Update to Minimum Present Value Requirements for Defined Benefit Plan Distributions, 85190-85196 [2016-27907]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 227 (Friday, November 25, 2016)]
[Proposed Rules]
[Pages 85190-85196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27907]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107424-12]
RIN 1545-BK95


Update to Minimum Present Value Requirements for Defined Benefit 
Plan Distributions

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 
provide guidance on changes made by the Pension Protection Act of 2006 
and would provide other modifications to these rules as well. These 
regulations would affect participants, beneficiaries, sponsors, and 
administrators 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 February 23, 
2017. Outlines of topics to be discussed at the public hearing 
scheduled for March 7, 2017, must be received by February 23, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107424-12), Room 
5203, Internal Revenue Service, P.O. 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-
107424-12), 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-107424-12). 
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, Neil S. 
Sandhu or Linda S.F. Marshall at (202) 317-6700; concerning submissions 
of comments, the hearing, and/or being placed on the building access 
list to attend the hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-
6901 (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), 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 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).
    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 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 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 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. However, for purposes of section 
417(e)(3), these rates are to be determined without regard to the 
segment rate stabilization rules of section 430(h)(2)(C)(iv). In 
addition, 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 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)

[[Page 85191]]

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 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 
have not been amended to reflect PPA '06. The regulations, which were 
issued on August 22, 1988, 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 (see 26 CFR 601.601(d)(2)(ii)(b)), 
provides guidance on the applicable interest rate. Rev. Rul. 2007-67, 
2007-2 CB 1047 (see 26 CFR 601.601(d)(2)(ii)(b)), provides guidance on 
the applicable mortality table \2\ and the timing rules that apply to 
the determination of the applicable interest rate and the applicable 
mortality table.
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    \2\ Notice 2008-85, 2008-2 CB 905, Notice 2013-49, 2013-32 IRB 
127, Notice 2015-53, 2015-33 IRB 190, and Notice 2016-50, 2016-38 
IRB 371, set forth the section 417(e)(3) applicable mortality tables 
for 2009 through 2017.
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    The Worker, Retiree, and Employer Recovery Act of 2008, Public Law 
109-280 (120 Stat. 780), 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).
    Sections 205(g), 203(e), and 204(g) of the Employee Retirement 
Income Security Act of 1974 (ERISA) contain rules that are parallel to 
Code sections 417(e), 411(a)(11), and 411(d)(6), 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 West v. AK Steel Corporation Retirement Accumulation Pension 
Plan, 484 F.3d 395 (6th Cir. 2007), the court held that a preretirement 
mortality discount could not be used in the computation of the present 
value of a participant's single-sum distribution under a cash balance 
plan if the death benefit under the plan was equal in value to the 
participant's accrued benefit under the plan. The court found that, if 
a participant's beneficiary is entitled to the participant's entire 
accrued benefit upon the participant's death before attainment of 
normal retirement age, the use of a mortality discount for the period 
before normal retirement age would result in a partial forfeiture of 
benefits in violation of the ERISA vesting rules that correspond to the 
rules of section 411(a). See also Berger v. Xerox Corporation 
Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); Crosby 
v. Bowater, Inc. Ret. Plan, 212 FRD. 350 (W.D. Mich. 2002), rev'd on 
other grounds, 382 F.3d 587 (6th Cir. 2004) (accrued benefits include 
not only retirement benefits themselves, but also death benefits which 
are directly related to the value of the retirement benefits). In 
Stewart v. AT&T Inc., 354 Fed. Appx. 111 (5th Cir. 2009), however, the 
court held that a preretirement mortality discount was appropriately 
applied to determine a single-sum distribution under a traditional 
defined benefit plan. The court distinguished AK Steel and Berger on 
the basis that the plans at issue in those cases did not provide for a 
forfeiture of the accrued benefit on the death of the participant 
before retirement, whereas the plan at issue in Stewart provided for 
such a forfeiture.
    Final regulations (TD 9783) under section 417(e) that permit 
defined benefit 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 were published by the Treasury 
Department and the IRS in the Federal Register on September 9, 2016 (81 
FR 62359).

