The Department of Treasury has issued final regulations that simplify the rules that allow retiring participants to simultaneously elect a partial lump sum and a partial annuity from a defined benefit pension plan. Under the tax code, the minimum present value of a benefit offered by a pension plan cannot be less than the present value calculated by using a specified mortality table and interest rate. The regulations, which were first proposed in February 2012, are an attempt to balance the need for retirees to insure against unexpected longevity (by promoting partial annuity payments) with the increased liquidity provided by accelerated forms of payment (like lump sums).

The rules make it easier for plans to provide partial annuities. They do so by allowing a plan to separate a participant’s accrued benefit such that the tax code’s minimum present value rules only apply to the portion of the benefit that is paid in an accelerated (i.e. lump sum) form.

The final regulations became effective on September 9, 2016, and will apply to distributions with annuity starting dates in plan years beginning on or after January 1, 2017. Please contact us for more details on how this may affect the operation and design of your pension plan.