Check the plan for a definite benefit formula that is not subject to the employer's discretion.

Determine whether actuarial assumptions used to determine plan benefits are specified in the plan in a manner that precludes employer discretion. Check the plan for either specific language as to the interest rate and mortality assumptions to be used to determine the accrued benefit or objective standards that will be used to determine benefits, such as a table of factors.

When determining an optional form of benefit, the requirements of IRC 417(e) and 415 may sometimes override the plan's definition of actuarial equivalence. Thus, it is crucial in these cases to know which form of benefit is the basis for the amount of the single-sum distribution. It is important for the plan to specify which form of benefit is being used when the plan offers optional forms of benefits that are subsidized.

The following is an example:
 
The normal retirement benefit under Plan A, a defined benefit plan, is a straight life annuity that begins when the participant reaches normal retirement age (which is 65). Plan A also provides for an early retirement benefit payable as a straight-life annuity beginning at or after age 55. Participants who elect early retirement have the option of receiving the benefit as a single-sum distribution. Plan A specifies the actuarial assumptions used for this calculation in a manner that precludes employer discretion.
 
From the description just given, it is unclear whether the amount of the single-sum distribution will be based on the normal retirement benefit or the early retirement benefit. Unless it contains language that removes this uncertainty, Plan A might fail the requirement that benefits be definitely determinable. This could occur for a number of reasons. One obvious reason would be if the early-retirement benefit is provided on a subsidized basis relative to the normal retirement benefit. Even if the plan calls for a reduction in the annual benefit amount on account of the early retirement, the reduction factors used by the plan might not be consistent with the actuarial assumptions used to calculate the amount of the single-sum distribution. A third reason might exist if the operation of IRC 415 causes the early-retirement benefit to be an amount lower than would otherwise have been provided under the plan.

Pursuant to IRC 417(e)(3)(A)(ii)(II), the applicable interest rate is the annual rate of interest on thirty-year Treasury securities for the month before the date of distribution. However, this same Code section gives the Secretary of the Treasury the authority to prescribe or permit the use of rates for other months. This authority was exercised in amendments to Reg. 1.417(e)-1(d)(3), issued on March 30, 1998.

As amended, the regulation introduces two notions: a stability period and a lookback month. The stability period defines the length of time during which the plan will use the same interest rate for determining the value of single-sum distributions. The lookback month defines the month (or months) which are used to determine that interest rate. Although plan designers have a choice as to the many combinations of available stability periods and lookback months, the particular method used by the plan must be applied uniformly to all participants in the plan.

The rules for determining the applicable interest rate are described in this guidance. Reg. 1.417(e)-1(d)(4)(v) provides the Commissioner with the ability to prescribe additional rules for determining the applicable interest rate. As of this writing, no additional rules have been prescribed.

The stability period is the length of time during which the plan will use the same interest rate for determining the value of single-sum distributions. In other words, all single-sum distributions which have annuity starting dates that occur within the stability period will have the same applicable interest rate for purposes of IRC 417(e)(3).

The stability period must be specified in the plan document. It may be either one month, one quarter, or one year. If the stability period is either a quarter or a year, the period can be either a calendar period or a plan period. If the stability period is a month, then a calendar month must be used. See Reg. 1.417(e)-1(d)(4)(ii).

For example, if a plan year begins on January 15 and ends on the subsequent February 14, the following stability periods are permissible with respect to a distribution for which the annuity starting date is in February of Year Z:

The lookback month defines the month that is used to determine the applicable interest rate. It must be specified in the plan document. The lookback month is either the first, second, third, fourth or fifth full calendar month preceding the stability period. See Reg. 1.417(e)-1(d)(4)(iii).

Reg. 1.417(e)-1(d)(4)(iv) permits the use of an average interest rate as the applicable interest rate. This average rate must be determined as the average of the individual annual rates of interest on thirty-year Treasury securities for two or more months. These months must be consecutive and each such month must be one which would itself be an eligible lookback month. All of these details must be specified in the plan document, including the manner by which the average will be calculated.

Shortly after the start of each month, the Service publishes a Notice that states the annual rate of interest on thirty-year Treasury securities for the month just ended. These rates are the thirty-year Treasury constant maturity rates published by the Federal Reserve Board.

