Allocation of Accrued Benefits Between Employer and Employee Contributions

[[Page 66532]]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[EE-35-95]

RIN 1545-AT82

Allocation of Accrued Benefits Between Employer and Employee

Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide

guidance on calculation of an employee's accrued benefit derived from

the employee's contributions to a qualified defined benefit pension

plan. These regulations are issued to reflect changes to the applicable

law made by the Omnibus Budget Reconciliation Act of 1987 (OBRA '87)

and the Omnibus Budget Reconciliation Act of 1989 (OBRA '89). OBRA '87

and OBRA '89 amended the law to change the accumulation of employee

contributions and the conversion of those accumulated contributions to

employee-derived accrued benefits.

DATES: Written comments and requests for a public hearing must be

received by March 21, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (EE-35-95), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (EE-35-95), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Janet A.

Laufer, (202) 622-4606, concerning submissions, Michael Slaughter,

(202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to regulations

containing rules for computing an employee's accrued benefit derived

from the employee's contributions to a qualified defined benefit

pension plan. The proposed amendments reflect changes made to section

411(c)(2) by the Omnibus Budget Reconciliation Act of 1987, Public Law

100-203 (OBRA '87), and the Omnibus Budget Reconciliation Act of 1989,

Public Law 101-239 (OBRA '89). OBRA '87 and OBRA '89 changed the

interest rates used to accumulate an employee's contributions to normal

retirement age. OBRA '89 also changed the manner in which the

accumulated contributions are converted to an annual benefit payable at

normal retirement age, and removed a limitation on the employee-derived

accrued benefit contained in prior law.

Section 411(c)(1) provides that an employee's accrued benefit

derived from employer contributions as of any applicable date is the

excess, if any, of the accrued benefit for the employee as of that date

over the accrued benefit derived from contributions made by the

employee as of that date. Section 411(c)(2)(B) provides that in the

case of a defined benefit plan, the accrued benefit derived from

contributions made by an employee as of any applicable date is the

amount equal to the employee's contributions accumulated to normal

retirement age using the interest rate(s) specified in section

411(c)(2)(C), expressed as an actuarially equivalent annual benefit

commencing at normal retirement age using an interest rate which would

be used by the plan under section 417(e)(3), as of the determination

date. If the employee-derived accrued benefit is determined with

respect to a benefit other than an annual benefit in the form of a

single life annuity (without ancillary benefits) commencing at normal

retirement age, section 411(c)(3) requires that the employee-derived

accrued benefit be the actuarial equivalent of the benefit determined

under section 411(c)(2).

Under section 411(c)(2)(C)(iii)(I), effective for plan years

beginning after December 31, 1987, the interest rate used to accumulate

an employee's contributions until the determination date is 120 percent

of the Federal mid-term rate under section 1274 of the Internal Revenue

Code (Code). For the period between the determination date and normal

retirement age, section 411(c)(2)(C)(iii)(II) provides that the

interest rate used to accumulate an employee's contributions is the

interest rate which would be used under the plan under section

417(e)(3) as of the determination date. As noted above, section

411(c)(2)(B) provides that the interest rate which would be used under

the plan under section 417(e)(3) as of the determination date also

applies for purposes of converting the accumulated contributions to an

annual benefit commencing at normal retirement age. The Retirement

Protection Act of 1994, Public Law 103-465 (RPA '94) amended section

417(e) to change the applicable interest rate under section 417(e)(3)

and to specify the applicable mortality table under that section.

Examples contained in Sec. 1.411(c)-1(c)(6) of these proposed

regulations reflect a plan that has been amended to comply with the

interest rate and mortality table specifications enacted in RPA '94.

Explanation of Provisions

1. Conversion Calculation

Prior to OBRA '89, section 411(c)(2)(B) specified that the

conversion factor to be used for purposes of computing the employee-

derived accrued benefit was 10 percent for a straight life annuity

commencing at normal retirement age of 65 (i.e., multiply the

accumulated contributions by .10), and that for other normal retirement

ages the conversion factor was to be determined in accordance with

regulations prescribed by the Secretary. Section 1.411(c)-1(c)(2) of

the existing regulations provides that for normal retirement ages other

than age 65, the conversion factor shall be the factor as determined by

the Commissioner.

