Valuation of Plan Distributions

Federal RegisterApr 7, 1998

Ask Donna

What actually matters in this document.

Text

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8768]

RIN 1545-AT27

Valuation of Plan Distributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final and temporary regulations that

provide guidance to employers in determining the present value of an

employee's benefit under a qualified defined benefit pension plan, for

purposes of the applicable consent rules and for purposes of

determining the amount of a distribution made in any form other than

certain nondecreasing annuity forms. These regulations are issued to

reflect changes to the applicable law made by the Retirement Protection

Act of 1994 (RPA '94), which is part of the Uruguay Round Agreements

Act of 1994. RPA '94 amended the law to change the interest rate, and

to specify the mortality table, for the purposes described above. These

regulations affect employers that maintain qualified defined benefit

pension plans, and participants and beneficiaries in those plans.

DATES: Effective date: These regulations are effective April 3, 1998.

Applicability date: These regulations apply to plan years beginning

after December 31, 1994, except as provided in Sec. 1.417(e)-1(d) (8)

and (9).

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, (202) 622-6030

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26

CFR part 1) under section 417(e). Section 417(e) was amended by the

Retirement Protection Act of 1994 (RPA '94). On April 5, 1995,

temporary regulations (TD 8591) under section 417(e) were published in

the Federal Register (60 FR 17216). A notice of proposed rulemaking

(EE-12-95), cross-referencing the temporary regulations, was published

in the Federal Register (60 FR 17286) on the same day. The temporary

regulations provide guidance related to the determination of the

present value of an employee's benefit under a qualified defined

benefit pension plan in accordance with the rules of section 417(e)(3).

After consideration of the public comments received regarding the

temporary and proposed regulations, the temporary regulations are

replaced and the proposed regulations are adopted as revised by this

Treasury decision.

Section 417(e)(3) sets forth rules to be used in determining the

present value of an employee's benefit under a qualified defined

benefit pension plan, for purposes of the applicable consent rules and

for purposes of determining the amount of a distribution. The rules of

section 417(e)(3) are also relevant to the application of section

411(a)(11) and section 415(b). Section 411(a)(11) provides that a

participant's benefit with a present value that exceeds a statutory

threshold can be immediately distributed to a participant only with the

participant's consent. The level of this statutory threshold was

changed from $3,500 to $5,000 by the Taxpayer Relief Act of 1997,

effective for plan years beginning after August 5, 1997. Under section

411(a)(11)(B), as amended by RPA '94, the present value of a

participant's benefit is calculated using the rules of section

417(e)(3).

Section 415(b) limits the maximum benefit that can be provided

under a qualified defined benefit plan. Under section 415(b)(2)(E)(ii),

as amended by RPA '94, the minimum interest rate permitted to be used

for certain purposes to determine compliance with the limit under

section 415(b) is the applicable interest rate as defined in section

417(e)(3). Because the rules of section 417(e)(3) affect the

application of sections 411(a)(11)(B) and 415(b)(2)(E)(ii), the

guidance provided by these regulations is relevant to the application

of those provisions.

Explanation of provisions

Section 417(e) restricts the ability of certain qualified

retirement plans to distribute a participant's benefit under the plan

without the consent of the participant and, in many cases, the

participant's spouse. The application of these restrictions is

determined based on the present value of the participant's benefit.

Prior to amendments made by RPA '94, section 417(e)(3) restricted the

interest rate to be used under a plan to calculate the present value of

a participant's benefit, but did not impose any restrictions on the

mortality table to be used for that purpose. Section 767 of

[[Page 16896]]

RPA '94 modified section 417(e)(3) to provide that the present value of

a participant's benefit is not less than the present value calculated

by using the applicable mortality table and the applicable interest

rate.

In general, comments received on the proposed and temporary

regulations were favorable. Thus, the final regulations retain the

general structure and substance of the proposed and temporary

regulations.