As of this writing, all such rates (going back to 1977) can be obtained on the Internet at www.federalreserve.gov . Once at this Web site, use the following steps:

IRC 417(e)(3)(A)(ii) defines the applicable mortality table as a table based on the mortality table used by life insurance companies under IRC 807(d)(5)(A) for reserves under newly-issued group-annuity contracts. When RPA 94 became effective, the applicable mortality table was the 1983 Group Annuity Mortality Table. As of this writing, the table is (until further notice) the 1994 Group Annuity Reserve Table. Both of these tables were constructed and published by the Society of Actuaries.

IRC 417(e)(3)(A)(ii) requires only that the applicable mortality table be "based on" the table used under the life-insurance Code section. Citing the 1983 decision by the U.S. Supreme Court in Arizona v. Norris (concerning the appropriateness of gender-distinct actuarial factors), the Service has opted to construct its own unisex table "based on" the gender-distinct tables published by the Society of Actuaries. The table based on the 1983 Group Annuity Mortality Table was published in Rev. Rul. 95-6 (1995-1 C.B. 80). The table based on the 1994 Group Annuity Reserve Table was published in Rev. Rul. 2001-62 (2001-53 IRB 632).

The use of the table in Rev. Rul. 95-6 became required as of the same date that the provisions of RPA 94 became effective with respect to the plan. See the section below entitled "Effective Dates and Transition Rules" for specific information.

The use of the table in Rev. Rul. 2001-62 is required for distributions with annuity starting dates on or after the94 GAR effective date. The "94 GAR effective date" is December 31, 2002. A plan may specify an earlier "94 GAR effective date" , but this earlier date must be within calendar year 2002. The plan must be ameded to reflect the use of the new mortality table and the amendment must be made no later than the last day of the plan year containing the "94 GAR effective date" . For a plan whose plan year is the calendar year, this implies that the plan must be amended no later than December 31, 2002, regardless of the date in calendar year 2002 that is chosen as the "94 GAR effective date" . On the other hand, a plan whose plan year is other than the calendar year will need to be amended no later than a date that depends on the plan's "94 GAR effective date" . As an example, consider a plan whose plan year runs from July 1 to the following June 30. If the "94 GAR effective date" for this plan is chosen to be June 30, 2002 (or any prior date in calendar year 2002), the plan must be amended no later than June 30, 2002. In contrast, if the "94 GAR effective date" for this plan is chosen to be July 1, 2002 (or any subsequent date in calendar year 2002), the plan must be amended no later than June 30, 2003.

IRC 417(e)(3) and its underlying regulation prescribe rules for determining the minimum amount (subject to the requirements of IRC 415 and IRC 411(c)) that may be received by a participant as a single-sum distribution. (See section 10.1(2) of this guidance for examples of distributions for which these rules do not apply.) Nothing in the statute or regulation prevents a plan from specifying actuarial factors for single-sum distributions that are more generous than those required by the statute (provided, of course, that the requirements of IRC 415 are satisfied).

Generally, if a plan specifies an actuarial basis for calculating the value of a single-sum distribution that is different than the basis prescribed under IRC 417(e)(3), then the plan must further provide that the amounts paid to the participant will not be less than the amounts calculated in conformance with IRC 417(e)(3). This requirement generally implies that the plan must specify an applicable interest rate and an applicable mortality table per IRC 417(e)(3), even if the plan provides for the use of other actuarial factors. This requirement also generally implies that the value of a participant's distribution must be calculated using the specified applicable interest rate and applicable mortality table, even if only for the tentative purpose of verifying that the plan's actuarial factors produce a greater distribution.

The actuarial factors (i.e., interest rate and mortality table) used by the plan. Often, these factors are located either in the definitional section of the plan (under "Actuarial Equivalence" or "Present Value" ), or in the section of the plan that addresses accrued benefits or distributions. If no rates or standards are specified by the plan, the plan is not qualified. See section 4.72.10.2 of this guidance ( "Definitely Determinable Benefits" ).
 
 
If the factors described in the previous paragraph do not comply with the requirements of IRC 417(e), then it is necessary to determine the plan's procedure for choosing the applicable interest rate and the applicable mortality table. See sections 4.72.10.3 and 4.72.10.4 of this guidance.
 