Rev. Rul. 76-47 (1976-1 C.B. 109) sets forth in tabular form the

conversion factors to be used for determining the accrued benefit

derived from employee contributions when the normal retirement age

under the plan is other than age 65 or when the normal form of benefit

is other than a single life annuity (without ancillary benefits). Rev.

Rul 76-47 further provides that where no standard factor is available,

a conversion factor must be determined using an interest rate of 5

percent and the UP-1984 mortality table (without age setback).

OBRA '89 deleted the ten percent conversion factor in section

411(c)(2)(B) and replaced it with the requirement that the accumulated

contributions at normal retirement age be expressed as an annual

benefit commencing at normal retirement age using an interest rate

which would be used under the plan under section 417(e)(3) (as of the

determination date). This change was effective retroactively to the

effective date of the OBRA '87 provision relating to section

411(c)(2)(C) (the first day of the first plan year beginning after

December 31, 1987).

To reflect the OBRA '89 amendments, these proposed regulations

define appropriate conversion factor with respect to an accrued benefit

expressed in the form of an annual benefit that is nondecreasing for

the life of the participant as the present value of an annuity in the

form of that annual benefit commencing at normal retirement age at a

rate of $1 per year. This amount is to be computed using the interest

rate and mortality table

[[Page 66533]]

which would be used under the plan under section 417(e)(3) and

Sec. 1.417(e)-1T. To reflect the post-OBRA '89 conversion factor

definition and to conform to common actuarial practice, these proposed

regulations would change the multiplied by language in Sec. 1.411(c)-

1(c)(1) to divided by.

2. Accumulated Contributions

As added by the Employee Retirement Income Security Act of 1974

(ERISA), section 411(c)(2)(C) provided that employee contributions were

to be accumulated using a standard interest rate of 5 percent for years

beginning on or after the effective date of that section. OBRA '87

changed the interest rate under section 411(c)(2)(C) to 120 percent of

the applicable Federal mid-term rate under section 1274 for plan years

after 1987. OBRA '89 again amended section 411(c)(2)(C) to provide that

120 percent of the applicable Federal mid-term rate under section 1274

is to be used for accumulating contributions only up to the

determination date. For the period from the determination date to

normal retirement age, the interest rate which would be used under the

plan under section 417(e)(3) (as of the determination date) must be

used for accumulating contributions for the period from the

determination date to normal retirement age. Accordingly, these

proposed regulations would amend paragraph (3) of Sec. 1.411(c)-1(c) to

reflect those rates. As stated above, RPA '94 amended section 417(e)(3)

to change the applicable interest rate. See Sec. 1.417(e)-1T.

3. Determination Date

Section 1.411(c)-1(c)(5)(i) defines the term determination date for

purposes of section 411(c)(2)(C)(iii), in a case in which a participant

will receive his or her entire accrued benefit derived from employee

contributions in any one of the following forms (described in paragraph

(c)(5)(ii)): an annuity that is substantially nonincreasing,

substantially nonincreasing installment payments for a fixed number of

years, or a single sum distribution. In such a case, the term

determination date means the date on which distribution of such benefit

commences. For this purpose, an annuity that is nonincreasing except

for automatic increases to reflect increases in the consumer price

index is considered to be an annuity that is substantially

nonincreasing.

Thus, for example, for purposes of section 411(c)(2)(C)(iii), in

the case of a distribution of the employee's entire accrued benefit (or

the employee's entire employee-derived accrued benefit) in the form of

a nonincreasing single life annuity payable commencing either at normal

retirement age or at early retirement age, the determination date is

the date the annuity commences. Similarly, in the case of a single sum

distribution of accumulated employee contributions (i.e., employee

contributions plus interest computed at or above the section 411(c)

required rates) upon termination of employment with a deferred annuity

benefit derived solely from employer contributions, the determination

date is the date of distribution of the single sum of accumulated

employee contributions.

Alternatively, the plan may provide that the determination date is

the annuity starting date, as defined in Sec. 1.401(a)-20, Q&A-10.

Under Sec. 1.411(c)-1(c)(5)(iii) of these regulations, where a

participant will receive a distribution that is not described in

paragraph (c)(5)(i), the determination date will be as provided by the

Commissioner.

