Modifications to Minimum Present Value Requirements for Partial Annuity Distribution Options Under Defined Benefit Pension Plans, 5454-5460 [2012-2341]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Proposed Rules]
[Pages 5454-5460]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2341]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-110980-10]
RIN 1545-BJ55


Modifications to Minimum Present Value Requirements for Partial 
Annuity Distribution Options Under Defined Benefit Pension Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
relating to the minimum present value requirements applicable to 
certain defined benefit pension plans. These proposed regulations would 
change the regulations regarding 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 more accelerated form. These 
regulations would affect sponsors, administrators, participants, and 
beneficiaries of defined benefit pension plans. This document also 
provides a notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by May 3, 2012. 
Outlines of topics to be discussed at the public hearing scheduled for 
June 1, 2012, must be received by May 11, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-110980-10), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
110980-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-110980-10). 
The public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Peter J. 
Marks or Linda S.F. Marshall at (202) 622-6090; concerning submissions 
of comments, the hearing, and/or being placed on the building access 
list to attend the hearing, Oluwafunmilayo (Funmi) Taylor at (202) 622-
7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 401(a)(11) of the Internal Revenue Code (Code) provides 
that, in order for a defined benefit plan to qualify under section 
401(a), and except as provided under section 417, in the case of a 
vested participant who does not die before the annuity starting date, 
the accrued benefit payable to such participant must be provided in the 
form of a qualified joint and survivor annuity. In the case of a vested 
participant who dies before the annuity starting date and who has a 
surviving spouse, a defined benefit plan must provide a qualified 
preretirement survivor annuity to the surviving spouse of such 
participant, except as provided under section 417.
    Section 417(e)(1) provides that a plan may provide that the present 
value of a qualified joint and survivor annuity or a qualified 
preretirement survivor annuity will be immediately distributed if that 
present value does not exceed the amount that can be distributed 
without

[[Page 5455]]

