IRS Releases Guidelines on Actuarial Assumption Alterations

November 15, 2004 ( - The Internal Revenue Service (IRS) has released guidelines on the actuarial assumptions that are required for distributions with annuity starting dates occurring during plan years beginning in 2004 and 2005.

>The guidelines attempt to clarify whether an amount payable under a defined benefit (DB) plan in a form that is subject to the minimum present value requirements of section 417(e)(3) of the IRS Code satisfies another section’s requirements, specifically section 415. Section 415 was altered recently by section 101 of the Pension Funding Equity Act (PFEA) of 2004. Also, the guidelines clarify the transition rules of the PFEA, as well as application dates.

>According to the IRS bulletin, under the changes to section 415(b)(2) by the PFEA, if a DB plan provides a benefit in the form that is subject to the minimum present value requirements of section 417 in either 2004 or 2005, then the actuarially equivalent straight life annuity is the greater of the straight life annuity determined using the plan mortality tables and rates and the same calculations using a 5.5% rate and the applicable mortality tables. This change is effective for plan years that begin on January 1. However, this does not apply to plans that terminate before April 10.

>The transition rule, prescribed in section 101(d)(3) of the PFEA, sets out a transition period during which plans are permitted to a pay a benefit subject to section 417(e)(3) of the IRS code that would be higher than that otherwise permitted under the amended section 415. The higher amount will be the lesser of the transition amount and the benefits calculated under the terms that applied before the alterations made by the PFEA. The transition amount will be calculated by using mortality tables and transition rates provided by in the transition rules.

>The transition period during which these calculations may apply begins on the first day of the first plan year beginning on or after January 1. The period ends December 31, 2004.

>Plans must be amended by January 1, 2006, in order to not be in violation of section 411(d)(6) of the IRS code and section 204(g) of the Employee Retirement Income Security Act (ERISA), if in fact the plan was in violation to begin with.

>For a copy of the guidelines, please see .