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CFR Citation: 26 CFR Part 1

RIN ID: RIN 1545-BA60

TD ID: [TD 9130]

NOTICE: RULES

ACTION: Income taxes:

DOCUMENT ACTION: Final regulations.

SUBJECT CATEGORY: Required Distributions From Retirement Plans

DATES: Effective Date: These regulations are effective June 15, 2004.

Applicability Date: These regulations apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003.

DOCUMENT SUMMARY: This document contains final regulations concerning required minimum distributions under section 401(a)(9) for defined benefit plans and annuity contracts providing benefits under qualified plans, individual retirement plans, and section 403(b) contracts. This document also contains a change to the separate account rules in the final regulations concerning
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required minimum distributions for defined contribution plans. These final regulations provide the public with guidance necessary to comply with the law and will affect administrators of, participants in, and beneficiaries of qualified plans; institutions that sponsor and administer individual retirement plans, individuals who use individual retirement plans for retirement income, and beneficiaries of individual retirement plans; and employees for whom amounts are contributed to section 403(b) annuity contracts, custodial accounts, or retirement income accounts and beneficiaries of such contracts and accounts.

SUMMARY: Retirement plans; required distributions,

SUPPLEMENTAL INFORMATION

These final regulations amend 26 CFR part 1 relating to section 401(a)(9). The regulations provide guidance on the minimum distribution requirements under section 401(a)(9) for plans qualified under section 401(a) and for other arrangements that incorporate the section 401(a)(9) rules by reference. The section 401(a)(9) rules are incorporated by reference in section 408(a)(6) and (b)(3) for individual retirement accounts and annuities (IRAs) (including Roth IRAs, except as provided in section 408A(c)(5)), section 403(b)(10) for section 403(b) annuity contracts, and section 457(d) for eligible deferred compensation plans.

Section 401(a)(9) provides rules for distributions during the life of the employee in section 401(a)(9)(A) and rules for distributions after the death of the employee in section 401(a)(9)(B). Section 401(a)(9)(A)(ii) provides that the entire interest of an employee in a qualified plan must be distributed, beginning not later than the employee's required beginning date, in accordance with regulations, over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).

Section 401(a)(9)(C) defines required beginning date for employees (other than 5percent owners and IRA owners) as April 1 of the calendar year following the later of the calendar year in which the employee attains age 70\1/2\ or the calendar year in which the employee retires. For 5percent owners and IRA owners, the required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70\1/2\, even if the employee has not retired.

Section 401(a)(9)(D) provides that (except in the case of a life annuity) the life expectancy of an employee and the employee's spouse that is used to determine the period over which payments must be made may be redetermined, but not more frequently than annually.

Section 401(a)(9)(E) provides that the term designated beneficiary means any individual designated as a beneficiary by the employee.

Section 401(a)(9)(F) provides that, under regulations prescribed by the Secretary, any amount paid to a child shall be treated as if it had been paid to the surviving spouse if such amount will be become payable to the surviving spouse upon such child reaching the age of majority (or other designated event permitted under regulations).

Section 401(a)(9)(G) provides that any distribution required to satisfy the incidental death benefit requirement of section 401(a) is a required minimum distribution.

Section 401(a)(9) also provides that, if the employee dies after distributions have begun, the employee's interest must be distributed at least as rapidly as under the method used by the employee.

Section 401(a)(9) further provides that, if the employee dies before required minimum distributions have begun, the employee's interest must be either distributed (in accordance with regulations) over the life or life expectancy of the designated beneficiary with the distributions beginning no later than 1 year after the date of the employee's death, or distributed within 5 years after the death of the employee. However, under section 401(a)(9)(B)(iv), a surviving spouse may wait until the date the employee would have attained age 70\1/2\ to begin taking required minimum distributions.

Comprehensive proposed regulations under section 401(a)(9) were first published in the Federal Register on July 27, 1987 (52 FR 28070) (EE11382). Those proposed regulations were amended in 1997 (62 FR 67780) (REG20946382) to address the limited issue of the rules that apply when a trust is designated as an employee's beneficiary. Comprehensive proposed regulations were reproposed in the Federal Register on January 17, 2001 ((66 FR 3928) (REG13047700/REG130481 00)). The 2001 proposed regulations substantially revised and simplified the rules for defined contribution plans but maintained the basic structure for defined benefit plans and requested additional comments on the rules that should apply to those plans. With respect to annuity payments, the 2001 proposed regulations retained the basic structure of the 1987 proposed regulations and the preamble indicated that the IRS and Treasury were continuing to study these rules and specifically requested updated comments on current practices and issues relating to required minimum distributions from annuity contracts. Commentators on the 2001 proposed regulations provided information on the variety of annuity contracts being developed and available as insurance company products for purchase with separate accounts.

Final and temporary regulations relating to required minimum distributions from qualified plans, individual retirement plans, and section 403(b) annuity contracts, custodial accounts, and retirement income accounts were published in the Federal Register on April 17, 2002 (67 FR 18987). Proposed regulations that cross reference those temporary regulations were published in the Proposed Rules section of the Federal Register on April 17, 2002 ((67 FR 18834) (REG10869702)). The final and temporary regulations were effective with the 2003 calendar year.

The 2002 regulations finalized the rules for defined contribution plans and the basic rules regarding the determination of the required beginning date, determination of designated beneficiary and other general rules that apply to both defined benefit and defined contribution plans. The 2002 regulations also provided temporary regulations under Sec. 1.401(a)(9)6T relating to minimum distribution requirements for defined benefit plans and annuity contracts purchased with an employee's account balance under a defined contribution plan. In response to the comments to the 2001 proposed regulations, the temporary regulations significantly expanded the situations in which annuity payments under annuity contracts purchased with an employee's benefit may provide for increasing payments, but this guidance was provided in proposed and temporary form rather than final form in order to give taxpayers an opportunity to comment on these changes.