the participant's consent under section 411(a)(11). Section 417(e)(2) 
provides that, if the present value of the qualified joint and survivor 
annuity or the qualified preretirement survivor annuity exceeds the 
amount that can be distributed without the participant's consent under 
section 411(a)(11), then a plan may immediately distribute the present 
value of a qualified joint and survivor annuity or the qualified 
preretirement survivor annuity only if the participant and the spouse 
of the participant (or where the participant has died, the surviving 
spouse) consent in writing to the distribution.
    Section 417(e)(3)(A) provides that the present value shall not be 
less than the present value calculated by using the applicable 
mortality table and the applicable interest rate.\1\
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    \1\ Under section 411(a)(11)(B), the same actuarial assumptions 
are used for purposes of determining whether the present value of a 
participant's nonforfeitable accrued benefit exceeds the maximum 
amount that can be immediately distributed without the participant's 
consent.
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    Section 417(e)(3)(B) of the Code, as amended by section 302 of the 
Pension Protection Act of 2006 (PPA '06), Public Law 109-280, 120 Stat. 
780 (2006), provides that the term ``applicable mortality table'' means 
a mortality table, modified as appropriate by the Secretary, based on 
the mortality table specified for the plan year under section 
430(h)(3)(A) (without regard to section 430(h)(3)(C) or (3)(D)).
    Section 417(e)(3)(C) of the Code, as amended by section 302 of PPA 
'06, provides that the term ``applicable interest rate'' means the 
adjusted first, second, and third segment rates applied under rules 
similar to the rules of section 430(h)(2)(C) of the Code for the month 
before the date of the distribution or such other time as the Secretary 
may prescribe by regulations. Under section 417(e)(3)(D), these rates 
are to be determined using the average yields for a month, rather than 
the 24-month average used under section 430(h)(2)(D). Section 
417(e)(3)(D) also provides special rules applicable for plan years 
beginning in 2008 through 2011 under which the applicable interest rate 
is based on a blend of the interest rates under section 417(e)(3)(C) 
and the previously applicable 30-year Treasury rate.
    Section 411(a)(13) of the Code, as added by section 701(b) of PPA 
'06, provides that an ``applicable defined benefit plan'' is not 
treated as failing to meet the requirements of section 417(e) with 
respect to accrued benefits derived from employer contributions solely 
because the present value of a participant's accrued benefit (or any 
portion thereof) may be, under the terms of the plan, equal to the 
amount expressed as the hypothetical account balance or as an 
accumulated percentage of such participant's final average 
compensation. Section 411(a)(13)(C) defines the term ``applicable 
defined benefit plan'' to mean a defined benefit plan under which the 
accrued benefit (or any portion thereof) is calculated as the balance 
of a hypothetical account maintained for the participant or as an 
accumulated percentage of the participant's final average compensation.
    Section 1107(a)(2) of PPA '06 provides that a pension plan does not 
fail to meet the requirements of section 411(d)(6) by reason of a plan 
amendment to which section 1107 applies, except as provided by the 
Secretary of the Treasury. Section 1107 of PPA '06 applies to plan 
amendments made pursuant to the provisions of PPA '06 or regulations 
issued thereunder that are adopted no later than a specified date, 
generally the last day of the first plan year beginning on or after 
January 1, 2009.
    Final regulations under section 417 relating to the qualified joint 
and survivor and qualified preretirement survivor annuity requirements 
were issued on August 22, 1988. The final regulations were amended on 
April 3, 1998, to reflect changes enacted by the Uruguay Round 
Agreements Act, Public Law 103-465 (GATT).
    Section 1.417(e)-1(d)(1) provides that a defined benefit plan 
generally must provide that the present value of any accrued benefit 
and the amount of any distribution, including a single sum, must not be 
less than the amount calculated using the specified applicable interest 
rate and the specified applicable mortality table. The present value of 
any optional form of benefit cannot be less than the present value of 
the accrued benefit determined in accordance with the preceding 
sentence.
    Section 1.417(e)-1(d)(6) provides an exception from the minimum 
present value requirements of section 417(e) and Sec.  1.417(e)-1(d). 
This exception applies to the amount of a distribution paid in the form 
of an annual benefit that either does not decrease during the life of 
the participant (or, in the case of a qualified preretirement survivor 
annuity, 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 percent of the annual benefit payable before the death of such 
survivor annuitant) or the cessation or reduction of Social Security 
supplements or qualified disability benefits.
    Notice 2007-81 2007-2 CB 899 (2007), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) provides guidance on the 
corporate bond yield curve and the segment rates used under section 
430, as well as the interest rates for determining minimum present 
values under section 417(e)(3), to implement changes to the funding 
rules and minimum present value requirements made in PPA '06.
    Rev. Rul. 2007-67 2007-2 CB 1047 (2007), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) provides that the applicable 
mortality table for a given year applies to distributions with annuity 
starting dates that occur during stability periods that begin during 
that calendar year. Under Rev. Rul. 2007-67, the applicable mortality 
table for 2008 was based on a fixed blend of 50 percent of the static 
male combined mortality rates and 50 percent of the static female 
combined mortality rates promulgated under Sec.  1.430(h)(3)-1(c)(3) of 
the proposed regulations (which were later issued as final 
regulations). Rev. Rul. 2007-67 provides that updated section 417(e)(3) 
applicable mortality tables will be published for each calendar year in 
future guidance and, except as provided in that future guidance, will 
be determined from the section 430(h)(3)(A) tables on the same basis as 
the applicable mortality table for 2008.\2\
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    \2\ Notice 2008-85, 2008-2 CB 905, sets forth the section 
417(e)(3) applicable mortality tables for distributions with annuity 
starting dates that occur during stability periods that begin during 
calendar years 2009 through 2013.
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    Rev. Rul. 2007-67 provides that an amendment to determine the 
applicable interest rate under the section 417(e)(3) rules in effect 
for plan years beginning on or after January 1, 2008, will not violate 
section 411(d)(6) solely because of a reduction in accrued benefits or 
a reduction in the amount of any distribution with an annuity starting 
date occurring during a plan year beginning in 2008 or in a subsequent 
year if the cause of such reduction is the substitution of the modified 
segment rates for the 30-year Treasury rate for the same period. 
Additionally, Rev. Rul. 2007-67 provides that a plan amendment to 
incorporate by reference the applicable mortality table under section 
417(e)(3) that is prescribed by Rev. Rul. 2007-67 and by subsequent 
guidance will not violate section 411(d)(6) solely because of a 
reduction in accrued benefits or a reduction in the amount of any 
distribution with an annuity starting date occurring during a plan year 
beginning in 2008 or in a subsequent year if the cause of such 
reduction is the substitution of the

[[Page 5456]]

applicable section 417(e)(3) mortality table for the prior applicable 
mortality table under section 417(e)(3).
    Rev. Rul. 2007-67 also provides guidance regarding the applicable 
interest rate used under section 417(e)(3) pursuant to the PPA '06 
changes. Pursuant to Rev. Rul. 2007-67, the rules of Sec. Sec.  
1.417(e)-1(d)(4) and 1.417(e)-1(d)(10)(ii) regarding the time for 
determining the applicable interest rate continue to apply for plan 
years beginning on or after January 1, 2008, without regard to the 
change in the basis for determining the applicable interest rate.
    The Worker, Retiree, and Employer Recovery Act of 2008, Public Law 
109-280 (120 Stat. 780 (2008)), amended section 415(b)(2)(E)(v) to 
provide that the applicable mortality table under section 417(e)(3)(B) 
applies for purposes of adjusting a benefit or limitation pursuant to 
section 415(b)(2)(B), (C), or (D).

