Modifications to Minimum Present Value Requirements for Partial Annuity Distribution Options Under Defined Benefit Pension Plans, 62359-62365 [2016-21393]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 175 (Friday, September 9, 2016)]
[Rules and Regulations]
[Pages 62359-62365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21393]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9783]
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: Final regulations.

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SUMMARY: This document contains final regulations providing guidance 
relating to the minimum present value requirements applicable to 
certain defined benefit pension plans. These regulations 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 single sum or other more 
accelerated form. These regulations affect participants, beneficiaries, 
sponsors, and administrators of defined benefit pension plans.

DATES: 
    Effective date: These regulations are effective on September 9, 
2016.
    Applicability date: These regulations apply to distributions with 
annuity starting dates in plan years beginning on or after on or after 
January 1, 2017. In addition, a taxpayer can elect to apply these 
regulations with respect to any earlier period.

FOR FURTHER INFORMATION CONTACT: Neil S. Sandhu or Linda S. F. Marshall 
at (202) 317-6700 (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) of the Internal Revenue Code (Code). 
These final regulations amend Sec.  1.417(e)-1 of the Treasury 
regulations.
    Section 401(a)(11) of the 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 (QJSA), as defined in section 417(b).
    Section 417(e)(1) provides that a plan may provide that the present 
value of a QJSA or a qualified preretirement survivor annuity (QPSA), 
as defined in 417(c), will be immediately distributed if that present 
value does not exceed the amount that can be distributed without the 
participant's consent under section 411(a)(11). Section 417(e)(2) 
provides that, if the present value of the QJSA or QPSA 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 that annuity only if the participant and the spouse of the 
participant (or if 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\ Section 
417(e)(3)(B) and (C) define the terms ``applicable mortality table'' 
and ``applicable interest rate,'' respectively.
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    \1\ Under section 411(a)(11)(B), the same applicable mortality 
table and applicable interest rate 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 411(a)(13) of the Code, as added by section 701(b) of PPA 
'06, provides that an ``applicable defined benefit plan,'' as defined 
by section 411(a)(13)(C), 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(d)(6)(B) provides that a plan amendment that has the 
effect of eliminating or reducing an early retirement benefit or a 
retirement-type subsidy, or eliminating an optional form of benefit, 
with respect to benefits attributable to service before the amendment 
is treated as impermissibly reducing accrued benefits. However, the 
last sentence of section 411(d)(6)(B) provides that the Secretary may 
by regulations provide that section 411(d)(6)(B) does not apply to a 
plan amendment that eliminates an optional form of benefit (other than 
a plan amendment that has the effect of eliminating or reducing an 
early retirement benefit or a retirement-type subsidy).
    Final regulations under section 417 relating to the QJSA and QPSA 
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 (108 Stat. 4809 (1994)).
    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 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 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.
    Sections 204(g) and 205(g) of the Employee Retirement Income 
Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as 
amended (ERISA), contain rules that are parallel to Code sections 
411(d)(6) and 417(e), respectively. Under section 101 of Reorganization 
Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has 
interpretive jurisdiction over the subject matter addressed in these 
regulations for purposes of ERISA, as well as the Code. Thus, these 
regulations apply for purposes of the Code and the corresponding 
provisions of ERISA.
    In the case of a defined benefit plan that offers a single-sum 
distribution or other form of accelerated distribution as an optional 
form of benefit in addition to the required QJSA, many participants 
have been reluctant to elect lifetime payments to insure against 
unexpected longevity, choosing instead an accelerated distribution form 
in order to maximize their liquidity. However, participants who elect a 
single sum or other accelerated form of distribution may face greater 
challenges in protecting against the risk of outliving their retirement 
savings. The Treasury Department and the IRS believe that

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many participants are better served by having the opportunity to elect 
to receive a portion of their retirement benefits in annuity form 
(which provides financial protection against unexpected longevity) 
while receiving accelerated payments for the remainder of their 
benefits to provide increased liquidity during retirement.
    In order to 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, the IRS issued proposed 
regulations under section 417(e)(3) (77 FR 5454) on February 3, 2012, 
that would have modified existing final regulations regarding the 
minimum present value requirements for defined benefit plan 
distributions. A number of comments were received on the proposed 
regulations, and a public hearing was held on June 1, 2012. After 
consideration of the comments received, the Treasury Department and the 
IRS are issuing these final regulations to adopt the rules set forth in 
the proposed regulations with modifications in response to the comments 
received.