A public hearing was held on the temporary and proposed regulations on October 9, 2002. At the public hearing, and in comments on the temporary regulations, concerns were raised that
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requiring compliance with certain of the rules in the temporary regulations in 2003 would not be appropriate. Many of the comments relate to restrictions on variable annuity payments, and certain other increasing annuity payments, set forth in A1 of Sec. 1.401(a)(9)6T. Commentators also requested additional guidance in applying the rule in A12 of Sec. 1.401(a)(9)6T that requires the entire interest under an annuity contract to include the actuarial value of other benefits (such as minimum survivor benefits) provided under the contract and that the rule requiring the inclusion of these values be delayed until the guidance is provided. Finally, commentators requested that special consideration be provided to governmental plans.

In response to these comments and in order to provide adequate time to consider the issues raised, the IRS issued Notice 20032 (20031 C.B. 257) which provided that, pending the issuance of further regulations, plans are permitted to satisfy certain requirements in the 1987 or 2001 proposed regulations with respect to variable annuity payments in lieu of complying with the corresponding requirements in the 2002 temporary regulations, and that the entire interest under an annuity contract (including an annuity described in section 408(b) or section 403(b)) is permitted to be determined as the dollar amount credited to the employee or beneficiary without regard to the actuarial value of any other benefits (such as minimum survivor benefits) that will be provided under the contract. Notice 20032 also provided that, pending the issuance of further regulations under section 401(a)(9), governmental plans are only required to satisfy a reasonable and good faith interpretation of section 401(a)(9). Finally, Notice 20032 provided that the transitional relief would continue at least through the year in which additional regulations are published, with a later effective date for certain governmental plans.

In response to the comments received, these final regulations make a number of significant modifications to the proposed and temporary regulations and adopt the regulations as modified. They also make a minor modification to the rules in A2 of Sec. 1.401(a)(9)8 for separate accounts. These final regulations contain rules relating to minimum distribution requirements for defined benefit plans and annuity contracts purchased with an employee's account balance under a defined contribution plan. For purposes of this discussion of the background of the regulations in this preamble, as well as the explanation of provisions below, whenever the term employee is used, it is intended to include not only an employee but also an IRA owner.
Explanation of Provisions

Overview

These final regulations retain the basic rules of the temporary regulations. For example, distributions of an employee's entire interest must be paid in the form of periodic annuity payments for the employee's or beneficiary's life (or the joint lives of the employee and beneficiary) or over a comparable period certain. The payments must be nonincreasing or only increase as provided in the regulations. As provided in the temporary regulations, the permitted increases under these final regulations include: adjustments to reflect increases in the cost of living; any increase in benefits pursuant to a plan amendment; a pop up in payments in the event of the death of the beneficiary or the divorce of the employee and spouse; or return of employee contributions upon an employee's death. In addition, for both annuity contracts purchased from insurance companies and annuities paid from section 401(a) qualified trusts, the regulations allow variable annuities and other regular increases, if certain conditions are satisfied. The regulations also allow changes in distribution form in certain circumstances.

These regulations retain many rules from the temporary regulations without modification. These include, for example, rules regarding: the distribution of benefits that accrue after an employee's first distribution calendar year; the treatment of nonvested benefits; the actuarial increase to an employee's benefit that must be provided if the employee retires after the calendar year in which the employee attains age 70\1/2\; and benefits that commence in the form of an annuity prior to an employee's required beginning date.

Incidental Benefit Requirement

The basic purpose of the incidental benefit rule is to ensure that the payments under the annuity are primarily to provide retirement benefits to the employee. These final regulations retain the basic rule in the temporary regulations that, if distributions commence under a distribution option that is in the form of a joint and survivor annuity where the beneficiary is not the employee's spouse, the incidental benefit requirement will not be satisfied unless the payments to the beneficiary as a percentage of the payments to the employee do not exceed the percentage provided in the table in the regulations. The percentage is based on the number of years that the employee's age exceeds the beneficiary's age, and the percentage decreases as the difference between the ages increases. This reflects the fact that the greater the number of years younger a beneficiary is than the employee, the greater the number of years of expected payments that will be made to the beneficiary after the death of the employee. Under the table in the temporary regulations, a plan may not provide a 100 percent survivor benefit to an employee's nonspouse beneficiary under a joint and survivor annuity if the beneficiary is more than 10 years younger than the employee. Some commentators suggested that an adjustment to the table is appropriate if the employee commences distributions before 70\1/2\. This is because, in such a case, more payments are expected to be made while the employee is alive.

In response to these comments, the final regulations provide that, if an employee's annuity starting date is at an age younger than age 70, an adjustment is made to the employee/beneficiary age difference. This adjusted employee/beneficiary age difference is determined by decreasing the age difference by the number of years the employee is younger than age 70 at the annuity starting date. The effect of this change is to permit a higher percentage after an employee's death for employees who commence benefits at earlier ages. Thus, for an employee age 55 at the time of the employee's annuity starting date, a joint and 100 percent survivor annuity can be provided if the survivor is not more than 25 years younger than the employee.
Increasing Annuities (Including Acceleration and CostofLiving Increases)

These final regulations clarify that a plan may provide an annual increase that does not exceed the increase in an eligible costof living index for a 12month period ending in the year during which the increase occurs or the prior year. An eligible costofliving index is a consumer price index (CPI) issued by the Bureau of Labor Statistics and based on prices of all items (or all items excluding food and energy), including an index for a population of consumers (such as urban consumers or urban wage earners and clerical workers) or geographic area or areas (such as a given metropolitan area or state).

Under these regulations, a plan may provide for annual costof living increases, or may provide for less frequent costofliving increases that are
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cumulative since the most recent increase (or the employee's annuity starting date, if later), as long as there is no actuarial increase to reflect having not provided increases in the interim years.