Explanation of Provisions

Treatment of Bifurcated Accrued Benefits

    These proposed regulations would amend the current final 
regulations under section 417(e) to permit plans to simplify the 
treatment of certain optional forms of benefit that are paid partly in 
the form of an annuity that is excepted from the minimum present value 
requirements of section 417(e)(3) pursuant to Sec.  1.417(e)-1(d)(6) 
and partly in a more accelerated form. Where a defined benefit plan 
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, 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 a greater 
challenge in protecting themselves against the risk of outliving their 
retirement savings.
    The IRS and the Treasury Department believe that many participants 
would be 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 the benefit to provide 
increased liquidity during retirement. Under current regulations, both 
portions of such a distribution option are subject to the minimum 
present value requirements of section 417(e)(3).
    The proposed regulations would provide an exception to this rule in 
the case of a plan with a bifurcated accrued benefit as defined in the 
proposed regulations. Under this exception, such a plan is permitted to 
provide that, if a participant selects two different distribution 
options with respect to separate portions of the bifurcated accrued 
benefit, then the two different distribution options are treated as two 
separate optional forms of benefit for purposes of applying the 
requirements of section 417(e)(3). Thus, if this rule applies to treat 
two separate distribution options selected with respect to separate 
portions of a bifurcated accrued benefit as two separate optional forms 
of benefit, and one of those separate optional forms of benefit is 
exempt from the requirement to use the section 417(e)(3) assumptions, 
then that exemption would apply to that separate optional form of 
benefit. In such a case, the plan would have to apply the section 
417(e)(3) assumptions only to the separate optional form of benefit 
that is not so exempted (rather than apply those assumptions to the 
entire optional form of benefit).
    The primary impact of this proposed change would be to make it 
simpler and easier for a plan to offer an optional form of benefit that 
is a combination of a single-sum payment and an annuity. Allowing a 
plan to apply a bifurcated approach would permit the plan to use the 
section 417(e)(3) assumptions for the single-sum portion of the 
optional form and its usual annuity equivalence factors for the annuity 
portion (rather than being required to make a special calculation of 
the annuity portion using the section 417(e)(3) assumptions). Not only 
would this be simpler administratively, it would also yield a more 
intuitive result.
    One type of plan with a bifurcated accrued benefit that would be 
eligible for this treatment is a plan that provides for two separate 
portions of the accrued benefit that are determined without regard to 
any election of optional form of benefit and permits a participant to 
choose different forms of benefit with respect to each of those 
portions of the accrued benefit. An example of such a plan is a plan 
that has been amended to accrue benefits under a different plan 
formula, where a participant's benefit is the sum of the participant's 
accrued benefit for years of service before the amendment date, 
determined under the pre-amendment plan terms, plus the participant's 
accrued benefit for years of service after the amendment date, 
determined under the post-amendment plan terms, with no interaction 
between the two formulas, and the plan permits a participant to make 
separate elections of optional forms of benefit with respect to each of 
those portions of the accrued benefit.
    A second type of plan with a bifurcated accrued benefit that would 
be eligible for this treatment is a plan that provides for a 
participant to apply different distribution elections to different 
portions of the accrued benefit so that the amount of the distribution, 
with respect to the distribution election applied to its respective 
portion of the accrued benefit, is the pro rata portion of the amount 
of the distribution that would be determined if that distribution 
election had been applied to the entire accrued benefit. An example of 
such a plan is a plan that provides both a single-sum option and a 
joint and survivor option for the entire benefit, but allows a 
participant to select an optional form which is 25 percent of the full 
lump sum and 75 percent of the full joint and survivor annuity.
    A third type of plan with a bifurcated accrued benefit that would 
be eligible for this treatment is a plan that provides a single-sum 
distribution option with respect to only a portion of the benefit and 
provides a separate benefit election for the remainder of the 
distribution. In order to satisfy the requirements to be this type of 
plan with a bifurcated accrued benefit, the amount of the distribution 
that is not paid in a single sum must be no less than the amount that 
would be payable under the rules described in the prior paragraph had a 
single sum election been available with respect to the entire accrued 
benefit, where the single sum is determined as the present value of the 
accrued benefit payable at normal retirement age (or the immediate 
annuity if the participant is older than normal retirement age) 
determined using the applicable interest rates and the applicable 
mortality table. An example of such a plan is a plan that provides that 
a participant can elect to receive in a single sum an amount equal to 
the employee contributions, accumulated with interest, with the 
remainder of the accrued benefit paid under one of the annuity optional 
forms of benefit available under the plan in an amount sufficient to 
satisfy the requirements under the proposed regulations.
    As previously discussed, the proposed regulations would make the 
bifurcation of benefits for purposes of section 417(e)(3) conditional 
on the existence of plan terms that explicitly provide that, if a 
participant selects two different distribution options with respect to 
separate portions of the bifurcated accrued benefit, then the two 
different distribution options are treated

[[Page 5457]]

as two separate optional forms of benefit for purposes of applying the 
requirements of section 417(e)(3). To provide for such bifurcated 
treatment, a plan sponsor would be required to amend its plan to 
provide for use of the plan factors that generally apply to annuity 
distributions instead of the section 417(e)(3) assumptions in these 
circumstances. Any plan amendment must comply with the requirements of 
section 411(d)(6). See the discussion in this preamble under the 
heading ``Effective/Applicability Date.''
    The Treasury Department and the IRS recognize that additional 
modifications to the regulations under section 417(e)(3) are needed in 
light of the enactment of PPA `06. It is expected that additional 
proposed amendments to the regulations under section 417(e)(3) will be 
issued to reflect statutory changes and to make other clarifications.

