[Federal Register Volume 69, Number 114 (Tuesday, June 15, 2004)]
[Rules and Regulations]
[Pages 33288-33302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13475]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9130]
RIN 1545-BA60
Required Distributions From Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations concerning required
minimum distributions under section 401(a)(9) for defined benefit plans
and annuity contracts providing benefits under qualified plans,
individual retirement plans, and section 403(b) contracts. This
document also contains a change to the separate account rules in the
final regulations concerning
[[Page 33289]]
required minimum distributions for defined contribution plans. These
final regulations provide the public with guidance necessary to comply
with the law and will affect administrators of, participants in, and
beneficiaries of qualified plans; institutions that sponsor and
administer individual retirement plans, individuals who use individual
retirement plans for retirement income, and beneficiaries of individual
retirement plans; and employees for whom amounts are contributed to
section 403(b) annuity contracts, custodial accounts, or retirement
income accounts and beneficiaries of such contracts and accounts.
DATES: Effective Date: These regulations are effective June 15, 2004.
Applicability Date: These regulations apply for purposes of
determining required minimum distributions for calendar years beginning
on or after January 1, 2003.
FOR FURTHER INFORMATION CONTACT: Cathy Vohs at (202) 622-6090.
SUPPLEMENTARY INFORMATION:
Background
These final regulations amend 26 CFR part 1 relating to section
401(a)(9). The regulations provide guidance on the minimum distribution
requirements under section 401(a)(9) for plans qualified under section
401(a) and for other arrangements that incorporate the section
401(a)(9) rules by reference. The section 401(a)(9) rules are
incorporated by reference in section 408(a)(6) and (b)(3) for
individual retirement accounts and annuities (IRAs) (including Roth
IRAs, except as provided in section 408A(c)(5)), section 403(b)(10) for
section 403(b) annuity contracts, and section 457(d) for eligible
deferred compensation plans.
Section 401(a)(9) provides rules for distributions during the life
of the employee in section 401(a)(9)(A) and rules for distributions
after the death of the employee in section 401(a)(9)(B). Section
401(a)(9)(A)(ii) provides that the entire interest of an employee in a
qualified plan must be distributed, beginning not later than the
employee's required beginning date, in accordance with regulations,
over the life of the employee or over the lives of the employee and a
designated beneficiary (or over a period not extending beyond the life
expectancy of the employee and a designated beneficiary).
Section 401(a)(9)(C) defines required beginning date for employees
(other than 5-percent owners and IRA owners) as April 1 of the calendar
year following the later of the calendar year in which the employee
attains age 70\1/2\ or the calendar year in which the employee retires.
For 5-percent owners and IRA owners, the required beginning date is
April 1 of the calendar year following the calendar year in which the
employee attains age 70\1/2\, even if the employee has not retired.
Section 401(a)(9)(D) provides that (except in the case of a life
annuity) the life expectancy of an employee and the employee's spouse
that is used to determine the period over which payments must be made
may be redetermined, but not more frequently than annually.
Section 401(a)(9)(E) provides that the term designated beneficiary
means any individual designated as a beneficiary by the employee.
Section 401(a)(9)(F) provides that, under regulations prescribed by
the Secretary, any amount paid to a child shall be treated as if it had
been paid to the surviving spouse if such amount will be become payable
to the surviving spouse upon such child reaching the age of majority
(or other designated event permitted under regulations).
Section 401(a)(9)(G) provides that any distribution required to
satisfy the incidental death benefit requirement of section 401(a) is a
required minimum distribution.
Section 401(a)(9) also provides that, if the employee dies after
distributions have begun, the employee's interest must be distributed
at least as rapidly as under the method used by the employee.
Section 401(a)(9) further provides that, if the employee dies
before required minimum distributions have begun, the employee's
interest must be either distributed (in accordance with regulations)
over the life or life expectancy of the designated beneficiary with the
distributions beginning no later than 1 year after the date of the
employee's death, or distributed within 5 years after the death of the
employee. However, under section 401(a)(9)(B)(iv), a surviving spouse
may wait until the date the employee would have attained age 70\1/2\ to
begin taking required minimum distributions.
Comprehensive proposed regulations under section 401(a)(9) were
first published in the Federal Register on July 27, 1987 (52 FR 28070)
(EE-113-82). Those proposed regulations were amended in 1997 (62 FR
67780) (REG-209463-82) to address the limited issue of the rules that
apply when a trust is designated as an employee's beneficiary.
Comprehensive proposed regulations were reproposed in the Federal
Register on January 17, 2001 ((66 FR 3928) (REG-130477-00/REG-130481-
00)). The 2001 proposed regulations substantially revised and
simplified the rules for defined contribution plans but maintained the
basic structure for defined benefit plans and requested additional
comments on the rules that should apply to those plans. With respect to
annuity payments, the 2001 proposed regulations retained the basic
structure of the 1987 proposed regulations and the preamble indicated
that the IRS and Treasury were continuing to study these rules and
specifically requested updated comments on current practices and issues
relating to required minimum distributions from annuity contracts.
Commentators on the 2001 proposed regulations provided information on
the variety of annuity contracts being developed and available as
insurance company products for purchase with separate accounts.
Final and temporary regulations relating to required minimum
distributions from qualified plans, individual retirement plans, and
section 403(b) annuity contracts, custodial accounts, and retirement
income accounts were published in the Federal Register on April 17,
2002 (67 FR 18987). Proposed regulations that cross reference those
temporary regulations were published in the Proposed Rules section of
the Federal Register on April 17, 2002 ((67 FR 18834) (REG-108697-02)).
The final and temporary regulations were effective with the 2003
calendar year.
The 2002 regulations finalized the rules for defined contribution
plans and the basic rules regarding the determination of the required
beginning date, determination of designated beneficiary and other
general rules that apply to both defined benefit and defined
contribution plans. The 2002 regulations also provided temporary
regulations under Sec. 1.401(a)(9)-6T relating to minimum distribution
requirements for defined benefit plans and annuity contracts purchased
with an employee's account balance under a defined contribution plan.
In response to the comments to the 2001 proposed regulations, the
temporary regulations significantly expanded the situations in which
annuity payments under annuity contracts purchased with an employee's
benefit may provide for increasing payments, but this guidance was
provided in proposed and temporary form rather than final form in order
to give taxpayers an opportunity to comment on these changes.
A public hearing was held on the temporary and proposed regulations
on October 9, 2002. At the public hearing, and in comments on the
temporary regulations, concerns were raised that
[[Page 33290]]
requiring compliance with certain of the rules in the temporary
regulations in 2003 would not be appropriate. Many of the comments
relate to restrictions on variable annuity payments, and certain other
increasing annuity payments, set forth in A-1 of Sec. 1.401(a)(9)-6T.
Commentators also requested additional guidance in applying the rule in
A-12 of Sec. 1.401(a)(9)-6T that requires the entire interest under an
annuity contract to include the actuarial value of other benefits (such
as minimum survivor benefits) provided under the contract and that the
rule requiring the inclusion of these values be delayed until the
guidance is provided. Finally, commentators requested that special
consideration be provided to governmental plans.
In response to these comments and in order to provide adequate time
to consider the issues raised, the IRS issued Notice 2003-2 (2003-1
C.B. 257) which provided that, pending the issuance of further
regulations, plans are permitted to satisfy certain requirements in the
1987 or 2001 proposed regulations with respect to variable annuity
payments in lieu of complying with the corresponding requirements in
the 2002 temporary regulations, and that the entire interest under an
annuity contract (including an annuity described in section 408(b) or
section 403(b)) is permitted to be determined as the dollar amount
credited to the employee or beneficiary without regard to the actuarial
value of any other benefits (such as minimum survivor benefits) that
will be provided under the contract. Notice 2003-2 also provided that,
pending the issuance of further regulations under section 401(a)(9),
governmental plans are only required to satisfy a reasonable and good
faith interpretation of section 401(a)(9). Finally, Notice 2003-2
provided that the transitional relief would continue at least through
the year in which additional regulations are published, with a later
effective date for certain governmental plans.
In response to the comments received, these final regulations make
a number of significant modifications to the proposed and temporary
regulations and adopt the regulations as modified. They also make a
minor modification to the rules in A-2 of Sec. 1.401(a)(9)-8 for
separate accounts. These final regulations contain rules relating to
minimum distribution requirements for defined benefit plans and annuity
contracts purchased with an employee's account balance under a defined
contribution plan. For purposes of this discussion of the background of
the regulations in this preamble, as well as the explanation of
provisions below, whenever the term employee is used, it is intended to
include not only an employee but also an IRA owner.
Explanation of Provisions
Overview
These final regulations retain the basic rules of the temporary
regulations. For example, distributions of an employee's entire
interest must be paid in the form of periodic annuity payments for the
employee's or beneficiary's life (or the joint lives of the employee
and beneficiary) or over a comparable period certain. The payments must
be nonincreasing or only increase as provided in the regulations. As
provided in the temporary regulations, the permitted increases under
these final regulations include: adjustments to reflect increases in
the cost of living; any increase in benefits pursuant to a plan
amendment; a pop up in payments in the event of the death of the
beneficiary or the divorce of the employee and spouse; or return of
employee contributions upon an employee's death. In addition, for both
annuity contracts purchased from insurance companies and annuities paid
from section 401(a) qualified trusts, the regulations allow variable
annuities and other regular increases, if certain conditions are
satisfied. The regulations also allow changes in distribution form in
certain circumstances.
These regulations retain many rules from the temporary regulations
without modification. These include, for example, rules regarding: the
distribution of benefits that accrue after an employee's first
distribution calendar year; the treatment of nonvested benefits; the
actuarial increase to an employee's benefit that must be provided if
the employee retires after the calendar year in which the employee
attains age 70\1/2\; and benefits that commence in the form of an
annuity prior to an employee's required beginning date.
Incidental Benefit Requirement
The basic purpose of the incidental benefit rule is to ensure that
the payments under the annuity are primarily to provide retirement
benefits to the employee. These final regulations retain the basic rule
in the temporary regulations that, if distributions commence under a
distribution option that is in the form of a joint and survivor annuity
where the beneficiary is not the employee's spouse, the incidental
benefit requirement will not be satisfied unless the payments to the
beneficiary as a percentage of the payments to the employee do not
exceed the percentage provided in the table in the regulations. The
percentage is based on the number of years that the employee's age
exceeds the beneficiary's age, and the percentage decreases as the
difference between the ages increases. This reflects the fact that the
greater the number of years younger a beneficiary is than the employee,
the greater the number of years of expected payments that will be made
to the beneficiary after the death of the employee. Under the table in
the temporary regulations, a plan may not provide a 100 percent
survivor benefit to an employee's nonspouse beneficiary under a joint
and survivor annuity if the beneficiary is more than 10 years younger
than the employee. Some commentators suggested that an adjustment to
the table is appropriate if the employee commences distributions before
70\1/2\. This is because, in such a case, more payments are expected to
be made while the employee is alive.
