) of this section.
(iv) Determination of delayed or accelerated effective date by plan
amendment adopting RPA '94 rules. The optional delayed effective date
of paragraph (d)(8)(ii) of this section, or the optional accelerated
effective date of paragraph (d)(8)(iii) of this section, whichever is
applicable, is the date plan amendments applying both the applicable
mortality table of paragraph (d)(2) of this section and the applicable
interest rate of paragraph (d)(3) of this section are adopted or, if
later, are made effective.
(9) Plan years beginning before January 1, 1995--(i) Interest rate.
(A) For distributions made in plan years beginning after December 31,
1986, and before January 1, 1995, the following interest rate described
in paragraph (d)(9)(i)(A)(1) or (2) of this section, whichever applies,
is substituted for the
[[Page 16900]]
applicable interest rate for purposes of this section--
(1) The rate or rates that would be used by the PBGC for a trusteed
single-employer plan to value the participant's (or beneficiary's)
vested benefit (PBGC interest rate) if the present value of such
benefit does not exceed $25,000; or
(2) 120 percent of the PBGC interest rate, as determined in
accordance with paragraph (d)(9)(i)(A)(1) of this section, if such
present value exceeds $25,000. In no event shall the present value
determined by use of 120 percent of the PBGC interest rate result in a
present value less than $25,000.
(B) The PBGC interest rate may be a series of interest rates for
any given date. For example, the PBGC interest rate for immediate
annuities for November 1994 is 6%, and the PBGC interest rates for the
deferral period for that month are as follows: 5.25% for the first 7
years of the deferral period, 4% for the following 8 years of the
deferral period, and 4% for the remainder of the deferral period. For
November 1994, 120 percent of the PBGC interest rate is 7.2% (1.2 times
6%) for an immediate annuity, 6.3% (1.2 times 5.25%) for the first 7
years of the deferral period, 4.8% (1.2 times 4%) for the following 8
years of the deferral period, and 4.8% (1.2 times 4%) for the remainder
of the deferral period. The PBGC interest rates are the interest rates
that would be used (as of the date of the distribution) by the PBGC for
purposes of determining the present value of that benefit upon
termination of an insufficient trusteed single employer plan. Except as
otherwise provided by the Commissioner, the PBGC interest rates are
determined by PBGC regulations. See subpart B of 29 CFR part 4044 for
the applicable PBGC rates.
(ii) Time for determining interest rate. (A) Except as provided in
paragraph (d)(9)(ii)(B) of this section, the PBGC interest rate or
rates are determined on either the annuity starting date or the first
day of the plan year that contains the annuity starting date. The plan
must provide which date is applicable.
(B) The plan may provide for the use of any other time for
determining the PBGC interest rate or rates provided that such time is
not more than 120 days before the annuity starting date if such time is
determined in a consistent manner and is applied uniformly to all
participants.
(C) The Commissioner may, in revenue rulings, notices or other
guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2)(ii)(b), prescribe other times for determining the
PBGC interest rate or rates.
(iii) No applicable mortality table. In the case of a distribution
to which this paragraph (d)(9) applies, the rules of this paragraph (d)
are applied without regard to the applicable mortality table described
in paragraph (d)(2) of this section.
(10) Relationship with section 411(d)(6)--(i) In general. A plan
amendment that changes the interest rate, the time for determining the
interest rate, or the mortality assumptions used for the purposes
described in paragraph (d)(1) of this section is subject to section
411(d)(6). But see Sec. 1.411(d)-4, Q&A-2(b)(2)(v) (regarding plan
amendments relating to involuntary distributions). In addition, a plan
amendment that changes the interest rate or the mortality assumptions
used for the purposes described in paragraph (d)(1) of this section
merely to eliminate use of the interest rate described in paragraph
(d)(3) or paragraph (d)(9) of this section, or the applicable mortality
table, with respect to a distribution form described in paragraph
(d)(6) of this section, for distributions with annuity starting dates
occurring after a specified date that is after the amendment is
adopted, does not violate the requirements of section 411(d)(6) if the
amendment is adopted on or before the last day of the last plan year
ending before January 1, 2000.
(ii) Section 411(d)(6) relief for change in time for determining
interest rate. Notwithstanding the general rule of paragraph (d)(10)(i)
of this section, if a plan amendment changes the time for determining
the applicable interest rate (including an indirect change as a result
of a change in plan year), the amendment will not be treated as
reducing accrued benefits in violation of section 411(d)(6) merely on
account of this change if the conditions of this paragraph (d)(10)(ii)
are satisfied. If the plan amendment is effective on or after the
adoption date, any distribution for which the annuity starting date
occurs in the one-year period commencing at the time the amendment is
effective must be determined using the interest rate provided under the
plan determined at either the date for determining the interest rate
before the amendment or the date for determining the interest rate
after the amendment, whichever results in the larger distribution. If
the plan amendment is adopted retroactively (that is, the amendment is
effective prior to the adoption date), the plan must use the interest
rate determination date resulting in the larger distribution for the
period beginning with the effective date and ending one year after the
adoption date.