Applicable mortality table

The applicable mortality table under section 417(e)(3) is defined

as the table prescribed by the Secretary based on the prevailing

commissioners' standard table (described in section 807(d)(5)(A)) used

to determine reserves for group annuity contracts issued on the date as

of which present value is being determined (without regard to any other

subparagraph of section 807(d)(5)). Currently, the prevailing

commissioners' standard table is the 1983 Group Annuity Mortality

Table. See Rev. Rul. 92-19 (1992-1 C.B. 227). These regulations retain

the provision in the temporary regulation that the applicable mortality

table as described above is to be prescribed by the Commissioner in

revenue rulings, notices or other guidance published in the Internal

Revenue Bulletin. The mortality table currently prescribed by the

Commissioner is set forth in Rev. Rul. 95-6 (1995-1 C.B. 80), and is

based on a fixed blend of 50 percent of the male mortality rates and 50

percent of the female mortality rates from the 1983 Group Annuity

Mortality Table.

Applicable interest rate

Under section 417(e)(3), the applicable interest rate is defined as

the annual rate of interest on 30-year Treasury securities for the

month before the date of distribution or such other time as the

Secretary may by regulations prescribe. These regulations retain the

rule in the temporary regulations that the applicable interest rate for

a month is the annual interest rate on 30-year Treasury securities as

specified by the Commissioner for that month. The Commissioner

publishes this interest rate for each month by notice, after the end of

the month. Currently, this interest rate is the interest rate published

in Federal Reserve releases G.13 and H.15 as the average yield on 30-

year Treasury Constant Maturities for the month.

The interest rate on 30-year Treasury Constant Maturities published

monthly in Federal Reserve releases G.13 and H.15 can also be obtained

by telephone from the Public Information Department of the Federal

Reserve Bank of New York at (212) 720-6130 (not a toll-free number), or

from the Federal Reserve Board of Governors' Internet site at http://

www.bog.frb.fed.us/releases. Information regarding subscriptions to

Federal Reserve releases G.13 and H.15 can be obtained from the

Publications Department of the Federal Reserve Board of Governors at

(202) 452-3244 (not a toll-free number).

Time for determining applicable interest rate

Section 417(e)(3)(A)(ii)(II) provides that the applicable interest

rate for distributions made during a month is the annual rate of

interest on 30-year Treasury securities for the month before the date

of distribution or such other time as the Secretary may by regulations

prescribe. As an alternative to this monthly change in the applicable

interest rate, the temporary regulations permitted selection of a plan

quarter or a plan year as a stability period during which the

applicable interest rate remains constant, thereby permitting plans to

offer greater benefit stability than is provided by the statutory rule.

One commentator suggested adding a calendar year and a calendar quarter

as additional alternative stability periods for the applicable interest

rate, and another suggested adding a plan half-year. The IRS and

Treasury have weighed the usefulness of the additional proposed

stability periods for taxpayers against the additional complexity that

would be added to the regulation, and have added a calendar year and a

calendar quarter as additional alternative stability periods.

These regulations retain the rule in the temporary regulations that

the applicable interest rate for the stability period may be determined

as the 30-year Treasury rate for any one of the five calendar months

preceding the first day of the stability period. Permitting this

``lookback'' of up to five months provides added flexibility and gives

plan administrators and participants more time to comply with

applicable notice and election requirements using the actual interest

rate (instead of an estimate).

Several commentators suggested that regulations permit an average

of lookback month interest rates to be used, in lieu of the interest

rate for a single lookback month, to minimize interest rate

fluctuations. These regulations adopt this suggestion, and permit an

average interest rate based on consecutive permitted lookback months to

be used for this purpose.

Several commentators suggested that a plan be allowed to provide

for different applicable interest rates for each portion of the plan

that independently meets the requirements of sections 410(b) and

401(a)(26). The IRS and Treasury have determined, however, that there

is insufficient basis for adopting a definition of a ``plan'' that is

different from the general definition set forth in Sec. 1.414(l)-

1(b)(1).

Exceptions from the requirements of section 417(e)(3)

The temporary regulations provided an exception from the

requirements of section 417(e)(3) and Sec. 1.417(e)-1T(d) for the

amount of a distribution under a nondecreasing annuity payable for a

period not less than the life of the participant or, in the case of a

QPSA, the life of the surviving spouse. For purposes of this exception,

a nondecreasing annuity included a QJSA, a QPSA, and an annuity that

decreased merely because of the cessation or reduction of Social

Security supplements or qualified disability payments (as defined in

section 411(a)(9)). This exception was identical to the exception

provided under former final regulations. Several commentators pointed

out that this exception did not cover several other types of annuity

forms of distribution that were nondecreasing during the life of the

participant, and suggested that the regulations be changed to provide

additional exceptions for these additional annuity forms of

distribution.