For a plan that provides annual increases, but provides a ceiling on the annual increase, and thus does not allow a full costofliving increase in some years, the plan may allow an unused portion of the costofliving increase to be provided in a subsequent year when the ceiling exceeds the increase in the CPI for that year and still treat the increase in that subsequent year as an increase that does not exceed an eligible costofliving index.

Finally, a plan can provide for annuity payments with a percentage adjustment based on the increase in compensation for the position held by the employee at the time of retirement. However, in the case of a nongovernmental plan, this form of adjustment is only permitted if it is provided under the terms of the plan as in effect on April 17, 2002.

In addition to these permitted increases in the amount of annuity payments, the final regulations retain the rules in the temporary regulations allowing an annuity purchased from an insurance company with an employee's account balance under a defined contribution plan to provide for variable and increasing payments and clarify that these rules apply to an annuity contract purchased from an insurance company by a qualified trust for a defined benefit plan. For an annuity contract purchased from an insurance company, these final regulations retain the rule that the total expected future payments (disregarding any payment increases) as of the annuity starting date must exceed the premium being annuitized. This rule insures that annuity payments start at a high enough amount to prevent inappropriate deferral.

In response to comments asking for more flexibility in the rules relating to changes in distribution amounts from an annuity contract purchased from an insurance company, the final regulations replace the rule permitting partial and complete withdrawals with a broader rule permitting all types of acceleration. The final regulations allow any method that retains the same rate of increase in future payments but results in the total future expected payments under the annuity (disregarding any future payment increases and including the amount of any payment made as a result of the acceleration) being decreased, thereby allowing acceleration in the form of a shorter period as well as through withdrawals. In addition, the requirement that a total withdrawal option be available has been eliminated.

These final regulations also permit defined benefit plans under a qualified trust to provide variable or fixedrate increasing annuities paid directly from the trust, but the control in the regulations on the rate of increase for these annuities is different. For these annuities, increases in payments solely to reflect betterthanassumed investment performance are permitted but only if the assumed interest rate for calculating the initial level of payments is at least 3 percent. Alternatively, fixed rate increases may be provided but only if the rate of increase is less than 5 percent. Paralleling the payment of the undistributed premium at death, the regulations allow a payment at death to the extent that the payments after annuitization are less than the present value of the employee's accrued benefit as of the annuity starting date calculated using the applicable interest and morality under section 417(e).

The rule allowing an acceleration of payments under an annuity has not been extended to annuity payments from a qualified trust. However, as noted below, such plans are permitted to allow changes in form of distribution in certain specific circumstances as described below. In addition, if distribution is in the form of a joint and survivor annuity, the final regulations allow the survivor to convert the survivor annuity into a lump sum upon the death of the employee. Permitted Changes in Form of Distribution

Some commentators requested that employees and beneficiaries be permitted to change the form of future distributions in response to changed circumstances, such as upon retirement or death. In response to these comments, the regulations allow an employee or beneficiary to change the form of future distributions in a number of circumstances provided certain conditions are satisfied. First, if distribution is in the form of a period certain only annuity (i.e., an annuity with no life contingency), the individual may change the form of distribution prospectively at any time. The employee or beneficiary also is permitted to change the form of distribution prospectively upon an employee's actual retirement or upon plan termination, regardless of the form of annuity payments before retirement or plan termination. In addition, an employee may change to a qualified joint and survivor annuity in connection with marriage.

In order to make these changes, the future payments must satisfy section 401(a)(9) (as though payments first commenced on the new annuity starting date, treating the actuarial value of the remaining payments as the employee's or beneficiary's entire interest). As a condition to changes in the form of distribution, whether under a period certain only annuity or a life contingent annuity, the stream of payments from the employee's original annuity starting date (both the payments before and after the change in form) must satisfy section 415 using the interest rate assumption and applicable mortality table in effect as of the annuity starting date. In addition, the end point of the new period certain, if any, may not be later the end point available at the original annuity starting date. Furthermore, the plan must treat an individual electing a new form of distribution under these rules as having a new annuity starting date for purposes of sections 415 and 417. Thus, the payments under the new form must satisfy section 415 as of its new annuity starting date based on the applicable interest rate and applicable mortality table for that date, taking into account prior payments. Although not stated, for plans subject to section 411, any form of distribution or change in the form of distribution must not result in an impermissible forfeiture of benefits.

A number of commentators requested that the final regulations provide the rule in prior proposed regulations that allowed minimum distributions from a defined benefit plan to be calculated using the rule for defined contribution plans in Sec. 1.401(a)(9)5. The primary argument for allowing this level of flexibility in calculating distribution amounts from year to year is to allow employees to adjust to changed circumstances. The rules in these final regulations allowing a change in distribution form upon retirement or plan termination, and at any time when distribution is in the form of a term certain only, address this need.
Value of Guarantees in Determining Account Value Prior to Annuitization

The final regulations retain the basic rule in the temporary regulations that, before annuitization, the defined contribution plan rules apply. For this purpose, an employee's entire interest under an annuity contract is the dollar amount credited to the employee or beneficiary under the contract plus the actuarial value of any additional benefits (such as survivor benefits in excess of the account balance) that will be provided under the contract. A number of commentators requested guidance on how this actuarial value is [[Page 33292]]
calculated and indicated that, in certain circumstances it would be appropriate to disregard this additional value.

The IRS and Treasury believe that it is generally appropriate to reflect the value of additional benefits under an annuity contract, just as the fair market value of all assets generally must be reflected in valuing an account balance under a defined contribution plan. However, in response to these comments, the final regulations allow the additional benefits to be disregarded when there is a prorata reduction in the additional benefits for any withdrawal, provided the actuarial present value of the additional benefits is not more than 20 percent of the account balance. An example is provided that illustrates an acceptable method of determining the value of an additional benefit that is a guaranteed death benefit. In addition, an exception is provided for an additional benefit in the form of a guaranteed return of premiums upon death.

