\[4830-01-P\]

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

\[TD 9130\]

RIN 1545-BA60

Required Distributions from Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Final regulations

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 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.

DATES: [Effective Date]{.underline}: These regulations are effective
June 15, 2004.

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

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

SUPPLEMENTARY INFORMATION:

**Background**

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 5-percent owners and IRA owners) as April 1 of the calendar
year following the later of the calendar year in which the employee
attains age 702 or the calendar year in which the employee retires. For
5-percent 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 702, 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]{.underline} 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 702 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)
(EE-113-82). Those proposed regulations were amended in 1997 (62 FR
67780) (REG-209463-82) 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)
(REG-130477-00/REG-130481-00)). 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)
(REG-108697-02)). 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 \'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 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 A-1 of \'1.401(a)(9)-6T. Commentators also requested additional
guidance in applying the rule in A-12 of \'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 2003-2 (2003-1 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 2003-2 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 2003-2 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 A-2 of \'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]{.underline} 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 70½; 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 70½.
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 cost-of-living increases)

These final regulations clarify that a plan may provide an annual
increase that does not exceed the increase in an eligible cost-of-living
index for a 12-month period ending in the year during which the increase
occurs or the prior year. An eligible cost-of-living 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 cost-of-living
increases, or may provide for less frequent cost-of-living increases
that are 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 cost-of-living increase
in some years, the plan may allow an unused portion of the
cost-of-living 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 cost-of-living 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 fixed-rate 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 better-than-assumed 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]{.underline}

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 \'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]{.underline}

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 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 pro-rata 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]{.underline}

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 pop-up 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]{.underline}

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, post-death
investment experience must be shared on a pro-rata 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 2003-2 to allow
plans to continue to use certain provisions from the pre-existing
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 90^th^ 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 **[\[ENTER DATE
OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER\],]{.underline}** if such 90^th^ 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
\'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
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 1\--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing
the entry for "§1.401(a)(9)-6T" and adding an entry in numerical order
to read, in part, as follows:

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

\'1.401(a)(9)-6 is also issued under 26 U.S.C. 401(a)(9). \* \* \*

Par. 2. Remove "\'1.401(a)(9)-6T" and replace it with \'1.401(a)(9)-6
each time it is used in the sections listed below:

§1.401(9)-0

§1.401(a)(9)-1 A-2(b)

§1.401(a)(9)-2 A-1(c)

§1.401(a)(9)-2 A-5

§1.401(a)(9)-2 A-6(a)

§1.401(a)(9)-3 A-1(a)

§1.401(a)(9)-3 A-1(b)

§1.401(a)(9)-3 A-6

§1.401(a)(9)-4 A-4(a)

§1.401(a)(9)-5 A-1(e)

§1.401(a)(9)-8 A-2(a)(3)

§1.401(a)(9)-8 A-6(b)(2)

§1.401(a)(9)-8 A-7

§1.401(a)(9)-8 A-8

§1.403(b)-3 A-1(c)(3)

§1.408-8 A-1(a)

§1.408-8 A-1(b)

§54.4974-2 A-3(a)

§54.4974-2 A-4(b)(2)(i)

Par. 3. Section 1.401(a)(9)-6 is added to read as follows as follows:

[§1.401(a)(9)-6 Required minimum distributions for defined benefit plans
and annuity contracts]{.underline}.

Q‑1. How must distributions under a defined benefit plan be paid in
order to satisfy section 401(a)(9)?

A-1. (a) [General rules]{.underline}. 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 A-3 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 A-13 of this
section. Life (or joint and survivor) annuity payments must satisfy the
minimum distribution incidental benefit requirements of A-2 of this
section. Except as otherwise provided in this section (such as permitted
increases described in A-14 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]{.underline}. 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 A-1. 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]{.underline}. (1)
Annuity payments must commence on or before the employee's required
beginning date (within the meaning of A-2 of §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 A‑3(a) or (b)
(whichever is applicable) of §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]{.underline}. A defined benefit plan (Plan X) provides monthly
annuity payments of \$500 for the life of unmarried participants with a
10-year period certain. An unmarried, retired participant (A) in Plan X
attains age 70½ 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 10-year period
certain.

\(d\) [Single sum distributions]{.underline}. 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 A-1.

\(1\) 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]{.underline}. The rule in paragraph (a) of this
A-1, 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 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 A-1 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 §1.401-1(b)(1)(i).

\(f\) [Additional guidance]{.underline}. 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 §601.601(d)(2)(ii)(b) of this chapter.

Q-2. 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
§1.401-1(b)(1)(i)?

A-2. (a) [Life annuity for employee]{.underline}. 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]{.underline}. 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]{.underline}\--(1) [Explanation of rule]{.underline}. 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 A-2. 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]{.underline}.

Adjusted employee/beneficiary age difference Applicable 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]{.underline}. This paragraph (c) is illustrated by the
following example:

[Example]{.underline}. 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 A-10 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 A-2, the applicable percentage for a 25-year
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]{.underline}. 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 A-2 after the expiration
of the period certain.

\(e\) [Deemed satisfaction of incidental benefit rule]{.underline}.
Except in the case of distributions with respect to an employee\'s
benefit that include an ancillary death benefit described in paragraph
A-1(e) of this section, to the extent the incidental benefit requirement
of §1.401-1(b)(1)(i) requires a distribution, that requirement is deemed
to be satisfied if distributions satisfy the minimum distribution
incidental benefit requirement of this A-2. If the employee's benefits
include an ancillary death benefit described in paragraph A-1(e) of this
section, the benefits (including the ancillary death benefit) must be
distributed in accordance with the incidental benefit requirement
described in §1.401-1(b)(1)(i) and the benefits (excluding the ancillary
death benefit) must also satisfy the minimum distribution incidental
benefit requirement of this A-2.