Explanation of Provisions

Overview

    These proposed regulations would amend the current final 
regulations under section 417(e) regarding the minimum present value 
requirements of section 417(e)(3) in several areas. Specifically, the 
proposed regulations would update the regulations for changes made by 
PPA '06 and to eliminate certain obsolete provisions. The proposed 
regulations also contain a few other clarifying changes.

Updates To Reflect Statutory and Regulatory Changes

    The proposed regulations would update the existing regulatory 
provisions to reflect the statutory changes made by PPA '06, including 
the new interest rates and mortality tables set forth in section 
417(e)(3) and the exception from the valuation rules for certain 
applicable defined benefit plans set forth in section 411(a)(13). The 
proposed regulations clarify that the interest rates that are published 
by the Commissioner pursuant to the provisions as modified by PPA '06 
are to be used without further adjustment. In addition, the proposed 
regulations would eliminate obsolete provisions of the regulations 
relating to the transition from pre-1995 law to the interest rates and 
mortality assumptions provided by GATT. Furthermore, the proposed 
regulations make conforming changes to reflect the final regulations 
under section 417(e) that permit defined benefit 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.

[[Page 85192]]

Other Clarifying Changes

A. Treatment of Preretirement Mortality
    The proposed regulations would include rules relating to the 
treatment of preretirement mortality discounts in determining the 
minimum present value of accrued benefits under the regulations to 
address the issue raised by AK Steel and Berger of whether a plan that 
provides a death benefit equal in value to the accrued benefit may 
apply a preretirement mortality discount for the probability of death 
when determining the amount of a single-sum distribution.
    Section 411(a) generally prohibits forfeitures of accrued benefits. 
Under section 411(a)(1), an employee's rights in his accrued benefit 
derived from employee contributions must be nonforfeitable, and under 
section 411(a)(2), an employee's rights in his accrued benefit derived 
from employer contributions must become nonforfeitable in accordance 
with a vesting schedule that is specified in the statute. Section 
411(a)(3)(A) provides that a right to an accrued benefit derived from 
employer contributions is not treated as forfeitable solely because the 
plan provides that it is not payable if the participant dies (except in 
the case of a survivor annuity which is payable as provided in section 
401(a)(11)).
    Section 411(a)(7)(A)(i) defines a participant's accrued benefit 
under a defined benefit plan as the employee's accrued benefit 
determined under the plan and, except as provided in section 411(c)(3), 
expressed in the form of an annual benefit commencing at normal 
retirement age. Section 1.411(a)-7(a)(1) defines a participant's 
accrued benefit under a defined benefit plan as the annual benefit 
commencing at normal retirement age if the plan provides an accrued 
benefit in that form. If a defined benefit plan does not provide an 
accrued benefit in the form of an annual benefit commencing at normal 
retirement age, Sec.  1.411(a)-7(a)(1)(ii) defines the accrued benefit 
as an annual benefit commencing at normal retirement age which is the 
actuarial equivalent of the accrued benefit determined under the plan. 
The regulation further clarifies that the term ``accrued benefits'' 
refers only to pension or retirement benefits. Consequently, accrued 
benefits do not include ancillary benefits not directly related to 
retirement benefits, such as incidental death benefits.
    Section 411(d)(6)(A) prohibits a plan amendment that decreases a 
participant's accrued benefit. Section 411(d)(6)(B) provides that a 
plan amendment that has the effect of eliminating or reducing an early 
retirement benefit or retirement-type subsidy or eliminating an 
optional form of benefit with respect to benefits attributable to 
service before the amendment is treated as reducing accrued benefits 
for this purpose. Section 1.411(d)-3(g)(2)(v) provides that a death 
benefit under a defined benefit plan other than a death benefit that is 
part of an optional form of benefit is an ancillary benefit. Section 
1.411(d)-3(g)(6)(ii)(B) describes death benefits payable after the 
annuity starting date that are considered part of an optional form of 