(iii) Section 411(d)(6) relief for plan amendments pursuant to
changes to section 417 made by RPA '94 providing for statutory interest
rate determination date. Notwithstanding the general rule of paragraph
(d)(10)(i) of this section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not
considered to be reduced in violation of section 411(d)(6) merely
because of a plan amendment that changes any interest rate or mortality
assumption used to calculate the present value of a participant's
benefit under the plan, if the following conditions are satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate
used under the plan in determining the present value of a participant's
benefit under this paragraph (d); and
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate for the first full calendar month preceding the calendar
month that contains the annuity starting date.
(iv) Section 411(d)(6) relief for plan amendments pursuant to
changes to section 417 made by RPA '94 providing for prior
determination date or up to two months earlier. Notwithstanding the
general rule of paragraph (d)(10)(i) of this section, except as
provided in paragraph (d)(10)(vi)(B) of this section, a participant's
accrued benefit is not considered to be reduced in violation of section
411(d)(6) merely because of a plan amendment that changes any interest
rate or mortality assumption used to calculate the present value of a
participant's benefit under the plan, if the following conditions are
satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate
used under the plan in determining the present value of a participant's
benefit under this paragraph (d); and
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate, but only if the applicable interest rate is the annual
interest rate on 30-year Treasury securities for the calendar month
that contains the date as of which the PBGC interest rate (or an
interest rate or rates based on the PBGC interest rate) was determined
immediately before the amendment, or for one of the two
[[Page 16901]]
calendar months immediately preceding such month.
(v) Section 411(d)(6) relief for plan amendments pursuant to
changes to section 417 made by RPA '94 providing for other interest
rate determination date. Notwithstanding the general rule of paragraph
(d)(10)(i) of this section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not
considered to be reduced in violation of section 411(d)(6) merely
because of a plan amendment that changes any interest rate or mortality
assumption used to calculate the present value of a participant's
benefit under the plan, if the following conditions are satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate
used under the plan in determining the present value of a participant's
benefit under this paragraph (d);
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate; and
(C) The plan amendment satisfies either the condition of paragraph
(d)(10)(ii) of this section (determined using the interest rate
provided under the terms of the plan after the effective date of the
amendment) or the special early transition interest rate rule of
paragraph (d)(10)(vi)(C) of this section.
(vi) Special rules--(A) Provision of temporary additional benefits.
A plan amendment described in paragraph (d)(10)(iii), (iv), or (v) of
this section is not considered to reduce a participant's accrued
benefit in violation of section 411(d)(6) even if the plan amendment
provides for temporary additional benefits to accommodate a more
gradual transition from the plan's old interest rate to the new rules.
(B) Replacement of non-PBGC interest rate. The section 411(d)(6)
relief provided in paragraphs (d)(10)(iii) through (v) of this section
does not apply to a plan amendment that replaces an interest rate other
than the PBGC interest rate (or an interest rate or rates based on the
PBGC interest rate) as an interest rate used under the plan in
determining the present value of a participant's benefit under this
paragraph (d). Thus, the accrued benefit determined using that interest
rate and the associated mortality table is protected under section
411(d)(6). For purposes of this paragraph (d), an interest rate is
based on the PBGC interest rate if the interest rate is defined as a
specified percentage of the PBGC interest rate, the PBGC interest rate
minus a specified number of basis points, or an average of such
interest rates over a specified period.
(C) Special early transition interest rate rule for paragraph
(d)(10)(v). A plan amendment satisfies the special rule of this
paragraph (d)(10)(vi)(C) if any distribution for which the annuity
starting date occurs in the one-year period commencing at the time the
plan amendment is effective is determined using whichever of the
following two interest rates results in the larger distribution--
(1) The interest rate as provided under the terms of the plan after
the effective date of the amendment, but determined at a date that is
either one month or two months (as specified in the plan) before the
date for determining the interest rate used under the terms of the plan
before the amendment; or
(2) The interest rate as provided under the terms of the plan after
the effective date of the amendment, determined at the date for
determining the interest rate after the amendment.
(vii) Examples. The provisions of this paragraph (d)(10) are
illustrated by the following examples:
Example 1. On December 31, 1994, Plan A provided that all
single-sum distributions were to be calculated using the UP-1984
Mortality Table and 100% of the PBGC interest rate for the date of
distribution. On January 4, 1995, and effective on February 1, 1995,
Plan A was amended to provide that all single-sum distributions are
calculated using the applicable mortality table and the annual
interest rate on 30-year Treasury securities for the first full
calendar month preceding the calendar month that contains the
annuity starting date. Pursuant to paragraph (d)(10)(iii) of this
section, this amendment of Plan A is not considered to reduce the
accrued benefit of any participant in violation of section
411(d)(6).