Q-3. How long is a period certain under a defined benefit plan permitted
to extend?

A-3. (a) [Distributions commencing during the employee's
life]{.underline}. 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 A-2 of
§1.401(a)(9)-9) for the calendar year that contains the annuity starting
date. See A-10 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 A-1(b)
of this section.

\(b\) [Distributions commencing after the employee's death]{.underline}.
(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 A-5(b)
of §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.

Q-4. 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?

A-4. 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 A-14 of this section
permitting certain increases under annuity contracts.

Q‑5. 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)?

A-5. (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 A-1
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 A-5(a) of this section.

Q‑6. 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?

A-6. 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 A-5 of this section for the rules for distributing benefits which
accrue under a defined benefit plan after the employee\'s first
distribution calendar year.

Q-7. If an employee (other than a 5-percent owner) retires after the
calendar year in which the employee attains age 70½, for what period
must the employee\'s accrued benefit under a defined benefit plan be
actuarially increased?

A-7. (a) [Actuarial increase starting date]{.underline}. If an employee
(other than a 5-percent owner) retires after the calendar year in which
the employee attains age 70½, 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 70½ 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 70½, or January 1, 1997, if later.

\(b\) [Actuarial increase ending date]{.underline}. 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]{.underline}. If, as permitted under A-2(e) of
§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 70½ (regardless of whether the employee is a 5-percent 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]{.underline}. The
actuarial increase required under this A-7 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]{.underline}
means a plan maintained by a church for church employees, and the term
[church]{.underline} means any church (as defined in section
3121(w)(3)(A)) or qualified church-controlled organization (as defined
in section 3121(w)(3)(B)).

Q-8. What amount of actuarial increase is required under section
401(a)(9)(C)(iii)?

A-8. 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 A-7 of this section) must be no
less than: the 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 A-7 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.

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

A-9. 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 A-7 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).

Q-10. 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 A‑1 of this section?

A-10. (a) [General rule]{.underline}. 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 A‑1 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 §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
A-2 of §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 §1.401(a)(9)-3 and section
401(a)(9)(B)(ii) or (iii) and (iv) do not apply.

\(b\) [Period certain]{.underline}. 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 A-3 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 A-2 of §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]{.underline}.
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.

Q- 11. 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 A‑1 of this section.

A-11. 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 A‑1
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, A-5 of §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 A‑1 of this section, over the
remaining period over which distributions commenced.

Q-12. 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?

A-12. (a) [General rule]{.underline}. 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 §1.401(a)(9)-5 rather than this section. See A-1 of
§1.401(a)(9)-5 for rules relating to the satisfaction of section
401(a)(9) in the year that annuity payments commence and A-2(a)(3) of
§1.401(a)(9)-8.

\(b\) [Entire interest]{.underline}. For purposes of applying the rules
in §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 A-3 of
§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 A-12 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 A-12 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]{.underline}. (1) The actuarial present value of any
additional benefits provided under an annuity contract described in
paragraph (b) of this A-12 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 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 A-14, 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 §601.601(d)(2) of this
chapter) may provide additional guidance on additional benefits that may
be disregarded.

\(d\) [Examples]{.underline}. The following examples, which use a 5
percent interest rate and the Mortality Table provided in Rev. Rul.
2001-62 (2001-2 C.B. 632), illustrate the application of the rules in
this A-12:

[Example 1]{.underline}. (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 mid-year; 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.

Year Death End-of-Year Average Withdrawal End-of-Year

Benefit Notional Notional at Notional

During Account Account End of Year Account

> Year Before After

Withdrawal Withdrawal

2008 \$1,000,000 \$550,000

2009 \$ 950,739^1^ \$561,000^2^ \$555,500^3^ \$28,205^4^ \$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

Year Survivorship Interest Mortality Discounted

> to Start Discount Rate Additional

of Year to End During Benefits

> of 2008 Year Within Year

2008

2009 1.00000 .97590 .04426^5^ \$17,070

2010 .95574 .92943^6^ .04946 \$15,987^7^

2011. .90847^8^ .88517 .05519 \$14,807

2012. .85833 .84302 .06146 \$13,546

2013. .80558 .80288 .06788 \$12,150

2014. .75090 .76464 .07477 \$10,739

> \-\-\-\-\-\-\-\-\-\--
>
> \$84,300

1 \$1,000,000 death benefit reduced 4.93 percent for withdrawal during
2008.

2\. Notional account value at end of prior year (after distribution)
increased by 2 percent return for year.

3 Average of \$550,000 notional account value at end of prior year
(after distribution) and \$561,000 notional account value at end of
current year (before distribution).

4\. December 31, 2008 notional account (before distribution) divided by
uniform lifetime table age 79 factor of 19.5.

5 One-quarter age 78 rate plus three-quarters age 79 rate.

6 Five percent discounted 18 months (1.05\^(-1.5)).

7 Blended age 79/age 80 mortality rate (.04946) multiplied by the
\$363,860 excess of death benefit over the average notional account
value (901,983 less 538,123) multiplied by .95574 probability of
survivorship to the start of 2010 multiplied by 18 month interest
discount of .92943.