Certain Payments to Children

The final regulations provide rules governing when, pursuant to section 401(a)(9)(F), payment of an employee's accrued benefit to a child may be treated as if such payments were made to a surviving spouse. Under the final regulations, payments under a defined benefit plan or annuity contract that are made to an employee's child until such child reaches the age of majority (or dies, if earlier) may be treated, for purposes of section 401(a)(9), as if such payments were made to the surviving spouse, provided they become payable to the surviving spouse upon cessation of the payments to the child. In addition, for this purpose, a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26, or so long as the child is disabled.

Governmental Plans

A number of commentators raised concerns that governmental plans offer annuity distribution options that are not permitted under the temporary regulations. Most of the suggestions made by commentators on behalf of governmental plans were incorporated into the final regulations, such as expanding the list of acceptable COLAs; permitting lump sum distributions to beneficiaries; and providing for popup payments to a surviving spouse after the cessation of payments to a child.

Nevertheless, some substantive changes recommended by or on behalf of governmental plans were not made in the final regulations. In light of the difficulties a governmental plan faces in changing its plan terms (e.g., in some states, the state constitution does not allow elimination of existing distribution options) and the public oversight of such plans, these final regulations provide a grandfather rule under which, in the case of an annuity distribution option provided under the terms of a governmental plan as in effect on April 17, 2002, the plan will not fail to satisfy section 401(a)(9) merely because the annuity payments do not satisfy the requirements set forth in these regulations. However, a grandfathered distribution option must satisfy the statutory requirements of section 401(a)(9), based on a reasonable and good faith interpretation of that section.

This grandfather rule only applies to existing plan provisions. Otherwise, the regulations provide that annuity payments under governmental plans within the meaning of section 414(d) must satisfy the rules for nongovernmental plans. Thus, any new distribution option in a governmental plan or change in a distribution option must comply with the rules applicable to nongovernmental plans under these final regulations.

Separate Accounts Under Defined Contribution Plans

Several comments have been received raising administrative concerns with the rule in the final regulations applicable to defined contribution plans that recognizes separate accounts for purposes of section 401(a)(9) only after the separate account is actually established. In particular, concerns have been raised that, for employees who die late in a calendar year, it is nearly impossible to set up separate accounts by the end of the year so that they can be used to determine required minimum distributions for the year after death. In response to these comments the regulations have been modified to provide that if separate accounts, determined as of an employee's date of death, are actually established by the end of the calendar year following the year of an employee's death, the separate accounts can be used to determine required minimum distributions for the year following the year of the employee's death. Under the separate account rules, postdeath investment experience must be shared on a prorata basis until the date on which the separate accounts are actually established. Effective Date

As provided in the temporary and proposed regulations, these final regulations apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003. However, in order to fulfill the commitment in Notice 20032 to allow plans to continue to use certain provisions from the preexisting proposed regulations and to provide plan sponsors sufficient time to make any adjustments in their plans needed to comply with these regulations, a distribution from a defined benefit plan or annuity contract for calendar years 2003, 2004, and 2005 will not fail to satisfy section 401(a)(9) merely because the payments do not satisfy the rules in these final regulations, provided the payments satisfy section 401(a)(9) based on a reasonable and good faith interpretation of the provisions of section 401(a)(9). For a plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001 proposed regulations, the 2002 temporary and proposed regulations, or these final regulations, a distribution will be deemed to satisfy a reasonable good faith interpretation of section 401(a)(9).

For governmental plans, this reasonable good faith standard extends to the end of the calendar year that contains the 90th day after the opening of the first legislative session of the legislative body with the authority to amend the plan that begins on or after June 15, 2004, if such 90th day is later than December 31, 2005.

Special Analyses

It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because Sec. 1.401(a)(9)6 imposes no new collection of information on small entities, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Marjorie Hoffman and Cathy A. Vohs of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel [[Page 33293]]
from the IRS and Treasury participated in the development of these regulations.

List of Subjects 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by removing the entry for ``Sec. 1.401(a)(9)6T'' and adding an entry in numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Sec. 1.401(a)(9)6 is also issued under 26 U.S.C. 401(a)(9). * * *
Par. 2. Remove Sec. 1.401(a)(9)6T'' and replace it with Sec. 1.401(a)(9)6'' each time it is used in the sections listed below: Sec. 1.401(9)0
Sec. 1.401(a)(9)1 A2(b)
Sec. 1.401(a)(9)2 A1(c)
Sec. 1.401(a)(9)2 A5
Sec. 1.401(a)(9)2 A6(a)
Sec. 1.401(a)(9)3 A1(a)
Sec. 1.401(a)(9)3 A1(b)
Sec. 1.401(a)(9)3 A6
Sec. 1.401(a)(9)4 A4(a)
Sec. 1.401(a)(9)5 A1(e)
Sec. 1.401(a)(9)8 A2(a)(3)
Sec. 1.401(a)(9)8 A6(b)(2)
Sec. 1.401(a)(9)8 A7
Sec. 1.401(a)(9)8 A8
Sec. 1.403(b)3 A1(c)(3)
Sec. 1.4088 A1(a)
Sec. 1.4088 A1(b)
Sec. 54.49742 A3(a)
Sec. 54.49742 A4(b)(2)(i)
Par. 3. Section 1.401(a)(9)6 is added to read as follows:
Sec. 1.401(a)(9)6 Required minimum distributions for defined benefit plans and annuity contracts.

Q1. How must distributions under a defined benefit plan be paid in order to satisfy section 401(a)(9)?

