Following its issuance of a final rule on partial annuity
distribution options in defined benefit plans (DBs), the Internal Revenue
Service (IRS) has just issued model amendments including language that DB
sponsors might want to use when offering such options.
To facilitate the payment of benefits partly in the form of an annuity and partly as a single sum, the Department of the Treasury and the IRS amended the regulations to simplify how sponsors would calculate the payments, in order to encourage sponsors to offer participants the additional option of an annuity. Their objective was to protect participants with an annuity in the event of unexpected longevity. The participant can decide to divide his benefit into two or more portions, and the IRS offers sponsors two methods to compute how the benefits would be distributed.
In addition, for pre-approved plans, some portions of the model amendment may be included in the basic plan document and others may be included in the adoption agreement.
However, the IRS is also allowing plan sponsors to limit how the bifurcation is handled. For example, sponsors may limit bifurcation to only two forms. They could also set certain percentage parameters, such as 50/50 or 75/25. Sponsors could also limit bifurcation for the portion of an accrued benefit earned before a specific date and the portion earned after that date.
The IRS’s notice on model amendments to add bifurcated distribution options to DB plans can be downloaded here.