In response to these comments, the final regulations provide that,
if an employee's annuity starting date is at an age younger than age
70, an adjustment is made to the employee/beneficiary age difference.
This adjusted employee/beneficiary age difference is determined by
decreasing the age difference by the number of years the employee is
younger than age 70 at the annuity starting date. The effect of this
change is to permit a higher percentage after an employee's death for
employees who commence benefits at earlier ages. Thus, for an employee
age 55 at the time of the employee's annuity starting date, a joint and
100 percent survivor annuity can be provided if the survivor is not
more than 25 years younger than the employee.
Increasing Annuities (Including Acceleration and Cost-of-Living
Increases)
These final regulations clarify that a plan may provide an annual
increase that does not exceed the increase in an eligible cost-of-
living index for a 12-month period ending in the year during which the
increase occurs or the prior year. An eligible cost-of-living index is
a consumer price index (CPI) issued by the Bureau of Labor Statistics
and based on prices of all items (or all items excluding food and
energy), including an index for a population of consumers (such as
urban consumers or urban wage earners and clerical workers) or
geographic area or areas (such as a given metropolitan area or state).
Under these regulations, a plan may provide for annual cost-of-
living increases, or may provide for less frequent cost-of-living
increases that are
[[Page 33291]]
cumulative since the most recent increase (or the employee's annuity
starting date, if later), as long as there is no actuarial increase to
reflect having not provided increases in the interim years.
For a plan that provides annual increases, but provides a ceiling
on the annual increase, and thus does not allow a full cost-of-living
increase in some years, the plan may allow an unused portion of the
cost-of-living increase to be provided in a subsequent year when the
ceiling exceeds the increase in the CPI for that year and still treat
the increase in that subsequent year as an increase that does not
exceed an eligible cost-of-living index.
Finally, a plan can provide for annuity payments with a percentage
adjustment based on the increase in compensation for the position held
by the employee at the time of retirement. However, in the case of a
nongovernmental plan, this form of adjustment is only permitted if it
is provided under the terms of the plan as in effect on April 17, 2002.
In addition to these permitted increases in the amount of annuity
payments, the final regulations retain the rules in the temporary
regulations allowing an annuity purchased from an insurance company
with an employee's account balance under a defined contribution plan to
provide for variable and increasing payments and clarify that these
rules apply to an annuity contract purchased from an insurance company
by a qualified trust for a defined benefit plan. For an annuity
contract purchased from an insurance company, these final regulations
retain the rule that the total expected future payments (disregarding
any payment increases) as of the annuity starting date must exceed the
premium being annuitized. This rule insures that annuity payments start
at a high enough amount to prevent inappropriate deferral.
In response to comments asking for more flexibility in the rules
relating to changes in distribution amounts from an annuity contract
purchased from an insurance company, the final regulations replace the
rule permitting partial and complete withdrawals with a broader rule
permitting all types of acceleration. The final regulations allow any
method that retains the same rate of increase in future payments but
results in the total future expected payments under the annuity
(disregarding any future payment increases and including the amount of
any payment made as a result of the acceleration) being decreased,
thereby allowing acceleration in the form of a shorter period as well
as through withdrawals. In addition, the requirement that a total
withdrawal option be available has been eliminated.
These final regulations also permit defined benefit plans under a
qualified trust to provide variable or fixed-rate increasing annuities
paid directly from the trust, but the control in the regulations on the
rate of increase for these annuities is different. For these annuities,
increases in payments solely to reflect better-than-assumed investment
performance are permitted but only if the assumed interest rate for
calculating the initial level of payments is at least 3 percent.
Alternatively, fixed rate increases may be provided but only if the
rate of increase is less than 5 percent. Paralleling the payment of the
undistributed premium at death, the regulations allow a payment at
death to the extent that the payments after annuitization are less than
the present value of the employee's accrued benefit as of the annuity
starting date calculated using the applicable interest and morality
under section 417(e).
The rule allowing an acceleration of payments under an annuity has
not been extended to annuity payments from a qualified trust. However,
as noted below, such plans are permitted to allow changes in form of
distribution in certain specific circumstances as described below. In
addition, if distribution is in the form of a joint and survivor
annuity, the final regulations allow the survivor to convert the
survivor annuity into a lump sum upon the death of the employee.
Permitted Changes in Form of Distribution
Some commentators requested that employees and beneficiaries be
permitted to change the form of future distributions in response to
changed circumstances, such as upon retirement or death. In response to
these comments, the regulations allow an employee or beneficiary to
change the form of future distributions in a number of circumstances
provided certain conditions are satisfied. First, if distribution is in
the form of a period certain only annuity (i.e., an annuity with no
life contingency), the individual may change the form of distribution
prospectively at any time. The employee or beneficiary also is
permitted to change the form of distribution prospectively upon an
employee's actual retirement or upon plan termination, regardless of
the form of annuity payments before retirement or plan termination. In
addition, an employee may change to a qualified joint and survivor
annuity in connection with marriage.
In order to make these changes, the future payments must satisfy
section 401(a)(9) (as though payments first commenced on the new
annuity starting date, treating the actuarial value of the remaining
payments as the employee's or beneficiary's entire interest). As a
condition to changes in the form of distribution, whether under a
period certain only annuity or a life contingent annuity, the stream of
payments from the employee's original annuity starting date (both the
payments before and after the change in form) must satisfy section 415
using the interest rate assumption and applicable mortality table in
effect as of the annuity starting date. In addition, the end point of
the new period certain, if any, may not be later the end point
available at the original annuity starting date. Furthermore, the plan
must treat an individual electing a new form of distribution under
these rules as having a new annuity starting date for purposes of
sections 415 and 417. Thus, the payments under the new form must
satisfy section 415 as of its new annuity starting date based on the
applicable interest rate and applicable mortality table for that date,
taking into account prior payments. Although not stated, for plans
subject to section 411, any form of distribution or change in the form
of distribution must not result in an impermissible forfeiture of
benefits.
A number of commentators requested that the final regulations
provide the rule in prior proposed regulations that allowed minimum
distributions from a defined benefit plan to be calculated using the
rule for defined contribution plans in Sec. 1.401(a)(9)-5. The primary
argument for allowing this level of flexibility in calculating
distribution amounts from year to year is to allow employees to adjust
to changed circumstances. The rules in these final regulations allowing
a change in distribution form upon retirement or plan termination, and
at any time when distribution is in the form of a term certain only,
address this need.
Value of Guarantees in Determining Account Value Prior to Annuitization
The final regulations retain the basic rule in the temporary
regulations that, before annuitization, the defined contribution plan
rules apply. For this purpose, an employee's entire interest under an
annuity contract is the dollar amount credited to the employee or
beneficiary under the contract plus the actuarial value of any
additional benefits (such as survivor benefits in excess of the account
balance) that will be provided under the contract. A number of
commentators requested guidance on how this actuarial value is
[[Page 33292]]
calculated and indicated that, in certain circumstances it would be
appropriate to disregard this additional value.
The IRS and Treasury believe that it is generally appropriate to
reflect the value of additional benefits under an annuity contract,
just as the fair market value of all assets generally must be reflected
in valuing an account balance under a defined contribution plan.
However, in response to these comments, the final regulations allow the
additional benefits to be disregarded when there is a pro-rata
reduction in the additional benefits for any withdrawal, provided the
actuarial present value of the additional benefits is not more than 20
percent of the account balance. An example is provided that illustrates
an acceptable method of determining the value of an additional benefit
that is a guaranteed death benefit. In addition, an exception is
provided for an additional benefit in the form of a guaranteed return
of premiums upon death.
Certain Payments to Children
The final regulations provide rules governing when, pursuant to
section 401(a)(9)(F), payment of an employee's accrued benefit to a
child may be treated as if such payments were made to a surviving
spouse. Under the final regulations, payments under a defined benefit
plan or annuity contract that are made to an employee's child until
such child reaches the age of majority (or dies, if earlier) may be
treated, for purposes of section 401(a)(9), as if such payments were
made to the surviving spouse, provided they become payable to the
surviving spouse upon cessation of the payments to the child. In
addition, for this purpose, a child may be treated as having not
reached the age of majority if the child has not completed a specified
course of education and is under the age of 26, or so long as the child
is disabled.
Governmental Plans
A number of commentators raised concerns that governmental plans
offer annuity distribution options that are not permitted under the
temporary regulations. Most of the suggestions made by commentators on
behalf of governmental plans were incorporated into the final
regulations, such as expanding the list of acceptable COLAs; permitting
lump sum distributions to beneficiaries; and providing for pop-up
payments to a surviving spouse after the cessation of payments to a
child.
Nevertheless, some substantive changes recommended by or on behalf
of governmental plans were not made in the final regulations. In light
of the difficulties a governmental plan faces in changing its plan
terms (e.g., in some states, the state constitution does not allow
elimination of existing distribution options) and the public oversight
of such plans, these final regulations provide a grandfather rule under
which, in the case of an annuity distribution option provided under the
terms of a governmental plan as in effect on April 17, 2002, the plan
will not fail to satisfy section 401(a)(9) merely because the annuity
payments do not satisfy the requirements set forth in these
regulations. However, a grandfathered distribution option must satisfy
the statutory requirements of section 401(a)(9), based on a reasonable
and good faith interpretation of that section.
This grandfather rule only applies to existing plan provisions.
Otherwise, the regulations provide that annuity payments under
governmental plans within the meaning of section 414(d) must satisfy
the rules for nongovernmental plans. Thus, any new distribution option
in a governmental plan or change in a distribution option must comply
with the rules applicable to nongovernmental plans under these final
regulations.
Separate Accounts Under Defined Contribution Plans
Several comments have been received raising administrative concerns
with the rule in the final regulations applicable to defined
contribution plans that recognizes separate accounts for purposes of
section 401(a)(9) only after the separate account is actually
established. In particular, concerns have been raised that, for
employees who die late in a calendar year, it is nearly impossible to
set up separate accounts by the end of the year so that they can be
used to determine required minimum distributions for the year after
death. In response to these comments the regulations have been modified
to provide that if separate accounts, determined as of an employee's
date of death, are actually established by the end of the calendar year
following the year of an employee's death, the separate accounts can be
used to determine required minimum distributions for the year following
the year of the employee's death. Under the separate account rules,
post-death investment experience must be shared on a pro-rata basis
until the date on which the separate accounts are actually established.