The IRS and Treasury have determined that it is appropriate to

provide additional exceptions for these benefit forms. Accordingly,

under the final regulations, section 417(e)(3) and Sec. 1.417(e)-1(d)

do not apply to the amount of a distribution paid in the form of an

annual benefit that does not decrease during the life of the

participant, or, in the case of a QPSA, the life of the participant's

spouse; or that decreases during the life of the participant merely

because of the death of the survivor annuitant (but only if the

reduction is to a level not below 50% of the annual benefit payable

before the death of the survivor annuitant) or merely because of the

cessation or reduction of Social Security supplements or qualified

disability benefits. Also, under Q&A-2 of Rev. Rul. 98-1 (1998-2 I.R.B.

1), the interest rate prescribed by section 415(b)(2)(E)(ii) does not

apply to these forms of benefit.

Effective dates

These regulations generally apply to plan years beginning after

December 31, 1994.

[[Page 16897]]

Under section 417(e)(3)(B) and these regulations, the general

effective date for the RPA '94 rules is delayed for certain plans until

the first plan year that begins after December 31, 1999, unless an

employer takes earlier action. The delayed effective date applies to a

plan adopted and in effect before December 8, 1994, if the provisions

of the plan in effect on December 7, 1994, met the requirements of

section 417(e)(3) as in effect on December 7, 1994. For such a plan,

the determination of whether a distribution made before the first day

of the first plan year that begins after December 31, 1999, satisfies

section 417(e) is made under the provisions of the plan in effect on

December 7, 1994, if the annuity starting date for the distribution

occurs before the date a plan amendment applying both the applicable

mortality table and the applicable interest rate rules added by RPA '94

is adopted or, if later, is made effective. Thus, under section

417(e)(3)(B) and these regulations, a plan that was adopted and in

effect before December 8, 1994, and the provisions of which, as in

effect on December 7, 1994, met the requirements of section 417(e)(3)

as in effect on that date, cannot be amended to provide a different

method of calculating the present value of a distribution under section

417(e)(3) effective before the date a plan amendment applying both the

applicable mortality table and the applicable interest rate rules added

by RPA '94 is adopted or, if later, is made effective.

One commentator inquired whether, where a plan is spun off from

another plan during the optional delayed effective date period, both

plans are required to be amended to apply the applicable mortality

table and the applicable interest rate rules added by RPA '94 effective

on the same date. Because these rules apply on a plan by plan basis,

the plans are not required to be amended effective on the same date.

One other commentator suggested that the regulations be changed to

permit a plan to provide for different optional delayed effective dates

for each separate benefit structure that independently meets the

requirements of section 401(a)(4). Section 417(e)(3)(B) requires a

single effective date for a plan amendment applying the applicable

mortality table and the applicable interest rate rules added by RPA

'94. Therefore, this suggestion is inconsistent with the statute. Of

course, a plan amendment that applies the applicable mortality table

and the applicable interest rate rules added by RPA '94 may provide for

temporary or permanent use of interest and mortality assumptions for

specified participant groups that result in larger distributions than

the minimum required under these RPA '94 rules, provided that other

qualification requirements (such as section 401(a)(4)) are satisfied.

These regulations restate the rules applicable to plan years

beginning before January 1, 1995, without substantive change. Those

pre-1995 rules also apply to later plan years, to the extent that the

application of the RPA '94 rules is delayed as described above.

In addition, section 767(d)(1) of RPA '94 permits an employer to

elect to accelerate the effective date of the RPA '94 rules, and hence

these regulations, in order to apply the RPA '94 rules to distributions

with annuity starting dates occurring after December 7, 1994, in plan

years beginning before January 1, 995. An employer that makes a plan

amendment applying the applicable mortality table and the applicable

interest rate rules of these regulations is treated as making this

election as of the date the plan amendment is adopted or, if later, is

made effective.