A1. (a) General rules. In order to satisfy section 401(a)(9), except as otherwise provided in this section, distributions of the employee's entire interest under a defined benefit plan must be paid in the form of periodic annuity payments for the employee's life (or the joint lives of the employee and beneficiary) or over a period certain that does not exceed the maximum length of the period certain determined in accordance with A3 of this section. The interval between payments for the annuity must be uniform over the entire distribution period and must not exceed one year. Once payments have commenced over a period, the period may only be changed in accordance with A13 of this section. Life (or joint and survivor) annuity payments must satisfy the minimum distribution incidental benefit requirements of A2 of this section. Except as otherwise provided in this section (such as permitted increases described in A14 of this section), all payments (whether paid over an employee's life, joint lives, or a period certain) also must be nonincreasing.
(b) Life annuity with period certain. The annuity may be a life annuity (or joint and survivor annuity) with a period certain if the life (or lives, if applicable) and period certain each meet the requirements of paragraph (a) of this A1. For purposes of this section, if distributions are permitted to be made over the lives of the employee and the designated beneficiary, references to a life annuity include a joint and survivor annuity.
(c) Annuity commencement. (1) Annuity payments must commence on or before the employee's required beginning date (within the meaning of A 2 of Sec. 1.401(a)(9)2). The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Similarly, in the case of distributions commencing after death in accordance with section 401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or before the date determined under A3(a) or (b) (whichever is applicable) of Sec. 1.401(a)(9)3, must be the payment which is required for one payment interval. Payment intervals are the periods for which payments are received, e.g., bimonthly, monthly, semi annually, or annually. All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee's required beginning date.
(2) This paragraph (c) is illustrated by the following example:

Example. A defined benefit plan (Plan X) provides monthly annuity payments of $500 for the life of unmarried participants with a 10year period certain. An unmarried, retired participant (A) in Plan X attains age 70\1/2\ in 2005. In order to meet the
requirements of this paragraph, the first monthly payment of $500 must be made on behalf of A on or before April 1, 2006, and the payments must continue to be made in monthly payments of $500 thereafter for the life and 10year period certain.
(d) Single sum distributions. In the case of a single sum distribution of an employee's entire accrued benefit during a distribution calendar year, the amount that is the required minimum distribution for the distribution calendar year (and thus not eligible for rollover under section 402(c)) is determined using either the rule in paragraph (d)(1) or the rule in paragraph (d)(2) of this A1. (1) The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account plan and treating the amount of the single sum distribution as the employee's account balance as of the end of the relevant valuation calendar year. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee's first distribution calendar year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the employee's first and second distribution calendar years is not eligible for rollover. (2) The portion of the single sum distribution that is a required minimum distribution is permitted to be determined by expressing the employee's benefit as an annuity that would satisfy this section with an annuity starting date as of the first day of the distribution calendar year for which the required minimum distribution is being determined, and treating one year of annuity payments as the required minimum distribution for that year, and not eligible for rollover. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee's first distribution calendar year has not been made, the benefit must be expressed as an annuity with an annuity starting date as of the first day of the first distribution calendar year and the payments for the first two distribution calendar years would be treated as required minimum distributions, and not eligible for rollover.
(e) Death benefits. The rule in paragraph (a) of this A1, prohibiting increasing payments under an annuity applies to payments made upon the death of an employee. However, for purposes of this section, an ancillary death benefit described in this paragraph (e) may be disregarded in applying that rule. Such an ancillary death benefit is excluded in determining
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an employee's entire interest and the rules prohibiting increasing payments do not apply to such an ancillary death benefit. A death benefit with respect to an employee's benefit is an ancillary death benefit for purposes of this A1 if
(1) It is not paid as part of the employee's accrued benefit or under any optional form of the employee's benefit; and
(2) The death benefit, together with any other potential payments with respect to the employee's benefit that may be provided to a survivor, satisfy the incidental benefit requirement of Sec. 1.401 1(b)(1)(i).
(f) Additional guidance. Additional guidance regarding how distributions under a defined benefit plan must be paid in order to satisfy section 401(a)(9) may be issued by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.

Q2. How must distributions in the form of a life (or joint and survivor) annuity be made in order to satisfy the minimum distribution incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the distribution component of the incidental benefit requirement of Sec. 1.4011(b)(1)(i)?

A2. (a) Life annuity for employee. If the employee's benefit is paid in the form of a life annuity for the life of the employee satisfying section 401(a)(9) without regard to the MDIB requirement, the MDIB requirement of section 401(a)(9)(G) will be satisfied. (b) Joint and survivor annuity, spouse beneficiary. If the employee's sole beneficiary, as of the annuity starting date for annuity payments, is the employee's spouse and the distributions satisfy section 401(a)(9) without regard to the MDIB requirement, the distributions to the employee will be deemed to satisfy the MDIB requirement of section 401(a)(9)(G). For example, if an employee's benefit is being distributed in the form of a joint and survivor annuity for the lives of the employee and the employee's spouse and the spouse is the sole beneficiary of the employee, the amount of the periodic payment payable to the spouse would not violate the MDIB requirement if it was 100 percent of the annuity payment payable to the employee, regardless of the difference in the ages between the employee and the employee's spouse.
(c) Joint and survivor annuity, nonspouse beneficiary(1) Explanation of rule. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the employee and a beneficiary other than the employee's spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless under the distribution option, the annuity payments to be made on and after the employee's required beginning date will satisfy the conditions of this paragraph (c). The periodic annuity payment payable to the survivor must not at any time on and after the employee's required beginning date exceed the applicable percentage of the annuity payment payable to the employee using the table in paragraph (c)(2) of this A2. The applicable percentage is based on the adjusted employee/beneficiary age difference. The adjusted employee/beneficiary age difference is determined by first calculating the excess of the age of the employee over the age of the beneficiary based on their ages on their birthdays in a calendar year. Then, if the employee is younger than age 70, the age difference determined in the previous sentence is reduced by the number of years that the employee is younger than age 70 on the employee's birthday in the calendar year that contains the annuity starting date. In the case of an annuity that provides for increasing payments, the requirement of this paragraph (c) will not be violated merely because benefit payments to the beneficiary increase, provided the increase is determined in the same manner for the employee and the beneficiary.
(2) Table.
Applicable Adjusted employee/beneficiary age difference percentage 10 years or less.......................................... 100 11........................................................ 96 12........................................................ 93 13........................................................ 90 14........................................................ 87 15........................................................ 84 16........................................................ 82 17........................................................ 79 18........................................................ 77 19........................................................ 75 20........................................................ 73 21........................................................ 72 22........................................................ 70 23........................................................ 68 24........................................................ 67 25........................................................ 66 26........................................................ 64 27........................................................ 63 28........................................................ 62 29........................................................ 61 30........................................................ 60 31........................................................ 59 32........................................................ 59 33........................................................ 58 34........................................................ 57 35........................................................ 56 36........................................................ 56 37........................................................ 55 38........................................................ 55 39........................................................ 54 40........................................................ 54 41........................................................ 53 42........................................................ 53 43........................................................ 53 44 and greater............................................ 52 (3) Example. This paragraph (c) is illustrated by the following example:

Example. Distributions commence on January 1, 2003 to an employee (Z), born March 1, 1937, after retirement at age 65. Z's daughter (Y), born February 5, 1967, is Z's beneficiary. The distributions are in the form of a joint and survivor annuity for the lives of Z and Y with payments of $500 a month to Z and upon Z's death of $500 a month to Y, i.e., the projected monthly payment to Y is 100 percent of the monthly amount payable to Z. Accordingly, under A10 of this section, compliance with the rules of this section is determined as of the annuity starting date. The adjusted employee/beneficiary age difference is calculated by taking the excess of the employee's age over the beneficiary's age and subtracting the number of years the employee is younger than age 70. In this case, Z is 30 years older than Y and is commencing benefit 5 years before attaining age 70 so the adjusted employee/beneficiary age difference is 25 years. Under the table in paragraph (c)(2) of this A2, the applicable percentage for a 25year adjusted employee/ beneficiary age difference is 66 percent. As of January 1, 2003 (the annuity starting date) the plan does not satisfy the MDIB
requirement because, as of such date, the distribution option provides that, as of Z's required beginning date, the monthly payment to Y upon Z's death will exceed 66 percent of Z's monthly payment.
(d) Period certain and annuity features. If a distribution form includes a period certain, the amount of the annuity payments payable to the beneficiary need not be reduced during the period certain, but in the case of a joint and survivor annuity with a period certain, the amount of the annuity payments payable to the beneficiary must satisfy paragraph (c) of this A2 after the expiration of the period certain. (e) Deemed satisfaction of incidental benefit rule. Except in the case of distributions with respect to an employee's benefit that include an ancillary death benefit described in paragraph A1(e) of this section, to the extent the incidental benefit requirement of Sec. 1.4011(b)(1)(i) requires a distribution, that requirement is deemed to be satisfied if distributions satisfy the minimum distribution incidental benefit requirement of this A2. If the employee's benefits include an ancillary death benefit described in paragraph A1(e) of this section, the benefits (including the ancillary death
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benefit) must be distributed in accordance with the incidental benefit requirement described in Sec. 1.4011(b)(1)(i) and the benefits (excluding the ancillary death benefit) must also satisfy the minimum distribution incidental benefit requirement of this A2.

Q3. How long is a period certain under a defined benefit plan permitted to extend?

A3. (a) Distributions commencing during the employee's life. The period certain for any annuity distributions commencing during the life of the employee with an annuity starting date on or after the employee's required beginning date generally is not permitted to exceed the applicable distribution period for the employee (determined in accordance with the Uniform Lifetime Table in A2 of Sec. 1.401(a)(9) 9) for the calendar year that contains the annuity starting date. See A10 of this section for the rule for annuity payments with an annuity starting date before the required beginning date. However, if the employee's sole beneficiary is the employee's spouse, the period certain is permitted to be as long as the joint life and last survivor expectancy of the employee and the employee's spouse, if longer than the applicable distribution period for the employee, provided the period certain is not provided in conjunction with a life annuity under A1(b) of this section.
(b) Distributions commencing after the employee's death. (1) If annuity distributions commence after the death of the employee under the life expectancy rule (under section 401(a)(9)(B)(iii) or (iv)), the period certain for any distributions commencing after death cannot exceed the applicable distribution period determined under A5(b) of Sec. 1.401(a)(9)5 for the distribution calendar year that contains the annuity starting date.
(2) If the annuity starting date is in a calendar year before the first distribution calendar year, the period certain may not exceed the life expectancy of the designated beneficiary using the beneficiary's age in the year that contains the annuity starting date.

Q4. Will a plan fail to satisfy section 401(a)(9) merely because distributions are made from an annuity contract which is purchased from an insurance company?

A4. A plan will not fail to satisfy section 401(a)(9) merely because distributions are made from an annuity contract which is purchased with the employee's benefit by the plan from an insurance company, as long as the payments satisfy the requirements of this section. If the annuity contract is purchased after the required beginning date, the first payment interval must begin on or before the purchase date and the payment required for one payment interval must be made no later than the end of such payment interval. If the payments actually made under the annuity contract do not meet the requirements of section 401(a)(9), the plan fails to satisfy section 401(a)(9). See also A14 of this section permitting certain increases under annuity contracts.

Q5. In the case of annuity distributions under a defined benefit plan, how must additional benefits that accrue after the employee's first distribution calendar year be distributed in order to satisfy section 401(a)(9)?