Effective Date
As provided in the temporary and proposed regulations, these final
regulations apply for purposes of determining required minimum
distributions for calendar years beginning on or after January 1, 2003.
However, in order to fulfill the commitment in Notice 2003-2 to allow
plans to continue to use certain provisions from the pre-existing
proposed regulations and to provide plan sponsors sufficient time to
make any adjustments in their plans needed to comply with these
regulations, a distribution from a defined benefit plan or annuity
contract for calendar years 2003, 2004, and 2005 will not fail to
satisfy section 401(a)(9) merely because the payments do not satisfy
the rules in these final regulations, provided the payments satisfy
section 401(a)(9) based on a reasonable and good faith interpretation
of the provisions of section 401(a)(9). For a plan that satisfies the
parallel provisions of the 1987 proposed regulations, the 2001 proposed
regulations, the 2002 temporary and proposed regulations, or these
final regulations, a distribution will be deemed to satisfy a
reasonable good faith interpretation of section 401(a)(9).
For governmental plans, this reasonable good faith standard extends
to the end of the calendar year that contains the 90th day after the
opening of the first legislative session of the legislative body with
the authority to amend the plan that begins on or after June 15, 2004,
if such 90th day is later than December 31, 2005.
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Because Sec.
1.401(a)(9)-6 imposes no new collection of information on small
entities, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the proposed regulations preceding these
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 Marjorie Hoffman and
Cathy A. Vohs of the Office of the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
[[Page 33293]]
from the IRS and Treasury participated in the development of these
regulations.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for ``Sec. 1.401(a)(9)-6T'' and adding an entry in numerical
order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.401(a)(9)-6 is also issued under 26 U.S.C. 401(a)(9). *
* *
0
Par. 2. Remove Sec. 1.401(a)(9)-6T'' and replace it with Sec.
1.401(a)(9)-6'' each time it is used in the sections listed below:
Sec. 1.401(9)-0
Sec. 1.401(a)(9)-1 A-2(b)
Sec. 1.401(a)(9)-2 A-1(c)
Sec. 1.401(a)(9)-2 A-5
Sec. 1.401(a)(9)-2 A-6(a)
Sec. 1.401(a)(9)-3 A-1(a)
Sec. 1.401(a)(9)-3 A-1(b)
Sec. 1.401(a)(9)-3 A-6
Sec. 1.401(a)(9)-4 A-4(a)
Sec. 1.401(a)(9)-5 A-1(e)
Sec. 1.401(a)(9)-8 A-2(a)(3)
Sec. 1.401(a)(9)-8 A-6(b)(2)
Sec. 1.401(a)(9)-8 A-7
Sec. 1.401(a)(9)-8 A-8
Sec. 1.403(b)-3 A-1(c)(3)
Sec. 1.408-8 A-1(a)
Sec. 1.408-8 A-1(b)
Sec. 54.4974-2 A-3(a)
Sec. 54.4974-2 A-4(b)(2)(i)
0
Par. 3. Section 1.401(a)(9)-6 is added to read as follows:
Sec. 1.401(a)(9)-6 Required minimum distributions for defined benefit
plans and annuity contracts.
Q-1. How must distributions under a defined benefit plan be paid in
order to satisfy section 401(a)(9)?
A-1. (a) General rules. In order to satisfy section 401(a)(9),
except as otherwise provided in this section, distributions of the
employee's entire interest under a defined benefit plan must be paid in
the form of periodic annuity payments for the employee's life (or the
joint lives of the employee and beneficiary) or over a period certain
that does not exceed the maximum length of the period certain
determined in accordance with A-3 of this section. The interval between
payments for the annuity must be uniform over the entire distribution
period and must not exceed one year. Once payments have commenced over
a period, the period may only be changed in accordance with A-13 of
this section. Life (or joint and survivor) annuity payments must
satisfy the minimum distribution incidental benefit requirements of A-2
of this section. Except as otherwise provided in this section (such as
permitted increases described in A-14 of this section), all payments
(whether paid over an employee's life, joint lives, or a period
certain) also must be nonincreasing.
(b) Life annuity with period certain. The annuity may be a life
annuity (or joint and survivor annuity) with a period certain if the
life (or lives, if applicable) and period certain each meet the
requirements of paragraph (a) of this A-1. For purposes of this
section, if distributions are permitted to be made over the lives of
the employee and the designated beneficiary, references to a life
annuity include a joint and survivor annuity.
(c) Annuity commencement. (1) Annuity payments must commence on or
before the employee's required beginning date (within the meaning of A-
2 of Sec. 1.401(a)(9)-2). The first payment, which must be made on or
before the employee's required beginning date, must be the payment
which is required for one payment interval. The second payment need not
be made until the end of the next payment interval even if that payment
interval ends in the next calendar year. Similarly, in the case of
distributions commencing after death in accordance with section
401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or
before the date determined under A-3(a) or (b) (whichever is
applicable) of Sec. 1.401(a)(9)-3, must be the payment which is
required for one payment interval. Payment intervals are the periods
for which payments are received, e.g., bimonthly, monthly, semi-
annually, or annually. All benefit accruals as of the last day of the
first distribution calendar year must be included in the calculation of
the amount of annuity payments for payment intervals ending on or after
the employee's required beginning date.
(2) This paragraph (c) is illustrated by the following example:
Example. A defined benefit plan (Plan X) provides monthly
annuity payments of $500 for the life of unmarried participants with
a 10-year period certain. An unmarried, retired participant (A) in
Plan X attains age 70\1/2\ in 2005. In order to meet the
requirements of this paragraph, the first monthly payment of $500
must be made on behalf of A on or before April 1, 2006, and the
payments must continue to be made in monthly payments of $500
thereafter for the life and 10-year period certain.
(d) Single sum distributions. In the case of a single sum
distribution of an employee's entire accrued benefit during a
distribution calendar year, the amount that is the required minimum
distribution for the distribution calendar year (and thus not eligible
for rollover under section 402(c)) is determined using either the rule
in paragraph (d)(1) or the rule in paragraph (d)(2) of this A-1.
(1) The portion of the single sum distribution that is a required
minimum distribution is determined by treating the single sum
distribution as a distribution from an individual account plan and
treating the amount of the single sum distribution as the employee's
account balance as of the end of the relevant valuation calendar year.
If the single sum distribution is being made in the calendar year
containing the required beginning date and the required minimum
distribution for the employee's first distribution calendar year has
not been distributed, the portion of the single sum distribution that
represents the required minimum distribution for the employee's first
and second distribution calendar years is not eligible for rollover.
(2) The portion of the single sum distribution that is a required
minimum distribution is permitted to be determined by expressing the
employee's benefit as an annuity that would satisfy this section with
an annuity starting date as of the first day of the distribution
calendar year for which the required minimum distribution is being
determined, and treating one year of annuity payments as the required
minimum distribution for that year, and not eligible for rollover. If
the single sum distribution is being made in the calendar year
containing the required beginning date and the required minimum
distribution for the employee's first distribution calendar year has
not been made, the benefit must be expressed as an annuity with an
annuity starting date as of the first day of the first distribution
calendar year and the payments for the first two distribution calendar
years would be treated as required minimum distributions, and not
eligible for rollover.
(e) Death benefits. The rule in paragraph (a) of this A-1,
prohibiting increasing payments under an annuity applies to payments
made upon the death of an employee. However, for purposes of this
section, an ancillary death benefit described in this paragraph (e) may
be disregarded in applying that rule. Such an ancillary death benefit
is excluded in determining
[[Page 33294]]
an employee's entire interest and the rules prohibiting increasing
payments do not apply to such an ancillary death benefit. A death
benefit with respect to an employee's benefit is an ancillary death
benefit for purposes of this A-1 if--
(1) It is not paid as part of the employee's accrued benefit or
under any optional form of the employee's benefit; and
(2) The death benefit, together with any other potential payments
with respect to the employee's benefit that may be provided to a
survivor, satisfy the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i).
(f) Additional guidance. Additional guidance regarding how
distributions under a defined benefit plan must be paid in order to
satisfy section 401(a)(9) may be issued by the Commissioner in revenue
rulings, notices, or other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
Q-2. How must distributions in the form of a life (or joint and
survivor) annuity be made in order to satisfy the minimum distribution
incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the
distribution component of the incidental benefit requirement of Sec.
1.401-1(b)(1)(i)?
A-2. (a) Life annuity for employee. If the employee's benefit is
paid in the form of a life annuity for the life of the employee
satisfying section 401(a)(9) without regard to the MDIB requirement,
the MDIB requirement of section 401(a)(9)(G) will be satisfied.
(b) Joint and survivor annuity, spouse beneficiary. If the
employee's sole beneficiary, as of the annuity starting date for
annuity payments, is the employee's spouse and the distributions
satisfy section 401(a)(9) without regard to the MDIB requirement, the
distributions to the employee will be deemed to satisfy the MDIB
requirement of section 401(a)(9)(G). For example, if an employee's
benefit is being distributed in the form of a joint and survivor
annuity for the lives of the employee and the employee's spouse and the
spouse is the sole beneficiary of the employee, the amount of the
periodic payment payable to the spouse would not violate the MDIB
requirement if it was 100 percent of the annuity payment payable to the
employee, regardless of the difference in the ages between the employee
and the employee's spouse.
(c) Joint and survivor annuity, nonspouse beneficiary--(1)
Explanation of rule. If distributions commence under a distribution
option that is in the form of a joint and survivor annuity for the
joint lives of the employee and a beneficiary other than the employee's
spouse, the minimum distribution incidental benefit requirement will
not be satisfied as of the date distributions commence unless under the
distribution option, the annuity payments to be made on and after the
employee's required beginning date will satisfy the conditions of this
paragraph (c). The periodic annuity payment payable to the survivor
must not at any time on and after the employee's required beginning
date exceed the applicable percentage of the annuity payment payable to
the employee using the table in paragraph (c)(2) of this A-2. The
applicable percentage is based on the adjusted employee/beneficiary age
difference. The adjusted employee/beneficiary age difference is
determined by first calculating the excess of the age of the employee
over the age of the beneficiary based on their ages on their birthdays
in a calendar year. Then, if the employee is younger than age 70, the
age difference determined in the previous sentence is reduced by the
number of years that the employee is younger than age 70 on the
employee's birthday in the calendar year that contains the annuity
starting date. In the case of an annuity that provides for increasing
payments, the requirement of this paragraph (c) will not be violated
merely because benefit payments to the beneficiary increase, provided
the increase is determined in the same manner for the employee and the
beneficiary.
