IRS proposes rule to encourage partial annuity distribution options in pension plans

The IRS has proposed a rule intended to encourage defined benefit retirement plan sponsors to offer distribution options consisting of both a lump-sum form of payment and a lifelong stream of income, by reducing regulatory and plan administrative complexities. For plan sponsors already offering a “bifurcated” benefit, the proposed rule may simplify benefit certification processes.

The proposed rule would amend current tax regulations under Internal Revenue Code section 417(e)(3), which provides the assumptions used to determine the minimum “present value” of certain optional forms of benefit. The proposed rule, which is part of the Treasury Department’s effort to promote retirement security by expanding lifetime income choices, would provide a simplified method for plan sponsors to calculate the bifurcated benefit amounts. Public comments on the proposed rule must be submitted to the IRS by May 11, 2012.

Under the proposed rule, plans could be amended to allow participants to receive their retirement benefits in two different distribution forms: one part as a lump sum and the remainder as an annuity. To calculate the bifurcated benefits, the rule would apply the current, statutorily prescribed actuarial assumptions only to the lump-sum portion, permitting a plan sponsor to determine the annuity portion using the plan’s regular conversion factors. 

Plan sponsors that already permit the selection of combination forms of distribution may find the proposed rule helpful. Those that do not currently offer bifurcated optional forms may wish to consider whether doing so would be appropriate. In contemplating this opportunity, plan sponsors should consider administrative and other issues, and may want to submit formal comments to the IRS. For example, the proposed rule does not address the effect on plans that are subject to tax code section 436 benefit restrictions on optional lump sums.

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