A5. (a) In the case of annuity distributions under a defined benefit plan, if any additional benefits accrue in a calendar year after the employee's first distribution calendar year, distribution of the amount that accrues in the calendar year must commence in accordance with A1 of this section beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues.
(b) A plan will not fail to satisfy section 401(a)(9) merely because there is an administrative delay in the commencement of the distribution of the additional benefits accrued in a calendar year, provided that the actual payment of such amount commences as soon as practicable. However, payment must commence no later than the end of the first calendar year following the calendar year in which the additional benefit accrues, and the total amount paid during such first calendar year must be no less than the total amount that was required to be paid during that year under A5(a) of this section.

Q6. If a portion of an employee's benefit is not vested as of December 31 of a distribution calendar year, how is the determination of the required minimum distribution affected?

A6. In the case of annuity distributions from a defined benefit plan, if any portion of the employee's benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that distribution calendar year. When an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual. See A5 of this section for the rules for distributing benefits which accrue under a defined benefit plan after the employee's first distribution calendar year.

Q7. If an employee (other than a 5percent owner) retires after the calendar year in which the employee attains age 70\1/2\, for what period must the employee's accrued benefit under a defined benefit plan be actuarially increased?

A7. (a) Actuarial increase starting date. If an employee (other than a 5percent owner) retires after the calendar year in which the employee attains age 70\1/2\, in order to satisfy section
401(a)(9)(C)(iii), the employee's accrued benefit under a defined benefit plan must be actuarially increased to take into account any period after age 70\1/2\ in which the employee was not receiving any benefits under the plan. The actuarial increase required to satisfy section 401(a)(9)(C)(iii) must be provided for the period starting on the April 1 following the calendar year in which the employee attains age 70\1/2\, or January 1, 1997, if later.
(b) Actuarial increase ending date. The period for which the actuarial increase must be provided ends on the date on which benefits commence after retirement in an amount sufficient to satisfy section 401(a)(9).
(c) Nonapplication to plan providing same required beginning date for all employees. If, as permitted under A2(e) of Sec. 1.401(a)(9) 2, a plan provides that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which the employee attains age 70\1/2\ (regardless of whether the employee is a 5percent owner) and the plan makes distributions in an amount sufficient to satisfy section 401(a)(9) using that required beginning date, no actuarial increase is required under section 401(a)(9)(C)(iii).
(d) Nonapplication to governmental and church plans. The actuarial increase required under this A7 does not apply to a governmental plan (within the meaning of section 414(d)) or a church plan. For purposes of this paragraph, the term church plan means a plan maintained by a church for church employees, and the term church means any church (as defined in section 3121(w)(3)(A)) or qualified churchcontrolled organization (as defined in section 3121(w)(3)(B)).

Q8. What amount of actuarial increase is required under section 401(a)(9)(C)(iii)?

A8. In order to satisfy section 401(a)(9)(C)(iii), the retirement benefits payable with respect to an employee as of the end of the period for actuarial increases (described in A7 of this section) must be no less than: the
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actuarial equivalent of the employee's retirement benefits that would have been payable as of the date the actuarial increase must commence under paragraph (a) of A7 of this section if benefits had commenced on that date; plus the actuarial equivalent of any additional benefits accrued after that date; reduced by the actuarial equivalent of any distributions made with respect to the employee's retirement benefits after that date. Actuarial equivalence is determined using the plan's assumptions for determining actuarial equivalence for purposes of satisfying section 411.

Q9. How does the actuarial increase required under section 401(a)(9)(C)(iii) relate to the actuarial increase required under section 411?

A9. In order for any of an employee's accrued benefit to be nonforfeitable as required under section 411, a defined benefit plan must make an actuarial adjustment to an accrued benefit, the payment of which is deferred past normal retirement age. The only exception to this rule is that generally no actuarial adjustment is required to reflect the period during which a benefit is suspended as permitted under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829). The actuarial increase required under section 401(a)(9)(C)(iii) for the period described in A7 of this section is generally the same as, and not in addition to, the actuarial increase required for the same period under section 411 to reflect any delay in the payment of retirement benefits after normal retirement age. However, unlike the actuarial increase required under section 411, the actuarial increase required under section 401(a)(9)(C)(iii) must be provided even during any period during which an employee's benefit has been suspended in accordance with ERISA section 203(a)(3)(B).

Q10. What rule applies if distributions commence to an employee on a date before the employee's required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A1 of this section?

A10. (a) General rule. If distributions commence to an employee on a date before the employee's required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A1 of this section, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of this section and Sec. 1.401(a)(9)2. Thus, for example, the designated beneficiary distributions will be determined as of the annuity starting date. Similarly, if the employee dies after the annuity starting date but before the required beginning date determined under A2 of Sec. 1.401(a)(9)2, after the employee's death, the remaining portion of the employee's interest must continue to be distributed in accordance with this section over the remaining period over which distributions commenced. The rules in Sec. 1.401(a)(9)3 and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply. (b) Period certain. If, as of the employee's birthday in the year that contains the annuity starting date, the age of the employee is under 70, the following rule applies in applying the rule in paragraph (a) of A3 of this section. The applicable distribution period for the employee is the distribution period for age 70, determined in accordance with the Uniform Lifetime Table in A2 of Sec. 1.401(a)(9) 9, plus the excess of 70 over the age of the employee as of the employee's birthday in the year that contains the annuity starting date.
(c) Adjustment to employee/beneficiary age difference. See A 2(c)(1) of this section for the determination of the adjusted employee/ beneficiary age difference in the case of an employee whose age on the annuity starting date is less than 70.

Q11. What rule applies if distributions commence to the surviving spouse of an employee over a period permitted under section 401(a)(9)(B)(iii)(II) before the date on which distributions are required to commence and the distribution form is an annuity under which distributions are made as of the date distributions commence in accordance with the provisions of A1 of this section.