Effective/Applicability Date

    These regulations are proposed to be effective on the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.
    The changes under the proposed regulations are proposed to apply to 
distributions with annuity starting dates in plan years beginning after 
the publication date of final regulations. If the regulations are 
finalized as proposed and a plan that previously provided for a partial 
single-sum distribution together with a specified annuity distribution 
is amended to treat that distribution form as a bifurcated accrued 
benefit (and applies less favorable actuarial factors to the portion of 
the benefit that is not subject to section 417(e)(3)), then the plan 
must comply with the requirements of section 411(d)(6). This can be 
done by providing that, after the applicable amendment date under Sec.  
1.411(d)-3(g)(4), the amount of each portion of a distribution is not 
less than the amount that would have been payable under the plan 
provisions in effect before the amendment applied to the participant's 
accrued benefit as of the applicable amendment date.

Special Analyses

    It has been determined that this notice of proposed rule making is 
not a significant regulatory action as defined in Executive Order 
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 proposed regulation does not impose a collection of information on 
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Pursuant to section 7805(f) of the Code, this notice of 
proposed rule making has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on all 
aspects of these proposed regulations. In particular, the Treasury 
Department and the IRS request comments regarding whether the special 
rules in these proposed regulations regarding bifurcated accrued 
benefits should be extended to any types of benefits that are not 
covered by the rules in these proposed regulations. All comments will 
be available for public inspection or copying at www.regulations.gov or 
upon request. A public hearing has been scheduled for June 1, 2012, 
beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by May 3, 2012, and an outline of topics to be 
discussed and the amount of time to be devoted to each topic (a signed 
original and eight (8) copies) by May 11, 2012. A period of 10 minutes 
will be allotted to each person for making comments. An agenda showing 
the scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Peter J. Marks and 
Linda S.F. Marshall, Office of Division Counsel/Associate Chief Counsel 
(Tax Exempt and Government Entities). However, other personnel from the 
IRS and the Treasury Department participated in the development of 
these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. Section 1.417(e)-1 is amended by:
    1. Redesignating paragraph (d)(1) as newly designated paragraph 
(d)(1)(i) and revising the heading of the newly designated paragraph 
(d)(1)(i).
    2. Adding a new paragraph (d)(1)(ii).
    3. Revising paragraphs (d)(7) and (d)(8)(i).
    4. Adding a new paragraph (d)(8)(v).
    The additions and revisions 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--(i) Defined 
benefit plans. * * *
    (ii) 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), regardless of whether the requirements of section 401(a)(11) apply 
to the plan.
* * * * *
    (7) Permitted bifurcation of certain optional forms of benefit--(i) 
General rule. A plan with a bifurcated accrued benefit (as described in 
paragraph (d)(7)(ii) of this section) is permitted to provide that, if 
a participant selects two different distribution options with respect 
to separate portions of the bifurcated accrued benefit, then the two 
different distribution options are treated as two separate optional 
forms of benefit for purposes of applying the requirements of section 
417(e)(3) and this paragraph (d). Thus, if this paragraph (d)(7) 
applies to treat two separate distribution options selected with 
respect to separate portions of a bifurcated accrued benefit as two 
separate optional forms of benefit, and

[[Page 5458]]

