Update to Minimum Present Value Requirements for Defined Benefit Plan Distributions

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 9987]</DEPDOC> <RIN>RIN 1545-BK95</RIN> <SUBJECT>Update to Minimum Present Value Requirements for Defined Benefit Plan Distributions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document sets forth final regulations providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. These regulations provide guidance on changes made by the Pension Protection Act of 2006 to the prescribed interest rate and mortality table and other guidance, including rules regarding the treatment of preretirement mortality discounts and Social Security level income options. These regulations affect participants, beneficiaries, sponsors, and administrators of defined benefit pension plans. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 19, 2024. <E T="03">Applicability date:</E> These regulations generally apply to distributions with annuity starting dates that occur on or after October 1, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Diane S. Bloom or Linda S.F. Marshall at (202) 317-6700 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> Section 401(a)(11) of the Internal Revenue Code (Code) provides rules that a defined benefit plan must satisfy with respect to a vested participant in order to be a qualified plan under section 401(a). Under those rules, except as provided under section 417: (1) if the participant survives to the annuity starting date, the accrued benefit payable to the participant must be provided in the form of a qualified joint and survivor annuity (QJSA); and (2) if the participant dies before the annuity starting date and has a surviving spouse, the plan must provide a qualified preretirement survivor annuity (QPSA) to the surviving spouse. Under section 417(e)(1), a plan may provide that the present value of a QJSA or a QPSA will be distributed immediately if that present value does not exceed the amount that may be distributed without the participant's consent under section 411(a)(11). <SU>1</SU> <FTREF/> Under section 417(e)(2), if the present value of the QJSA or the QPSA exceeds that amount, then a plan may immediately distribute the present value of the QJSA or the QPSA only if the participant and the spouse of the participant (or, if the participant has died, the surviving spouse) consent in writing to the distribution. <FTNT> <SU>1</SU>  Section 411(a)(11)(A) generally provides that if the present value of a participant's nonforfeitable accrued benefit exceeds $7,000 ($5,000 for distributions made on or before December 31, 2023), then the benefit may not be distributed immediately without the participant's consent. </FTNT> Section 417(e)(3)(A) provides that the present value of the QJSA or QPSA must not be less than the present value calculated by using the applicable mortality table and the applicable interest rate. <SU>2</SU> <FTREF/> <FTNT> <SU>2</SU>  Under section 411(a)(11)(B), the present value that is used to apply the rules of section 411(a)(11) is calculated using the rules of section 417(e)(3). </FTNT> Section 417(e)(3)(B), as amended by section 302 of the Pension Protection Act of 2006, Public Law 109-280, 120 Stat. 780 (PPA '06), provides that the term “applicable mortality table” means a mortality table, modified as appropriate by the Secretary, based on the mortality table specified for the plan year under section 430(h)(3)(A) of the Code (without regard to section 430(h)(3)(C) or (D)). Section 417(e)(3)(C), as amended by section 302 of PPA '06, provides that the term “applicable interest rate” means the adjusted first, second, and third segment rates applied under rules similar to the rules of section 430(h)(2)(C) of the Code for the month before the date of the distribution or such other time as the Secretary may prescribe by regulations. However, for purposes of section 417(e)(3), these rates are determined without regard to the segment rate stabilization rules of section 430(h)(2)(C)(iv). In addition, under section 417(e)(3)(D), these rates are determined using the average yields for a month, rather than the 24-month average used under section 430(h)(2)(D). Section 411(a)(13), as added by section 701(b) of PPA '06, provides that an “applicable defined benefit plan,” as defined by section 411(a)(13)(C) of the Code, is not treated as failing to meet the requirements of section 417(e) with respect to accrued benefits derived from employer contributions solely because the present value of a participant's accrued benefit (or any portion thereof) may be, under the terms of the plan, equal to the amount expressed