(2) Table.
------------------------------------------------------------------------
Applicable
Adjusted employee/beneficiary age difference percentage
------------------------------------------------------------------------
10 years or less.......................................... 100
11........................................................ 96
12........................................................ 93
13........................................................ 90
14........................................................ 87
15........................................................ 84
16........................................................ 82
17........................................................ 79
18........................................................ 77
19........................................................ 75
20........................................................ 73
21........................................................ 72
22........................................................ 70
23........................................................ 68
24........................................................ 67
25........................................................ 66
26........................................................ 64
27........................................................ 63
28........................................................ 62
29........................................................ 61
30........................................................ 60
31........................................................ 59
32........................................................ 59
33........................................................ 58
34........................................................ 57
35........................................................ 56
36........................................................ 56
37........................................................ 55
38........................................................ 55
39........................................................ 54
40........................................................ 54
41........................................................ 53
42........................................................ 53
43........................................................ 53
44 and greater............................................ 52
------------------------------------------------------------------------
(3) Example. This paragraph (c) is illustrated by the following
example:
Example. Distributions commence on January 1, 2003 to an
employee (Z), born March 1, 1937, after retirement at age 65. Z's
daughter (Y), born February 5, 1967, is Z's beneficiary. The
distributions are in the form of a joint and survivor annuity for
the lives of Z and Y with payments of $500 a month to Z and upon Z's
death of $500 a month to Y, i.e., the projected monthly payment to Y
is 100 percent of the monthly amount payable to Z. Accordingly,
under A-10 of this section, compliance with the rules of this
section is determined as of the annuity starting date. The adjusted
employee/beneficiary age difference is calculated by taking the
excess of the employee's age over the beneficiary's age and
subtracting the number of years the employee is younger than age 70.
In this case, Z is 30 years older than Y and is commencing benefit 5
years before attaining age 70 so the adjusted employee/beneficiary
age difference is 25 years. Under the table in paragraph (c)(2) of
this A-2, the applicable percentage for a 25-year adjusted employee/
beneficiary age difference is 66 percent. As of January 1, 2003 (the
annuity starting date) the plan does not satisfy the MDIB
requirement because, as of such date, the distribution option
provides that, as of Z's required beginning date, the monthly
payment to Y upon Z's death will exceed 66 percent of Z's monthly
payment.
(d) Period certain and annuity features. If a distribution form
includes a period certain, the amount of the annuity payments payable
to the beneficiary need not be reduced during the period certain, but
in the case of a joint and survivor annuity with a period certain, the
amount of the annuity payments payable to the beneficiary must satisfy
paragraph (c) of this A-2 after the expiration of the period certain.
(e) Deemed satisfaction of incidental benefit rule. Except in the
case of distributions with respect to an employee's benefit that
include an ancillary death benefit described in paragraph A-1(e) of
this section, to the extent the incidental benefit requirement of Sec.
1.401-1(b)(1)(i) requires a distribution, that requirement is deemed to
be satisfied if distributions satisfy the minimum distribution
incidental benefit requirement of this A-2. If the employee's benefits
include an ancillary death benefit described in paragraph A-1(e) of
this section, the benefits (including the ancillary death
[[Page 33295]]
benefit) must be distributed in accordance with the incidental benefit
requirement described in Sec. 1.401-1(b)(1)(i) and the benefits
(excluding the ancillary death benefit) must also satisfy the minimum
distribution incidental benefit requirement of this A-2.
Q-3. How long is a period certain under a defined benefit plan
permitted to extend?
A-3. (a) Distributions commencing during the employee's life. The
period certain for any annuity distributions commencing during the life
of the employee with an annuity starting date on or after the
employee's required beginning date generally is not permitted to exceed
the applicable distribution period for the employee (determined in
accordance with the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-
9) for the calendar year that contains the annuity starting date. See
A-10 of this section for the rule for annuity payments with an annuity
starting date before the required beginning date. However, if the
employee's sole beneficiary is the employee's spouse, the period
certain is permitted to be as long as the joint life and last survivor
expectancy of the employee and the employee's spouse, if longer than
the applicable distribution period for the employee, provided the
period certain is not provided in conjunction with a life annuity under
A-1(b) of this section.
(b) Distributions commencing after the employee's death. (1) If
annuity distributions commence after the death of the employee under
the life expectancy rule (under section 401(a)(9)(B)(iii) or (iv)), the
period certain for any distributions commencing after death cannot
exceed the applicable distribution period determined under A-5(b) of
Sec. 1.401(a)(9)-5 for the distribution calendar year that contains
the annuity starting date.
(2) If the annuity starting date is in a calendar year before the
first distribution calendar year, the period certain may not exceed the
life expectancy of the designated beneficiary using the beneficiary's
age in the year that contains the annuity starting date.
Q-4. Will a plan fail to satisfy section 401(a)(9) merely because
distributions are made from an annuity contract which is purchased from
an insurance company?
A-4. A plan will not fail to satisfy section 401(a)(9) merely
because distributions are made from an annuity contract which is
purchased with the employee's benefit by the plan from an insurance
company, as long as the payments satisfy the requirements of this
section. If the annuity contract is purchased after the required
beginning date, the first payment interval must begin on or before the
purchase date and the payment required for one payment interval must be
made no later than the end of such payment interval. If the payments
actually made under the annuity contract do not meet the requirements
of section 401(a)(9), the plan fails to satisfy section 401(a)(9). See
also A-14 of this section permitting certain increases under annuity
contracts.
Q-5. In the case of annuity distributions under a defined benefit
plan, how must additional benefits that accrue after the employee's
first distribution calendar year be distributed in order to satisfy
section 401(a)(9)?
A-5. (a) In the case of annuity distributions under a defined
benefit plan, if any additional benefits accrue in a calendar year
after the employee's first distribution calendar year, distribution of
the amount that accrues in the calendar year must commence in
accordance with A-1 of this section beginning with the first payment
interval ending in the calendar year immediately following the calendar
year in which such amount accrues.
(b) A plan will not fail to satisfy section 401(a)(9) merely
because there is an administrative delay in the commencement of the
distribution of the additional benefits accrued in a calendar year,
provided that the actual payment of such amount commences as soon as
practicable. However, payment must commence no later than the end of
the first calendar year following the calendar year in which the
additional benefit accrues, and the total amount paid during such first
calendar year must be no less than the total amount that was required
to be paid during that year under A-5(a) of this section.
Q-6. If a portion of an employee's benefit is not vested as of
December 31 of a distribution calendar year, how is the determination
of the required minimum distribution affected?
A-6. In the case of annuity distributions from a defined benefit
plan, if any portion of the employee's benefit is not vested as of
December 31 of a distribution calendar year, the portion that is not
vested as of such date will be treated as not having accrued for
purposes of determining the required minimum distribution for that
distribution calendar year. When an additional portion of the
employee's benefit becomes vested, such portion will be treated as an
additional accrual. See A-5 of this section for the rules for
distributing benefits which accrue under a defined benefit plan after
the employee's first distribution calendar year.
Q-7. If an employee (other than a 5-percent owner) retires after
the calendar year in which the employee attains age 70\1/2\, for what
period must the employee's accrued benefit under a defined benefit plan
be actuarially increased?
A-7. (a) Actuarial increase starting date. If an employee (other
than a 5-percent owner) retires after the calendar year in which the
employee attains age 70\1/2\, in order to satisfy section
401(a)(9)(C)(iii), the employee's accrued benefit under a defined
benefit plan must be actuarially increased to take into account any
period after age 70\1/2\ in which the employee was not receiving any
benefits under the plan. The actuarial increase required to satisfy
section 401(a)(9)(C)(iii) must be provided for the period starting on
the April 1 following the calendar year in which the employee attains
age 70\1/2\, or January 1, 1997, if later.
(b) Actuarial increase ending date. The period for which the
actuarial increase must be provided ends on the date on which benefits
commence after retirement in an amount sufficient to satisfy section
401(a)(9).
(c) Nonapplication to plan providing same required beginning date
for all employees. If, as permitted under A-2(e) of Sec. 1.401(a)(9)-
2, a plan provides that the required beginning date for purposes of
section 401(a)(9) for all employees is April 1 of the calendar year
following the calendar year in which the employee attains age 70\1/2\
(regardless of whether the employee is a 5-percent owner) and the plan
makes distributions in an amount sufficient to satisfy section
401(a)(9) using that required beginning date, no actuarial increase is
required under section 401(a)(9)(C)(iii).
(d) Nonapplication to governmental and church plans. The actuarial
increase required under this A-7 does not apply to a governmental plan
(within the meaning of section 414(d)) or a church plan. For purposes
of this paragraph, the term church plan means a plan maintained by a
church for church employees, and the term church means any church (as
defined in section 3121(w)(3)(A)) or qualified church-controlled
organization (as defined in section 3121(w)(3)(B)).
Q-8. What amount of actuarial increase is required under section
401(a)(9)(C)(iii)?
A-8. In order to satisfy section 401(a)(9)(C)(iii), the retirement
benefits payable with respect to an employee as of the end of the
period for actuarial increases (described in A-7 of this section) must
be no less than: the
[[Page 33296]]
actuarial equivalent of the employee's retirement benefits that would
have been payable as of the date the actuarial increase must commence
under paragraph (a) of A-7 of this section if benefits had commenced on
that date; plus the actuarial equivalent of any additional benefits
accrued after that date; reduced by the actuarial equivalent of any
distributions made with respect to the employee's retirement benefits
after that date. Actuarial equivalence is determined using the plan's
assumptions for determining actuarial equivalence for purposes of
satisfying section 411.
Q-9. How does the actuarial increase required under section
401(a)(9)(C)(iii) relate to the actuarial increase required under
section 411?
A-9. In order for any of an employee's accrued benefit to be
nonforfeitable as required under section 411, a defined benefit plan
must make an actuarial adjustment to an accrued benefit, the payment of
which is deferred past normal retirement age. The only exception to
this rule is that generally no actuarial adjustment is required to
reflect the period during which a benefit is suspended as permitted
under section 203(a)(3)(B) of the Employee Retirement Income Security
Act of 1974 (ERISA) (88 Stat. 829). The actuarial increase required
under section 401(a)(9)(C)(iii) for the period described in A-7 of this
section is generally the same as, and not in addition to, the actuarial
increase required for the same period under section 411 to reflect any
delay in the payment of retirement benefits after normal retirement
age. However, unlike the actuarial increase required under section 411,
the actuarial increase required under section 401(a)(9)(C)(iii) must be
provided even during any period during which an employee's benefit has
been suspended in accordance with ERISA section 203(a)(3)(B).