A11.If distributions commence to the surviving spouse of an employee over a period permitted under section 401(a)(9)(B)(iii)(II) before the date on which distributions are required to commence and the distribution form is an annuity under which distributions are made as of the date distributions commence in accordance with the provisions of A1 of this section, distributions will be considered to have begun on the actual commencement date for purposes of section
401(a)(9)(B)(iv)(II). Consequently, in such case, A5 of Sec. 1.401(a)(9)3 and section 401(a)(9)(B)(ii) and (iii) will not apply upon the death of the surviving spouse as though the surviving spouse were the employee. Instead, the annuity distributions must continue to be made, in accordance with the provisions of A1 of this section, over the remaining period over which distributions commenced.

Q12. In the case of an annuity contract under an individual account plan that has not yet been annuitized, how is section 401(a)(9) satisfied with respect to the employee's or beneficiary's entire interest under the annuity contract for the period prior to the date annuity payments so commence?

A12. (a) General rule. Prior to the date that an annuity contract under an individual account plan is annuitized, the interest of an employee or beneficiary under that contract is treated as an individual account for purposes of section 401(a)(9). Thus, the required minimum distribution for any year with respect to that interest is determined under Sec. 1.401(a)(9)5 rather than this section. See A1 of Sec. 1.401(a)(9)5 for rules relating to the satisfaction of section 401(a)(9) in the year that annuity payments commence and A2(a)(3) of Sec. 1.401(a)(9)8.
(b) Entire interest. For purposes of applying the rules in Sec. 1.401(a)(9)5, the entire interest under the annuity contract as of December 31 of the relevant valuation calendar year is treated as the account balance for the valuation calendar year described in A3 of Sec. 1.401(a)(9)5. The entire interest under an annuity contract is the dollar amount credited to the employee or beneficiary under the contract plus the actuarial present value of any additional benefits (such as survivor benefits in excess of the dollar amount credited to the employee or beneficiary) that will be provided under the contract. However, paragraph (c) of this A12 describes certain additional benefits that may be disregarded in determining the employee's entire interest under the annuity contract. The actuarial present value of any additional benefits described under this A12 is to be determined using reasonable actuarial assumptions, including reasonable assumptions as to future distributions, and without regard to an individual's health. (c) Exclusions. (1) The actuarial present value of any additional benefits provided under an annuity contract described in paragraph (b) of this A12 may be disregarded if the sum of the dollar amount credited to the employee or beneficiary under the contract and the actuarial present value of the additional benefits is no more than 120 percent of the dollar amount credited to the employee or beneficiary under the
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contract and the contract provides only for the following additional benefits:
(i) Additional benefits that, in the case of a distribution, are reduced by an amount sufficient to ensure that the ratio of such sum to the dollar amount credited does not increase as a result of the distribution, and
(ii) An additional benefit that is the right to receive a final payment upon death that does not exceed the excess of the premiums paid less the amount of prior distributions.
(2) If the only additional benefit provided under the contract is the additional benefit described in paragraph (c)(1)(ii) of this A14, the additional benefit may be disregarded regardless of its value in relation to the dollar amount credited to the employee or beneficiary under the contract.
(3) The Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) may provide additional guidance on additional benefits that may be disregarded.
(d) Examples. The following examples, which use a 5 percent interest rate and the Mortality Table provided in Rev. Rul. 200162 (20012 C.B. 632), illustrate the application of the rules in this A 12:

Example 1. (i) G is the owner of a variable annuity contract (Contract S) under an individual account plan which has not been annuitized. Contract S provides a death benefit until the end of the calendar year in which the owner attains the age of 84 equal to the greater of the current Contract S notional account value (dollar amount credited to G under the contract) and the largest notional account value at any previous policy anniversary reduced
proportionally for subsequent partial distributions (High Water Mark). Contract S provides a death benefit in calendar years after the calendar year in which the owner attains age 84 equal to the current notional account value. Contract S provides that assets within the contract may be invested in a Fixed Account at a guaranteed rate of 2 percent. Contract S provides no other additional benefits.
(ii) At the end of 2008, when G has an attained age of 78 and 9 months the notional account value of Contract S (after the distribution for 2008 of 4.93% of the notional account value as of December 31, 2007) is $550,000, and the High Water Mark, before adjustment for any withdrawals from Contract S in 2008 is
$1,000,000. Thus, Contract S will provide additional benefits (i.e. the death benefits in excess of the notional account value) through 2014, the year S turns 84. The actuarial present value of these additional benefits at the end of 2008 is determined to be $84,300 (15 percent of the notional account value). In making this determination, the following assumptions are made: on the average, deaths occur midyear; the investment return on his notional account value is 2 percent per annum; and minimum required distributions (determined without regard to additional benefits under the Contract S) are made at the end of each year. The following table summarizes the actuarial methodology used in determining the actuarial present value of the additional benefit.
Endofyear Endofyear Death benefit notional Average Withdrawal at notional Year during year account before notional end of year account after withdrawal account withdrawal 2008............................ $1,000,000 .............. .............. .............. $550,000 2009............................ \1\ 950,739 \2\ $561,000 \3\ $555,500 \4\ $28,205 532,795 2010............................ 901,983 543,451 538,123 28,492 514,959 2011............................ 853,749 525,258 520,109 28,769 496,490 2012............................ 806,053 506,419 501,454 29,034 477,385 2013............................ 758,916 486,933 482,159 29,287 457,645 2014............................ 712,356 466,798 462,222 29,525 437,273 \1\ $1,000,000 death benefit reduced 4.93 percent for withdrawal during 2008. \2\ Notional account value at end of prior year (after dist

FOR FURTHER INFORMATION CONTACT Cathy Vohs at (202) 622-6090.