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US Treasury Final Regulations Clarify Partial Lump Sum Distribution Rules

In September, the US Department of the Treasury issued final regulations that clarify the minimum present value requirements for defined benefit plans in order to simplify the rules associated with partial lump sum distributions. These new rules, which generally apply to distributions with annuity payments starting in plan years beginning on or after January 1, 2017, are intended to encourage plans to offer hybrid distribution options that include an annuity, to ensure a lifetime benefit stream.

Defined benefit pension plans are generally required to provide a participant’s accrued benefit in an annuity form of benefit as the normal form of payment. Many pension plans also offer optional forms of distribution, including lump sum payments, which are available with spousal consent (if applicable). Some plans offer optional forms of benefit that include a partial lump sum payment and an annuity stream. Lump sum distributions from pension plans are subject to minimum present value requirements, however, the application of such rules to bifurcated lump sum/annuity payments has not been clear.

The final regulations provide two approaches to bifurcating a participant’s accrued benefit under a plan so that the Internal Revenue Code section 417(e) minimum present value requirements apply only to the lump sum portion:

  • Explicit Bifurcation Rule. A plan may split the accrued benefit to provide that the present value requirements apply to a portion of the benefit as if that portion were the entire accrued benefit. This is applied when the plan document identifies a specific portion of a participant’s accrued benefit that is settled when paid in a form subject to the minimum present value requirements.

  • Implicit Bifurcation—Distribution of a Specified Amount. A plan that distributes a specified lump sum amount not described in the explicit bifurcation rule satisfies the present value requirements if the remainder of the participant's accrued benefit is no less than the excess of

    • the participant's total accrued benefit; over

    • the annuity that is actuarially equivalent to the lump sum amount (determined using the applicable interest rate and mortality table).

Plan sponsors of defined benefit plans that currently offer partial lump sum distributions will want to review their plans for compliance with the final regulations. Plan sponsors that have previously considered but rejected partial lump sum distributions due to lack of clarity on the present value requirements may want to revisit the design change.

Copyright © 2018 by Morgan, Lewis & Bockius LLP. All Rights Reserved.


About this Author

Althea R day, Morgan Lewis, Tax Attorney

Althea R. Day advises plan sponsors of all types—from tax-exempt organizations and governmental employers to Fortune 100 companies—regarding employee benefits and developing practical solutions to complex issues. Her experience includes the design, implementation, governance, operation, and regulatory compliance of qualified and nonqualified retirement plans, equity and executive compensation arrangements, and health and welfare plans. She also counsels clients, both multiemployer funds and contributing employers, on complex multiemployer plan issues.