Q-10. What rule applies if distributions commence to an employee on
a date before the employee's required beginning date over a period
permitted under section 401(a)(9)(A)(ii) and the distribution form is
an annuity under which distributions are made in accordance with the
provisions of A-1 of this section?
A-10. (a) General rule. If distributions commence to an employee on
a date before the employee's required beginning date over a period
permitted under section 401(a)(9)(A)(ii) and the distribution form is
an annuity under which distributions are made in accordance with the
provisions of A-1 of this section, the annuity starting date will be
treated as the required beginning date for purposes of applying the
rules of this section and Sec. 1.401(a)(9)-2. Thus, for example, the
designated beneficiary distributions will be determined as of the
annuity starting date. Similarly, if the employee dies after the
annuity starting date but before the required beginning date determined
under A-2 of Sec. 1.401(a)(9)-2, after the employee's death, the
remaining portion of the employee's interest must continue to be
distributed in accordance with this section over the remaining period
over which distributions commenced. The rules in Sec. 1.401(a)(9)-3
and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
(b) Period certain. If, as of the employee's birthday in the year
that contains the annuity starting date, the age of the employee is
under 70, the following rule applies in applying the rule in paragraph
(a) of A-3 of this section. The applicable distribution period for the
employee is the distribution period for age 70, determined in
accordance with the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-
9, plus the excess of 70 over the age of the employee as of the
employee's birthday in the year that contains the annuity starting
date.
(c) Adjustment to employee/beneficiary age difference. See A-
2(c)(1) of this section for the determination of the adjusted employee/
beneficiary age difference in the case of an employee whose age on the
annuity starting date is less than 70.
Q-11. What rule applies if distributions commence to the surviving
spouse of an employee over a period permitted under section
401(a)(9)(B)(iii)(II) before the date on which distributions are
required to commence and the distribution form is an annuity under
which distributions are made as of the date distributions commence in
accordance with the provisions of A-1 of this section.
A-11.If distributions commence to the surviving spouse of an
employee over a period permitted under section 401(a)(9)(B)(iii)(II)
before the date on which distributions are required to commence and the
distribution form is an annuity under which distributions are made as
of the date distributions commence in accordance with the provisions of
A-1 of this section, distributions will be considered to have begun on
the actual commencement date for purposes of section
401(a)(9)(B)(iv)(II). Consequently, in such case, A-5 of Sec.
1.401(a)(9)-3 and section 401(a)(9)(B)(ii) and (iii) will not apply
upon the death of the surviving spouse as though the surviving spouse
were the employee. Instead, the annuity distributions must continue to
be made, in accordance with the provisions of A-1 of this section, over
the remaining period over which distributions commenced.
Q-12. In the case of an annuity contract under an individual
account plan that has not yet been annuitized, how is section 401(a)(9)
satisfied with respect to the employee's or beneficiary's entire
interest under the annuity contract for the period prior to the date
annuity payments so commence?
A-12. (a) General rule. Prior to the date that an annuity contract
under an individual account plan is annuitized, the interest of an
employee or beneficiary under that contract is treated as an individual
account for purposes of section 401(a)(9). Thus, the required minimum
distribution for any year with respect to that interest is determined
under Sec. 1.401(a)(9)-5 rather than this section. See A-1 of Sec.
1.401(a)(9)-5 for rules relating to the satisfaction of section
401(a)(9) in the year that annuity payments commence and A-2(a)(3) of
Sec. 1.401(a)(9)-8.
(b) Entire interest. For purposes of applying the rules in Sec.
1.401(a)(9)-5, the entire interest under the annuity contract as of
December 31 of the relevant valuation calendar year is treated as the
account balance for the valuation calendar year described in A-3 of
Sec. 1.401(a)(9)-5. The entire interest under an annuity contract is
the dollar amount credited to the employee or beneficiary under the
contract plus the actuarial present value of any additional benefits
(such as survivor benefits in excess of the dollar amount credited to
the employee or beneficiary) that will be provided under the contract.
However, paragraph (c) of this A-12 describes certain additional
benefits that may be disregarded in determining the employee's entire
interest under the annuity contract. The actuarial present value of any
additional benefits described under this A-12 is to be determined using
reasonable actuarial assumptions, including reasonable assumptions as
to future distributions, and without regard to an individual's health.
(c) Exclusions. (1) The actuarial present value of any additional
benefits provided under an annuity contract described in paragraph (b)
of this A-12 may be disregarded if the sum of the dollar amount
credited to the employee or beneficiary under the contract and the
actuarial present value of the additional benefits is no more than 120
percent of the dollar amount credited to the employee or beneficiary
under the
[[Page 33297]]
contract and the contract provides only for the following additional
benefits:
(i) Additional benefits that, in the case of a distribution, are
reduced by an amount sufficient to ensure that the ratio of such sum to
the dollar amount credited does not increase as a result of the
distribution, and
(ii) An additional benefit that is the right to receive a final
payment upon death that does not exceed the excess of the premiums paid
less the amount of prior distributions.
(2) If the only additional benefit provided under the contract is
the additional benefit described in paragraph (c)(1)(ii) of this A-14,
the additional benefit may be disregarded regardless of its value in
relation to the dollar amount credited to the employee or beneficiary
under the contract.
(3) The Commissioner in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter) may provide additional guidance on additional benefits
that may be disregarded.
(d) Examples. The following examples, which use a 5 percent
interest rate and the Mortality Table provided in Rev. Rul. 2001-62
(2001-2 C.B. 632), illustrate the application of the rules in this A-
12:
Example 1. (i) G is the owner of a variable annuity contract
(Contract S) under an individual account plan which has not been
annuitized. Contract S provides a death benefit until the end of the
calendar year in which the owner attains the age of 84 equal to the
greater of the current Contract S notional account value (dollar
amount credited to G under the contract) and the largest notional
account value at any previous policy anniversary reduced
proportionally for subsequent partial distributions (High Water
Mark). Contract S provides a death benefit in calendar years after
the calendar year in which the owner attains age 84 equal to the
current notional account value. Contract S provides that assets
within the contract may be invested in a Fixed Account at a
guaranteed rate of 2 percent. Contract S provides no other
additional benefits.
(ii) At the end of 2008, when G has an attained age of 78 and 9
months the notional account value of Contract S (after the
distribution for 2008 of 4.93% of the notional account value as of
December 31, 2007) is $550,000, and the High Water Mark, before
adjustment for any withdrawals from Contract S in 2008 is
$1,000,000. Thus, Contract S will provide additional benefits (i.e.
the death benefits in excess of the notional account value) through
2014, the year S turns 84. The actuarial present value of these
additional benefits at the end of 2008 is determined to be $84,300
(15 percent of the notional account value). In making this
determination, the following assumptions are made: on the average,
deaths occur mid-year; the investment return on his notional account
value is 2 percent per annum; and minimum required distributions
(determined without regard to additional benefits under the Contract
S) are made at the end of each year. The following table summarizes
the actuarial methodology used in determining the actuarial present
value of the additional benefit.
----------------------------------------------------------------------------------------------------------------
End-of-year End-of-year
Death benefit notional Average Withdrawal at notional
Year during year account before notional end of year account after
withdrawal account withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................ $1,000,000 .............. .............. .............. $550,000
2009............................ \1\ 950,739 \2\ $561,000 \3\ $555,500 \4\ $28,205 532,795
2010............................ 901,983 543,451 538,123 28,492 514,959
2011............................ 853,749 525,258 520,109 28,769 496,490
2012............................ 806,053 506,419 501,454 29,034 477,385
2013............................ 758,916 486,933 482,159 29,287 457,645
2014............................ 712,356 466,798 462,222 29,525 437,273
----------------------------------------------------------------------------------------------------------------
\1\ $1,000,000 death benefit reduced 4.93 percent for withdrawal during 2008.
\2\ Notional account value at end of prior year (after distribution) increased by 2 percent return for year.
\3\ Average of $550,000 notional account value at end of prior year (after distribution) and $561,000 notional
account value at end of current year (before distribution).
\4\ December 31, 2008 notional account (before distribution) divided by uniform lifetime table age 79 factor of
19.5.
----------------------------------------------------------------------------------------------------------------
Discounted
Survivorship Interest Mortality additional
Year to start of discount to rate during benefits
year end of 2008 year within year
----------------------------------------------------------------------------------------------------------------
2008............................................ .............. .............. .............. ..............
2009............................................ 1.00000 .97590 \5\ .04426 17,070
2010............................................ .95574 \6\ .92943 .04946 \7\ 15,987
2011............................................ \8\ .90847 .88517 .05519 14,807
2012............................................ .85833 .84302 .06146 13,546
2013............................................ .80558 .80288 .06788 12,150
2014............................................ .75090 .76464 .07477 10,739
---------------
.............. .............. .............. $84,300
----------------------------------------------------------------------------------------------------------------
\5\ One-quarter age 78 rate plus three-quarters age 79 rate.
\6\ Five percent discounted 18 months (1.05[caret](-1.5)).
\7\ Blended age 79/age 80 mortality rate (.04946) multiplied by the $363,860 excess of death benefit over the
average notional account value (901,983 less 538,123) multiplied by .95574 probability of survivorship to the
start of 2010 multiplied by 18 month interest discount of .92943.
\8\ Survivorship to start of preceding year (.95574) multiplied by probability of survivorship during prior year
(1-.04946).
(iii) Because Contract S provides that, in the case of a
distribution, the value of the additional death benefit (which is
the only additional benefit available under the contract) is reduced
by an amount that is at least proportional to the reduction in the
notional account value and, at age 78 and 9 months, the sum of the
notional account value (dollar amount credited to the employee under
the contract) and the actuarial present value of the additional
death benefit is no more than 120 percent of the notional account
value, the exclusion under paragraph (c)(2) of this A-12 is
applicable for 2009. Therefore, for purposes
[[Page 33298]]
of applying the rules in Sec. 1.401(a)(9)-5, the entire interest
under Contract S may be determined as the notional account value
(i.e. without regard to the additional death benefit).