Some plans use two interest rates, one for the post-retirement period and one for the pre-retirement period. However, this is never the case for the applicable interest rate used under IRC 417(e).
 
Some plans specify that the mortality table is to be used only for the participant's post-retirement period, and not the pre-retirement period. This can also be the case for the applicable mortality table under IRC 417(e). If there is any question as to whether a pre-retirement mortality assumption should be used, contact the Area Actuary (or other actuarial contact) for your area.

The form of benefit upon which the single-sum distribution will be based. Usually (but not always), this will be the normal form of benefit under the plan. In addition, it is necessary to know the age at which the benefit is presumed payable.
 
For example, if a participant is to receive a single-sum distribution at an age earlier than the plan's normal retirement age, there might be a question as to whether the amount of the distribution is based on an annuity beginning immediately at the participant's attained age, or a deferred annuity that would not have begun until the participant reached the plan's normal retirement age.

The annuity starting date for the distribution

The participant's attained age as of the annuity starting date (and, if appropriate, the attained age of the spouse)

The accrued benefit in the form of benefit that will be used as the basis of the single-sum distribution. This accrued benefit should reflect the terms of the plan, as well as the requirements of IRC 415 and IRC 411(c). Of course, it will also reflect the appropriate details of the participant's employment history.

Because the applicable mortality table under IRC 417(e) is a unisex table, the participant's gender is not needed for calculating the minimum amount of the distribution or 417(e). However, if the plan uses alternative actuarial factors, the participant's gender might be needed for these alternative calculations.

For each single-sum distribution that was made during the years being examined, assemble all of the information described in sections 4.72.10.4.1 and 4.72.10.4.2.

Determine whether the amounts of the single-sum distribution were at least as great as the amounts required by IRC 417(e). If the plan provides for the use of alternative factors that result in a single-sum distribution that is greater than the minimum amount required under IRC 417(e), check that the participant was paid the correct greater amount.

Because the applicable interest rate is a percentage that is expressed in basis points (i.e., a percentage with two decimal places), it is not feasible to maintain a collection of actuarial factors for each different interest rate. As a practical matter, performing the required calculations requires the use of a computer, along with spreadsheets or other types of software that have been designed for making these calculations. If you do not have access to such software, contact the Area Actuary (or other actuarial contact) for your area.

Section 767(d)(2) of RPA 94 provides that no violation of IRC 411(d)(6) will occur merely because a plan is amended to use the applicable interest rate and applicable mortality table required by IRC 417(e)(3), even if such an amendment serves to reduce the value of a participant's accrued benefit payable as a single-sum distribution. In accordance with this provision, Reg. 1.417(e)-1(d)(10) provides various forms of relief from the anti-cutback rules of IRC 411(d)(6).
 
At various points, the regulation refers to interest rates that are "based on" the interest rates used by the Pension Benefit Guaranty Corporation ( "PBGC" ). An interest rate is "based on" the PBGC rate if it (i) is equal to a specified percentage of the PBGC rate, (ii) is defined to differ from the PBGC rate by a specified number of basis points (a basis point is 0.01%), or (iii) is equal to the average of any rates defined under items (i) and (ii) over a specified period. See Reg. 1.417(e)-1(d)(10)(vi)(B).

The numbering of the following items parallels the numbering of the paragraphs under Reg. 1.417(e)-1(d)(10). For example, item (3) below corresponds to Reg. 1.417(e)-1(d)(10)(iii).

Determine if a plan amendment eliminates any optional forms of benefit, such as a single-sum distribution option.

Check whether actuarial assumptions used to compute accrued benefits have been amended. If yes, determine whether the amendment complies with IRC 411(d)(6). In general, an increase in the interest rate will result in a decrease in the amount of the present value, thereby resulting in a reduction in the accrued benefit in violation of IRC 411(d)(6). Also, based upon the effective date of and date of adoption of amendments changing the actuarial assumptions, determine if the amendment satisfies IRC 411(d)(6). Two permissible approaches to satisfying IRC 411(d)(6) in such situations are described in Rev. Rul. 81-12. See section 4.72.10.6.1(2) of this guidance for a discussion of this revenue ruling.