the exception from the application of paragraph (d) of this section 
that is contained in paragraph (d)(6) of this section applies to one of 
those optional forms of benefit, then this paragraph (d) applies only 
to the optional form of benefit to which the exception under paragraph 
(d)(6) of this section does not apply.
    (ii) Bifurcated accrued benefit--(A) In general. A plan provides a 
bifurcated accrued benefit within the meaning of this paragraph 
(d)(7)(ii) if the plan satisfies the requirements of paragraph 
(d)(7)(iii) of this section (relating to separately determined 
benefits), (d)(7)(iv) of this section (relating to separate 
distribution options for proportionate benefits), or (d)(7)(v) of this 
section (relating to single sum with separate distribution option for 
remainder).
    (B) Rules of operation. If a plan provides a bifurcated accrued 
benefit within the meaning of this paragraph (d)(7)(ii), and one 
portion of the benefits under the plan would itself be a bifurcated 
accrued benefit if it were the entire accrued benefit, then the rules 
of paragraph (d)(7)(i) of this section may be re-applied to such 
portion.
    (iii) Separately determined benefits. A plan satisfies the 
requirements of this paragraph (d)(7)(iii) if the plan provides for two 
separate portions of the accrued benefit that are determined without 
regard to any election of optional form of benefit and permits a 
participant to select different distribution options with respect to 
each of those portions of the accrued benefit.
    (iv) Separate elections for proportionate benefits. A plan 
satisfies the requirements of this paragraph (d)(7)(iv) if--
    (A) The plan provides for a participant to select one distribution 
option with respect to a portion of the accrued benefit and a different 
distribution option with respect to the remaining portion of the 
accrued benefit;
    (B) The distribution option selected with respect to each of the 
separate portions of the accrued benefit is available with respect to 
the entire accrued benefit; and
    (C) The amount of the distribution with respect to each 
distribution option applied to its respective portion of the accrued 
benefit is the pro rata portion of the amount of the distribution that 
would be determined if that distribution option had been applied to the 
entire accrued benefit.
    (v) Single sum with separate election for remainder. A plan 
satisfies the requirements of this paragraph (d)(7)(v) if--
    (A) The plan provides for a specified amount to be distributed in a 
single sum, with the remainder distributed as another distribution 
option payable under the plan;
    (B) A single-sum distribution is not available with respect to the 
participant's entire accrued benefit; and
    (C) The amount of the distribution that is not paid in a single sum 
is not less than the amount that would be payable if--
    (1) A single sum election were available with respect to the entire 
accrued benefit, where the single sum is the present value of the 
accrued benefit payable at normal retirement age (or the immediate 
annuity if the participant is older than normal retirement age) 
determined using the applicable interest rates and the applicable 
mortality table;
    (2) The participant elected to receive the specified amount in a 
single sum; and
    (3) The rules of paragraph (d)(7)(iv) of this section were applied 
to determine the amount of the distribution that is not paid in a 
single sum.
    (vi) Examples. The following examples illustrate the rules of this 
paragraph (d)(7). Unless otherwise indicated, these examples are based 
on the following assumptions: Each plan is a single-employer defined 
benefit plan with a calendar-year plan year, a one-year stability 
period coinciding with the calendar year, and a one-month lookback used 
for determining the applicable interest rate. The normal retirement age 
is 65, and all participant elections are made with proper spousal 
consent. In addition, these examples reflect the amendments to sections 
417 and 411 that were made in the Pension Protection Act of 2006, 
Public Law 109-280, 120 Stat. 780 (2006).

    Example 1. (i) Plan B offers a number of optional forms of 
payment, including a qualified joint and survivor annuity and a 
single-sum payment. The single-sum payment is equal to the present 
value of the participant's immediate benefit (but no less than the 
present value of the participant's accrued benefit) using the 
applicable interest and mortality rates under section 417(e)(3). The 
amount of the joint and survivor annuity is determined using plan 
factors that are not based on the applicable interest and mortality 
rates under section 417(e)(3). Plan B permits a participant to elect 
to receive a percentage of the accrued benefit chosen by the 
participant as a single sum and the remainder in any annuity form 
provided under the plan, with both portions of the payment 
determined by multiplying the amount that would be payable if the 
entire benefit were paid in that form by the percentage that applies 
to that distribution option. Plan B provides that, with respect to a 
distribution that is paid partly in the form of a single sum and 
partly in the form of an annuity, the single sum and the annuity are 
treated as two separate optional forms of benefit for purposes of 
applying the provisions of the plan implementing the requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d). Assume that the December 
2012 segment rates are 3.21%, 5.19% and 5.67% for purposes of this 
example.
    (ii) Participant S retires at age 62 in 2013, with an accrued 
benefit of $1,000 per month payable as a straight life annuity at 
normal retirement age. Participant S is eligible for an unreduced 
early retirement benefit and can therefore collect a straight life 
annuity benefit of $1,000 per month beginning immediately. 
Alternatively, Participant S can elect to receive the benefit in 
other forms, including a single-sum payment of $153,852 (based on 
the applicable interest rate and mortality table under section 
417(e), which are the 2013 applicable mortality table and the 
December 2012 segment rates), or a 100% joint and survivor annuity 
of $850 per month (based on the plan's annuity conversion factors). 
Participant S elects to receive 25% of the benefit in the form of a 
single-sum payment and the balance as a 100% joint and survivor 
annuity.
    (iii) In accordance with paragraph (d)(7)(iv) of this section, 
Plan B provides for a bifurcated accrued benefit because Plan B 
provides for a participant to select a single-sum distribution with 
respect to a portion of the accrued benefit and an annuity 
distribution option with respect to the remaining portion of the 
accrued benefit. Each distribution option is available with respect 
to the entire accrued benefit, and the amount of the distribution 
with respect to each distribution option applied to its respective 
portion of the accrued benefit is the pro rata portion of the amount 
of the distribution that would be determined if that distribution 
option had been applied to the entire accrued benefit. Furthermore, 
Plan B provides that the two different distribution options selected 
with respect to each of those portions of the accrued benefit are 
treated as two separate optional forms of benefit for purposes of 
applying the provisions of Plan B implementing the requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d). Accordingly, Participant 
S receives a single sum payment equal to 25% of the full single sum 
amount, or $38,463. In addition, Participant S receives a 100% joint 
and survivor annuity in the amount of $637.50 per month, equal to 
75% of the full joint and survivor benefit of $850 per month 
otherwise payable. The joint and survivor benefit is not subject to 
the minimum present value requirements of section 417(e)(3) because 
it is treated as a separate optional form of benefit under paragraph 
(d)(7)(i) of this section.
    Example 2. (i) Plan C permits participants to elect a partial 
single sum equal to employee contributions, accumulated with 
interest. Any other amounts must be paid in the form of an annuity. 
Under the terms of Plan C, if a participant elects to receive this 
partial single sum, the annuity benefit payable to the participant 
is at least as great as the minimum amount determined pursuant to 
paragraph (d)(7)(v)(C) of this section. Plan C provides that, with 
respect to a distribution that is paid partly in the form