benefit. Pursuant to Sec.  1.411(d)-3(g)(14) and (15), section 
411(d)(6) protected benefits do not include a death benefit under a 
defined benefit plan that is an ancillary benefit and not part of an 
optional form of benefit.
    A death benefit under a defined benefit plan that is payable when 
the participant dies before attaining normal retirement age and before 
benefits commence is not part of the participant's accrued benefit 
within the meaning of section 411(a)(7). Accordingly, the anti-
forfeiture rules of section 411(a) do not apply to such a death 
benefit. This is the case even if the amount of the death benefit is 
the same as the amount the participant would have received had the 
participant separated from service and elected to receive a 
distribution immediately before death. Moreover, such a death benefit 
is an ancillary benefit within the meaning of Sec.  1.411(d)-
3(g)(2)(v)--rather than a section 411(d)(6) protected benefit--and 
therefore can be eliminated by plan amendment (provided that a 
qualified preretirement survivor annuity for a surviving spouse is 
preserved, pursuant to section 401(a)(11)).
    The minimum present value requirements of section 417(e)(3) do not 
take into account the value of ancillary benefits that are not part of 
the participant's accrued benefit under the plan. Consistent with this, 
Sec.  1.417(e)-1(d)(1)(i) does not require ancillary death benefits to 
be taken into account in the required minimum present value 
calculation. Because questions have arisen regarding this rule, the 
proposed regulations would clarify that the probability of death under 
the applicable mortality table is generally taken into account for 
purposes of determining the present value under section 417(e)(3), 
without regard to the death benefits provided under the plan other than 
a death benefit that is part of the normal form of benefit or part of 
another optional form of benefit (as described in Sec.  1.411(d)-
3(g)(6)(ii)(B)) for which present value is determined.
    However, a different rule applies with respect to whether the 
probability of death under the applicable mortality table is taken into 
account for purposes of determining the present value with respect to 
the accrued benefit derived from contributions made by an employee. 
This is because an employee's rights in the accrued benefit derived 
from the employee's own contributions are nonforfeitable under section 
411(a)(1), and the exception for death under section 411(a)(3)(A) to 
the nonforfeitability of accrued benefits does not apply to the accrued 
benefit derived from employee contributions. As a result, for purposes 
of determining the present value under section 417(e)(3) with respect 
to the accrued benefit derived from contributions made by an employee 
(that is computed in accordance with the requirements of section 
411(c)(3)), the probability of death during the assumed deferral 
period, if any, is not taken into account. For purposes of the 
preceding sentence, the assumed deferral period is the period between 
the date of the present value determination and the assumed 
commencement date for the annuity attributable to contributions made by 
an employee.
    The proposed regulations include an example to illustrate the 
application of the minimum present value requirements of section 
417(e)(3) in the case of a single-sum distribution of a participant's 
entire accrued benefit that consists both of an accrued benefit derived 
from employee contributions and an employer-provided accrued benefit. 
Consistent with the rules in these proposed regulations, the example 
illustrates that a single-sum distribution of the participant's entire 
accrued benefit in such a case must equal the sum of the minimum 
present value of the accrued benefit derived from employee 
contributions, determined under section 417(e)(3) (applying the special 
rules set forth in the preceding paragraph), and the minimum present 
value of the employer-provided accrued benefit, determined under 
section 417(e)(3). Note that Rev. Rul. 89-60, 1989-1 CB 113 (1989) 
suggests that it is sufficient for a single-sum distribution in such a 
case to merely equal the greater of the minimum present value of the 
accrued benefit derived from employee contributions and the minimum 
present value of the participant's entire accrued benefit. To the 
extent the guidance under Rev. Rul. 89-60 is inconsistent with the 
final regulations that adopt these proposed regulations, the 
regulations would