4. Elimination of Limitation on Employee-derived Accrued Benefit

Prior to OBRA '89, section 411(c)(2)(E) of the Code limited the

accrued benefit derived from employee contributions to the greater of

(1) the employee's accrued benefit under the plan, or (2) the sum of

the employee's mandatory contributions, without interest. Section

7881(m)(1)(C) of OBRA '89 deleted that provision. Section 7881(m)(1)(D)

of OBRA '89 added section 411(a)(7)(D) to the Code, which provides that

the accrued benefit of an employee shall not be less than the amount

determined under section 411(c)(2)(B) with respect to the employee's

accumulated contributions. Accordingly, these proposed regulations

delete the rule included in Sec. 1.411(c)-1(d) of the existing

regulations, which reflects the pre-OBRA '89 rule.

5. Delegation of Authority

Section 1.411(c)-1(d) of these proposed regulations provides that

the Commissioner may prescribe additional guidance on calculating the

accrued benefit derived from employer or employee contributions under a

defined benefit plan.

Effective Date

These amendments are proposed to be effective for plan years

beginning on or after January 1, 1997. For example, assume that under a

plan the employee's date of termination of employment is treated as the

determination date, and distribution of the employee's entire employee-

derived accrued benefit (as determined under the terms of the plan then

in effect) occurs or commences prior to the first day of the plan year

beginning in 1997. In that case, with respect to interest credits under

section 411(c)(2)(C)(iii) for plan years beginning after 1987, the

Service will not treat the plan as having failed to satisfy the

requirements of section 411(c), nor will it require that additional

amounts be credited in the calculation of the employee-derived accrued

benefit in order to satisfy the requirements of section 411(c) after

final regulations become effective, merely because the date the

employee's employment terminated was treated as the determination date,

provided that interest is credited in accordance with section

411(c)(2)(C)(iii)(I) for the period before the date the employee

terminated employment and in accordance with section

411(c)(2)(C)(iii)(II) thereafter.

Once amendments to the regulations under Sec. 1.411(c)-1 are

adopted in final form, the Service will obsolete or modify Rev. Rul.

76-47, Rev. Rul. 78-202 (1978-2 C.B. 124) and Rev. Rul. 89-60 (1989-1

C.B. 113) as necessary or appropriate.

Taxpayers may rely on these proposed regulations for guidance

pending the issuance of final regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying. A public

hearing may be scheduled if requested in writing by a person that

timely submits written comments. If a public hearing is scheduled,

notice of the date, time, and place for the hearing will be published

in the Federal Register.

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Drafting Information

The principal author of these regulations is Janet A. Laufer,

Office of the Associate Chief Counsel (Employee Benefits and Exempt

Organizations). However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.411(c)-1 is amended by:

1. Revising paragraphs (c)(1), (c)(2), and (c)(3), and by adding

paragraphs (c)(5) and (c)(6).

2. Revising paragraph (d).

3. Adding paragraph (g).

The additions and revisions read as follows:

Sec. 1.411(c)-1 Allocation of accrued benefits between employer and

employee contributions.

* * * * *

(c) Accrued benefit derived from mandatory employee contributions

to a defined benefit plan--(1) General Rule. In the case of a defined

benefit plan (as defined in section 414(j)), the accrued benefit

derived from contributions made by an employee under the plan as of any

applicable date in the form of an annual benefit commencing at normal

retirement age and nondecreasing for the life of the participant is

equal to the amount of the employee's accumulated contributions

(determined under paragraph (c)(3) of this section) divided by the

appropriate conversion factor with respect to that form of benefit

(determined under paragraph (c)(2) of this section). Paragraph (e) of

this section provides rules for actuarial adjustments where the benefit

is to be determined in a form other than the form described in this

paragraph (c)(1).

(2) Appropriate conversion factor. For purposes of this paragraph,

with respect to a form of annual benefit commencing at normal

retirement age described in paragraph (c)(1), the term appropriate

conversion factor means the present value of an annuity in the form of

that annual benefit commencing at normal retirement age at a rate of $1

per year, computed using an interest rate and mortality table which

would be used under the plan under section 417(e)(3) and Sec. 1.417(e)-

1T (as of the determination date).