8 Survivorship to start of preceding year (.95574) multiplied by
probability of survivorship during prior year (1 - .04946).

\(iii\) Because Contract S provides that, in the case of a distribution,
the value of the additional death benefit (which is the only additional
benefit available under the contract) is reduced by an amount that is at
least proportional to the reduction in the notional account value and,
at age 78 and 9 months, the sum of the notional account value (dollar
amount credited to the employee under the contract) and the actuarial
present value of the additional death benefit is no more than 120
percent of the notional account value, the exclusion under paragraph
(c)(2) of this A-12 is applicable for 2009. Therefore, for purposes of
applying the rules in §1.401(a)(9)-5, the entire interest under Contract
S may be determined as the notional account value (i.e. without regard
to the additional death benefit).

[Example 2]{.underline}. (i) The facts are the same as in [Example
1]{.underline} except that the notional account value is \$450,000 at
the end of 2008. In this instance, the actuarial present value of the
death benefit in excess of the notional account value in 2008 is
determined to be \$108,669 (24 percent of the notional account value).
The following table summarizes the actuarial methodology used in
determining the actuarial present value of the additional benefit.

Year Death End-of-Year Average Withdrawal End-of-Year

Benefit Notional Notional at Notional

During Account Account End of Year Account

> Year Before After

Withdrawal Withdrawal

2008 \$1,000,000 \$450,000

2009 \$ 950,739 \$459,000 \$454,500 \$23,077 \$435,923

2010 \$ 901,983 \$444,642 \$440,282 \$23,311 \$421,330

2011 \$ 853,749 \$429,757 \$425,543 \$23,538 \$406,219

2012 \$ 806,053 \$414,343 \$410,281 \$23,755 \$390,588

2013 \$ 758,916 \$398,399 \$394,494 \$23,962 \$374,437

2014 \$ 712,356 \$381,926 \$378,181 \$24,157 \$357,768

> Survivorship Interest Mortality Discounted
>
> to Start Discount Rate Additional

Year of year to end During Benefits

> of 2008 Year Within Year

2008

2009 1.00000 .97590 .04426 \$21,432

2010 .95574 .92943 .04946 \$20,286

2011 .90847 .88517 .05519 \$19,004

2012 .85833 .84302 .06146 \$17,601

2013 .80558 .80288 .06788 \$15,999

2014 .75090 .76464 .07477 \$14,347

> \-\-\-\-\-\-\-\-\-\--
>
> \$108,669

\(ii\) Because the sum of the notional account balance and the actuarial
present value of the additional death benefit is more than 120 percent
of the notional account value, the exclusion under paragraph (b)(1) of
this A-12 does not apply for 2009. Therefore, for purposes of applying
the rules in §1.401(a)(9)-5, the entire interest under Contract S must
include the actuarial present value of the additional death benefit.

Q-13: When can an annuity payment period be changed?

A-13. (a) [In general]{.underline}. An annuity payment period may be
changed in accordance with the provisions set forth in paragraph (b) of
this A-13 or in association with an annuity payment increase described
in A-14 of this section.

\(b\) [Reannuitization]{.underline}. If, in a stream of annuity payments
that otherwise satisfies section 401(a)(9), the annuity payment period
is changed and the annuity payments are modified in association with
that change, this modification will not cause the distributions to fail
to satisfy section 401(a)(9) provided the conditions set forth in
paragraph (c) of this A-13 are satisfied, and either \--

\(1\) The modification occurs at the time that the employee retires or
in connection with a plan termination;

\(2\) The annuity payments prior to modification are annuity payments
paid over a period certain without life contingencies; or

\(3\) The annuity payments after modification are paid under a qualified
joint and survivor annuity over the joint lives of the employee and a
designated beneficiary, the employee's spouse is the sole designated
beneficiary, and the modification occurs in connection with the employee
becoming married to such spouse.

\(c\) [Conditions]{.underline}. In order to modify a stream of annuity
payments in accordance with paragraph (b) of this A-13, the following
conditions must be satisfied \--

\(1\) The future payments under the modified stream satisfy section
401(a)(9) and this section (determined by treating the date of the
change as a new annuity starting date and the actuarial present value of
the remaining payments prior to modification as the entire interest of
the participant);

\(2\) For purposes of sections 415 and 417, the modification is treated
as a new annuity starting date;

\(3\) After taking into account the modification, the annuity stream
satisfies section 415 (determined at the original annuity starting date,
using the interest rates and mortality tables applicable to such date);
and

\(4\) The end point of the period certain, if any, for any modified
payment period is not later than the end point available under section
401(a)(9) to the employee at the original annuity starting date.

\(d\) [Examples]{.underline}. For the following examples in this A-13,
assume that the Applicable Interest Rate throughout the period from 2005
through 2008 is 5 percent and throughout 2009 is 4 percent, the
Applicable Mortality Table throughout the period from 2005 to 2009 is
the table provided in Rev. Rul. 2001-62 (2001-C.B. 632) and the section
415 limit in 2005 at age 70 for a straight life annuity is \$255,344:

[Example 1]{.underline}. (i) A participant (D), who has 10 years of
participation in a frozen defined benefit plan (Plan W), attains age 70½
in 2005. D is not retired and elects to receive distributions from Plan
W in the form of a straight life (i.e. level payment) annuity with
annual payments of \$240,000 per year beginning in 2005 at a date when D
has an attained age of 70. Plan W offers non-retired employees in pay
status the opportunity to modify their annuity payments due to an
associated change in the payment period at retirement. Plan W treats the
date of the change in payment period as a new annuity starting date for
the purposes of sections 415 and 417. Thus, for example, the plan
provides a new qualified and joint survivor annuity election and obtains
spousal consent.