Explanation of Provisions

Treatment of Bifurcated Accrued Benefits

    In order to facilitate the payment of benefits partly in the form 
of an annuity and partly as a single sum (or other accelerated form), 
this document amends the regulations under section 417(e) to permit 
plans to simplify the treatment of certain optional forms of benefit 
that are paid to a participant partly in the form of an annuity that is 
excepted from the minimum present value requirements of section 
417(e)(3) pursuant to Sec.  1.417(e)-1(d)(6) and partly in a more 
accelerated form. Like the proposed regulations, these final 
regulations provide rules under which the participant's accrued benefit 
can be bifurcated so that the minimum present value requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d) apply to only the portion of 
the participant's accrued benefit that is paid in an accelerated form.
    The proposed regulations would have provided for three different 
approaches to bifurcating the accrued benefit so that the minimum 
present value requirements apply to only a portion of the accrued 
benefit. Under the first approach in the proposed regulations, a plan 
could have provided for two separate portions of the accrued benefit 
that were determined without regard to any election of optional form of 
benefit and permitted a participant to select different distribution 
options with respect to each of those portions of the accrued benefit. 
Under the second approach, a plan could have provided for proportionate 
benefits with respect to each distribution option equal to 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. Finally, under the third approach, a plan could have provided 
for a specified amount to be distributed as a single sum, but only if 
the plan satisfied a minimum benefit requirement with respect to the 
distribution that was not paid in a single sum.
    Commenters generally supported the adoption of the rules in the 
proposed regulations, but raised several specific issues. Several 
commenters stated that it was sometimes difficult to determine which 
approach for bifurcating the accrued benefit applied to a particular 
plan design. These commenters suggested that certain plan designs 
appeared to fit within more than one approach, while other plan designs 
that were consistent with the intent of the proposed regulations did 
not seem to fit within any approach. In response to comments received, 
the rules providing for the bifurcation of the accrued benefit have 
been simplified and clarified in these final regulations.
    The final regulations combine the first two bifurcation approaches 
from the proposed regulations into a single, more broadly applicable 
rule. Under the rule in these final regulations, a plan is permitted to 
explicitly bifurcate the accrued benefit so that the plan provides that 
the requirements of Sec.  1.417(e)-1(d) apply to a specified portion of 
a participant's accrued benefit as if that portion were the 
participant's entire accrued benefit. This rule does not impose any 
requirements with respect to the distribution options for the remaining 
portion of the accrued benefit.
    An alternative rule is provided in the final regulations under 
which a plan that distributes a specified single-sum amount to a 
participant satisfies the requirements of Sec.  1.417(e)-1(d) with 
respect to that payment, provided the remaining portion of the 
participant's accrued benefit satisfies a minimum requirement. This 
rule is essentially the same as the third bifurcation approach from the 
proposed regulations. Under this alternative rule, the portion of the 
participant's accrued benefit, expressed in the normal form of benefit 
under the plan and commencing at normal retirement age (or at the 
current date, if later), that is not settled by the single-sum payment 
must be no less than the excess of: (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. Thus, the portion of the participant's accrued benefit 
that is settled by the payment of a specified single-sum amount is 
implicitly determined as the actuarial equivalent of that single-sum 
amount.
    The regulations provide a number of rules of operation that apply 
to one or both of the rules for bifurcating the accrued benefit. In 
particular, the regulations provide that if a participant selects 
different distribution options with respect to two separate portions of 
the participant's accrued benefit that were determined under the rules 
in these regulations, then the two different distribution options are 
treated as two separate optional forms of benefit for purposes of 
applying the requirements of section 417(e)(3) and Sec.  1.417(e)-1(d), 
even if the distribution options have the same annuity starting date. 
Thus, if one of those separate optional forms of benefit is exempt from 
the requirement to use the section 417(e)(3) assumptions, the plan is 
required to apply the section 417(e)(3) assumptions only to the other 
optional form of benefit. This would permit a plan to use 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). The approach set forth in these 
regulations is simpler than applying the section 417(e)(3) assumptions 
to the entire optional form of benefit, and yields an intuitive result 
that is consistent with plan sponsor and participant expectations.
    The regulations provide that explicit bifurcation must be used in 
specified cases. One such case is the situation in which a plan has 
been amended to eliminate an optional form of benefit (but, in 
accordance with section 411(d)(6), retains the optional form of benefit 
with respect to benefits accrued as of the applicable amendment date). 
Commenters indicated that it was unclear which bifurcation approach 
would apply to this situation under the proposed regulations. In 
response to these comments, the final regulations specify that if the 
amount of a distribution in an optional form of benefit to which Sec.  
1.417(e)-1(d) applies is determined by reference to the portion of a 
participant's accrued benefit as of the applicable amendment date, then 
the plan is not permitted to use the alternative rule under which the 
amount of the benefit that is settled by the single-sum payment is 
implicitly

