The Internal Revenue Service (IRS) has proposed updates to the minimum present value requirements for defined benefit (DB) plan distributions.
The proposed regulations would provide guidance about changes made by the Pension Protection Act of 2006 (PPA) and would provide other modifications to these rules as well. They would amend the current final regulations under section 417(e) of the Internal Revenue Code regarding the minimum present value requirements of section 417(e)(3) in several areas.
The proposed regulations would update the existing regulatory provisions to reflect the statutory changes made by the PPA, including the new interest rates and mortality tables set forth in section 417(e)(3) and the exception from the valuation rules for certain applicable defined benefit plans set forth in section 411(a)(13). They clarify that the interest rates that are published by the Commissioner pursuant to the provisions as modified by PPA are to be used without further adjustment.
In addition, the proposed regulations would eliminate obsolete provisions of the regulations relating to the transition from pre-1995 law to the interest rates and mortality assumptions provided by the General Agreement on Tariffs and Trade (GATT). Furthermore, they make conforming changes to reflect the final regulations under section 417(e) that permit defined benefit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form.NEXT: Actuary describes other clarifying changes
According to Scott Hittner, partner and chief actuary at October Three in Denver, The proposal also includes other clarifying changes:
- Treatment of postretirement mortality – “To address questions about the application of preretirement mortality discounts raised in various court cases, the proposed regulations would clarify that present value requirements apply only to the accrued benefit payable at retirement. Therefore, ancillary preretirement death benefits don’t affect the calculation, and the present value of the retirement benefit generally reflects the probability of death prior to retirement. However, a different rule applies with respect to the determination of the present value of the accrued benefit derived from employee contributions. Because employee contributions are nonforfeitable, no preretirement mortality discount is permitted for the employee-paid portion of the accrued benefit,” he says.
- Social security level income options – “The proposed regulations would clarify that social security level income options are subject to 417(e) since a portion of the accrued benefit is accelerated,” Hittner adds.
- Optional forms of benefit – “The proposed regulations would require that the present value of any optional form of benefit cannot be less than the present value of the accrued benefit payable and normal retirement age,” he says.