Example 2. On December 31, 1994, Plan B provided that all
single-sum distributions were to be calculated using the UP-1984
Mortality Table and an interest rate equal to the lesser of 100% of
the PBGC interest rate for the date of distribution, or 6%. On
January 4, 1995, and effective on February 1, 1995, Plan B was
amended to provide that all single-sum distributions are calculated
using the applicable mortality table and the annual interest rate on
30-year Treasury securities for the second full calendar month
preceding the calendar month that contains the annuity starting
date. Pursuant to paragraph (d)(10)(iv) of this section, this
amendment of Plan B is not considered to reduce the accrued benefit
of any participant in violation of section 411(d)(6) merely because
of the replacement of the PBGC interest rate. However, under
paragraph (d)(10)(vi)(B) of this section, the section 411(d)(6)
relief provided in paragraphs (d)(10)(iii) through (v) of this
section does not apply to a plan amendment that replaces an interest
rate other than the PBGC interest rate (or a rate based on the PBGC
interest rate). Therefore, pursuant to paragraph (d)(10)(vi)(B) of
this section, to satisfy the requirements of section 411(d)(6), the
plan must provide that the single-sum distribution payable to any
participant must be no less than the single-sum distribution
calculated using the UP-1984 Mortality Table and an interest rate of
6%, based on the participant's benefits under the plan accrued
through January 31, 1995, and based on the participant's age at the
annuity starting date.
Example 3. On December 31, 1994, Plan C, a calendar year plan,
provided that all single sum distributions were to be calculated
using the UP-1984 Mortality Table and an interest rate equal to the
PBGC interest rate for January 1 of the plan year. On March 1, 1995,
and effective on July 1, 1995, Plan C was amended to provide that
all single-sum distributions are calculated using the applicable
mortality table and the annual interest rate on 30-year Treasury
securities for August of the year before the plan year that contains
the annuity starting date. The plan amendment provides that each
distribution with an annuity starting date after June 30, 1995, and
before July 1, 1996, is calculated using the 30-year Treasury rate
for August of the year before the plan year that contains the
annuity starting date, or the 30-year Treasury rate for January of
the plan year that contains the annuity starting date, whichever
produces the larger benefit. Pursuant to paragraph (d)(10)(v) of
this section, the amendment of Plan C is not considered to have
reduced the accrued benefit of any participant in violation of
section 411(d)(6).
Example 4. (a) Employer X maintains Plan D, a calendar year
plan. As of December 7, 1994, Plan D provided for single-sum
distributions to be calculated using the PBGC interest rate as of
the annuity starting date for distributions not greater than
$25,000, and 120% of that interest rate (but not an interest rate
producing a present value less than $25,000) for distributions over
$25,000. Employer X wishes to delay the effective date of the RPA
'94 rules for a year, and to provide for an extended transition from
the use of the PBGC interest rate to the new applicable interest
rate under section 417(e)(3). On December 1, 1995, and effective on
January 1, 1996, Employer X amends Plan D to provide that single-sum
distributions are determined as the sum of--
(i) The single-sum distribution calculated based on the
applicable mortality table and the annual interest rate on 30-year
Treasury securities for the first full calendar month preceding the
calendar month that contains the annuity starting date; and
(ii) A transition amount.
(b) The amendment provides that the transition amount for
distributions in the years 1996-99 is a transition percentage of the
excess, if any, of the amount that the single-sum distribution would
have been under the plan provisions in effect prior to this
amendment over the amount of the single sum described in paragraph
(a)(i) of this Example 4. The transition percentages are 80% for
1996, decreasing to 60% for 1997, 40% for 1998 and 20% for 1999. The
[[Page 16902]]
amendment also provides that the transition amount is zero for plan
years beginning on or after the year 2000. Pursuant to paragraphs
(d)(10)(iii) and (vi)(A) of this section, the amendment of Plan D is
not considered to have reduced the accrued benefit of any
participant in violation of section 411(d)(6).
Example 5. On December 31, 1994, Plan E, a calendar year plan,
provided that all single sum distributions were to be calculated
using the UP-1984 Mortality Table and an interest rate equal to the
PBGC interest rate for January 1 of the plan year. On March 1, 1995,
and effective on July 1, 1995, Plan E was amended to provide that
all single-sum distributions are calculated using the applicable
mortality table and the annual interest rate on 30-year Treasury
securities for August of the year before the plan year that contains
the annuity starting date. The plan amendment provides that each
distribution with an annuity starting date after June 30, 1995, and
before July 1, 1996, is calculated using the 30-year Treasury rate
for August of the year before the plan year that contains the
annuity starting date, or the 30-year Treasury rate for November of
the plan year preceding the plan year that contains the annuity
starting date, whichever produces the larger benefit. Pursuant to
paragraphs (d)(10)(v) and (vi)(C) of this section, the amendment of
Plan E is not considered to have reduced the accrued benefit of any
participant in violation of section 411(d)(6).
Par. 3. In Sec. 1.417(e)-1T, paragraph (d) is revised to read as
follows:
Sec. 1.417(e)-1T Restrictions and valuations of distributions from
plans subject to sections 401(a)(11) and 417. (Temporary)
* * * * *
(d) For rules regarding the present value of a participant's
accrued benefit and related matters, see Sec. 1.417(e)-1(d).
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: March 30, 1998
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-8981 Filed 4-3-98; 8:45 am]
BILLING CODE 4830-01-U