[[Page 5459]]

of a single sum and partly in the form of an annuity, the single sum 
and the annuity are treated as two separate optional forms of 
benefit for purposes of applying the provisions of the plan 
implementing the requirements of section 417(e)(3) and Sec.  
1.417(e)-1(d). Participant T retires at age 60 in 2013 with an 
accrued benefit of $1,500 per month payable as a straight life 
annuity payable at normal retirement age. Based on the plan's early 
retirement and optional form factors (which are not based on the 
applicable interest and mortality rates under section 417(e)(3)), 
Participant T's benefit commencing at age 60 in the form of a 10-
year certain and continuous annuity would be $925 per month. 
Participant T elects to receive a single sum payment of $32,000 
equal to T's accumulated contributions with interest, and the 
remainder as a 10-year certain and continuous annuity. Assume that 
the December 2012 segment rates are the same as those assumed in 
Example 1. Based on the applicable mortality table for 2013 and the 
December 2012 segment rates, the deferred annuity factor at age 60 
for lifetime payments commencing at age 65 is 8.769.
    (ii) In accordance with paragraph (d)(7)(v) of this section, 
Plan C provides for a bifurcated accrued benefit because Plan C 
provides for a specified amount to be distributed in a single sum, 
with the remainder distributed as another distribution option 
payable under the plan, a single-sum distribution is not available 
with respect to a participant's entire accrued benefit, and the 
amount of the distribution that is not paid in a single sum meets 
the requirements of paragraph (d)(7)(v)(C) of this section. 
Furthermore, Plan C provides that, with respect to a distribution 
that is paid partly in the form of a single sum and partly in the 
form of an annuity, the single sum and the annuity are treated as 
two separate optional forms of benefit for purposes of applying the 
provisions of the plan implementing the requirements of section 
417(e)(3) and Sec.  1.417(e)-1(d). Accordingly, the rule for 
proportional benefits under paragraph (d)(7)(iv) of this section is 
applied to determine the minimum amount of Participant T's annuity 
as if a single sum payment were available, equal to the present 
value of T's full accrued benefit. If Plan C had offered a single 
sum payment option with respect to Participant T's full accrued 
benefit of $1,500 per month, the minimum present value based on the 
applicable mortality table for 2013 and the assumed December 2012 
segment rates would have been $1,500 x 12 x the deferred annuity 
factor of 8.769, or $157,842. The single sum payment actually 
available to Participant T under the provisions of Plan C is the 
amount of accumulated contributions with interest, or $32,000 which 
represents 20.27% of the single sum value of Participant T's full 
accrued benefit ($32,000 / $157,842 = 20.27%).
    (iii) Therefore, the portion of T's accrued benefit not payable 
as a single sum must be at least as great as the amount based on the 
remaining 79.73% of T's benefit multiplied by the accrued benefit of 
$1,500 per month, or $1,195.95 per month payable at normal 
retirement age. Based on Plan C's early retirement and optional form 
factors, the annuity benefit payable to Participant T in the form of 
a 10-year certain and continuous annuity beginning at age 60 cannot 
be less than $925 times 79.73% or $737.50 per month. Participant T 
receives this in addition to the single sum payment of $32,000. The 
10-year certain and continuous benefit is not subject to the minimum 
present value requirements of section 417(e)(3) because it is 
treated as a separate optional form of benefit under paragraph 
(d)(7)(i) of this section.
    Example 3. (i) Plan D permits participants to elect a single-sum 
payment of up to $10,000 with the remaining benefit payable in the 
form of an annuity. Under the terms of Plan D, if a participant 
elects to receive this partial single sum, the annuity benefit 
payable to the participant is at least as great as the minimum 
amount determined pursuant to paragraph (d)(7)(v)(C) of this 
section. Plan D provides that, with respect to a distribution that 
is paid partly in the form of a single sum and partly in the form of 
an annuity, the single sum and the annuity are treated as two 
separate optional forms of benefit for purposes of applying the 
provisions of the plan implementing the requirements of section 
417(e)(3) and Sec.  1.417(e)-1(d). Participant W retires in 2013 at 
age 55 with an accrued benefit of $1,000 per month payable at normal 
retirement age. Participant W is eligible for an unreduced early 
retirement benefit of $1,000 per month payable as a straight life 
annuity. Alternatively, based on Plan D's definition of actuarial 