[[Page 85193]]

supersede the guidance in Rev. Rul. 89-60.
B. Social Security Level Income Options
    Questions have arisen regarding whether the minimum present value 
requirements of section 417(e)(3) apply to a social security level 
income option. As noted above, Sec.  1.417(e)-1(d)(6) provides that the 
minimum present value requirements of section 417(e)(3) do not apply to 
the amount of a distribution paid in the form of an annual benefit that 
does not decrease during the life of the participant, or that decreases 
during the life of the participant merely because of the death of the 
survivor annuitant or the cessation or reduction of social security 
supplements or qualified disability benefits.
    A social security supplement is defined in Sec.  1.411(a)-7(c)(4) 
as a benefit for plan participants that commences before and terminates 
before the age when participants are entitled to old-age insurance 
benefits, unreduced on account of age, under title II of the Social 
Security Act, and does not exceed such old-age insurance benefit. A 
social security supplement (other than a QSUPP as defined in Sec.  
1.401(a)(4)-12) is an ancillary benefit that is not a section 411(d)(6) 
protected benefit.
    A social security level income option is an optional form of 
benefit (protected under section 411(d)(6)) under which a participant's 
accrued benefit is paid in the form of an annuity with larger payments 
in earlier years, before an assumed social security commencement age, 
to provide the participant with approximately level retirement income 
when the assumed social security payments are taken into account. It is 
appropriate to subject a social security level income option to the 
rules of section 417(e)(3) because, when a participant's accrued 
benefit is paid as a social security level income option, a portion of 
the participant's accrued benefit (which may be substantial) is 
accelerated and paid over a short period of time until social security 
retirement age. Because the periodic payments under a social security 
level income option decrease during the lifetime of the participant and 
the decrease is not the result of the cessation of an ancillary social 
security supplement, Sec.  1.417(e)-1(d)(6) does not provide an 
exception from the minimum present value requirements of section 
417(e)(3) for such a distribution. These proposed regulations contain 
an example that illustrates this point.
C. Application of Required Assumptions to the Accrued Benefit
    The proposed regulations would clarify the scope of the rule of 
Sec.  1.417(e)-1(d)(1) under which the present value of any optional 
form of benefit cannot be less than the present value of the normal 
retirement benefit (with both values determined using the applicable 
interest rate and the applicable mortality table). The proposed 
regulations would require that the present value of any optional form 
of benefit cannot be less than the present value of the accrued benefit 
payable at normal retirement age, and would provide an exception for an 
optional form of benefit payable after normal retirement age to the 
extent that a suspension of benefits applies pursuant to section 
411(a)(3)(B).

Effective/Applicability Dates

    The changes under the proposed regulations are proposed to apply to 
distributions with annuity starting dates in plan years beginning on or 
after the date regulations that finalize these proposed regulations are 
published in the Federal Register. Prior to this applicability date, 
taxpayers must continue to apply existing regulations relating to 
section 417(e), modified to reflect the relevant statutory provisions 
during the applicable period (and guidance of general applicability 
relating to those statutory provisions, such as Rev. Rul. 2007-67).

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 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 rulemaking 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 addition, the Treasury 
Department and the IRS specifically request comments on whether, in the 
case of a plan that provides a subsidized annuity payable upon early 
retirement and determines a single-sum distribution as the present 
value of the early retirement annuity, the present-value determination 
should be required to be calculated using the applicable interest rate 
and the applicable mortality table applied to the early retirement 
annuity (or whether the requirement to have a minimum present value 
that is equal to the present value of the annuity payable at normal 
retirement age determined in accordance with section 417(e)(3) provides 
the level of protection for the participant that is required by section 
417(e)(3)). See Rybarczyk v. TRW, 235 F.3d 975 (6th Cir. 2000).
    All comments will be available at www.regulations.gov or upon 
request. A public hearing has been scheduled for March 7, 2017, 
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 February 23, 2017, 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 February 23, 2017. 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 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

[[Page 85194]]