Relationship with section 411(d)(6)

Section 411(d)(6) provides that a plan does not satisfy the

requirements of section 411 if the accrued benefit of a participant is

decreased by a plan amendment. In general, a plan amendment that

changes the interest rate or the mortality assumptions used for

purposes of determining the amount of any accrued benefit in any

preexisting optional form is subject to section 411(d)(6). Consistent

with both the temporary regulations and the prior final regulations,

these regulations provide limited section 411(d)(6) relief for certain

plan amendments that change the time for determining the applicable

interest rate. A plan amendment that changes the time for determining

the applicable interest rate will not be treated as violating section

411(d)(6) if each distribution made until one year after the later of

the effective date or the adoption date of the amendment is calculated

using the time for determining the applicable interest rate as provided

before or after the amendment, whichever produces the larger benefit.

For this purpose, all other plan provisions must be applied as in

effect after the amendment.

Section 767(d)(2) of RPA '94 provides that a participant's accrued

benefit is not considered to be reduced in violation of section

411(d)(6) merely because the benefit is determined in accordance with

the applicable interest rate rules and the applicable mortality table

rules of section 417(e)(3)(A), as amended by RPA '94. These regulations

provide that an amendment replacing an interest rate used for purposes

of section 417(e)(3) qualifies for this section 411(d)(6) relief if the

interest rate replaced is the Pension Benefit Guaranty Corporation

(PBGC) interest rate or a rate based on the PBGC interest rate.

Pursuant to suggestions made by several commentators, these regulations

clarify that the interest rates that may be replaced pursuant to this

section 411(d)(6) relief include an interest rate based on the average

of the PBGC interest rates over a specified period. In addition,

pursuant to suggestions made by two commentators, the final regulations

clarify the relationship between the various types of section 411(d)(6)

relief under the regulations, and provide some additional flexibility

to employers in determining how to transition between the PBGC interest

rate and the applicable interest rate and applicable mortality table,

where the transition is combined with a change in the time for

determining the interest rate.

One commentator asked whether the section 411(d)(6) relief for plan

amendments adopting the applicable mortality table and the applicable

interest rate rules applies with respect to terminated vested

participants. Because the section 411(d)(6) relief provided under

section 767(d)(2) of RPA '94 applies in the same manner with respect to

active and terminated participants, the regulations likewise do not

distinguish terminated vested participants from other participants in

this regard.

Several commentators requested that the regulations be amended to

provide unconditional section 411(d)(6) relief for plan amendments

adopting the applicable interest rate and applicable mortality table

rules of RPA '94 regardless of changes in the time for determining the

applicable interest rate. The IRS and Treasury have determined that

providing some additional flexibility to employers in determining how

to transition between the PBGC interest rate and the applicable

interest rate and applicable mortality table, as discussed above, where

the transition is combined with a change in the time for determining

the interest rate, strikes an appropriate balance between the practical

concerns of employers and the rights of participants.

These regulations further provide that, where a plan provided for

the use of an interest rate not based on the PBGC interest rate

prescribed by section 417(e)(3) as in effect before amendments made by

RPA '94, a plan amendment

[[Page 16898]]

that eliminates the use of that interest rate and the associated

mortality table may result in a reduction of a participant's accrued

benefit, which would violate the requirements of section 411(d)(6). Two

commentators suggested that final regulations provide section 411(d)(6)

relief for plan amendments that eliminate the use of an interest rate

not based on the PBGC interest rate, for plan amendments that adopt the

applicable interest rate and applicable mortality table rules of RPA

'94. Another commentator requested that final regulations provide for

similar section 411(d)(6) relief, but only for mandatory distributions

that are permitted pursuant to the rules of section 411(a)(11). The IRS

and Treasury have determined that section 767(d)(2) of RPA '94 does not

support a grant of section 411(d)(6) relief with respect to plan

amendments eliminating interest rates that are not based on the PBGC

interest rate.

These regulations provide examples of the application of section

411(d)(6) and the special rule of section 767(d)(2) of RPA '94,

including an example illustrating the use of a phase-in that provides

for a smoother transition from the plan's former terms to the new

rules. In addition, these regulations provide section 411(d)(6) relief

for certain plan amendments that eliminate use of the applicable

interest rate and the applicable mortality table with respect to

distribution forms that are newly excepted from the application of

section 417(e)(3) by these regulations.

The PBGC has advised the IRS and Treasury that it has not made any

decision at this time on whether it will continue to calculate and

publish the relevant interest rates after the year 2000. Therefore, in

amending plans to comply with these regulations, employers should not

rely on the continued determination and publication of these rates by

the PBGC beyond the year 2000.

