Clarity Needed for IRS Partial Annuity Rules

The American Benefits Council welcomes proposed regulations to Internal Revenue Code Section 417(e), on the treatment of benefits paid partially as an annuity and partially in another form from a defined benefit (DB) pension plan.

However, Michael L. Hadley, a partner in the law firm of Davis & Harman, in testimony on the Council’s behalf, urged the Treasury and the Internal Revenue Service (IRS) to apply the proposals prospectively only and to state that no inference should be drawn regarding current law.

“[W]e disagree with Treasury and IRS’ position in the guidance that under current law, when one portion of a retirement benefit distribution subject to Section 417(e) is a ‘decreasing’ benefit, both portions of the distribution are subject to the minimum present value requirements of Section 417(e)(3). The Council believes instead the current regulation does not clearly require that and can be reasonably interpreted to reach the opposite result,” Hadley said. (See “U.S. Treasury Proposal to Reduce Regulatory Burdens for Retirees.”)

Hadley explained: “Generally lump sums and certain other distributions paid from defined benefit pension plans must be no less than the amount calculated using the interest and mortality assumptions provided under Section 417(e). The regulations apply the 417(e) valuation requirement to all payment forms not explicitly exempted.” Hadley asked for clarity about an exemption such as one relating to non-decreasing annuities.  

The current Section 417(e) present value requirement “does not apply to an amount of a distribution paid in the form of an annual benefit that does not decrease during the life of the participant,” said Hadley. “If the requirement applies to the whole benefit if any portion of the benefit decreases, then saying it does not apply to ‘an amount’ of a distribution is unnecessary. Rather, the regulation would have just said 417(e) does not apply to ‘a distribution’ or to ‘an optional form’ that does not decrease during the life of the participant.”



Hadley also requested that Treasury and IRS officials ensure that the final regulation’s discussion of its “three-bucket” approach to plan designs that offer bifurcated benefits (separately determined benefits with separate elections made by the participant) does not result in a retirement plan program being inadvertently excluded from the relief because the design does not fit into an allowed category under the proposed rule.   

“The Council appreciates Treasury and the IRS’ efforts to clarify the treatment of optional forms of benefits paid out under the Section 417(e) regulations,” Hadley concluded. “Retirement plan participants are better served by having a choice on how they receive those benefits. But reasonable minds might differ on the meaning of the proposed regulation, which is exactly why we support a clarification.”  

The Council’s testimony is available here.