as the hypothetical account balance or as an accumulated percentage of such participant's final average compensation. The Department of the Treasury (Treasury Department) and the IRS issued final regulations under section 417 relating to the QJSA and QPSA requirements in 1988 (53 FR 31854, August 22, 1988), and amended those regulations in 1998 (63 FR 16898, April 3, 1998), to reflect changes to section 417(e)(3) enacted by the Retirement Protection Act of 1994, Subtitle F of Title VII of the Uruguay Round Agreements Act, Public Law 103-465, 108 Stat. 4809 (RPA '94). Section 1.417(e)-1 was further amended in 2016 (81 FR 62359, September 9, 2016) to permit defined benefit plans to bifurcate a benefit that is paid partly in the form of an annuity and partly in a more accelerated form and to apply the requirements of section 417(e)(3) only to the accelerated portion of the distribution. However, § 1.417(e)-1 was not updated at that time to reflect changes made by PPA '06. Under § 1.417(e)-1(d)(1), a defined benefit plan generally must provide that the present value of any accrued benefit and the amount (subject to sections 411(c)(3) and 415) of any distribution, including a single sum, may not be less than the amount calculated using the applicable interest rate and the applicable mortality table. In addition, under § 1.417(e)-1(d)(1), the present value of any optional form of benefit may not be less than the present value of the normal retirement benefit determined in accordance with the preceding sentence. Section 1.417(e)-1(d)(6) provides an exception from the minimum present value requirements of section 417(e) and § 1.417(e)-1(d) for certain distributions. This exception applies to the amount of a distribution paid in the form of an annual benefit that either does not decrease during the life of the participant (or, in the case of a QPSA, the life of the participant's spouse), or that decreases during the life of the participant merely because of (1) the death of the survivor annuitant (but only if the reduction is to a level not below 50 percent of the annual benefit payable before the death of the survivor annuitant), or (2) the cessation or reduction of Social Security supplements or qualified disability benefits. Section 1.401(a)-20 provides rules regarding the survivor annuity requirements of sections 401(a)(11) and 417. Section 1.401(a)-20, Q&A-16, provides that, in the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Section 1.401(a)-20, Q&A-16 does not specify a particular actuarial basis for applying this requirement; therefore, this requirement may be satisfied using any set of reasonable actuarial assumptions. In addition, § 1.401(a)-20, Q&A-16 provides that a plan does not fail to satisfy the at-least-as-valuable requirement merely because the amount payable under an optional form of benefit that is subject to the minimum present value requirement of section 417(e)(3) is calculated using the applicable interest rate (and, for periods when required, the applicable mortality table) under section 417(e)(3). Under section 401(a)(7), a plan is not a qualified plan unless the plan satisfies the requirements of section 411. Section 411(d)(6)(A) provides that a plan is treated as not satisfying the requirements of section 411 if it is amended to reduce accrued benefits (subject to certain exceptions). For this purpose, section 411(d)(6)(B) provides that a plan amendment is treated as impermissibly reducing accrued benefits if it has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment. However, the last sentence of section 411(d)(6)(B) provides that the Secretary may by regulations provide that section 411(d)(6)(B) does not apply to a plan amendment that eliminates an optional form of benefit (other than a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy). Notice 2007-81, 2007-2 CB 899, provides guidance on the applicable interest rate. Rev. Rul. 2007-67, 2007-2 CB 1047, provides guidance on the applicable mortality table  <SU>3</SU> <FTREF/> and the timing rules that apply to the determination of the applicable interest rate under section 417(e)(3)(C) and the applicable mortality table under section 417(e)(3)(B). <FTNT> <SU>3</SU>  Notice 2008-85, 2008-2 CB 905, Notice 2013-49, 2013-32 IRB 127, Notice 2015-53, 2015-33 IRB 190, Notice 2016-50, 2016-38 IRB 371, Notice 2017-60, 2017-43 IRB 365, Notice 2018-2, 2018-2 IRB 281, Notice 2019-26, 2019-15 IRB 943, Notice 2019-67, 2019-52 IRB 1510, Notice 2020-85, 2020-51 IRB 1645, Notice 2022-22, 2022-20 IRB 1057, an ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 78k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━