Proposed Regulations for Non-Hybrid Type Defined Benefit Plans

The IRS issued proposed regulations for non-hybrid type defined benefit plans.

In general, current regulations provide that a defined benefit plan must provide that the present value of an accrued benefit and the amount of any distribution, including a single sum distribution (e.g., lump sum payment), must not be less than the amount calculated using the IRS applicable interest rate and applicable mortality table. However, there remain many questions on how to apply these regulations, and they do not clearly define the applicable interest rates under the Pension Protection Act of 2006 (PPA).

Questions Answered – Clarification Provided

The proposed regulations would modify the current rules to clarify when to discount for preretirement mortality, confirm that the requirements apply to Social Security level income (SSLI) options, and clarify that the present value of optional forms of benefit must be at least equal to the present value of the accrued benefit payable at normal retirement age using the applicable interest rate and mortality table.

• Preretirement Mortality
  The proposed regulations would allow the application of a preretirement mortality discount when determining the present value of employer-provided benefits, but not employee-provided benefits. Employer-provided accrued benefits can be forfeited on death where employee-provided cannot.

  The IRS is taking the position that the probability of death is taken into account, without regard to the death benefits provided for under the plan, because the death benefit is not part of the accrued benefit.

• Social Security Level Income (SSLI) Options
  A SSLI option is an optional form of benefit where the accrued benefit is paid as an annuity with larger payments before an assumed Social Security commencement date to provide approximately level retirement income when taking into account Social Security payments.

  The IRS is taking the position that the SSLI options are not exempt from the minimum present value regulations because the accrued benefit is accelerated over a short period of time and because payments decrease during the lifetime of the participant.

• Applications of Required Assumptions to the Accrued Benefit
  The proposed regulations would clarify that each optional form of benefit, including minimum actuarial increases for optional forms paid after normal retirement age, must be at least equal to the present value of the accrued benefit payable at normal retirement age using the applicable interest rate and mortality. There would be an exception to the minimum actuarial increases to the extent suspension of benefits applies.

Updates to Reflect Statutory and Regulatory Changes – including PPA

The proposed regulations would update the existing regulations to reflect the PPA applicable interest rates and would also eliminate obsolete provisions of the regulations.

Effective Date & Request for Comments

The proposed changes will be effective for distributions with annuity starting dates in plan years beginning on or after the date the final rules are published in the Federal Register. The IRS has asked for comments on all aspects of these proposed regulations and requests that the comments be submitted no later than February 23, 2017.

If you would like to find out more about how these proposed regulations will affect the determinations of lump sums, SSLIs, or other distributions subject to minimum present value requirements, please contact a BPAS Actuarial & Pension Services consultant.