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

0
Par. 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. Revising paragraphs (d)(1)(i), (d)(2), (d)(3), (d)(4), and (d)(6).
0
2. Adding paragraph (d)(8)(vi).
0
3. Revising paragraph (d)(9).
0
4. Removing paragraph (d)(10).
    The addition 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--(A) In general. A defined benefit plan must provide that 
the present value of any accrued benefit and the amount (subject to 
sections 411(c)(3) and 415) of any distribution, including a single 
sum, must not be less than the amount calculated using the applicable 
mortality table described in paragraph (d)(2) of this section and the 
applicable interest rate described in paragraph (d)(3) of this section, 
as determined for the month described in paragraph (d)(4) of this 
section. The present value of any optional form of benefit, determined 
in accordance with the preceding sentence, cannot be less than the 
present value of the accrued benefit payable at normal retirement age, 
except to the extent that, for an optional form of benefit payable 
after normal retirement age, the requirements for suspension of 
benefits under section 411(a)(3)(B) are satisfied. The same rules used 
for the plan under this paragraph (d) must also be used to compute the 
present value of the benefit for purposes of determining whether 
consent for a distribution is required under paragraph (b) of this 
section.
    (B) Payment of a portion of a participant's benefit. The rules of 
this paragraph (d)(1) apply with respect to a payment of only a portion 
of the accrued benefit in the same manner as these rules would apply to 
a distribution of the entire accrued benefit. See paragraph (d)(7) of 
this section.
    (C) Special rules for applicable defined benefit plans. See section 
411(a)(13) and the regulations thereunder for an exception from the 
rules of section 417(e)(3) and this paragraph (d) that applies to 
certain distributions from certain applicable defined benefit plans.
* * * * *
    (2) Applicable mortality table--(i) In general. The applicable 
mortality table for a calendar year is the mortality table that is 
prescribed by the Commissioner in guidance published in the Internal 
Revenue Bulletin. See Sec.  601.601(d)(2) of this chapter. This 
mortality table is to be based on the table specified under section 
430(h)(3)(A), but without regard to section 430(h)(3)(C) or (D).
    (ii) Mortality discounts--(A) In general. Except as provided under 
paragraph (d)(2)(ii)(B) of this section, the probability of death under 
the applicable mortality table is taken into account for purposes of 
determining the present value under this paragraph (d) without regard 
to the death benefits provided under the plan (other than a death 
benefit that is part of the normal form of benefit or part of another 
optional form of benefit, as described in Sec.  1.411(d)-
3(g)(6)(ii)(B), for which present value is determined).
    (B) Special rule for employee-provided benefit. For purposes of 
determining the present value under this paragraph (d) with respect to 
the accrued benefit derived from employee contributions (that is 
determined in accordance with the requirements of section 411(c)(3)), 
the probability of death during the assumed deferral period, if any, is 
not taken into account. For purposes of the preceding sentence, the 
assumed deferral period is the period between the date of the present 
value determination and the assumed commencement date for the annuity 
attributable to contributions made by an employee.
    (3) Applicable interest rate--(i) In general. The applicable 
interest rate for a month is determined using the first, second, and 
third segment rates for that month under section 430(h)(2)(C), as 
modified pursuant to section 417(e)(3)(D) (and without regard to the 
segment rate stabilization rules of section 430(h)(2)(C)(iv)). The 
applicable interest rate is specified by the Commissioner in revenue 
rulings, notices, or other guidance published in the Internal Revenue 
Bulletin, and is applied under rules similar to the rules under Sec.  
1.430(h)(2)-1(b). Thus, for example, in determining the present value 
of a straight life annuity, the first segment is applied with respect 
to payments expected to be made during the 5-year period beginning on 
the annuity starting date, the second segment rate is applied with 
respect to payments expected to be made during the 15-year period 
following the end of that 5-year period, and the third segment rate is 
applied with respect to payments expected to be made after the end of 
that 15-year period. The interest rates that are published by the 
Commissioner are to be used for this purpose without further 
adjustment.
    (ii) Examples. The following examples illustrate the rules of 
paragraphs (d)(2) and (3) of this section.