equivalence (which is not based on the applicable interest and 
mortality rates under section 417(e)(3)), Participant W can receive 
an immediate benefit in the form of a 100% joint-and-survivor 
annuity of $800 per month. Participant W elects to receive a single 
sum payment of $10,000, with the balance of the benefit payable as a 
100% joint-and-survivor annuity beginning at age 55. Assume that the 
December 2012 segment rates are the same as those assumed in Example 
1. Based on the applicable mortality table for 2013 and the December 
2012 segment rates, the deferred annuity factor at age 55 for 
lifetime payments commencing at age 65 is 6.558.
    (ii) In accordance with paragraph (d)(7)(v) of this section, 
Plan D provides for a bifurcated accrued benefit because Plan D 
provides for a specified amount to be distributed in a single sum, 
with the remainder distributed as another distribution option 
payable under the plan, a single-sum distribution is not available 
with respect to a participant's entire accrued benefit, and the 
amount of the distribution that is not paid in a single sum meets 
the requirements of paragraph (d)(7)(v)(C) of this section.
    Furthermore, Plan D provides that, with respect to a 
distribution that is paid partly in the form of a single sum and 
partly in the form of an annuity, the single sum and the annuity are 
treated as two separate optional forms of benefit for purposes of 
applying the provisions of the plan implementing the requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d). Accordingly, the rule for 
proportional benefits under paragraph (d)(7)(iv) of this section is 
applied to determine the minimum amount of Participant W's annuity 
as if a single sum payment were available, equal to the present 
value of W's full accrued benefit.
    (iii) If Plan D had offered a single sum payment option with 
respect to Participant W's full accrued benefit of $1,000 per month, 
the minimum present value based on the applicable mortality table 
for 2013 and the assumed December 2012 segment rates would have been 
$1,000 x 12 x the deferred annuity factor of 6.558, or $78,696. The 
single sum payment actually available to Participant W under the 
provisions of Plan D is $10,000, which represents 12.71% of the 
single sum value of W's full accrued benefit ($10,000 / $78,696 = 
12.71%).
    (iv) Therefore, the portion of Participant W's accrued benefit 
not payable as a single sum must be at least as great as the amount 
based on the remaining 87.29% of W's benefit multiplied by the 
accrued benefit of $1,000 per month, or $872.90 per month payable at 
normal retirement age. Based on Plan D's early retirement and 
optional form factors, the annuity benefit payable to Participant W 
in the form of a 100% joint-and-survivor annuity beginning at age 55 
is no less than 87.29% x $800, or $698.32 per month. Participant W 
receives this in addition to the single sum payment of $10,000. The 
joint and survivor annuity benefit is not subject to the minimum 
present value requirements of section 417(e)(3) because it is 
treated as a separate optional form of benefit under paragraph 
(d)(7)(i) of this section.
    Example 4.  (i) Plan E was amended to freeze benefits under the 
traditional plan formula as of December 31, 2012, and to provide 
benefits under a cash balance formula beginning January 1, 2013. The 
plan provides that participants may elect separate distribution 
options for the portion of the benefit accrued under the traditional 
formula as of December 31, 2012, and the portion of the benefit 
earned under the cash balance formula. Furthermore, the plan 
provides that a participant may elect to receive a single-sum 
payment only with respect to the portion of the benefit earned under 
the cash balance formula. Plan E provides that the two distribution 
options selected with respect to the portion of the benefit accrued 
under the traditional formula as of December 31, 2012, and the 
portion of the benefit earned under the cash balance formula are 
treated as two separate optional forms of benefit for purposes of 
applying the provisions of Plan E implementing the requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d).
    (ii) In accordance with paragraph (d)(7)(iii) of this section, 
Plan E provides for a bifurcated accrued benefit because the portion 
of the accrued benefit determined under the traditional formula and 
the portion of the accrued benefit determined under the cash balance 
formula are determined separately without regard to any election of 
optional form of benefit and Plan E permits a participant to select 
different distribution options with respect to both of those 
portions of the accrued benefit. Furthermore, as permitted by 
paragraph (d)(7)(i) of this section, Plan E provides that the two 
different distribution options selected with