Example 2. (i) The facts are the same as in (Example 1 except
that the notional account value is $450,000 at the end of 2008. In
this instance, the actuarial present value of the death benefit in
excess of the notional account value in 2008 is determined to be
$108,669 (24 percent of the notional account value). The following
table summarizes the actuarial methodology used in determining the
actuarial present value of the additional benefit.
----------------------------------------------------------------------------------------------------------------
End-of-year
notional Average End-of-year
Year Death benefit account notional Withdrawal at notional
during year before account end of year account after
withdrawal withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................ $1,000,000 .............. .............. .............. $450,000
2009............................ 950,739 $459,000 $454,500 $23,077 435,923
2010............................ 901,983 444,642 440,282 23,311 421,330
2011............................ 853,749 429,757 425,543 23,538 406,219
2012............................ 806,053 414,343 410,281 23,755 390,588
2013............................ 758,916 398,399 394,494 23,962 374,437
2014............................ 712,356 381,926 378,181 24,157 357,768
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Discounted
Survivorship Interest Mortality additional
Year to start of discount to rate during benefits
year end of 2008 year within year
----------------------------------------------------------------------------------------------------------------
2008............................................ .............. .............. .............. ..............
2009............................................ 1.00000 .97590 .04426 $21,432
2010............................................ .95574 .92943 .04946 20,286
2011............................................ .90847 .88517 .05519 19,004
2012............................................ .85833 .84302 .06146 17,601
2013............................................ .80558 .80288 .06788 15,999
2014............................................ .75090 .76464 .07477 14,347
---------------
.............. .............. .............. $108,669
----------------------------------------------------------------------------------------------------------------
(ii) Because the sum of the notional account balance and the
actuarial present value of the additional death benefit is more than
120 percent of the notional account value, the exclusion under
paragraph (b)(1) of this A-12 does not apply for 2009. Therefore,
for purposes of applying the rules in Sec. 1.401(a)(9)-5, the
entire interest under Contract S must include the actuarial present
value of the additional death benefit.
Q-13: When can an annuity payment period be changed?
A-13. (a) In general. An annuity payment period may be changed in
accordance with the provisions set forth in paragraph (b) of this A-13
or in association with an annuity payment increase described in A-14 of
this section.
(b) Reannuitization. If, in a stream of annuity payments that
otherwise satisfies section 401(a)(9), the annuity payment period is
changed and the annuity payments are modified in association with that
change, this modification will not cause the distributions to fail to
satisfy section 401(a)(9) provided the conditions set forth in
paragraph (c) of this A-13 are satisfied, and either--
(1) The modification occurs at the time that the employee retires
or in connection with a plan termination;
(2) The annuity payments prior to modification are annuity payments
paid over a period certain without life contingencies; or
(3) The annuity payments after modification are paid under a
qualified joint and survivor annuity over the joint lives of the
employee and a designated beneficiary, the employee's spouse is the
sole designated beneficiary, and the modification occurs in connection
with the employee becoming married to such spouse.
(c) Conditions. In order to modify a stream of annuity payments in
accordance with paragraph (b) of this A-13, the following conditions
must be satisfied--
(1) The future payments under the modified stream satisfy section
401(a)(9) and this section (determined by treating the date of the
change as a new annuity starting date and the actuarial present value
of the remaining payments prior to modification as the entire interest
of the participant);
(2) For purposes of sections 415 and 417, the modification is
treated as a new annuity starting date;
(3) After taking into account the modification, the annuity stream
satisfies section 415 (determined at the original annuity starting
date, using the interest rates and mortality tables applicable to such
date); and
(4) The end point of the period certain, if any, for any modified
payment period is not later than the end point available under section
401(a)(9) to the employee at the original annuity starting date.
(d) Examples. For the following examples in this A-13, assume that
the Applicable Interest Rate throughout the period from 2005 through
2008 is 5 percent and throughout 2009 is 4 percent, the Applicable
Mortality Table throughout the period from 2005 to 2009 is the table
provided in Rev. Rul. 2001-62 (2001-C.B. 632) and the section 415 limit
in 2005 at age 70 for a straight life annuity is $255,344:
Example 1. (i) A participant (D), who has 10 years of
participation in a frozen defined benefit plan (Plan W), attains age
70\1/2\ in 2005. D is not retired and elects to receive
distributions from Plan W in the form of a straight life (i.e. level
payment) annuity with annual payments of $240,000 per year beginning
in 2005 at a date when D has an attained age of 70. Plan W offers
non-retired employees in pay status the opportunity to modify their
annuity payments due to an associated change in the payment period
at retirement. Plan W treats the date of the change in payment
period as a new annuity starting date for the purposes of sections
415 and 417. Thus, for example, the plan provides a new qualified
and joint survivor annuity election and obtains spousal consent.
[[Page 33299]]
(ii) Plan W determines modifications of annuity payment amounts
at retirement such that the present value of future new annuity
payment amounts (taking into account the new associated payment
period) is actuarially equivalent to the present value of future
pre-modification annuity payments (taking into account the pre-
modification annuity payment period). Actuarial equivalency for this
purpose is determined using the Applicable Interest Rate and the
Applicable Mortality Table as of the date of modification.
(iii) D retires in 2009 at the age of 74 and, after receiving
four annual payments of $240,000, elects to receive his remaining
distributions from Plan W in the form of an immediate final lump sum
payment (calculated at 4 percent interest) of $2,399,809.
(iv) Because payment of retirement benefits in the form of an
immediate final lump sum payment satisfies (in terms of form)
section 401(a)(9), the condition under paragraph (c)(1) of this A-13
is met.
(v) Because Plan W treats a modification of an annuity payment
stream at retirement as a new annuity starting date for purposes of
sections 415 and 417, the condition under paragraph (c)(2) of this
A-13 is met.
(vi) After taking into account the modification, the annuity
stream determined as of the original annuity starting date consists
of annual payments beginning at age 70 of $240,000, $240,000,
$240,000, $240,000, and $2,399,809. This benefit stream is
actuarially equivalent to a straight life annuity at age 70 of
$250,182, an amount less than the section 415 limit determined at
the original annuity starting date, using the interest and mortality
rates applicable to such date. Thus, the condition under paragraph
(c)(3) of this A-13 is met.
(vii) Thus, because a stream of annuity payments in the form of
a straight life annuity satisfies section 401(a)(9), and because
each of the conditions under paragraph (c) of this A-13 are
satisfied, the modification of annuity payments to D described in
this example meets the requirements under paragraph (c)(1) of this
A-13.
Example 2. The facts are the same as in Example 1 except that
the straight life annuity payments are paid at a rate of $250,000
per year and after D retires the lump sum payment at age 75 is
$2,499,801. Thus, after taking into account the modification, the
annuity stream determined as of the original annuity starting date
consists of annual payments beginning at age 70 of $250,000,
$250,000, $250,000, $250,000, and $2,499,801. This benefit stream is
actuarially equivalent to a straight life annuity at age 70 of
$260,606, an amount greater than the section 415 limit determined at
the original annuity starting date, using the interest and mortality
rates applicable to such date. Thus, the lump sum payment to D fails
to satisfy the condition under paragraph (c)(3) of this A-13.
Therefore, the lump sum payment to D fails to meet the requirements
of this A-13 and thus fails to satisfy the requirements of section
401(a)(9).
Example 3. (i) A participant (E), who has 10 years of
participation in a frozen defined benefit plan (Plan X), attains age
70\1/2\ and retires in 2005 at a date when his attained age is 70. E
elects to receive annual distributions from Plan X in the form of a
27 year period certain annuity (i.e., a 27 year annuity payment
period without a life contingency) paid at a rate of $37,000 per
year beginning in 2005 with future payments increasing at a rate of
4 percent per year (i.e., the 2006 payment will be $38,480, the 2007
payment will be $40,019 and so on). Plan X offers participants in
pay status whose annuity payments are in the form of a term-certain
annuity the opportunity to modify their payment period at any time
and treats such modifications as a new annuity starting date for the
purposes of sections 415 and 417. Thus, for example, the plan
provides a new qualified and joint survivor annuity election and
obtains spousal consent.
(ii) Plan X determines modifications of annuity payment amounts
such that the present value of future new annuity payment amounts
(taking into account the new associated payment period) is
actuarially equivalent to the present value of future pre-
modification annuity payments (taking into account the pre-
modification annuity payment period). Actuarial equivalency for this
purpose is determined using 5 percent and the Applicable Mortality
Table as of the date of modification.
(iii) In 2008, E, after receiving annual payments of $37,000,
$38,480, and $40,019, elects to receive his remaining distributions
from Plan W in the form of a straight life annuity paid with annual
payments of $92,133 per year.
(iv) Because payment of retirement benefits in the form of a
straight life annuity satisfies (in terms of form) section
401(a)(9), the condition under paragraph (c)(1) of this A-13 is met.
(v) Because Plan X treats a modification of an annuity payment
stream at retirement as a new annuity starting date for purposes of
sections 415 and 417, the condition under paragraph (c)(2) of this
A-13 is met.
(vi) After taking into account the modification, the annuity
stream determined as of the original annuity starting date consists
of annual payments beginning at age 70 of $37,000, $38,480, $40,019,
and a straight life annuity beginning at age 73 of $92,133. This
benefit stream is equivalent to a straight life annuity at age 70 of
$82,539, an amount less than the section 415 limit determined at the
original annuity starting date, using the interest and mortality
rates applicable to such date. Thus, the condition under paragraph
(c)(3) of this A-13 is met.
(vii) Thus, because a stream of annuity payments in the form of
a straight life annuity satisfies section 401(a)(9), and because
each of the conditions under paragraph (c) of this A-13 are
satisfied, the modification of annuity payments to E described in
this example meets the requirements of this A-13.
Q-14. Are annuity payments permitted to increase?
A-14. (a) General rules. Except as otherwise provided in this
section, all annuity payments (whether paid over an employee's life,
joint lives, or a period certain) must be nonincreasing or increase
only in accordance with one or more of the following --
(1) With an annual percentage increase that does not exceed the
percentage increase in an eligible cost-of-living index as defined in
paragraph (b) of this A-14 for a 12-month period ending in the year
during which the increase occurs or the prior year;
(2) With a percentage increase that occurs at specified times
(e.g., at specified ages) and does not exceed the cumulative total of
annual percentage increases in an eligible cost-of-living index as
defined in paragraph (b) of this A-14 since the annuity starting date,
or if later, the date of the most recent percentage increase. However,
in cases providing such a cumulative increase, an actuarial increase
may not be provided to reflect the fact that increases were not
provided in the interim years;
(3) To the extent of the reduction in the amount of the employee's
payments to provide for a survivor benefit, but only if there is no
longer a survivor benefit because the beneficiary whose life was being
used to determine the period described in section 401(a)(9)(A)(ii) over
which payments were being made dies or is no longer the employee's
beneficiary pursuant to a qualified domestic relations order within the
meaning of section 414(p);
(4) To pay increased benefits that result from a plan amendment;
(5) To allow a beneficiary to convert the survivor portion of a
joint and survivor annuity into a single sum distribution upon the
employee's death; or
(6) To the extent increases are permitted in accordance with
paragraph (c) or (d) of this A-14.