\(ii\) Plan W determines modifications of annuity payment amounts at
retirement such that the present value of future new annuity payment
amounts (taking into account the new associated payment period) is
actuarially equivalent to the present value of future pre-modification
annuity payments (taking into account the pre-modification annuity
payment period). Actuarial equivalency for this purpose is determined
using the Applicable Interest Rate and the Applicable Mortality Table as
of the date of modification.

\(iii\) D retires in 2009 at the age of 74 and, after receiving four
annual payments of \$240,000, elects to receive his remaining
distributions from Plan W in the form of an immediate final lump sum
payment (calculated at 4 percent interest) of \$2,399,809.

\(iv\) Because payment of retirement benefits in the form of an
immediate final lump sum payment satisfies (in terms of form) section
401(a)(9), the condition under paragraph (c)(1) of this A-13 is met.

\(v\) Because Plan W treats a modification of an annuity payment stream
at retirement as a new annuity starting date for purposes of sections
415 and 417, the condition under paragraph (c)(2) of this A-13 is met.

\(vi\) After taking into account the modification, the annuity stream
determined as of the original annuity starting date consists of annual
payments beginning at age 70 of \$240,000, \$240,000, \$240,000,
\$240,000, and \$2,399,809. This benefit stream is actuarially
equivalent to a straight life annuity at age 70 of \$250,182, an amount
less than the section 415 limit determined at the original annuity
starting date, using the interest and mortality rates applicable to such
date. Thus, the condition under paragraph (c)(3) of this A-13 is met.

\(vii\) Thus, because a stream of annuity payments in the form of a
straight life annuity satisfies section 401(a)(9), and because each of
the conditions under paragraph (c) of this A-13 are satisfied, the
modification of annuity payments to D described in this example meets
the requirements under of this A-13.

[Example 2]{.underline}. The facts are the same as in [Example
1]{.underline} except that the straight life annuity payments are paid
at a rate of \$250,000 per year and after D retires the lump sum payment
at age 75 is \$2,499,801. Thus, after taking into account the
modification, the annuity stream determined as of the original annuity
starting date consists of annual payments beginning at age 70 of
\$250,000, \$250,000, \$250,000, \$250,000, and \$2,499,801. This
benefit stream is actuarially equivalent to a straight life annuity at
age 70 of \$260,606, an amount greater than the section 415 limit
determined at the original annuity starting date, using the interest and
mortality rates applicable to such date. Thus, the lump sum payment to D
fails to satisfy the condition under paragraph (c)(3) of this A-13.
Therefore, the lump sum payment to D fails to meet the requirements of
this A-13 and thus fails to satisfy the requirements of section
401(a)(9).

[Example 3]{.underline}. (i) A participant (E), who has 10 years of
participation in a frozen defined benefit plan (Plan X), attains age 70½
and retires in 2005 at a date when his attained age is 70. E elects to
receive annual distributions from Plan X in the form of a 27 year period
certain annuity (i.e., a 27 year annuity payment period without a life
contingency) paid at a rate of \$37,000 per year beginning in 2005 with
future payments increasing at a rate of 4 percent per year (i.e., the
2006 payment will be \$38,480, the 2007 payment will be \$40,019 and so
on). Plan X offers participants in pay status whose annuity payments are
in the form of a term-certain annuity the opportunity to modify their
payment period at any time and treats such modifications as a new
annuity starting date for the purposes of sections 415 and 417. Thus,
for example, the plan provides a new qualified and joint survivor
annuity election and obtains spousal consent

\(ii\) Plan X determines modifications of annuity payment amounts such
that the present value of future new annuity payment amounts (taking
into account the new associated payment period) is actuarially
equivalent to the present value of future pre-modification annuity
payments (taking into account the pre-modification annuity payment
period). Actuarial equivalency for this purpose is determined using 5
percent and the Applicable Mortality Table as of the date of
modification.

\(iii\) In 2008, E, after receiving annual payments of \$37,000,
\$38,480, and \$40,019, elects to receive his remaining distributions
from Plan W in the form of a straight life annuity paid with annual
payments of \$92,133 per year.

\(iv\) Because payment of retirement benefits in the form of a straight
life annuity satisfies (in terms of form) section 401(a)(9), the
condition under paragraph (c)(1) of this A-13 is met.

\(v\) Because Plan X treats a modification of an annuity payment stream
at retirement as a new annuity starting date for purposes of sections
415 and 417, the condition under paragraph (c)(2) of this A-13 is met.

\(vi\) After taking into account the modification, the annuity stream
determined as of the original annuity starting date consists of annual
payments beginning at age 70 of \$37,000, \$38,480, \$40,019, and a
straight life annuity beginning at age 73 of \$92,133. This benefit
stream is equivalent to a straight life annuity at age 70 of \$82,539,
an amount less than the section 415 limit determined at the original
annuity starting date, using the interest and mortality rates applicable
to such date. Thus, the condition under paragraph (c)(3) of this A-13 is
met.

\(vii\) Thus, because a stream of annuity payments in the form of a
straight life annuity satisfies section 401(a)(9), and because each of
the conditions under paragraph (c) of this A-13 are satisfied, the
modification of annuity payments to E described in this example meets
the requirements of this A-13.

Q-14. Are annuity payments permitted to increase?