(3) Accumulated contributions. For purposes of section 411(c) and

this section, the term accumulated contributions means the total of--

(i) All mandatory contributions made by the employee (determined

under paragraph (c)(4) of this section);

(ii) Interest (if any) on such contributions, computed at the rate

provided by the plan to the end of the last plan year to which section

411(a)(2) does not apply (by reason of the applicable effective dates);

(iii) Interest on the sum of the amounts determined under

paragraphs (c)(3)(i) and (ii) of this section compounded annually at

the rate of 5 percent per annum from the beginning of the first plan

year to which section 411(a)(2) applies (by reason of the applicable

effective date) to the beginning of the first plan year beginning after

December 31, 1987;

(iv) Interest on the sum of the amounts determined under paragraphs

(c)(3)(i) through (iii) of this section compounded annually at 120

percent of the Federal mid-term rate(s) (as in effect under section

1274(d) of the Internal Revenue Code for the first month of a plan

year) for the period beginning with the first plan year beginning after

December 31, 1987 and ending on the determination date; and

(v) Interest on the sum of the amounts determined under paragraphs

(c)(3)(i) through (iv) of this section compounded annually, using an

interest rate which would be used under the plan under section

417(e)(3) and Sec. 1.417(e)-1T (as of the determination date), from the

determination date to the date on which the employee would attain

normal retirement age.

* * * * *

(5) Determination date--(i) For purposes of section 411(c) and this

section, in a case in which a participant will receive his or her

entire accrued benefit derived from employee contributions in any one

of the forms described in paragraph (c)(5)(ii), the term determination

date means the date on which distribution of such benefit commences.

Alternatively, in such a case, the plan may provide that the

determination date is the annuity starting date with respect to that

benefit, as defined in Sec. 1.401(a)-20, Q&A-10.

(ii) Paragraph (c)(5)(i) applies to the following forms: an annuity

that is substantially nonincreasing (e.g., an annuity that is

nonincreasing except for automatic increases to reflect increases in

the consumer price index), substantially nonincreasing installment

payments for a fixed number of years, or a single sum distribution.

(iii) In a case in which a participant will receive a distribution

that is not described in paragraph (c)(5)(i), the determination date

will be as provided by the Commissioner.

(6) Examples.

(i) Facts. (A) In the following examples, Employer X maintains a

qualified defined benefit plan that required mandatory employee

contributions for 1987 and prior years, but not for years after

1987. The plan year is the calendar year. The plan provides for a

normal retirement age of 65 and for 100 percent vesting in the

employer-derived portion of a participant's accrued benefit after 5

years of service.

(B) The terms of the plan provide that the normal form of

benefit is a level monthly amount commencing at normal retirement

age and payable for the life of the participant. A plan participant

who elects not to receive benefits in the form of the qualified

joint and survivor annuity provided by the plan may elect to receive

a single-sum distribution of the present value of his or her accrued

benefit upon termination of employment.

(C) As of January 1, 1995, the plan was amended to provide that,

for purposes of computing actuarially equivalent benefits, the

single sum is calculated using the unisex version of the 1983 GAM

mortality table (as provided in Revenue Ruling 95-6 (1995-1 C.B.

80)), and interest at the rate equal to the annual rate of interest

on 30-year Treasury securities for the first calendar month

preceding the first day of the plan year during which the annuity

starting date occurs.

(D) Under the plan, employee contributions are accumulated at 3

percent interest for plan years beginning before 1976, 5 percent

interest for plan years beginning after 1975 and before 1988, and

interest at 120 percent of the Federal mid-term rate (as in effect

under section 1274(d) for the first month of the plan year) for plan

years beginning after 1987 until the determination date. Under the

plan, the determination date is defined as the annuity starting

date. For the period from the determination date until the date on

which the employee attains normal retirement age, interest is

credited at the interest rate which would be used under the plan

under section 417(e)(3) as of the determination date.

(E) A, an unmarried participant, terminates employment with X on

January 1, 1997 at age 56 with 15 years of service. As of December

31, 1987, A's total accumulated mandatory employee contributions to

the plan, including interest compounded annually at 5 percent for

plan years beginning after 1975 and before 1988, equaled $3,021. A

receives his or her accrued benefit in the form of an annual single

life annuity commencing at normal retirement age. A's annuity

starting date is January 1, 2006, and therefore the determination

date is January 1, 2006.

[[Page 66535]]

(ii) Annuity at Normal Retirement Age--Determination of

Employee-Derived and Total Plan Vested Accrued Benefit.

Example 1.

For purposes of this example, it is assumed that A's total

accrued benefit under the plan in the normal form of benefit

commencing at normal retirement age is $2,949 per year. A's benefit,

as of January 1, 2006, would be determined as follows:

(1) Determine A's total accrued benefit in the form of an annual

single life annuity commencing at normal retirement age under the

plan's formula ($2,949 per year payable at age 65).

