New rules issued by the IRS are intended to facilitate the payment of benefits under a defined benefit plan in the form of an annuity and partly as a single sum or other accelerated form, giving participants more options for how to take their pension distribution.
Under the rules issued on Sept. 8, participants will better able to get financial protection against the risk of outliving their savings while also increasing liquidity during retirement, the IRS said.
The operation of the tax code minimum present value rules for defined benefit plans makes it difficult for many plan participants to achieve both objectives, it said.
As currently constructed, the rules leave many participants no practical choice but to accept an accelerated distribution such as a lump sum, when they would be better served if they could elect to receive a portion of their benefit in annuity form and the remainder in accelerated payments so that they don’t outlive their savings, the IRS said.
In general, the minimum present value of an optional form of benefit cannot be less than the present value of the accrued benefit calculated by using a specified applicable interest rate and specified applicable mortality table.
Under the new rules, rather than apply the minimum value requirements to the entire benefit distribution, the plan may explicitly bifurcate the benefit so that the minimum value requirements “apply to a specified portion of a participant’s accrued benefit as if that portion were the participant’s entire accrued benefit,” the IRS said.
There are no requirements imposed on the distribution options for the remaining portion of the accrued benefit, the IRS said.
In the alternative, a plan that distributes a specified single amount to a participant satisfies the minimum present value requirement as to that payment, “provided the remaining portion of the participant’s accrued benefit satisfies a minimum requirement,” the IRS said.
Under this computation, “the portion of the participant’s accrued benefit that is settled by the payment of a specified single-sum amount is implicitly determined as the actuarial equivalent of that single-sum amount,” the IRS said.
However, this process, which the rule calls “implicit bifurcation,” is not available in all circumstances, the IRS said. It is not available, for example, when a plan has been amended to eliminate an optional form of benefit, while retaining the optional form of benefit for benefits accrued as of the amendment date.
“The implicit bifurcation rule is also not available in a situation in which a single-sum distribution is available to settle a participant’s entire accrued benefit and the plan permits a portion of the benefit to be paid as a lump sum,” the IRS said.
Explicit bifurcation would have to be used to split the benefit distribution in those situations, the IRS said.
The new rules were part of a regulatory package unveiled by the Treasury Department in 2012 to help individuals save for retirement and provide retirees with expanded options for managing their savings. This included a proposal, finalized in 2014, allowing employees to convert part of their defined contribution plan account balances into a longevity contract at an advanced age without triggering the tax code’s age 70½ minimum distribution requirements.
The new rules went into effect Sept. 9 and apply to distributions with annuity starting dates in plan years beginning on or after Jan. 1, 2017. Plans must be amended to provide the bifurcated distributions.
See related story, Lump Sum or Annuity? Treasury Rules Don’t Make You Choose.
Stay on top of the latest industry trends and news coverage with a free trial to the Benefits Practice Resource Center.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)