(b) (1) For purposes of this A-14, an eligible cost-of-living index
means an index described in paragraphs (b)(2), (b)(3), or (b)(4) of
this A-14.
(2) A consumer price index that is based on prices of all items (or
all items excluding food and energy) and issued by the Bureau of Labor
Statistics, including an index for a specific population (such as urban
consumers or urban wage earners and clerical workers) and an index for
a geographic area or areas (such as a given metropolitan area or
state).
(3) A percentage adjustment based on a cost-of-living index
described in paragraph (b)(2) of this A-14, or a fixed percentage if
less. In any year when the cost-of-living index is lower than the fixed
percentage, the fixed percentage may be treated as an increase in an
eligible cost-of-living index, provided it does not exceed the sum of:
[[Page 33300]]
(i) The cost-of-living index for that year, and
(ii) The accumulated excess of the annual cost-of-living index from
each prior year over the fixed annual percentage used in that year
(reduced by any amount previously utilized under this paragraph
(b)(3)(ii)).
(4) A percentage adjustment based on the increase in compensation
for the position held by the employee at the time of retirement, and
provided under either the terms of a governmental plan within the
meaning of section 414(d) or under the terms of a nongovernmental plan
as in effect on April 17, 2002.
(c) Additional permitted increases for annuity payments under
annuity contracts purchased from insurance companies. In the case of
annuity payments paid from an annuity contract purchased from an
insurance company, if the total future expected payments (determined in
accordance with paragraph (e)(3) of this A-14) exceed the total value
being annuitized (within the meaning of paragraph (e)(1) of this A-14)
, the payments under the annuity will not fail to satisfy the
nonincreasing payment requirement in A-1(a) of this section merely
because the payments are increased in accordance with one or more of
the following --
(1) By a constant percentage, applied not less frequently than
annually;
(2) To provide a final payment upon the death of the employee that
does not exceed the excess of the total value being annuitized (within
the meaning of paragraph (e)(1) of this A-14) over the total of
payments before the death of the employee;
(3) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if actuarial gain is measured no less frequently than
annually and the resulting dividend payments or other payments are
either paid no later than the year following the year for which the
actuarial experience is measured or paid in the same form as the
payment of the annuity over the remaining period of the annuity
(beginning no later than the year following the year for which the
actuarial experience is measured); and
(4) An acceleration of payments under the annuity (within the
meaning of paragraph (e)(4) of this A-14).
(d) Additional permitted increases for annuity payments from a
qualified trust. In the case of annuity payments paid under a defined
benefit plan qualified under section 401(a) (other than annuity
payments under an annuity contract purchased from an insurance company
that satisfy paragraph (c) of this section), the payments under the
annuity will not fail to satisfy the nonincreasing payment requirement
in A-1(a) of this section merely because the payments are increased in
accordance with one of the following--
(1) By a constant percentage, applied not less frequently than
annually, at a rate that is less than 5 percent per year;
(2) To provide a final payment upon the death of the employee that
does not exceed the excess of the actuarial present value of the
employee's accrued benefit (within the meaning of section 411(a)(7))
calculated as the annuity starting date using the applicable interest
rate and the applicable mortality table under section 417(e) (or, if
greater, the total amount of employee contributions) over the total of
payments before the death of the employee; or
(3) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if--
(i) Actuarial gain is measured no less frequently than annually;
(ii) The resulting dividend payments or other payments are either
paid no later than the year following the year for which the actuarial
experience is measured or paid in the same form as the payment of the
annuity over the remaining period of the annuity (beginning no later
than the year following the year for which the actuarial experience is
measured);
(iii) The actuarial gain taken into account is limited to actuarial
gain from investment experience;
(iv) The assumed interest used to calculate such actuarial gains is
not less than 3 percent; and
(v) The payments are not increasing by a constant percentage as
described in paragraph (d)(1) of this A-14.
(e) Definitions. For purposes of this A-14, the following
definitions apply--
(1) Total value being annuitized means--
(i) In the case of annuity payments under a section 403(a) annuity
plan or under a deferred annuity purchased by a section 401(a) trust,
the value of the employee's entire interest (within the meaning of A-12
of this section) being annuitized (valued as of the date annuity
payments commence);
(ii) In the case of annuity payments under an immediate annuity
contract purchased by a trust for a defined benefit plan qualified
under section 401(a), the amount of the premium used to purchase the
contract; and
(iii) In the case of a defined contribution plan, the value of the
employee's account balance used to purchase an immediate annuity under
the contract.
(2) Actuarial gain means the difference between an amount
determined using the actuarial assumptions (i.e., investment return,
mortality, expense, and other similar assumptions) used to calculate
the initial payments before adjustment for any increases and the amount
determined under the actual experience with respect to those factors.
Actuarial gain also includes differences between the amount determined
using actuarial assumptions when an annuity was purchased or commenced
and such amount determined using actuarial assumptions used in
calculating payments at the time the actuarial gain is determined.
(3) Total future expected payments means the total future payments
expected to be made under the annuity contract as of the date of the
determination, calculated using the Single Life Table in A-1 of Sec.
1.401(a)(9)-9 (or, if applicable, the Joint and Last Survivor Table in
A-3 of in Sec. 1.401(a)(9)-9) for annuitants who are still alive,
without regard to any increases in annuity payments after the date of
determination, and taking into account any remaining period certain.
(4) Acceleration of payments means a shortening of the payment
period with respect to an annuity or a full or partial commutation of
the future annuity payments. An increase in the payment amount will be
treated as an acceleration of payments in the annuity only if the total
future expected payments under the annuity (including the amount of any
payment made as a result of the acceleration) is decreased as a result
of the change in payment period.
(f) Examples. Paragraph (c) of this A-14 is illustrated by the
following examples:
Example 1. Variable annuity. A retired participant (Z1) in
defined contribution plan X attains age 70 on March 5, 2005, and
thus, attains age 70\1/2\ in 2005. Z1 elects to purchase annuity
Contract Y1 from Insurance Company W in 2005. Contract Y1 is a
single life annuity contract with a 10-year period certain. Contract
Y1 provides for an initial annual payment calculated with an assumed
interest rate (AIR) of 3 percent. Subsequent payments are determined
by multiplying the prior year's payment by a fraction the numerator
of which is 1 plus the actual return on the separate account assets
underlying Contract Y1 since the preceding payment and the
denominator of which is 1 plus the AIR during that period. The value
of Z1's account balance in Plan X at the time of purchase is
$105,000, and the purchase price of Contract Y1 is $105,000.
Contract Y1 provides Z1 with an initial payment of
[[Page 33301]]
$7,200 at the time of purchase in 2005. The total future expected
payments to Z1 under Contract Y1 are $122,400, calculated as the
initial payment of $7,200 multiplied by the age 70 life expectancy
of 17 provided in the Single Life Table in A-1 of Sec. 1.401(a)(9)-
9. Because the total future expected payments on the purchase date
exceed the total value used to purchase Contract Y1 and payments may
only increase as a result of actuarial gain, with such increases,
beginning no later than the next year, paid in the same form as the
payment of the annuity over the remaining period of the annuity,
distributions received by Z1 from Contract Y1 meet the requirements
under paragraph (c)(3) of this A-14.
Example 2. Participating annuity. A retired participant (Z2) in
defined contribution plan X attains age 70 on May 1, 2005, and thus,
attains age 70\1/2\ in 2005. Z2 elects to purchase annuity Contract
Y2 from Insurance Company W in 2005. Contract Y2 is a participating
single life annuity contract with a 10-year period certain. Contract
Y2 provides for level annual payments with dividends paid in a lump
sum in the year after the year for which the actuarial experience is
measured or paid out levelly beginning in the year after the year
for which the actuarial gain is measured over the remaining lifetime
and period certain, i.e., the period certain ends at the same time
as the original period certain. Dividends are determined annually by
the Board of Directors of Company W based upon a comparison of
actual actuarial experience to expected actuarial experience in the
past year. The value of Z2's account balance in Plan X at the time
of purchase is $265,000, and the purchase price of Contract Y2 is
$265,000. Contract Y2 provides Z2 with an initial payment of $16,000
in 2005. The total future expected payments to Z2 under Contract Y2
are calculated as the annual initial payment of $16,000 multiplied
by the age 70 life expectancy of 17 provided in the Single Life
Table in A-1 of Sec. 1.401(a)(9)-9 for a total of $272,000. Because
the total future expected payments on the purchase date exceeds the
total value used to purchase Contract Y2 and payments may only
increase as a result of actuarial gain, with such increases,
beginning no later than the next year, paid in the same form as the
payment of the annuity over the remaining period of the annuity,
distributions received by Z2 from Contract Y2 meet the requirements
under paragraph (c)(3) of this A-14.
Example 3. Participating annuity with dividend accumulation. The
facts are the same as in Example 2 except that the annuity provides
a dividend accumulation option under which Z2 may defer receipt of
the dividends to a time selected by Z2. Because the dividend
accumulation option permits dividends to be paid later than the end
of the year following the year for which the actuarial experience is
measured or as a stream of payments that only increase as a result
of actuarial gain, with such increases beginning no later than the
next year, paid in the same form as the payment of the annuity over
the remaining period of the annuity in Example 2, the dividend
accumulation option does not meet the requirements of paragraph
(c)(3) of this A-14. Neither does the dividend accumulation option
fit within any of the other increases described in paragraph (c) of
this A-14. Accordingly, the dividend accumulation option causes the
contract, and consequently any distributions from the contract, to
fail to meet the requirements of this A-14 and thus fail to satisfy
the requirements of section 401(a)(9).