(2) Determine A's accumulated contributions with interest to

January 1, 1997. As of December 31, 1987, A's accumulated

contributions with interest under the plan provisions were $3,021.

A's employee contributions are accumulated from December 31, 1987 to

January 1, 1997 using 120 percent of the Federal mid-term rate under

section 1274(d). This rate is 10.61 percent for 1988, 11.11 percent

for 1989, 9.57 percent for 1990, 9.78 percent for 1991, 8.10 percent

for 1992, 7.63 percent for 1993, 6.40 percent for 1994, and 9.54

percent for 1995. It is assumed for purposes of this example that

120 percent of the Federal mid-term rate is 7.00 percent for each

year between 1996 and 2006, and that the 30-year Treasury rate for

December 2005 is 8.00 percent. Thus, A's contributions accumulated

to January 1, 1997, equal $6,480.

(3) Determine A's accumulated contributions with interest to

normal retirement age (January 1, 2006) using, for the 1996 plan

year and for years until normal retirement age, 120 percent of the

Federal mid-term rate under section 1274(d), which is assumed to be

7.00 percent ($11,913).

(4) Determine the accrued annual annuity benefit derived from

A's contributions by dividing A's accumulated contributions

determined in paragraph (3) of this Example 1 by the plan's

appropriate conversion factor. The plan's appropriate conversion

factor at age 65 is 9.196, and the accrued benefit derived from A's

contributions would be $11,913 - 9.196 = $1,295.

(5) Determine the accrued benefit derived from employer

contributions as the excess, if any, of the employee's accrued

benefit under the plan over the accrued benefit derived from

employee contributions ($2,949-$1,295=$1,654 per year).

(6) Determine the vested percentage of the accrued benefit

derived from employer contributions under the plan's vesting

schedule (100 percent).

(7) Determine the vested accrued benefit derived from employer

contributions by multiplying the accrued benefit derived from

employer contributions by the vested percentage ($1,654 x 100

percent = $1,654 per year).

(8) Determine A's vested accrued benefit in the form of an

annual single life annuity commencing at normal retirement age by

adding the accrued benefit derived from employee contributions and

the vested accrued benefit derived from employer contributions, the

sum of paragraphs (4) and (7) of this Example 1 ($1,295 + $1,654 =

$2,949 per year).

Example 2.

This example assumes the same facts as Example 1 except that A's

total accrued benefit under the plan in the normal form of benefit

commencing at normal retirement age is $1,000 per year. A's benefit,

as of January 1, 2006, would be determined as follows:

(1) Determine A's total accrued benefit in the form of an annual

single life annuity commencing at normal retirement age under the

plan's formula ($1,000 per year payable at age 65).

(2) Determine A's accumulated contributions with interest to

January 1, 1997 ($6,480 from paragraph 2 of Example 1).

(3) Determine A's accumulated contributions with interest to

normal retirement age (January 1, 2006) ($11,913 from paragraph 3 of

Example 1).

(4) Determine the accrued annual annuity benefit derived from

A's contributions by dividing A's accumulated contributions

determined in paragraph (3) of this Example 2 by the plan's

appropriate conversion factor ($1,295 from paragraph 4 of Example

1).

(5) Determine the accrued benefit derived from employer

contributions as the excess, if any, of the employee's accrued

benefit under the plan over the accrued benefit derived from

employee contributions. Because the accrued benefit derived from

employee contributions ($1,295) is greater than the employee's

accrued benefit under the plan ($1,000), the accrued benefit derived

from employer contributions is zero, and A's vested accrued benefit

in the form of an annual single life annuity commencing at normal

retirement age is $1,295 per year.

(d) Delegation to Commissioner. The Commissioner may prescribe

additional guidance on calculating the accrued benefit derived from

employee contributions under a defined benefit plan through publication

in the Internal Revenue Bulletin of revenue rulings, notices, or other

documents (see Sec. 601.601(d)(2) of this chapter).

* * * * *

(g) Effective date. Paragraphs (c)(1), (c)(2), (c)(3), (c)(5),

(c)(6) and (d) of this section are effective for plan years beginning

on or after January 1, 1997.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95-31006 Filed 12-21-95; 8:45 am]

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