    Example 1.  (i) Plan A is a non-contributory single-employer 
defined benefit plan with a calendar-year plan year, a one-year 
stability period coinciding with the calendar year, and a two-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. Plan A provides for optional single sum 
payments equal to the present value of the participant's accrued 
benefit. Plan A provides that the applicable interest rates are the 
segment rates as specified by the Commissioner for the second full 
calendar month preceding the calendar year that contains the annuity 
starting date. The applicable mortality table is the table specified 
by the Commissioner for the calendar year that contains the annuity 
starting date.
    (ii) Participant P retires in May 2017 at age 60 and elects 
(with spousal consent) to receive a single-sum payment. P has an 
accrued benefit of $2,000 per month payable as a life annuity 
beginning at the plan's normal retirement age of 65. The applicable 
mortality rates for 2017 apply. The applicable interest rates 
published by the Commissioner for November 2016 are 1.57%, 3.45%, 
and 4.39% for the first, second, and third segment rates, 
respectively. The deferred annuity factor calculated based on these 
interest rates and the applicable mortality table for 2017 is 10.931 
for a participant age 60. To satisfy the requirements of section 
417(e)(3) and this paragraph (d), the single-sum payment received by 
P cannot be less than $262,344 (that is, $2,000 x 12 x 10.931).
    Example 2.  (i) The facts are the same as for Example 1 of this 
paragraph (d)(3)(ii), except that Plan A provides for mandatory 
employee contributions. Participant Q retires in May 2017 at age 60 
and elects (with spousal consent) to receive a single-sum payment of 
Q's entire accrued benefit. Q has an accrued benefit of $2,000 per 
month payable as a life annuity beginning at Plan A's normal 
retirement age of 65, consisting of an accrued benefit derived from 
employee contributions determined in accordance with section 
411(c)(2) (Q's employee-provided accrued benefit) of $500 per month 
and an accrued benefit derived from employer contributions (Q's 
employer-provided accrued benefit) of $1,500 per month.

[[Page 85195]]

    (ii) Pursuant to paragraph (d)(2)(ii)(B) of this section, the 
single-sum payment used to settle Q's employee-provided accrued 
benefit cannot be less than the present value of that portion of Q's 
accrued benefit determined using the applicable interest and 
mortality rates described in paragraphs (d)(3)(i) and (d)(2)(ii) of 
this section, determined without taking the probability of death 
during the assumed deferral period into account. The deferred 
annuity factor calculated based on the interest and mortality rates 
specified in Example 1 of this paragraph (d)(3)(ii) (taking the 
probability of death only after age 65 into account) is 11.266 for a 
participant age 60. To satisfy the requirement of section 417(e)(3) 
and this paragraph (d), the single-sum payment received by Q with 
respect to the employee-provided portion of the accrued benefit 
cannot be less than the minimum present value of $67,596 (that is, 
$500 x 12 x 11.266).
    (iii) The single-sum payment used to settle Q's employer-
provided accrued benefit cannot be less than the present value of 
that portion of Q's accrued benefit determined using the applicable 
interest and mortality rates. However, for this purpose, Plan A is 
permitted to take the probability of death during the assumed 
deferral period into account. The single-sum payment received by Q 
with respect to the employer-provided portion of the accrued benefit 
cannot be less than $196,758 (that is, $1,500 x 12 x 10.931).
    (iv) The total single-sum payment received by Q cannot be less 
than the sum of the minimum present value of Q's employee- and 
employer-provided accrued benefits, or $264,354 ($67,596 + 
$196,758).