[[Page 62361]]

determined but could use the explicit bifurcation rule in order to 
avoid application of section 417(e) to both optional forms of benefit. 
The implicit bifurcation rule also is not available in a situation in 
which a single-sum distribution is available to settle a participant's 
entire accrued benefit and the plan permits a portion of the benefit to 
be paid as a lump sum.
    Under the regulations, if a plan provides for an early retirement 
benefit, a retirement-type subsidy, an optional form of benefit, or an 
ancillary benefit, that applies only to a portion of a participant's 
accrued benefit, and the plan provides for an accelerated form of 
distribution that settles some, but not all, of the participant's 
accrued benefit, then the plan must specify which portion of the 
participant's total accrued benefit is settled by that distribution. 
This is necessary in order to determine the extent to which the early 
retirement benefit, retirement-type subsidy, optional form of benefit, 
or ancillary benefit applies with respect to the remaining portion of 
the accrued benefit. For example, if a plan had one set of early 
retirement factors that applied to the accrued benefit as of December 
31, 2005, but a different set of early retirement factors that applied 
to benefit accruals earned after that date, and the plan provides for a 
single-sum distribution that settles only a portion of a participant's 
accrued benefit, then the plan must specify which portion of the 
accrued benefit is settled by that distribution (in order to determine 
which early retirement factors apply to the remaining portion of the 
accrued benefit).
    The regulations provide for limited section 411(d)(6) relief in the 
case of a plan that, for plan years beginning before January 1, 2017, 
uses the section 417(e)(3) applicable interest rate and applicable 
mortality table to calculate the amount of a distribution that is made 
to settle a portion of the accrued benefit if, pursuant to these final 
regulations, the requirements of section 417(e)(3) need not apply to 
the distribution. In such a case, section 411(d)(6) is not violated 
solely because, in accordance with these final regulations, the plan is 
amended on or before December 31, 2017, to provide that the amount of 
the distribution described in the preceding sentence to which the 
requirements of section 417(e)(3) need not apply is determined for an 
annuity starting date on or after the applicable amendment date (within 
the meaning of Sec.  1.411(d)-3(g)(4)) using the same actuarial 
assumptions that would apply to calculate the amount of a distribution 
in that same form of benefit if the participant elected to receive the 
entire accrued benefit in that form.
    The final regulations include a number of examples in order to 
illustrate the bifurcation rules of the regulations and the rules of 
operation with respect to these rules.

Effective/Applicability Date

    These regulations are effective on September 9, 2016.
    The changes under these regulations apply to distributions with 
annuity starting dates in plan years beginning on or after January 1, 
2017. However, taxpayers may apply these rules to earlier periods.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. 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 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, the proposed regulations preceding these final regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Neil S. Sandhu 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.417(e)-1 is amended by:
0
1. Redesignating paragraph (d)(1) as paragraph (d)(1)(i) and revising 
the heading of the newly redesignated paragraph (d)(1)(i).
0
2. Adding a heading for paragraph (d)(1).
0
3. In the first sentence of newly redesignated paragraph (d)(1)(i), 
removing ``A defined benefit plan'' and adding ``Except as provided in 
section 411(a)(13) and the regulations thereunder, a defined benefit 
plan'' in its place.
0
4. Adding paragraph (d)(1)(ii).
0
5. Revising paragraph (d)(7), the heading for paragraph (d)(8), and 
paragraph (d)(8)(i).
0
6. Adding 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) Application to portion of a participant's benefit--(i) In 
general. This paragraph (d)(7) provides rules under which the 
requirements of this paragraph (d) apply to the distribution of only a 
portion of a participant's accrued benefit. Paragraph (d)(7)(ii) of 
this section provides rules for how a participant's accrued benefit may 
be bifurcated into separate components for purposes of applying this 
paragraph (d). Paragraph (d)(7)(iii) of this section provides rules of 
application. Paragraph (d)(7)(iv) of this section provides certain 
limited section 411(d)(6) relief, and paragraph (d)(7)(v) of this 
section provides examples of the application of the rules of this 
paragraph (d)(7).
    (ii) Bifurcation of accrued benefit--(A) Explicit plan-specified 
bifurcation. A plan is permitted to provide that the requirements of 
this paragraph (d) apply to a specified portion of a participant's 
accrued benefit as if that portion were the participant's entire 
accrued benefit. For example, a plan is permitted to provide that a 
distribution in the form of a single-sum payment described in this 
paragraph (d)(7)(ii)(A) is made to settle a specified percentage of the 
participant's accrued benefit. As another example, a plan is permitted 
to provide