A-14. (a) [General rules]{.underline}. Except as otherwise provided in
this section, all annuity payments (whether paid over an employee's
life, joint lives, or a period certain) must be nonincreasing or
increase only in accordance with one of more of the following \--

\(1\) With an annual percentage increase that does not exceed the
percentage increase in an eligible cost-of-living index as defined in
paragraph (b) of this A-14 for a 12-month period ending in the year
during which the increase occurs or the prior year;

\(2\) With a percentage increase that occurs at specified times (e.g.,
at specified ages) and does not exceed the cumulative total of annual
percentage increases in an eligible cost-of-living index as defined in
paragraph (b) of this A-14 since the annuity starting date, or if later,
the date of the most recent percentage increase. However, in cases
providing such a cumulative increase, an actuarial increase may not be
provided to reflect the fact that increases were not provided in the
interim years;

\(3\) To the extent of the reduction in the amount of the employee\'s
payments to provide for a survivor benefit, but only if there is no
longer a survivor benefit because the beneficiary whose life was being
used to determine the period described in section 401(a)(9)(A)(ii) over
which payments were being made dies or is no longer the employee's
beneficiary pursuant to a qualified domestic relations order within the
meaning of section 414(p);

\(4\) To pay increased benefits that result from a plan amendment;

\(5\) To allow a beneficiary to convert the survivor portion of a joint
and survivor annuity into a single sum distribution upon the employee's
death; or

\(6\) To the extent increases are permitted in accordance with paragraph
(c) or (d) of this A-14.

\(b\) (1) For purposes of this A-14, an eligible cost-of-living index
means an index described in paragraphs (b)(2), (b)(3), or (b)(4) of this
A-14.

\(2\) A consumer price index that is based on prices of all items (or
all items excluding food and energy) and issued by the Bureau of Labor
Statistics, including an index for a specific population (such as urban
consumers or urban wage earners and clerical workers) and an index for a
geographic area or areas (such as a given metropolitan area or state).

\(3\) A percentage adjustment based on a cost-of-living index described
in paragraph (b)(2) of this A-14, or a fixed percentage if less. In any
year when the cost-of-living index is lower than the fixed percentage,
the fixed percentage may be treated as an increase in an eligible
cost-of-living index, provided it does not exceed the sum of:

\(i\) The cost-of-living index for that year, and

\(ii\) The accumulated excess of the annual cost-of-living index from
each prior year over the fixed annual percentage used in that year
(reduced by any amount previously utilized under this paragraph
(b)(3)(ii)).

\(4\) A percentage adjustment based on the increase in compensation for
the position held by the employee at the time of retirement, and
provided under either the terms of a governmental plan within the
meaning of section 414(d) or under the terms of a nongovernmental plan
as in effect on April 17, 2002.

\(c\) [Additional permitted increases for annuity payments under annuity
contracts purchased from insurance companies]{.underline}. In the case
of annuity payments paid from an annuity contract purchased from an
insurance company, if the total future expected payments (determined in
accordance with paragraph (e)(3) of this A-14) exceed the total value
being annuitized (within the meaning of paragraph (e)(1) of this A-14) ,
the payments under the annuity will not fail to satisfy the
nonincreasing payment requirement in A-1(a) of this section merely
because the payments are increased in accordance with one or more of the
following\--

\(1\) By a constant percentage, applied not less frequently than
annually;

\(2\) To provide a final payment upon the death of the employee that
does not exceed the excess of the total value being annuitized (within
the meaning of paragraph (e)(1) of this A-14) over the total of payments
before the death of the employee;

\(3\) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this
A-14), but only if actuarial gain is measured no less frequently than
annually and the resulting dividend payments or other payments are
either paid no later than the year following the year for which the
actuarial experience is measured or paid in the same form as the payment
of the annuity over the remaining period of the annuity (beginning no
later than the year following the year for which the actuarial
experience is measured); and

\(4\) An acceleration of payments under the annuity (within the meaning
of paragraph (e)(4) of this A-14).

\(d\) [Additional permitted increases for annuity payments from a
qualified trust]{.underline}. In the case of annuity payments paid under
a defined benefit plan qualified under section 401(a) (other than
annuity payments under an annuity contract purchased from an insurance
company that satisfy paragraph (c) of this section), the payments under
the annuity will not fail to satisfy the nonincreasing payment
requirement in A-1(a) of this section merely because the payments are
increased in accordance with one of the following \--

\(1\) By a constant percentage, applied not less frequently than
annually, at a rate that is less than 5 percent per year;

\(2\) To provide a final payment upon the death of the employee that
does not exceed the excess of the actuarial present value of the
employee's accrued benefit (within the meaning of section 411(a)(7))
calculated as the annuity starting date using the applicable interest
rate and the applicable mortality table under section 417(e) (or, if
greater, the total amount of employee contributions) over the total of
payments before the death of the employee; or

\(3\) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this
A-14), but only if \--

> \(i\) Actuarial gain is measured no less frequently than annually;

\(ii\) The resulting dividend payments or other payments are either paid
no later than the year following the year for which the actuarial
experience is measured or paid in the same form as the payment of the
annuity over the remaining period of the annuity (beginning no later
than the year following the year for which the actuarial experience is
measured);

\(iii\) The actuarial gain taken into account is limited to actuarial
gain from investment experience;

\(iv\) The assumed interest used to calculate such actuarial gains is
not less than 3 percent; and

\(v\) The payments are not increasing by a constant percentage as
described in paragraph (d)(1) of this A-14.

