The IRS issued final regulations (T.D. 9783) that provide guidance relating to the minimum present value requirements that apply to certain defined benefit pension plans. These regulations change the minimum present value requirements for defined benefit plan distributions to permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or other more accelerated form.
Rules in the final regulations state circumstances under which a participant’s accrued benefit can be bifurcated so that the minimum present value requirements of Section 417(e)(3) apply to only the portion of the participant’s accrued benefit that is paid in an accelerated form. A plan may explicitly bifurcate the accrued benefit so that the plan provides that the requirements of Treas. Reg. Sec. 1.417(e)-1(d) apply to a specified portion of a participant’s accrued benefit as if that portion was the participant’s entire accrued benefit. This rule doesn’t impose any requirements regarding the distribution options for the remaining portion of the accrued benefit.
An alternative procedure is available under which a plan that distributes a specified single-sum amount to a participant satisfies the requirements of Treas. Reg. Sec. 1.417(e)-1(d) related 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 beginning at normal retirement age (or the current date, if later), that is not settled by the single-sum payment must be no less than the excess of (1) the participant’s total accrued benefit expressed in that form over (2) the annuity payable in that form that is actuarially equivalent to the single-sum payment, determined using the applicable interest rate and the applicable mortality table. So 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.
These regulations became effective on Sept. 9, 2016, and the changes under these regulations apply to distributions with annuity start dates in plan years beginning on or after Jan. 1, 2017. However, the regulations may be applied to earlier periods.
Partner, Washington National Tax Office
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