June 1, 2012
For additional information:
Deanna Johnson

IRS proposed partial annuity rules ‘encouraging,’ but additional clarity still needed

Incentives for employee savings should be maintained for benefit of individuals, economy

WASHINGTON, DC — In testimony today before the U.S. Department of Treasury and the Internal Revenue Service (IRS), the American Benefits Council welcomed the increased flexibility provided by the proposed regulations to Internal Revenue Code Section 417(e), regarding the treatment of benefits paid partially as an annuity and partially in another form from a defined benefit pension plan.

But Michael L. Hadley, partner in the law firm of Davis & Harman and testifying on the Council’s behalf (based on written comments submitted to IRS on May 3), urged Treasury and the IRS to apply the clarification prospectively only and to state that no inference should be drawn regarding current law. “While we did request this clarification from the agencies back in October 2010, we 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.

“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),” he explained. “The regulations apply the 417(e) valuation requirement to all payment forms not explicitly exempted. But what 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. For more information, or to arrange an interview with Council staff on retirement policy, please contact Deanna Johnson at 202-289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.