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that a distribution in the form of a single-sum payment described in 
this paragraph (d)(7)(ii)(A) is made to settle the accrued benefit 
derived from contributions made by an employee. In both examples, the 
distribution must satisfy the requirements of this paragraph (d) with 
respect to the specified portion of the accrued benefit, and the 
remaining portion of the accrued benefit (the participant's total 
accrued benefit less the portion of the accrued benefit settled by the 
single-sum payment) can be paid in some other form of distribution that 
is available under the plan.
    (B) Distribution of specified amount. A plan that provides for a 
distribution of a single-sum payment that is not described in paragraph 
(d)(7)(ii)(A) of this section satisfies the requirements of this 
paragraph (d) with respect to that distribution if the portion of the 
participant's accrued benefit, expressed in the normal form of benefit 
under the plan and commencing at normal retirement age (or at the 
current date, if later), that is not settled by the distribution is 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.
    (iii) Rules of operation--(A) Multiple distribution options. If a 
participant selects different distribution options with respect to two 
separate portions of the participant's accrued benefit that were 
determined in accordance with paragraph (d)(7)(ii) of this section, 
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), even if the distribution 
options have the same annuity starting date. Thus, if the exception 
from the requirements of section 417(e)(3) and this paragraph (d) 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 other optional form of benefit.
    (B) Repeated application of rule. If a participant's accrued 
benefit has been bifurcated in accordance with paragraph (d)(7)(ii) of 
this section, then the provisions of paragraph (d)(7)(ii) of this 
section may be applied again to bifurcate the remaining accrued 
benefit.
    (C) Requirement to use explicit plan-specified bifurcation in 
certain cases--(1) Section 411(d)(6)--protected optional form. If the 
amount of a distribution in an optional form of benefit to which this 
paragraph (d) applies is determined by reference to the portion of a 
participant's accrued benefit as of the applicable amendment date for 
an amendment that eliminates that optional form of benefit (but, in 
accordance with section 411(d)(6), retains the optional form of benefit 
with respect to benefits accrued as of the applicable amendment date), 
then the plan must provide for explicit bifurcation of the accrued 
benefit as described in paragraph (d)(7)(ii)(A) of this section.
    (2) Single-sum available with respect to entire accrued benefit. If 
a plan provides that a single-sum distribution is available to settle a 
participant's entire accrued benefit, then, in order to also provide 
for a distribution in the form of a single-sum payment that settles 
only a portion of a participant's accrued benefit, the plan must 
provide for explicit bifurcation of the accrued benefit as described in 
paragraph (d)(7)(ii)(A) of this section.
    (D) Application of different factors to different portions of the 
accrued benefit. If a plan provides for an early retirement benefit, a 
retirement-type subsidy, an optional form of benefit, or an ancillary 
benefit, that applies only to a portion of a participant's accrued 
benefit, and the plan provides for a distribution that settles some, 
but not all, of the participant's accrued benefit, then the plan must 
specify which portion of the participant's total accrued benefit is 
settled by that distribution. For example, if a plan had one set of 
early retirement factors that applied to the accrued benefit as of 
December 31, 2005, but a different set of early retirement factors that 
applied to benefit accruals earned after that date, and the plan 
provides for a single-sum distribution that settles only a portion of a 
participant's accrued benefit, then the plan must specify which portion 
of the accrued benefit is settled by that distribution (in order to 
determine which early retirement factors apply to the remaining portion 
of the accrued benefit).
    (iv) Limited section 411(d)(6) anti-cutback relief. This paragraph 
(d)(7)(iv) applies in the case of a plan that, for plan years beginning 
before January 1, 2017, uses the section 417(e)(3) applicable interest 
rate and applicable mortality table to calculate the amount of a 
distribution that is made to settle a portion of the accrued benefit 
if, pursuant to this paragraph (d)(7), the requirements of section 
417(e)(3) and this paragraph (d) need not apply to the distribution. In 
such a case, section 411(d)(6) is not violated merely because, in 
accordance with this paragraph (d)(7), the plan is amended on or before 
December 31, 2017, to provide that the amount of a distribution 
described in the preceding sentence is determined for an annuity 
starting date on or after the applicable amendment date (within the 
meaning of Sec.  1.411(d)-3(g)(4)) using the same actuarial assumptions 
that apply to calculate the amount of a distribution in the same form 
of benefit that is made to settle the participant's entire accrued 
benefit.