[[Page 5460]]

respect to each of those portions of the accrued benefit are treated 
as two separate optional forms of benefit for purposes of applying 
the provisions of Plan E implementing the requirements of section 
417(e)(3) and Sec.  1.417(e)-1(d). Therefore, whether a participant 
elects to receive a single sum payment of the portion of the benefit 
earned under the cash balance formula does not affect whether the 
distribution elected with respect to the portion of the benefit 
earned as of December 31, 2012, is subject to the minimum present 
value requirements of section 417(e)(3).
    Example 5.  (i) The facts are the same as in Example 4, except 
that Plan E also permits a participant to elect, with respect to the 
cash balance portion of the benefit, to receive a percentage of the 
accrued benefit chosen by the participant as a single sum and the 
remainder in any annuity form provided under the plan, with both 
portions of the payment determined by multiplying the amount that 
would be payable if the entire benefit were paid in that form by the 
percentage that applies to that distribution option. Plan E provides 
that, with respect to such a distribution that is paid partly in the 
form of a single sum and partly in the form of an annuity, the 
single sum and the annuity are treated as two separate optional 
forms of benefit for purposes of applying the provisions of the plan 
implementing the requirements of section 417(e)(3) and Sec.  
1.417(e)-1(d). Participant X retires at age 65, with an accrued 
benefit under the traditional formula of $500 per month (earned as 
of December 31, 2012), and a cash balance hypothetical account of 
$45,000. Based on Plan E's actuarial equivalence factors, 
Participant X's accrued benefit derived from the cash balance 
hypothetical account is $320 per month, payable as a life annuity at 
normal retirement. Participant V elects to receive $15,000 of the 
current hypothetical account balance in the form of a single sum and 
to receive the remainder of the total accrued benefit as a life 
annuity.
    (ii) Under the analysis set forth in Example 4, Plan E provides 
for a bifurcated accrued benefit in accordance with paragraph 
(d)(7)(C) of this section with respect to the portion of the accrued 
benefit attributable to the benefit accrued as of December 31, 2012, 
and the portion of the accrued benefit attributable to the benefit 
earned under the cash balance formula. Furthermore, Plan E provides 
that the two different distribution options selected with respect to 
each of those portions of the accrued benefit are treated as two 
separate optional forms of benefit for purposes of applying the 
provisions of Plan E implementing the requirements of section 
417(e)(3) and Sec.  1.417(e)-1(d). Thus, a separate distribution 
option may be chosen for each of these two portions, and section 
417(e)(3) applies separately to each portion.
    (iii) In accordance with paragraphs (d)(7)(ii)(B) and (d)(7)(iv) 
of this section, the portion of the accrued benefit under Plan E 
earned under the cash balance formula is also a bifurcated accrued 
benefit because Plan E provides for a participant to select a 
single-sum distribution with respect to a portion of the cash 
balance formula accrued benefit and an annuity distribution option 
with respect to the remaining portion of the cash balance formula 
accrued benefit, each distribution option is available with respect 
to the entire cash balance formula accrued benefit, and the amount 
of the distribution with respect to each distribution option applied 
to its respective portion of the cash balance formula accrued 
benefit is the pro rata portion of the amount of the distribution 
that would be determined if that distribution option had been 
applied to the entire cash balance formula accrued benefit. 
Furthermore, Plan E provides that the two different distribution 
options selected with respect to each of those portions of the cash 
balance formula accrued benefit are treated as two separate optional 
forms of benefit for purposes of applying the provisions of Plan E 
implementing the requirements of section 417(e)(3) and Sec.  
1.417(e)-1(d). Thus, under paragraph (d)(7)(iv) of this section, \1/
3\ of the cash balance hypothetical account is paid as a single sum 
(that is, $15,000 / $45,000), and the remaining \2/3\ of the cash 
balance hypothetical account, or $30,000, is converted to an annuity 
benefit of \2/3\ x $320, or $213.33 per month.
    (iv) Participant X therefore receives a single sum payment of 
$15,000, representing the portion of the current hypothetical 
account balance that X elected to receive as a single sum. In 
addition, Participant X receives a monthly life annuity of $713.33 
per month (equal to the $500 benefit attributable to the benefit 
earned as of December 31, 2012, plus the $213.33 portion of the cash 
balance benefit paid as an annuity). Participant X's election to 
receive a single sum payment of part of the benefit earned under the 
cash balance formula does not affect whether the remainder of 
Participant X's distribution is subject to the minimum present value 
requirements of section 417(e)(3).
    (8) Effective/applicability date--(i) In general. Except as 
otherwise provided in this paragraph (d)(8), this paragraph (d) applies 
to distributions with annuity starting dates in plan years beginning on 
or after January 1, 1995.
* * * * *
    (v) Paragraph (d)(7) of this section applies to distributions with 
annuity starting dates in plan years beginning on or after the date 
final regulations that finalize these proposed regulations are 
published in the Federal Register.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-2341 Filed 2-2-12; 8:45 am]
BILLING CODE 4830-01-P