Example 4. Participating annuity with dividends used to purchase
additional death benefits. The facts are the same as in Example 2
except that the annuity provides an option under which actuarial
gain under the contract is used to provide additional death benefit
protection for Z2. Because this option permits payments as a result
of actuarial gain to be paid later than the end of the year
following the year for which the actuarial experience is measured or
as a stream of payments that only increase as a result of actuarial
gain, with such increases beginning no later than the next year,
paid in the same form as the payment of the annuity over the
remaining period of the annuity in Example 2, the option does not
meet the requirements of paragraph (c)(3) of this A-14. Neither does
the option fit within any of the other increases described in
paragraph (c) of this A-14. Accordingly, the addition of the option
causes the contract, and consequently any distributions from the
contract, to fail to meet the requirements of this A-14 and thus
fail to satisfy the requirements of section 401(a)(9).
Example 5. Annuity with a fixed percentage increase. A retired
participant (Z3) in defined contribution plan X attains age 70\1/2\
in 2005. Z3 elects to purchase annuity contract Y3 from Insurance
Company W. Contract Y3 is a single life annuity contract with a 20-
year period certain (which does not exceed the maximum period
certain permitted under A-3(a) of this section) with fixed annual
payments increasing 3 percent each year. The value of Z3's account
balance in Plan X at the time of purchase is $110,000, and the
purchase price of Contract Y3 is $110,000. Contract Y3 provides Z3
with an initial payment of $6,000 at the time of purchase in 2005.
The total future expected payments to Z3 under Contract Y3 are
$120,000, calculated as the initial annual payment of $6,000
multiplied by the period certain of 20 years. Because the total
future expected payments on the purchase date exceed the total value
used to purchase Contract Y3 and payments only increase as a
constant percentage applied not less frequently than annually,
distributions received by Z3 from Contract Y3 meet the requirements
under paragraph (c)(1) of this A-14.
Example 6. Annuity with excessive increases. The facts are the
same as in Example 5 except that the initial payment is $5,400 and
the annual rate of increase is 4 percent. In this example, the total
future expected payments are $108,000, calculated as the initial
payment of $5,400 multiplied by the period certain of 20 years.
Because the total future expected payments are less than the total
value of $110,000 used to purchase Contract Y3, distributions
received by Z3 do not meet the requirements under paragraph (c) of
this A-14 and thus fail to meet the requirements of section
401(a)(9).
Example 7. Annuity with full commutation feature. (i) A retired
participant (Z4) in defined contribution Plan X attains age 78 in
2005. Z4 elects to purchase Contract Y4 from Insurance Company W.
Contract Y4 provides for a single life annuity with a 10 year period
certain (which does not exceed the maximum period certain permitted
under A-3(a) of this section) with annual payments. Contract Y4
provides that Z4 may cancel Contract Y4 at any time before Z4
attains age 84, and receive, on his next payment due date, a final
payment in an amount determined by multiplying the initial payment
amount by a factor obtained from Table M of Contract Y4 using the
Y4's age as of Y4's birthday in the calendar year of the final
payment. The value of Z4's account balance in Plan X at the time of
purchase is $450,000, and the purchase price of Contract Y4 is
$450,000. Contract Y4 provides Z4 with an initial payment in 2005 of
$40,000. The factors in Table M are as follows:
------------------------------------------------------------------------
Age at final payment Factor
------------------------------------------------------------------------
79......................................................... 10.5
80......................................................... 10.0
81......................................................... 9.5
82......................................................... 9.0
83......................................................... 8.5
84......................................................... 8.0
------------------------------------------------------------------------
(ii) The total future expected payments to Z4 under ContractY4
are $456,000, calculated as the initial payment of 40,000 multiplied
by the age 78 life expectancy of 11.4 provided in the Single Life
Table in A-1 of Sec. 1.401(a)(9)-9. Because the total future
expected payments on the purchase date exceed the total value being
annuitized (i.e., the $450,000 used to purchase Contract Y4), the
permitted increases set forth in paragraph (c) of this A-14 are
available. Furthermore, because the factors in Table M are less than
the life expectancy of each of the ages in the Single Life Table
provided in A-1 of Sec. 1.401(a)(9)-9, the final payment is always
less than the total future expected payments. Thus, the final
payment is an acceleration of payments within the meaning of
paragraph (c)(4) of this A-14.
(iii) As an illustration of the above, if Participant Z4 were to
elect to cancel Contract Y4 on the day before he was to attain age
84, his contractual final payment would be $320,000. This amount is
determined as $40,000 (the annual payment amount due under Contract
Y4) multiplied by 8.0 (the factor in Table M for the next payment
due date, age 84). The total future expected payments under Contract
Y4 at age 84 before the final payment is $324,000, calculated as the
initial payment amount multiplied by 8.1, the age 84 life expectancy
provided in the Single Life Table in A-1 of Sec. 1.401(a)(9)-9.
Because $320,000 (the total future expected payments under the
annuity contract, including the amount of the final payment) is less
than $324,000 (the total future expected payments under the annuity
contract, determined before the election), the final payment is an
acceleration of payments within the meaning of paragraph (c)(4) of
this A-14.
[[Page 33302]]
Example 8. Annuity with partial commutation feature. (i) The
facts are the same as in Example 7 except that the annuity provides
Z4 may request, at any time before Z4 attains age 84, an ad hoc
payment on his next payment due date with future payments reduced by
an amount equal to the ad hoc payment divided by the factor obtained
from Table M (from Example 7) corresponding to Z4's age at the time
of the ad hoc payment. Because, at each age, the factors in Table M
are less than the corresponding life expectancies in the Single Life
Table in A-1 of Sec. 1.401(a)(9)-9, total future expected payments
under Contract Y4 will decrease after an ad hoc payment. Thus, ad
hoc distributions received by Z4 from Contract Y4 will satisfy the
requirements under paragraph (c)(4) of this A-4.
(ii) As an illustration of paragraph (i) of this Example 8, if
Z4 were to request, on the day before he was to attain age 84, an ad
hoc payment of $100,000 on his next payment due date, his
recalculated annual payment amount would be reduced to $27,500. This
amount is determined as $40,000 ( the amount of Z4's next annual
payment) reduced by $12,500 (his $100,000 ad hoc payment divided by
the Table M factor at age 84 of 8.0). Thus, Z4's total future
expected payments after the ad hoc payment (and including the ad hoc
payment) are equal to $322,750 ($100,000 plus $27,500 multiplied by
the Single Life Table value of 8.1). Note that this $322,750 amount
is less than the amount of Z4's total future expected payments
before the ad hoc payment ($324,000, determined as $40,000
multiplied by 8.1), and the requirements under paragraph (c)(4) of
this A-4 are be satisfied.
Example 9. Annuity with excessive increases. (i) A retired
participant (Z5) in defined contribution plan X attains age 70\1/2\
in 2005. Z5 elects to purchase annuity Contract Y5 from Insurance
Company W in 2005 with a premium of $1,000,000. Contract Y5 is a
single life annuity contract with a 20-year period certain. Contract
Y5 provides for an initial payment of $200,000, a second payment one
year from the time of purchase of $40,000, and 18 succeeding annual
payments each increasing at a constant percentage rate of 4.5
percent from the preceding payment.
(ii) Contract Y5 fails to meet the requirements of section
401(a)(9) because the total future expected payments without regard
to any increases in the annuity payment, calculated as $200,000 in
year one and $40,000 in each of years two through twenty, is only
$960,000 (i.e., an amount that does not exceed the total value used
to purchase the annuity).
Q-15: Are there special rules applicable to payments made under a
defined benefit plan or annuity contract to a surviving child?
A-15: Yes, pursuant to section 401(a)(9)(F), payments under a
defined benefit plan or annuity contract that are made to an employee's
child until such child reaches the age of majority (or dies, if
earlier) may be treated, for purposes of section 401(a)(9), as if such
payments were made to the surviving spouse to the extent they become
payable to the surviving spouse upon cessation of the payments to the
child. For purposes of the preceding sentence, a child may be treated
as having not reached the age of majority if the child has not
completed a specified course of education and is under the age of 26.
In addition, a child who is disabled within the meaning of section
72(m)(7) when the child reaches the age of majority may be treated as
having not reached the age of majority so long as the child continues
to be disabled. Thus, when payments described in this paragraph A-15
become payable to the surviving spouse because the child attains the
age of majority, recovers from a disabling illness, dies, or completes
a specified course of education, there is not an increase in benefits
under A-1 of this section. Likewise, the age of child receiving such
payments is not taken into consideration for purposes of the minimum
incidental benefit requirement of A-2 of this section.
Q-16: Will a governmental plan within the meaning of section 414(d)
fail to satisfy section 401(a)(9) if annuity payments under the plan do
not satisfy this section?
A-16: (a) Except as provided in paragraph (b) of this A-16, annuity
payments under a governmental plan within the meaning of section 414(d)
must satisfy this section.
(b) In the case of an annuity distribution option provided under
the terms of a governmental plan as in effect on April 17, 2002, the
plan will not fail to satisfy section 401(a)(9) merely because the
annuity payments do not satisfy the requirements A-1 through A-15 of
this section, provided the distribution option satisfies section
401(a)(9) based on a reasonable and good faith interpretation of the
provisions of section 401(a)(9).
Q-17: What are the rules for determining required minimum
distributions for defined benefit plans and annuity contracts for
calendar years 2003, 2004, and 2005?
A-17: A distribution from a defined benefit plan or annuity
contract for calendar years 2003, 2004, and 2005 will not fail to
satisfy section 401(a)(9) merely because the payments do not satisfy A-
1 through A-16 of this section, provided the payments satisfy section
401(a)(9) based on a reasonable and good faith interpretation of the
provisions of section 401(a)(9). For governmental plans, this
reasonable good faith standard extends to the end of the calendar year
that contains the 90th day after the opening of the first legislative
session of the legislative body with the authority to amend the plan
that begins on or after June 15, 2004, if such 90th day is later than
December 31, 2005.
Sec. 1.401(a)(9)-6T [Removed]
0
Par. 4. Section 1.401(a)(9)-6T is removed.
0
Par. 5. In Sec. 1.401(a)(9)-8 A-2, the first sentence in paragraph
(a)(2) is revised to read as follows:
Sec. 1.401(a)(9)-8 Special rules.
* * * * *
A-2(a) * * *
(2) If the employee's benefit in a defined contribution plan is
divided into separate accounts and the beneficiaries with respect to
one separate account differ from the beneficiaries with respect to the
other separate accounts of the employee under the plan, for years
subsequent to the calendar year containing the date as of which the
separate accounts were established, or date of death if later, such
separate account under the plan is not aggregated with the other
separate accounts under the plan in order to determine whether the
distributions from such separate account under the plan satisfy section
401(a)(9). * * *
* * * * *
Approved: June 1, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-13475 Filed 6-14-04; 8:45 am]
BILLING CODE 4830-01-P