    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(7). Unless otherwise indicated, these examples are based 
on the following assumptions: The taxpayers elect to apply the rules of 
this paragraph (d)(7) in 2016; each plan is a noncontributory defined 
benefit plan with a calendar-year plan year and a normal retirement age 
of age 65; a one-year stability period coinciding with the calendar 
year and a two-month lookback are used for determining the applicable 
interest rate; and all participant elections are made with proper 
spousal consent. The November 2015 segment rates are 1.76%, 4.15% and 
5.13%.

    Example 1. (i) Plan A 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 not less than the 
present value of the participant's accrued benefit payable at normal 
retirement age) 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 A permits a participant to elect to receive a percentage of the 
accrued benefit as a single sum and the remainder in any annuity 
form provided under the plan, with the amount of the single-sum 
payment determined by multiplying the amount that would be payable 
if the entire benefit were paid as a single sum by the percentage of 
the accrued benefit settled by the single-sum payment.
    (ii) Participant S retires at age 62 in 2016, 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 $168,516 (based on 
the applicable interest and mortality rates under section 417(e), 
which are the November 2015 segment rates and the 2016 applicable 
mortality table), or a 100% joint and survivor annuity of $850 per 
month (based on the plan's actuarial equivalence factors). 
Participant S elects to receive 25% of the accrued benefit in the 
form of a single-sum payment and the remaining 75% of the

[[Page 62363]]

