Final IRS Regulations Simplify Pension Plan Requirements for Partial Annuity Distributions

by McDermott Will & Emery

McDermott Will & Emery

In Depth

Effective September 9, 2016, the Department of Treasury (Treasury) and Internal Revenue Service (IRS) issued final regulations addressing the minimum present value requirements for pension benefits payable partly as an annuity and partly in an accelerated form, usually a lump sum. These final regulations under the Internal Revenue Code (Code) Section 417(e) aim to encourage pension plans to make partial annuities available to participants who can now elect only lump sums. With these regulations, Treasury and IRS take another step to promote lifetime income alternatives for retirement plan participants.

Like the proposed regulations issued in 2012 that we previously discussed here, the final regulations provide that the minimum present value requirements of Code Section 417(e) apply only to the accelerated or lump sum portion of the benefit. These final regulations should be reviewed by sponsors of pension plans that already provide for bifurcated benefits, because plan amendments may be needed. If a pension plan is newly amended to provide for bifurcated benefits, the amendments should take the final regulations into account.


Under Code section 417(e) and Reg. § 1.417(e)–1(d)(1), a pension plan must meet minimum present value requirements. The present value of any accrued benefit and the amount of any distribution, including a lump sum, must not be less than the amount calculated using the “applicable interest rate” and “applicable mortality table,” both described at Reg. §1.417(e)-1(d). The 2012 explanation of the proposed regulations asserted that under current law both the accelerated (lump sum) and annuity portions of a bifurcated distribution are subject to the minimum present value requirements of Code section 417(e)(3). The final regulations are consistent with the proposed regulations in creating an exception under which the minimum present value requirements apply only to the accelerated or lump sum portion, not the entire accrued benefit. 

Bifurcated Accrued Benefits

The final regulations describe two different approaches, depending on a plan’s terms. Under “explicit bifurcation,” if a pension plan provides an accelerated payment or lump sum as a specified portion of a participant’s accrued benefit, the minimum present value requirements apply only to the accelerated or lump sum portion.

For example, consider a pension plan that pays 25 percent of a participant’s accrued benefit as a lump sum at retirement. Under the final regulations, the lump sum amount would be determined using the Code section 417(e) interest and mortality factors, while the amount of the annuity could be determined using the plan’s assumptions.

The second approach (“implicit bifurcation”) applies if a lump sum payment is a specified dollar amount rather than a portion of a participant’s accrued benefit. In that case, the residual annuity amount (payable in the normal form at normal retirement) cannot be less than the excess of: (1) the participant’s total accrued benefit expressed in that annuity form, over (2) the annuity in that form which is actuarially equivalent to the lump sum payment applying the Code section 417(e) interest and mortality value factors.

For example, consider a contributory pension plan under which a participant’s contributions with interest are paid as a lump sum. That lump sum amount is first converted to an annuity payable in the normal form at normal retirement using the Code section 417(e) interest and mortality factors. This annuity amount is then subtracted from the participant’s total accrued benefit, expressed in the normal annuity form at normal retirement. The difference is the minimum amount payable as an annuity in the plan’s normal form at normal retirement. Plans that allow lump sum payments of specified dollar amounts should be reviewed for consistency with this minimum annuity requirement.

The regulations include seven examples to illustrate the application of these rules.

Other Rules

The final regulations require explicit bifurcation where a plan is amended to eliminate an optional form of benefit but retains the optional form for benefits already accrued, or if a participant can elect to receive all of the accrued benefit as a lump sum.

If different factors are used to calculate different portions of an accrued benefit attributable to an early retirement benefit, a retirement-type subsidy, an optional form of benefit, or an ancillary benefit, and if the plan provides for an accelerated distribution of only part or parts of the accrued benefit, the plan must specify the parts to which the accelerated distribution applies.

For example, if a plan had one set of early retirement factors that applied to a participant’s accrued benefit as of December 31, 2005, but a different set of factors for benefits accrued after that date, and the plan provides for a lump sum distribution that settles only a portion of the accrued benefit, then plan must include language that specifies which portion of the benefit is settled by that distribution.

The final regulations apply to bifurcated benefits with the same starting date, and the rules can be applied to bifurcate accrued benefits more than once.

Limited Anti-Cutback Relief

The final regulations provide a limited exception to the anti-cutback rule of Code section 411(d)(6) for pension plans that use the Code section 417(e) interest and mortality factors in calculating distributions if, under the final regulations, these factors are not required to be used. Plan sponsors can adopt amendments to reflect the final regulations for plan years beginning before January 1, 2017, even if the amendments reduce benefits. For anti-cutback relief, the deadline for adopting amendments is December 31, 2017.

Effective Date

The final regulations are effective September 9, 2016, and apply to distributions starting in plan years beginning after 2016. The regulations can be applied to any earlier period, subject to the deadline above for anti-cutback relief.

Next Steps

Sponsors of defined benefit pension plans with bifurcated benefits should review their plans to determine whether benefits are calculated in accordance with the final regulations. Some plans with bifurcated benefits should be amended for consistency with the final regulations. Amendments can apply retroactively, subject to the December 31, 2017, deadline for amendments which reduce benefits. Treasury and IRS have simplified the calculation of bifurcated benefits, thereby encouraging plan sponsors to consider amending their pension plans to make partial annuities available to participants.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McDermott Will & Emery | Attorney Advertising

Written by:

McDermott Will & Emery

McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.