Special Analyses

It has been determined that this Treasury decision 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)

does not apply to these regulations, and because the notice of proposed

rulemaking preceding the regulations was issued prior to March 29,

1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Internal Revenue Code, the

notice of proposed rulemaking preceding these regulations was submitted

to the Chief Counsel for Advocacy of the Small Business Administration

for comment on its impact on small business.

Drafting Information: The principal author of these regulations is

Linda S. F. Marshall, 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.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

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

Section 1.417(e)-1 also issued under 26 U.S.C.

417(e)(3)(A)(ii)(II). * * *

Par. 2. In Sec. 1.417(e)-1, paragraph (d) is revised to read as

follows:

Sec. 1.417(e)-1 Restrictions and valuations of distributions from

plans subject to sections 401(a)(11) and 417.

* * * * *

(d) Present value requirement--(1) General rule. A defined benefit

plan must provide that the present value of any accrued benefit and the

amount (subject to sections 411(c)(3) and 415) of any distribution,

including a single sum, must not be less than the amount calculated

using the applicable interest rate described in paragraph (d)(3) of

this section (determined for the month described in paragraph (d)(4) of

this section) and the applicable mortality table described in paragraph

(d)(2) of this section. The present value of any optional form of

benefit cannot be less than the present value of the normal retirement

benefit determined in accordance with the preceding sentence.

The same rules used for the plan under this paragraph (d) must also

be used to compute the present value of the benefit for purposes of

determining whether consent for a distribution is required under

paragraph (b) of this section.

(2) Applicable mortality table. The applicable mortality table is

the mortality table based on the prevailing commissioners' standard

table (described in section 807(d)(5)(A)) used to determine reserves

for group annuity contracts issued on the date as of which present

value is being determined (without regard to any other subparagraph of

section 807(d)(5)), that is prescribed by the Commissioner in revenue

rulings, notices, or other guidance published in the Internal Revenue

Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter). The

Commissioner may prescribe rules that apply in the case of a change to

the prevailing commissioners' standard table (described in section

807(d)(5)(A)) used to determine reserves for group annuity contracts,

in revenue rulings, notices, or other guidance published in the

Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this

chapter).

(3) Applicable interest rate--(i) General rule. The applicable

interest rate for a month is the annual interest rate on 30-year

Treasury securities as specified by the Commissioner for that month in

revenue rulings, notices or other guidance published in the Internal

Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).

(ii) Example. This example illustrates the rules of this paragraph

(d)(3):

Example. Plan A is a calendar year plan. For its 1995 plan year,

Plan A provides that the applicable mortality table is the table

described in Rev. Rul. 95-6 (1995-1 C.B. 80), and that the

applicable interest rate is the annual interest rate on 30-year

Treasury securities as specified by the Commissioner for the first

full calendar month preceding the calendar month that contains the

annuity starting date. Participant P is age 65 in January 1995,

which is the month that contains P's annuity starting date. P has an

accrued benefit payable monthly of $1,000 and has elected to receive

a distribution in the form of a single sum in January 1995. The

annual interest rate on 30-year Treasury securities as published by

the Commissioner for December 1994 is 7.87 percent. To satisfy the

requirements of section 417(e)(3) and this paragraph (d), the single

sum received by P may not be less than $111,351.

(4) Time for determining interest rate--(i) General rule. Except as

provided in paragraph (d)(4)(iv) or (v) of this section, the applicable

interest rate to be used for a distribution is the rate determined

under paragraph (d)(3) of this section for the applicable lookback

month. The applicable lookback month for a distribution is the lookback

month (as described in paragraph (d)(4)(iii) of this section) for the

month (or other longer stability period described in paragraph

(d)(4)(ii) of this section) that contains the annuity starting date for

the distribution. The time and method for determining the applicable

interest rate for each participant's distribution must be determined in

a consistent manner that is applied uniformly to all participants in

the plan.

[[Page 16899]]

(ii) Stability period. A plan must specify the period for which the

applicable interest rate remains constant. This stability period may be

one calendar month, one plan quarter, one calendar quarter, one plan

year, or one calendar year.