accrued benefit as a 100% joint and survivor annuity.
    (iii) Participant S receives a single-sum payment with respect 
to 25% of the accrued benefit. Accordingly, this single-sum payment 
is equal to 25% of the full single-sum amount, or $42,129. The 
remaining portion of the accrued benefit is 75% of the total accrued 
benefit, or $750 per month payable as a straight life annuity at 
normal retirement age.
    (iv) To settle the remaining portion of the accrued benefit, in 
addition to the single-sum payment of $42,129, Participant S 
receives a 100% joint and survivor annuity in the amount of $637.50 
per month, which is determined by applying the plan's unreduced 
early retirement and actuarial equivalence factors to the remaining 
portion of the accrued benefit of $750 per month payable as a 
straight life annuity at normal retirement age. 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)(iii)(A) of 
this section.
    Example 2. (i) Plan B is a contributory defined benefit plan 
that permits a participant to elect a single sum distribution equal 
to the participant's employee contributions, accumulated with 
interest, with the remainder payable as an annuity. Plan B provides 
that the probability of death before normal retirement age is not 
taken into account for purposes of determining actuarial equivalence 
between the single-sum payment and an annuity at normal retirement 
age. Based on the applicable mortality table for 2016 and the 
November 2015 segment rates, the deferred annuity factor at age 60 
for lifetime payments commencing at age 65 (determined without 
taking mortality before age 65 into account) is 10.209.
    (ii) Participant T retires at age 60 in 2016 with an accrued 
benefit of $1,500 per month payable as a straight life annuity 
commencing at normal retirement age. For benefits commencing at age 
60, Plan B provides for an early retirement reduction factor of 75% 
and an actuarial equivalence factor of 98% for adjusting a straight 
life annuity to a 10-year certain and life annuity, neither of which 
is 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 life annuity would be $1,500 x 75% 
x 98% = $1,102.50 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 life 
annuity.
    (iii) The single-sum payment elected by Participant T is a 
distribution that is determined by reference to Participant T's 
contributions and interest, and not by reference to a specified 
portion of the participant's accrued benefit. Therefore, the single-
sum payment is not described in paragraph (d)(7)(ii)(A) of this 
section. In order to satisfy paragraph (d)(7)(ii)(B) of this 
section, the portion of the participant's accrued benefit that is 
not settled by the single-sum payment must be no less than the 
excess of (A) the participant's total accrued benefit over (B) the 
annuity that is actuarially equivalent to the single-sum payment, 
(determined using the applicable interest and mortality rates under 
section 417(e)(3) as applicable), both expressed in the normal form 
of benefit commencing at normal retirement age. The amount of that 
actuarially equivalent annuity is determined by dividing Participant 
T's single-sum payment of $32,000 by the deferred annuity factor for 
lifetime payments commencing at age 65 under the terms of Plan B 
(10.209, not considering mortality for the deferral period) and 
dividing by 12 for an actuarially equivalent monthly benefit 
commencing at age 65 of $261.21. Thus, in order to satisfy paragraph 
(d)(7)(ii)(B) of this section, the remaining portion of T's accrued 
benefit must be at least $1,238.79 per month ($1,500.00-$261.21) 
payable as a straight life annuity at normal retirement age.
    (iv) Based on Plan B's early retirement and optional form 
factors applied to the remaining portion, the annuity benefit 
payable to Participant T in the form of a 10-year certain and life 
annuity beginning at age 60 cannot be less than $910.51 per month 
($1,238.79 x 75% x 98%). Participant T receives this in addition to 
the single-sum payment of $32,000. The 10-year certain and life 
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)(iii)(A) of this section.
    (v) If, instead, Plan B's terms had provided for a single-sum 
payment equal to the present value of the participant's employee-
provided accrued benefit as determined under section 411(c)(3), then 
the plan is determining the single-sum payment as the present value 
of a specified portion of the accrued benefit. In such a case, the 
plan is using explicit bifurcation as described in paragraph 
(d)(7)(ii)(A) of this section and the single-sum payment would have 
to be set equal to the present value, determined under Plan B's 
terms, of T's employee-provided accrued benefit (which may or may 
not be equal to T's accumulated contributions and interest, 
depending on the plan's terms). The remaining annuity benefit 
payable to Participant T would have been based on an accrued benefit 
equal to $1,500 per month minus the amount of T's employee-provided 
accrued benefit.
    Example 3. (i) The facts are the same as in Example 2 of this 
paragraph (d)(7)(v), except that Plan B also offers a single-sum 
payment option with respect to a participant's entire benefit. The 
single-sum payment is determined as the present value of the 
participant's early retirement 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). Based on the 
applicable mortality table for 2016 and the November 2015 segment 
rates, the immediate annuity factor for lifetime payments commencing 
at age 60 is 14.632. Under the terms of the plan, the early 
retirement benefit payable as a straight life annuity to Participant 
T at age 60 with respect to T's full accrued benefit is $1,125 
($1,500 x 75%), and the corresponding single-sum amount payable to T 
is $1,125 x 14.632 x 12 = $197,532. (Note that this amount is larger 
than the age-60 present value of T's accrued benefit without taking 
mortality before age 65 into account, $1,500 x 10.209 x 12 = 
$183,762.) Participant T elects to receive a partial single-sum 
payment of $32,000, equal to T's accumulated contributions with 
interest and to take the remaining accrued benefit in the form of a 
10-year certain and life annuity commencing at age 60.
    (ii) Because the plan also provides for a single-sum payment 
option with respect to a participant's entire benefit, pursuant to 
paragraph (d)(7)(iii)(C)(2) of this section the partial single-sum 
payment must be determined pursuant to the explicit bifurcation 
rules of paragraph (d)(7)(ii)(A) of this section.
    (iii) The portion of the participant's accrued benefit that is 
settled by the single-sum payment of $32,000 is determined as the 
amount that bears the same ratio to the total accrued benefit as 
that single-sum payment bears to the single-sum payment with respect 
to the entire accrued benefit (($32,000 / $197,532) x $1,500), which 
is $243 per month payable as a straight life annuity at normal 
retirement age. Thus, the remaining portion of the accrued benefit 
is $1,257.00 per month payable as a straight life annuity at normal 
retirement age.
    (iv) Based on Plan B's early retirement and optional form 
factors applied to the remaining portion, the annuity benefit 
payable to Participant T in the form of a 10-year certain and life 
annuity beginning at age 60 is $923.90 per month ($1,257 x 75% x 
98%). Participant T receives this benefit in addition to the single 
sum payment of $32,000. The 10-year certain and life 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)(iii)(A) of this section.
    Example 4. (i) Plan C was amended to freeze benefits under a 
traditional defined benefit formula as of December 31, 2016, and to 
provide benefits under a cash balance formula beginning January 1, 
2017. 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, 2016, 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.
    (ii) In accordance with paragraph (d)(7)(ii)(A) of this section, 
Plan C provides for an explicitly bifurcated accrued benefit because 
the portion of the accrued benefit settled by a distribution is 
determined separately for the portion under the traditional formula 
and the portion under the cash balance formula. As provided under 
paragraph (d)(7)(iii)(A) of this section, a single-sum payment under 
the cash balance formula and a distribution option under the 
traditional formula are treated as two separate optional forms of 
benefit for purposes of applying the provisions of the plan 
implementing the requirements of