\(e\) [Definitions]{.underline}. For purposes of this A-14, the
following definitions apply \--

\(1\) Total value being annuitized means \--

\(i\) In the case of annuity payments under a section 403(a) annuity
plan or under a deferred annuity purchased by a section 401(a) trust,
the value of the employee's entire interest (within the meaning of A-12
of this section) being annuitized (valued as of the date annuity
payments commence);

\(ii\) In the case of annuity payments under an immediate annuity
contract purchased by a trust for a defined benefit plan qualified under
section 401(a), the amount of the premium used to purchase the contract;
and

\(iii\) In the case of a defined contribution plan, the value of the
employee's account balance used to purchase an immediate annuity under
the contract.

\(2\) Actuarial gain means the difference between an amount determined
using the actuarial assumptions (i.e., investment return, mortality,
expense, and other similar assumptions) used to calculate the initial
payments before adjustment for any increases and the amount determined
under the actual experience with respect to those factors. Actuarial
gain also includes differences between the amount determined using
actuarial assumptions when an annuity was purchased or commenced and
such amount determined using actuarial assumptions used in calculating
payments at the time the actuarial gain is determined.

\(3\) Total future expected payments means the total future payments
expected to be made under the annuity contract as of the date of the
determination, calculated using the Single Life Table in A-1 of
§1.401(a)(9)-9 (or, if applicable, the Joint and Last Survivor Table in
A-3 of in §1.401(a)(9)-9) for annuitants who are still alive, without
regard to any increases in annuity payments after the date of
determination, and taking into account any remaining period certain.

\(4\) Acceleration of payments means a shortening of the payment period
with respect to an annuity or a full or partial commutation of the
future annuity payments. An increase in the payment amount will be
treated as an acceleration of payments in the annuity only if the total
future expected payments under the annuity (including the amount of any
payment made as a result of the acceleration) is decreased as a result
of the change in payment period.

\(f\) [Examples]{.underline}. Paragraph (c) of this A-14 is illustrated
by the following examples:

[Example 1. Variable annuity]{.underline}. A retired participant (Z1) in
defined contribution plan X attains age 70 on March 5, 2005, and thus,
attains age 70½ in 2005. Z1 elects to purchase annuity Contract Y1 from
Insurance Company W in 2005. Contract Y1 is a single life annuity
contract with a 10-year period certain. Contract Y1 provides for an
initial annual payment calculated with an assumed interest rate (AIR) of
3 percent. Subsequent payments are determined by multiplying the prior
year's payment by a fraction the numerator of which is 1 plus the actual
return on the separate account assets underlying Contract Y1 since the
preceding payment and the denominator of which is 1 plus the AIR during
that period. The value of Z1's account balance in Plan X at the time of
purchase is \$105,000, and the purchase price of Contract Y1 is
\$105,000. Contract Y1 provides Z1 with an initial payment of \$7,200 at
the time of purchase in 2005. The total future expected payments to Z1
under Contract Y1 are \$122,400, calculated as the initial payment of
\$7,200 multiplied by the age 70 life expectancy of 17 provided in the
Single Life Table in A-1 of \'1.401(a)(9)-9. Because the total future
expected payments on the purchase date exceed the total value used to
purchase Contract Y1 and payments may only increase as a result of
actuarial gain, with such increases, beginning no later than the next
year, paid in the same form as the payment of the annuity over the
remaining period of the annuity, distributions received by Z1 from
Contract Y1 meet the requirements under paragraph (c)(3) of this A-14.

[Example 2. Participating annuity]{.underline}. A retired participant
(Z2) in defined contribution plan X attains age 70 on May 1, 2005, and
thus, attains age 70½ in 2005. Z2 elects to purchase annuity Contract Y2
from Insurance Company W in 2005. Contract Y2 is a participating single
life annuity contract with a 10-year period certain. Contract Y2
provides for level annual payments with dividends paid in a lump sum in
the year after the year for which the actuarial experience is measured
or paid out levelly beginning in the year after the year for which the
actuarial gain is measured over the remaining lifetime and period
certain, i.e., the period certain ends at the same time as the original
period certain. Dividends are determined annually by the Board of
Directors of Company W based upon a comparison of actual actuarial
experience to expected actuarial experience in the past year. The value
of Z2's account balance in Plan X at the time of purchase is \$265,000,
and the purchase price of Contract Y2 is \$265,000. Contract Y2 provides
Z2 with an initial payment of \$16,000 in 2005. The total future
expected payments to Z2 under Contract Y2 are calculated as the annual
initial payment of \$16,000 multiplied by the age 70 life expectancy of
17 provided in the Single Life Table in A-1 of \'1.401(a)(9)-9 for a
total of \$272,000. Because the total future expected payments on the
purchase date exceeds the total value used to purchase Contract Y2 and
payments may only increase as a result of actuarial gain, with such
increases, beginning no later than the next year, paid in the same form
as the payment of the annuity over the remaining period of the annuity,
distributions received by Z2 from Contract Y2 meet the requirements
under paragraph (c)(3) of this A-14.