    (4) Time for determining interest rate and mortality table--(i) 
Interest rate general rule. Except as provided in paragraph (d)(4)(v) 
or (vi) of this section, the applicable interest rate to be used for a 
distribution is the applicable interest rate determined under paragraph 
(d)(3) of this section for the applicable lookback month. The 
applicable lookback month for a distribution is the lookback month (as 
described in paragraph (d)(4)(iv) of this section) for the stability 
period (as described in paragraph (d)(4)(iii) of this section) that 
contains the annuity starting date for the distribution. The time and 
method for determining the applicable interest rate for each 
participant's distribution must be determined in a consistent manner 
that is applied uniformly to all participants in the plan.
    (ii) Mortality table general rule. The applicable mortality table 
to be used for a distribution is the mortality table that is published 
for the calendar year during which the stability period containing the 
annuity starting date begins.
    (iii) Stability period. A plan must specify the period for which 
the applicable interest rate remains constant (the stability period). 
This stability period may be one calendar month, one plan quarter, one 
calendar quarter, one plan year, or one calendar year. This same 
stability period also applies to the applicable mortality table.
    (iv) Lookback month. A plan must specify the lookback month that is 
used to determine the applicable interest rate with respect to a 
stability period. The lookback month may be the first, second, third, 
fourth, or fifth full calendar month preceding the first day of the 
stability period.
    (v) Permitted average interest rate. A plan may apply the rules of 
paragraph (d)(4)(i) of this section by substituting a permitted average 
applicable interest rate with respect to the plan's stability period 
for the applicable interest rate determined under paragraph (d)(3) of 
this section for the applicable lookback month for the stability 
period. For this purpose, a permitted average applicable interest rate 
with respect to a stability period is the applicable interest rate that 
is computed by averaging the applicable interest rates determined under 
paragraph (d)(3) of this section for two or more consecutive months 
from among the first, second, third, fourth, and fifth calendar months 
preceding the first day of the stability period. For this paragraph 
(d)(4)(v) to apply, a plan must specify the manner in which the 
permitted average interest rate is computed.
    (vi) Additional determination dates. The Commissioner may 
prescribe, in guidance published in the Internal Revenue Bulletin, 
other times that a plan may provide for determining the applicable 
interest rate.
    (vii) Example. The following example illustrates the rules of this 
paragraph (d)(4):

    Example.  (i) The facts are the same as Example 1 of paragraph 
(d)(3)(ii) of this section, except that Plan A provides that the 
applicable interest rates are the rates for the third full calendar 
month preceding the beginning of the plan quarter that contains the 
annuity starting date. Plan A also provides that the applicable 
mortality table is the table specified by the Commissioner for the 
calendar year that contains the beginning of the stability period.
    (ii) The segment interest rates that apply for annuity starting 
dates during the period beginning April 1, 2017 and ending June 30, 
2017 are the segment rates for January 2017. This plan design 
permits the applicable interest rate to be fixed for each plan 
quarter and for the applicable interest rate for all distributions 
made during each plan quarter to be determined before the beginning 
of the plan quarter.

* * * * *
    (6) Exceptions--(i) In general. This paragraph (d) (other than the 
provisions relating to section 411(d)(6) requirements in paragraph 
(d)(9) of this section) does not apply to the amount of a distribution 
paid in the form of an annual benefit that--
    (A) Does not decrease during the life of the participant, or, in 
the case of a QPSA, the life of the participant's spouse; or
    (B) Decreases during the life of the participant merely because 
of--
    (1) 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 the survivor annuitant): or
    (2) The cessation or reduction of a social security supplement or 
qualified disability benefit (as defined in section 411(a)(9)).
    (ii) Example. The following example illustrates the rules of this 
paragraph (d)(6).

