IRS Notice 2017-44 Provides Model Amendments to a Defined Benefit Plan Document to Add Bifurcated Benefit Distribution Options

Practical Law Legal Update w-009-9510 (Approx. 6 pages)

IRS Notice 2017-44 Provides Model Amendments to a Defined Benefit Plan Document to Add Bifurcated Benefit Distribution Options

by Practical Law Employee Benefits & Executive Compensation

Background

In September 2016, the IRS amended the regulations under Code Section 417(e) (26 U.S.C. § 417(e)) to permit defined benefit plans to simplify the calculation of the amount of certain optional forms of benefits. These changes were intended to encourage plan sponsors that include single sum distribution options to offer participants the option to bifurcate their benefits so that they could receive a portion in annuity form and a portion in a lump sum. (To learn more about lump sum distributions from defined benefit plans, see Practice Note, Defined Benefit Plans: Lump Sum Windows.)

Treasury Regulation Sections 1.417(e)-1(d)(7)(ii)(A) and (B) (26 C.F.R. § 1.417(e)-1(d)(7)(ii)(A) and (B)) provide two acceptable bifurcation methods that a plan sponsor may include in the plan:

Under the explicit bifurcation method:
- a plan permits a participant to elect to divide her accrued benefit into two or more portions; and
- the minimum present value rules of Code Section 417(e)(3) are applied separately to each portion of the accrued benefit as if it were the participant's entire benefit.
Under the implicit bifurcation method, a plan permits a participant to elect the payment of a single-sum amount if the remaining portion of the participant's accrued benefit is no less than the total accrued benefit reduced by the actuarial equivalent of the single sum.

Each method allows the plan to compute the amount to be paid to a participant who elects to receive her accrued benefit in an optional form of payment consisting partially of an annuity and partially of a more accelerated form of payment.

Furthermore, Treasury Regulation Section 1.417(e)-1(d)(7)(iv) (26 C.F.R. § 1.417(e)-1(d)(7)(iv)) provides relief from the anti-cutback rule for a plan amendment that implements a bifurcated distribution option. This relief generally applies if the amendment is made on or before December 31, 2017.

Notice 2017-44

The Appendix to Notice 2017-44 includes model amendments that may be added to a qualified defined benefit plan to offer bifurcated distribution options determined under either the explicit bifurcation method or the implicit bifurcation method described in Treasury Regulation Section 1.417(e)-1(d)(7) (26 C.F.R. § 1.417(e)-1(d)(7)).

Explicit Bifurcation Required in Particular Circumstances

The explicit bifurcation method must be used if:

The optional form of benefit is eliminated through bifurcation and is calculated as of the applicable amendment date, in accordance with Code Section 411(d)(6).
The plan permits participants to receive their entire benefit in a single lump sum distribution, and the plan is bifurcating the distribution so that only a portion of the benefit is paid at a particular time.

(Treasury Regulation Section 1.417(e)-1(d)(7)(iii)(C) (26 C.F.R. § 1.417(e)-1(d)(7)(iii)(C).) Implicit bifurcation may not be used in these circumstances.

Adoption of Model Amendments: Favorable Treatment

Notice 2017-44 provides that a defined benefit plan that adopts a plan amendment incorporating the language in either of the model amendments:

Will not violate the requirements of Code Section 417(e) (26 U.S.C. § 417(e)) and Treasury Regulation Section 1.417(e)-1(d)(7) (26 C.F.R. § 1.417(e)-1(d)(7)).
If the plan adopts the amendment on or before December 31, 2017, the plan is eligible for the limited relief from the application of the anti-cutback provisions of Code Section 411(d)(6) (26 U.S.C. § 411(d)(6)) provided under Treasury Regulation Section 1.417(e)-1(d)(7)(iv) (26 C.F.R. § 1.417(e)-1(d)(7)(iv)). There are special rules regarding Code Section 411(d)(6) relief for plan amendments made in accordance with prior IRS guidance relating to the Retirement Protection Act of 1994.

In the case of a pre-approved plan, if one of the model amendments is adopted by an adopting employer rather than by the plan sponsor, practitioner, or provider, the adoption of the amendment will not cause the plan to fail to be identical to the pre-approved plan (see Section 8.03(2) of Rev. Proc. 2017-41 and Section 19.03(4)(c) of Rev. Proc. 2015-36).

Conditions for Favorable Treatment

The favorable treatment provided in Notice 2017-44 will apply only if the following conditions are satisfied:

The terms of the model amendment are not modified, except as otherwise permitted by the Notice (see Permissible Modifications to the Model Amendments).
The plan operates in accordance with the amendment from and after the effective date of the amendment.
As required by Treasury Regulation Section 1.417(e)-1(d)(7)(iii)(D) (26 C.F.R. § 1.417(e)-1(d)(7)(iii)(D)), if a plan has an early retirement benefit, a retirement-type subsidy, an optional form of benefit, or an ancillary benefit that applies only to a portion of a participant's accrued benefit, and the plan provides for a partial distribution of the participant's accrued benefit, the plan must specify the portion of the participant's total accrued benefit that is paid by that partial distribution. A plan may modify the language of a model amendment to satisfy this condition (see Permissible Modifications to the Model Amendments).

Permissible Modifications to the Model Amendments

Plans may modify the language of the model amendment to conform it to the plan's terminology or organization, or to satisfy the condition required by Treasury Regulation Section 1.417(e)-1(d)(7)(iii)(D) (26 C.F.R. § 1.417(e)-1(d)(7)(iii)(D)), if the modification does not alter the meaning of the provisions of the model amendment.

For pre-approved plans, some portions of the model amendment may be included in the basic plan document or the adoption agreement, as appropriate.

The model amendments in Notice 2017-44 provide for the payment of the minimum amounts required to be paid in order to comply with the rules of Treasury Regulation Section 1.417(e)-1(d)(7) (26 C.F.R. § 1.417(e)-1(d)(7)). A plan may provide for amounts that exceed the minimum amounts required to be paid under Treasury Regulation Section 1.417(e)-1(d)(7), but the favorable treatment provided under Notice 2017-44 (see Adoption of Model Amendments: Favorable Treatment) does not apply to a plan amendment that differs from the model language in order to provide greater amounts.

Limits on Bifurcation

Plan sponsors may:

Limit the extent to which a participant's accrued benefit may be bifurcated
Specify the number of forms of distribution among which an accrued benefit may be bifurcated.
Limit the combination of forms of distribution available for bifurcation.

Notice 2017-44 provides examples of acceptable ways a plan may limit bifurcation of a participant's accrued benefit.

Practical Implications

Defined benefit plan sponsors should review the benefit bifurcation rules and determine whether they intend to bifurcate plan benefits and, if so, whether implicit or explicit bifurcation should be used, bearing in mind that explicit bifurcation must be used in certain circumstances. Plan sponsors must properly amend their plans by December 31, 2017 and administer them in accordance with the plan amendment to get relief under Code Section 411(d)(6). Plans that use prototype documents should confer with the prototype plan sponsor to determine how plan amendments will be handled (that is, via the basic plan document or an adoption agreement).

For more information on defined benefit plans, see:

IRS Notice 2017-44 Provides Model Amendments to a Defined Benefit Plan Document to Add Bifurcated Benefit Distribution Options | Practical Law