(iii) Lookback month. A plan must specify the lookback month that

is used to determine the applicable interest rate. The lookback month

may be the first, second, third, fourth, or fifth full calendar month

preceding the first day of the stability period.

(iv) Permitted average interest rate. A plan may apply the rules of

paragraph (d)(4)(i) of this section by substituting a permitted average

interest rate with respect to the plan's stability period for the rate

determined under paragraph (d)(3) of this section for the applicable

lookback month for the stability period. For this purpose, a permitted

average interest rate with respect to a stability period is an interest

rate that is computed by averaging the applicable interest rates

determined under paragraph (d)(3) of this section for two or more

consecutive months from among the first, second, third, fourth, and

fifth calendar months preceding the first day of the stability period.

For this paragraph (d)(4)(iv) to apply, a plan must specify the manner

in which the permitted average interest rate is computed.

(v) Additional determination dates. The Commissioner may prescribe,

in revenue rulings, notices or other guidance published in the Internal

Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b)), other times that a

plan may provide for determining the applicable interest rate.

(vi) Example. This example illustrates the rules of this paragraph

(d)(4):

Example. Employer X maintains Plan A, a calendar year plan.

Employer X wishes to amend Plan A so that the applicable interest

rate will remain fixed for each plan quarter, and so that the

applicable interest rate for distributions made during each plan

quarter can be determined approximately 80 days before the beginning

of the plan quarter. To comply with the provisions of this paragraph

(d)(4), Plan A is amended to provide that the applicable interest

rate is the annual interest rate on 30-year Treasury securities as

specified by the Commissioner for the fourth calendar month

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

starting date occurs.

(5) Use of alternative interest rate and mortality table. If a plan

provides for use of an interest rate or mortality table other than the

applicable interest rate or the applicable mortality table, the plan

must provide that a participant's benefit must be at least as great as

the benefit produced by using the applicable interest rate and the

applicable mortality table. For example, if a plan provides for use of

an interest rate of 7% and the UP-1984 Mortality Table (see

Sec. 1.401(a)(4)-12, Standard mortality table) in calculating single-

sum distributions, the plan must provide that any single-sum

distribution is calculated as the greater of the single-sum benefit

calculated using 7% and the UP-1984 Mortality Table and the single-sum

benefit calculated using the applicable interest rate and the

applicable mortality table.

(6) Exceptions. This paragraph (d) (other than the provisions

relating to section 411(d)(6) requirements in paragraph (d)(10) of this

section) does not apply to the amount of a distribution paid in the

form of an annual benefit that--

(i) Does not decrease during the life of the participant, or, in

the case of a QPSA, the life of the participant's spouse; or

(ii) Decreases during the life of the participant merely because

of--

(A) The death of the survivor annuitant (but only if the reduction

is to a level not below 50% of the annual benefit payable before the

death of the survivor annuitant); or

(B) The cessation or reduction of Social Security supplements or

qualified disability benefits (as defined in section 411(a)(9)).

(7) Defined contribution plans. Because the accrued benefit under a

defined contribution plan equals the account balance, a defined

contribution plan is not subject to the requirements of this paragraph

(d), even though it is subject to section 401(a)(11).

(8) Effective date--(i) In general. This paragraph (d) is effective

for distributions with annuity starting dates in plan years beginning

after December 31, 1994.