    Example.  (i) The facts are the same as Example 1 of paragraph 
(d)(3)(ii) of this section. Plan A also provides an optional 
distribution in the form of a Social Security level income option. 
Under this provision, the participant's benefit is adjusted so that 
a larger amount is payable until age 65, at which time it is reduced 
to provide a level income in combination with the participant's 
estimated social security benefit beginning at age 65. Participant 
R's reduced early retirement benefit payable as a straight life 
annuity benefit commencing at age 60 is $1,300 per month (which is 
less than the actuarially equivalent benefit that would have been 
determined using the applicable interest and mortality rates under 
section 417(e)(3)) and R's estimated social security benefit is 
$1,000 per month beginning at age 65.
    (ii) Because the benefit payable under the social security level 
income option decreases at age 65 and the decrease is not on account 
of the death of the participant or a beneficiary or the cessation or 
reduction of social security supplements or qualified disability 
benefits, the benefits payable under the social security level 
income option are subject to the minimum present value requirements 
of section 417(e)(3). As illustrated in Example 1 of paragraph 
(d)(3)(ii) of this section, the minimum present value of Participant 
R's benefits under section 417(e)(3) is $262,344, which is based on 
the present value of R's accrued benefit, not R's benefit that would 
be payable as a straight life annuity at the annuity starting date.
    (iii) The deferred annuity factor for a participant age 60 with 
lifetime benefits commencing at age 65, based on the November 2016 
segment rates and the applicable mortality table for 2017, is 
10.931. The corresponding temporary annuity factor to age 65 is 
4.752. The minimum benefits payable to Participant R in the form of 
a social security level income option (with a decrease of $1,000--
equal to the participant's estimated social security benefit--
occurring at age 65) are $2,090.99 per month until age 65 and 
$1,090.99 per month thereafter. Any

[[Page 85196]]

amounts less than this would have a present value smaller than the 
required amount of $262,344, and thus would fail to satisfy the 
minimum present value requirement of section 417(e)(3).

* * * * *
    (8) * * *
    (vi) Applicability date for provisions reflecting PPA '06 updates 
and other rules. Paragraphs (d)(1) through (4) of this section apply to 
distributions with annuity starting dates in plan years beginning on or 
after the date regulations that finalize these proposed regulations are 
published in the Federal Register. Prior to this applicability date, 
taxpayers must continue to apply the provisions of Sec.  1.417(e)-1(d) 
as contained in 26 CFR part 1 as in effect immediately before 
publication of those final regulations, except to the extent superseded 
by statutory changes and guidance of general applicability relating to 
those statutory changes.
    (9) Relationship with section 411(d)(6)--(i) In general. A plan 
amendment that changes the interest rate or the mortality assumptions 
used for the purposes described in paragraph (d)(1) of this section 
(including a plan amendment that changes the time for determining those 
assumptions) is generally subject to section 411(d)(6). However, for 
certain exceptions to the rule in the preceding sentence, see paragraph 
(d)(7)(iv) of this section, Sec.  1.411(d)-4, Q&A-2(b)(2)(v) (with 
respect to plan amendments relating to involuntary distributions), and 
section 1107(a)(2) of the Pension Protection Act of 2006, Public Law 
109-280, 120 Stat. 780 (2006) (PPA '06) (with respect to certain plan 
amendments that were made pursuant to a change to the Internal Revenue 
Code by PPA '06 or regulations issued thereunder).
    (ii) Section 411(d)(6) relief for change in time for determining 
interest rate and mortality table. Notwithstanding the general rule of 
paragraph (d)(9)(i) of this section, if a plan amendment changes the 
time for determining the applicable interest rate (and, if the 
amendment changes the stability period described in paragraph 
(d)(4)(iii) of this section, the time for determining the applicable 
mortality table), including an indirect change as a result of a change 
in plan year, the amendment will not be treated as reducing accrued 
benefits in violation of section 411(d)(6) merely on account of this 
change if the conditions of this paragraph (d)(9)(ii) are satisfied. If 
the plan amendment is effective on or after the date the amendment is 
adopted, any distribution for which the annuity starting date occurs in 
the one-year period commencing at the time the amendment is effective 
must be determined using the interest rate and mortality table provided 
under the plan determined at either the date for determining the 
interest rate and mortality table before the amendment or the date for 
determining the interest rate and mortality table after the amendment, 
whichever results in the larger distribution. If the plan amendment is 
adopted retroactively (that is, the amendment is effective prior to the 
adoption date), the plan must use the interest rate and mortality table 
determination dates resulting in the larger distribution for 
distributions with annuity starting dates occurring during the period 
beginning with the effective date and ending one year after the 
adoption date.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-27907 Filed 11-23-16; 8:45 am]
 BILLING CODE 4830-01-P