[[Page 62364]]

section 417(e)(3) and this paragraph (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, 2016, 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 of this 
paragraph (d)(7)(v), except that Plan C also permits a participant 
to elect, with respect to the cash balance portion of the benefit, 
to receive a percentage of that portion as a single sum and the 
remainder in any annuity form provided under the plan, with the 
amount of the single-sum payment determined by multiplying the 
amount that would be payable if the entire cash balance portion were 
paid as a single sum by the percentage of the cash balance portion 
settled by the single-sum payment. Participant W retires at age 65, 
with an accrued benefit under the traditional defined benefit 
formula (earned as of December 31, 2016) of $500 per month payable 
as a straight life annuity at normal retirement age and a cash 
balance hypothetical account balance of $45,000. Based on Plan C's 
actuarial equivalence factors, Participant W's accrued benefit 
derived from the cash balance hypothetical account is $320 per 
month, payable as a straight life annuity at normal retirement age. 
Participant W elects to receive \1/3\ or $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 straight 
life annuity.
    (ii) Under the analysis set forth in Example 4 of this paragraph 
(d)(7)(v), Plan C provides for an explicitly bifurcated accrued 
benefit with respect to the traditional defined benefit portion and 
the cash balance portion because the portion of the accrued benefit 
settled by a distribution is determined separately for the portion 
under the traditional formula and the portion under the cash balance 
formula. As provided under paragraph (d)(7)(iii)(A) of this section, 
a single-sum payment under the cash balance formula and a 
distribution option under the traditional formula 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 this paragraph (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 paragraph (d)(7)(ii)(A) of this 
section, Plan C also provides for an explicitly bifurcated accrued 
benefit with respect to the cash balance benefit because the plan 
provides that a distribution in the form of a single-sum payment is 
made to settle a specified percentage of the cash balance benefit. 
As provided under paragraph (d)(7)(iii)(A) of this section, the 
single-sum payment and the annuity selected by Participant W with 
respect to the cash balance benefit 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 this 
paragraph (d). Thus, in accordance with paragraph (d)(7)(ii)(A) of 
this section, \1/3\ of the cash balance hypothetical account is 
settled by the distribution paid out as a single sum (that is, 
$15,000 / $45,000). After the single-sum payment, the remaining 
portion of the accrued benefit derived from the cash balance account 
is \2/3\ of the initial accrued benefit derived from the cash 
balance account, or a straight life annuity at normal retirement age 
of $213.33 per month (\2/3\ x $320).
    (iv) To settle the remaining portion of the entire accrued 
benefit (the portion of the benefit attributable to service as of 
December 31, 2016 plus the remaining portion of the cash balance 
benefit), Participant W receives a monthly life annuity of $713.33 
per month payable as a straight life annuity at normal retirement 
age (equal to the $500 straight life annuity at normal retirement 
age earned as of December 31, 2016 plus the remaining benefit 
derived from the cash balance portion of a straight life annuity 
payable at normal retirement age of $213.33 per month). Participant 
W'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 W's distribution is subject to the minimum 
present value requirements of section 417(e)(3).
    Example 6. (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. Participant X retires in 2016 at age 55 with an 
accrued benefit of $1,000 per month payable as a straight life 
annuity at normal retirement age. Participant X 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 X 
can receive an immediate benefit in the form of a 100% joint and 
survivor annuity of $800 per month. Participant X 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. 
Based on the applicable mortality table for 2016 and the November 
2015 segment rates, the deferred annuity factor at age 55 for 