(ii) Optional delayed effective date of Retirement Protection Act

of 1994 (RPA '94)(108 Stat. 5012) rules for plans adopted and in effect

before December 8, 1994. For a plan adopted and in effect before

December 8, 1994, the application of the rules relating to the

applicable mortality table and applicable interest rate under

paragraphs (d)(2) through (4) of this section is delayed to the extent

provided in this paragraph (d)(8)(ii), if the plan provisions in effect

on December 7, 1994, met the requirements of section 417(e)(3) and

Sec. 1.417(e)-1(d) as in effect on December 7, 1994 (as contained in 26

CFR part 1 revised April 1, 1995). In the case of a distribution from

such a plan with an annuity starting date that precedes the optional

delayed effective date described in paragraph (d)(8)(iv) of this

section, and that precedes the first day of the first plan year

beginning after December 31, 1999, the rules of paragraph (d)(9) of

this section (which generally apply to distributions with annuity

starting dates in plan years beginning before January 1, 1995) apply in

lieu of the rules of paragraphs (d)(2) through (4) of this section. The

interest rate under the rules of paragraph (d)(9) of this section is

determined under the provisions of the plan as in effect on December 7,

1994, reflecting the interest rate or rates published by the Pension

Benefit Guaranty Corporation (PBGC) and the provisions of the plan for

determining the date on which the interest rate is fixed. The above

described interest rate or rates published by the PBGC are those

determined by the PBGC (for the date determined under those plan

provisions) pursuant to the methodology under the regulations of the

PBGC for determining the present value of a lump sum distribution on

plan termination under 29 CFR part 2619 that were in effect on

September 1, 1993 (as contained in 29 CFR part 2619 revised July 1,

1994).

(iii) Optional accelerated effective date of RPA '94 rules. This

paragraph (d) is also effective for a distribution with an annuity

starting date after December 7, 1994, during a plan year beginning

before January 1, 1995, if the employer elects, on or before the

annuity starting date, to make the rules of this paragraph (d)

effective with respect to the plan as of the optional accelerated

effective date described in paragraph (d)(8)(iv) of this section. An

employer is treated as making this election by making the plan

amendments described in paragraph (d)(8)(iv) of this section.

(iv) Determination of delayed or accelerated effective date by plan

amendment adopting RPA '94 rules. The optional delayed effective date

of paragraph (d)(8)(ii) of this section, or the optional accelerated

effective date of paragraph (d)(8)(iii) of this section, whichever is

applicable, is the date plan amendments applying both the applicable

mortality table of paragraph (d)(2) of this section and the applicable

interest rate of paragraph (d)(3) of this section are adopted or, if

later, are made effective.

(9) Plan years beginning before January 1, 1995--(i) Interest rate.

(A) For distributions made in plan years beginning after December 31,

1986, and before January 1, 1995, the following interest rate described

in paragraph (d)(9)(i)(A)(1) or (2) of this section, whichever applies,

is substituted for the

[[Page 16900]]

applicable interest rate for purposes of this section--

(1) The rate or rates that would be used by the PBGC for a trusteed

single-employer plan to value the participant's (or beneficiary's)

vested benefit (PBGC interest rate) if the present value of such

benefit does not exceed $25,000; or

(2) 120 percent of the PBGC interest rate, as determined in

accordance with paragraph (d)(9)(i)(A)(1) of this section, if such

present value exceeds $25,000. In no event shall the present value

determined by use of 120 percent of the PBGC interest rate result in a

present value less than $25,000.

(B) The PBGC interest rate may be a series of interest rates for

any given date. For example, the PBGC interest rate for immediate

annuities for November 1994 is 6%, and the PBGC interest rates for the

deferral period for that month are as follows: 5.25% for the first 7

years of the deferral period, 4% for the following 8 years of the

deferral period, and 4% for the remainder of the deferral period. For

November 1994, 120 percent of the PBGC interest rate is 7.2% (1.2 times

6%) for an immediate annuity, 6.3% (1.2 times 5.25%) for the first 7

years of the deferral period, 4.8% (1.2 times 4%) for the following 8

years of the deferral period, and 4.8% (1.2 times 4%) for the remainder

of the deferral period. The PBGC interest rates are the interest rates

that would be used (as of the date of the distribution) by the PBGC for

purposes of determining the present value of that benefit upon

termination of an insufficient trusteed single employer plan. Except as

otherwise provided by the Commissioner, the PBGC interest rates are

determined by PBGC regulations. See subpart B of 29 CFR part 4044 for

the applicable PBGC rates.

(ii) Time for determining interest rate. (A) Except as provided in

paragraph (d)(9)(ii)(B) of this section, the PBGC interest rate or

rates are determined on either the annuity starting date or the first

day of the plan year that contains the annuity starting date. The plan

must provide which date is applicable.

(B) The plan may provide for the use of any other time for

determining the PBGC interest rate or rates provided that such time is

not more than 120 days before the annuity starting date if such time is

determined in a consistent manner and is applied uniformly to all

participants.

guidance published in the Internal Revenue Bulletin (see

Sec. 601.601(d)(2)(ii)(b), prescribe other times for determining the

PBGC interest rate or rates.