[Example 3. Participating annuity with dividend
accumulation]{.underline}. The facts are the same as in [Example
2]{.underline} except that the annuity provides a dividend accumulation
option under which Z2 may defer receipt of the dividends to a time
selected by Z2. Because the dividend accumulation option permits
dividends to be paid later than the end of the year following the year
for which the actuarial experience is measured or as a stream of
payments that only increase as a result of actuarial gain, with such
increases beginning no later than the next year, paid in the same form
as the payment of the annuity over the remaining period of the annuity
in [Example 2]{.underline}, the dividend accumulation option does not
meet the requirements of paragraph (c)(3) of this A-14. Neither does the
dividend accumulation option fit within any of the other increases
described in paragraph (c) of this A-14. Accordingly, the dividend
accumulation option causes the contract, and consequently any
distributions from the contract, to fail to meet the requirements of
this A-14 and thus fail to satisfy the requirements of section
401(a)(9).

[Example 4. Participating annuity with dividends used to purchase
additional death benefits]{.underline}. The facts are the same as in
[Example 2]{.underline} except that the annuity provides an option under
which actuarial gain under the contract is used to provide additional
death benefit protection for Z2. Because this option permits payments as
a result of actuarial gain to be paid later than the end of the year
following the year for which the actuarial experience is measured or as
a stream of payments that only increase as a result of actuarial gain,
with such increases beginning no later than the next year, paid in the
same form as the payment of the annuity over the remaining period of the
annuity in [Example 2]{.underline}, the option does not meet the
requirements of paragraph (c)(3) of this A-14. Neither does the option
fit within any of the other increases described in paragraph (c) of this
A-14. Accordingly, the addition of the option causes the contract, and
consequently any distributions from the contract, to fail to meet the
requirements of this A-14 and thus fail to satisfy the requirements of
section 401(a)(9).

[Example 5. Annuity with a fixed percentage increase]{.underline}. A
retired participant (Z3) in defined contribution plan X attains age 70½
in 2005. Z3 elects to purchase annuity contract Y3 from Insurance
Company W. Contract Y3 is a single life annuity contract with a 20-year
period certain (which does not exceed the maximum period certain
permitted under A-3(a) of this section) with fixed annual payments
increasing 3 percent each year. The value of Z3's account balance in
Plan X at the time of purchase is \$110,000, and the purchase price of
Contract Y3 is \$110,000. Contract Y3 provides Z3 with an initial
payment of \$6,000 at the time of purchase in 2005. The total future
expected payments to Z3 under Contract Y3 are \$120,000, calculated as
the initial annual payment of \$6,000 multiplied by the period certain
of 20 years. Because the total future expected payments on the purchase
date exceed the total value used to purchase Contract Y3 and payments
only increase as a constant percentage applied not less frequently than
annually, distributions received by Z3 from Contract Y3 meet the
requirements under paragraph (c)(1) of this A-14.

[Example 6. Annuity with excessive increases]{.underline}. The facts are
the same as in [Example 5]{.underline} except that the initial payment
is \$5,400 and the annual rate of increase is 4 percent. In this
example, the total future expected payments are \$108,000, calculated as
the initial payment of \$5,400 multiplied by the period certain of 20
years. Because the total future expected payments are less than the
total value of \$110,000 used to purchase Contract Y3, distributions
received by Z3 do not meet the requirements under paragraph (c) of this
A-14 and thus fail to meet the requirements of section 401(a)(9).

[Example 7. Annuity with full commutation feature.]{.underline} (i) A
retired participant (Z4) in defined contribution Plan X attains age 78
in 2005. Z4 elects to purchase Contract Y4 from Insurance Company W.
Contract Y4 provides for a single life annuity with a 10 year period
certain (which does not exceed the maximum period certain permitted
under A-3(a) of this section) with annual payments. Contract Y4 provides
that Z4 may cancel Contract Y4 at any time before Z4 attains age 84, and
receive, on his next payment due date, a final payment in an amount
determined by multiplying the initial payment amount by a factor
obtained from Table M of Contract Y4 using the Y4's age as of Y4's
birthday in the calendar year of the final payment. The value of Z4\'s
account balance in Plan X at the time of purchase is \$450,000, and the
purchase price of Contract Y4 is \$450,000. Contract Y4 provides Z4 with
an initial payment in 2005 of \$40,000. The factors in Table M are as
follows:

Age at Final Payment Factor

79 10.5

80 10.0

81 9.5

82 9.0

83 8.5

84 8.0

\(ii\) The total future expected payments to Z4 under Contract Y4 are
\$456,000, calculated as the initial payment of 40,000 multiplied by the
age 78 life expectancy of 11.4 provided in the Single Life Table in A-1
of \'1.401(a)(9)-9. Because the total future expected payments on the
purchase date exceed the total value being annuitized (i.e., the
\$450,000 used to purchase Contract Y4), the permitted increases set
forth in paragraph (c) of this A-14 are available. Furthermore, because
the factors in Table M are less than the life expectancy of each of the
ages in the Single Life Table provided in A-1 of \'1.401(a)(9)-9, the
final payment is always less than the total future expected payments.
Thus, the final payment is an acceleration of payments within the
meaning of paragraph (c)(4) of this A-14.

\(iii\) As an illustration of the above, if Participant Z4 were to elect
to cancel Contract Y4 on the day before he was to attain age 84, his
contractual final payment would be \$320,000. This amount is determined
as \$40,000 (the annual payment amount due under Contract Y4) multiplied
by 8.0 (the factor in Table M for the next payment due date, age 84).
The total future expected payments under Contract Y4 at age 84 before
the final payment is \$324,000, calculated as the initial payment amount
multiplied by 8.1, the age 84 life expectancy provided in the Single
Life Table in A-1 of \'1.401(a)(9)-9. Because \$320,000 (the total
future expected payments under the annuity contract, including the
amount of the final payment) is less than \$324,000 (the total future
expected payments under the annuity contract, determined before the
election), the final payment is an acceleration of payments within the
meaning of paragraph (c)(4) of this A-14.