lifetime payments commencing at age 65 is 7.602.
    (ii) Plan D provides for a single-sum distribution of a portion 
of the participant's accrued benefit but, because the plan initially 
specifies the amount of the single-sum distribution (rather than the 
portion of the accrued benefit that is being settled by that 
distribution), Plan D is described in paragraph (d)(7)(ii)(B) of 
this section. As provided under paragraph (d)(7)(iii)(A) of this 
section, the single-sum payment and the joint-and-survivor annuity 
selected by Participant X 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 this 
paragraph (d).
    (iii) A straight life annuity of $109.62 per month payable at 
normal retirement age is actuarially equivalent to the $10,000 
single-sum payment, determined using the applicable mortality table 
for 2016 and the November 2015 segment rates ($10,000 / 12 / 7.602). 
Therefore, pursuant to paragraph (d)(7)(ii)(B) of this section, in 
order to satisfy this paragraph (d) the remaining portion of the 
accrued benefit after the single-sum payment of $10,000 must be no 
less than $890.38 per month payable as a straight life annuity at 
normal retirement age ($1,000.00-$109.62).
    (iv) Based on Plan D's early retirement and optional form 
factors, in order to satisfy this paragraph (d), the annuity benefit 
payable to Participant X in the form of a 100% joint-and-survivor 
annuity beginning at age 55 must be no less than $712.30 per month 
($890.38 x .8). Participant X receives this benefit 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)(iii)(A) of this section.
    Example 7. (i) Plan E provides for an unreduced early retirement 
benefit for participants who have met certain age and service 
requirements. Prior to amendment, Plan E permitted participants to 
elect a single-sum payment equal to the present value of the 
participant's unreduced early retirement benefit, determined using 
the applicable interest rate and applicable mortality table under 
section 417(e)(3). Plan E did not permit participants to elect a 
single-sum payment with respect to only a portion of their benefits. 
Effective December 31, 2012, Plan E was amended to eliminate the 
single-sum payment with respect to benefits accrued after that date.
    (ii) Participant Y retires on December 31, 2016, at age 60, 
after meeting Plan E's age and service requirements for an unreduced 
early retirement benefit. Participant Y's accrued benefit is $1,000 
per month payable as a straight life annuity commencing at normal 
retirement age, of which $800 per month was accrued as of December 
31, 2012. Participant Y elects to take a single-sum payment based on 
the benefit accrued as of December 31, 2012, with the remainder paid 
as a lifetime annuity commencing at age 60. Based on the applicable 
mortality table for 2016 and the November 2015 segment rates, the 
immediate annuity factor for lifetime payments commencing at age 60 
is 14.632, so Y's single-sum payment is $800 x 12 x 14.632 = 
$140,467.20.
    (iii) In accordance with paragraph (d)(7)(iii)(C)(1) of this 
section, Plan E provides for explicit bifurcation of the accrued 
benefit as described in paragraph (d)(7)(ii)(A) of this section. 
Therefore, Participant Y must receive an annuity of $200 earned 
after December 31, 2012 in addition to the single-sum payment of 
$140,467. Plan E is not permitted to use the approach described in 
paragraph (d)(7)(ii)(B) of this section to reduce or eliminate the 
$200 annuity earned after December 31, 2012.

    (8) Effective/applicability date--(i) In general. Except as 
otherwise provided in this paragraph (d)(8), this paragraph (d) applies 
to distributions with annuity

[[Page 62365]]

starting dates in plan years beginning on or after January 1, 1995.
* * * * *
    (v) Effective date for special rules applicable to the payment of a 
portion of a participant's benefit. Paragraph (d)(7) of this section 
applies to distributions with annuity starting dates in plan years 
beginning on or after January 1, 2017. However, taxpayers may elect to 
apply the rules of paragraph (d)(7) of this section to earlier periods.
* * * * *

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: August 3, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-21393 Filed 9-8-16; 8:45 am]
BILLING CODE 4830-01-P