(iii) No applicable mortality table. In the case of a distribution

to which this paragraph (d)(9) applies, the rules of this paragraph (d)

are applied without regard to the applicable mortality table described

in paragraph (d)(2) of this section.

(10) Relationship with section 411(d)(6)--(i) In general. A plan

amendment that changes the interest rate, the time for determining the

interest rate, or the mortality assumptions used for the purposes

described in paragraph (d)(1) of this section is subject to section

411(d)(6). But see Sec. 1.411(d)-4, Q&A-2(b)(2)(v) (regarding plan

amendments relating to involuntary distributions). In addition, a plan

amendment that changes the interest rate or the mortality assumptions

used for the purposes described in paragraph (d)(1) of this section

merely to eliminate use of the interest rate described in paragraph

(d)(3) or paragraph (d)(9) of this section, or the applicable mortality

table, with respect to a distribution form described in paragraph

(d)(6) of this section, for distributions with annuity starting dates

occurring after a specified date that is after the amendment is

adopted, does not violate the requirements of section 411(d)(6) if the

amendment is adopted on or before the last day of the last plan year

ending before January 1, 2000.

(ii) Section 411(d)(6) relief for change in time for determining

interest rate. Notwithstanding the general rule of paragraph (d)(10)(i)

of this section, if a plan amendment changes the time for determining

the applicable interest rate (including an indirect change as a result

of a change in plan year), the amendment will not be treated as

reducing accrued benefits in violation of section 411(d)(6) merely on

account of this change if the conditions of this paragraph (d)(10)(ii)

are satisfied. If the plan amendment is effective on or after the

adoption date, any distribution for which the annuity starting date

occurs in the one-year period commencing at the time the amendment is

effective must be determined using the interest rate provided under the

plan determined at either the date for determining the interest rate

before the amendment or the date for determining the interest rate

after the amendment, whichever results in the larger distribution. If

the plan amendment is adopted retroactively (that is, the amendment is

effective prior to the adoption date), the plan must use the interest

rate determination date resulting in the larger distribution for the

period beginning with the effective date and ending one year after the

adoption date.

(iii) Section 411(d)(6) relief for plan amendments pursuant to

changes to section 417 made by RPA '94 providing for statutory interest

rate determination date. Notwithstanding the general rule of paragraph

(d)(10)(i) of this section, except as provided in paragraph

(d)(10)(vi)(B) of this section, a participant's accrued benefit is not

considered to be reduced in violation of section 411(d)(6) merely

because of a plan amendment that changes any interest rate or mortality

assumption used to calculate the present value of a participant's

benefit under the plan, if the following conditions are satisfied--

(A) The amendment replaces the PBGC interest rate (or an interest

rate or rates based on the PBGC interest rate) as the interest rate

used under the plan in determining the present value of a participant's

benefit under this paragraph (d); and

(B) After the amendment is effective, the present value of a

participant's benefit under the plan cannot be less than the amount

calculated using the applicable mortality table and the applicable

interest rate for the first full calendar month preceding the calendar

month that contains the annuity starting date.

(iv) Section 411(d)(6) relief for plan amendments pursuant to

changes to section 417 made by RPA '94 providing for prior

determination date or up to two months earlier. Notwithstanding the

general rule of paragraph (d)(10)(i) of this section, except as

provided in paragraph (d)(10)(vi)(B) of this section, a participant's

accrued benefit is not considered to be reduced in violation of section

411(d)(6) merely because of a plan amendment that changes any interest

rate or mortality assumption used to calculate the present value of a

participant's benefit under the plan, if the following conditions are

satisfied--

(A) The amendment replaces the PBGC interest rate (or an interest

rate or rates based on the PBGC interest rate) as the interest rate

used under the plan in determining the present value of a participant's

benefit under this paragraph (d); and

(B) After the amendment is effective, the present value of a

participant's benefit under the plan cannot be less than the amount

calculated using the applicable mortality table and the applicable

interest rate, but only if the applicable interest rate is the annual

interest rate on 30-year Treasury securities for the calendar month

that contains the date as of which the PBGC interest rate (or an

interest rate or rates based on the PBGC interest rate) was determined

immediately before the amendment, or for one of the two

[[Page 16901]]

calendar months immediately preceding such month.

(v) Section 411(d)(6) relief for plan amendments pursuant to

changes to section 417 made by RPA '94 providing for other interest