[Example 8. Annuity with partial commutation feature]{.underline}. (i)
The facts are the same as in [Example 7]{.underline} except that the
annuity provides Z4 may request, at any time before Z4 attains age 84,
an ad hoc payment on his next payment due date with future payments
reduced by an amount equal to the ad hoc payment divided by the factor
obtained from Table M (from [Example 7]{.underline}) corresponding to
Z4's age at the time of the ad hoc payment. Because, at each age, the
factors in Table M are less than the corresponding life expectancies in
the Single Life Table in A-1 of \'1.401(a)(9)-9, total future expected
payments under Contract Y4 will decrease after an ad hoc payment. Thus,
ad hoc distributions received by Z4 from Contract Y4 will satisfy the
requirements under paragraph (c)(4) of this A-4.

\(ii\) As an illustration of paragraph (i) of this [Example
8]{.underline}, if Z4 were to request, on the day before he was to
attain age 84, an ad hoc payment of \$100,000 on his next payment due
date, his recalculated annual payment amount would be reduced to
\$27,500. This amount is determined as \$40,000 ( the amount of Z4's
next annual payment) reduced by \$12,500 (his \$100,000 ad hoc payment
divided by the Table M factor at age 84 of 8.0). Thus, Z4's total future
expected payments after the ad hoc payment (and including the ad hoc
payment) are equal to \$322,750 (\$100,000 plus \$27,500 multiplied by
the Single Life Table value of 8.1). Note that this \$322,750 amount is
less than the amount of Z4's total future expected payments before the
ad hoc payment (\$324,000, determined as \$40,000 multiplied by 8.1),
and the requirements under paragraph (c)(4) of this A-4 are be
satisfied.

[Example 9. Annuity with excessive increases]{.underline}. (i) A retired
participant (Z5) in defined contribution plan X attains age 70½ in 2005.
Z5 elects to purchase annuity Contract Y5 from Insurance Company W in
2005 with a premium of \$1,000,000. Contract Y5 is a single life annuity
contract with a 20-year period certain. Contract Y5 provides for an
initial payment of \$200,000, a second payment one year from the time of
purchase of \$40,000, and 18 succeeding annual payments each increasing
at a constant percentage rate of 4.5 percent from the preceding payment.

\(ii\) Contract Y5 fails to meet the requirements of section 401(a)(9)
because the total future expected payments without regard to any
increases in the annuity payment, calculated as \$200,000 in year one
and \$40,000 in each of years two through twenty, is only \$960,000
(i.e., an amount that does not exceed the total value used to purchase
the annuity).

Q-15: Are there special rules applicable to payments made under a
defined benefit plan or annuity contract to a surviving child?

A-15: Yes, Pursuant to section 401(a)(9)(F), 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 to the extent they become payable to the
surviving spouse upon cessation of the payments to the child. For
purposes of the preceding sentence, 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. In addition, a child who
is disabled within the meaning of section 72(m)(7) when the child
reaches the age of majority may be treated as having not reached the age
of majority so long as the child continues to be disabled. Thus, when
payments described in this paragraph A-15 become payable to the
surviving spouse because the child attains the age of majority, recovers
from a disabling illness, dies, or completes a specified course of
education, there is not an increase in benefits under A-1 of this
section. Likewise, the age of child receiving such payments is not taken
into consideration for purposes of the minimum incidental benefit
requirement of A-2 of this section.

Q-16: Will a governmental plan within the meaning of section 414(d) fail
to satisfy section 401(a)(9) if annuity payments under the plan do not
satisfy this section?

A-16: (a) Except as provided in paragraph (b) of this A-16, annuity
payments under a governmental plan within the meaning of section 414(d)
must satisfy this section.

\(b\) 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 A-1 through A-15 of this
section, provided the distribution option satisfies section 401(a)(9)
based on a reasonable and good faith interpretation of the provisions of
section 401(a)(9).

Q-17: What are the rules for determining required minimum distributions
for defined benefit plans and annuity contracts for calendar years 2003,
2004, and 2005?

A-17: 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 A-1 through A-16 of
this section, 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 governmental plans, this reasonable good faith standard
extends to the end of the calendar year that contains the 90^th^ 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 90^th^ day is later than December 31, 2005.

**§1.401(a)(9)-6T \[Removed\]**

Par. 4. Section 1.401(a)(9)-6T is removed.

Par. 5. In \'1.401(a)(9)-8 A-2, the first sentence in paragraph (a)(2)
is revised to read as follows:

[\'1.401(a)(9)-8 Special rules]{.underline}.

\* \* \* \* \*

A-2 \* \* \*

\(a\) \* \* \*

\(2\) If the employee\'s benefit in a defined contribution plan is
divided into separate accounts and the beneficiaries with respect to one
separate account differ from the beneficiaries with respect to the other
separate accounts of the employee under the plan, for years subsequent
to the calendar year containing the date as of which the separate
accounts were established, or date of death if later, such separate
account under the plan is not aggregated with the other separate
accounts under the plan in

order to determine whether the distributions from such separate account
under the plan satisfy section 401(a)(9). \* \* \*

\* \* \* \* \*

Mark E. Matthews,

Deputy Commissioner for Services and Enforcement.

Approved: June 1, 2004

Gregory F. Jenner,

Acting Assistant Secretary of the Treasury.