Lifetime Annuity Guidance Phone Forum
Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the Lifetime Annuity Guidance phone forum. This information is current as of Aug. 28, 2012. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.
Mark: Hi everyone. I'm Mark O'Donnell, Director of IRS Employee Plans Customer Education and Outreach. Welcome to our Lifetime Annuity Guidance Phone Forum. We will be hearing from two of our actuaries, Carol Zimmerman and Larry Isaacs, who will discuss the guidance issued earlier this year on lifetime annuity options for retirees.
Before we start, I'd like to point out a couple of things. Everyone registered for this forum will receive a certification of completion by email in about a week, as long as you attend the entire live forum. Enrolled agents, enrolled retirement plan agents and enrolled actuaries are entitled to continuing education credits for this session. Other types of tax professionals should consult their licensing organization to see if today's session qualifies for continuing education credit.
As with all our presentations, the comments expressed by our speakers should not be construed as formal guidance from the IRS. For more information on Lifetime Annuity Guidance, please visit our retirement plan's website at www.IRS.gov/retirement and enter the phrase "lifetime income options" in the search box.
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Carol Z: Good afternoon or good morning, depending on where you are. This is Carol Zimmerman. I am an actuary with the IRS, as Mark said, and I've been with the IRS about seven years now. Before that I was in private consulting. For today's session we're going to start with a general update of what's going on at the IRS. And then we'll go through some of the pieces of guidance that were issued in February that were all geared toward encouraging lifetime income and we'll talk more about that as we get into the presentation.
But starting on slide four with a general update, I'm sure what's on most of everybody's mind is MAP-21. MAP-21 provides funding relief by basing funding and other applications on segment rates that are based on a corridor around a 25-year average of rates. I wanted to make sure that everyone was aware that we issued those rates for the 2012 plan year in notice 2012-55, that was issued on the 16th of this month. My understanding is that the rates were at the high- end of the ranges that were estimated by some of the consulting firms so hopefully, that was a pleasant surprise. The rates in this notice were based on some estimates of the past segment rates that we were missing. We had only built them starting with PPA. In the interest of time we were using estimates, but there are still some decisions being made as to whether we will go back and do more precise calculations of those historical rates. Until those decisions are made and until any new rates are calculated, we do not plan on publishing the historical rates. But we do plan on publishing those eventually once we know for sure that we are working with the final set of those rates. We are working on other guidance that are answering the questions that people have been asking as to how to apply these rates, including when the 436 restrictions will be effective if an employer opted to use those for 2012.
There have been a lot of questions on the "annuity substitution rule," which is the mechanism in the current regulations for valuing lump sum and other distributions subject to 417(e), and how to make various elections. We are working on that guidance and we understand the critical need for this guidance. We know that people are making funding decisions by September 15 for the 2011 plan year and we are working very hard to get that out as quickly as we can.
While we are working on that, there are other projects going on as well. We have final regulations under section 430; this is the final version of the regulations that were proposed in April of 2008. We are working on finalizing those and at the same time we are working on proposed regulations under sections 430 and 436. These proposed regulations would fill in some of the gaps that were in the initial regulations. Again, in the interest of time, we tried to get the key pieces out initially, and then now we're filling in gaps as far as mergers and acquisitions, some of the WRERA changes that have been published in notice form that have not been subject to notice and comment. Those kinds of things.
We are working on those. Also working on hybrid plan regulations and I know those are regulations that people have been looking for, for some time. As you well know these are full of difficult issues. We have received comments from a number of different parties with conflicting opinions, we are trying to sort through that and see where the rules would best come out and needless to say, there is a lot of work to do there and we have been working hard on those as well.
We are also working on finalizing proposed 417(e) regulations and those are actually the proposed regulations we will be talking about later in this session. We're working on form 5500 updates, that's kind of an annual update where we keep fine-tuning those and adjusting them for changes in the rules. [There are] a number of other projects as well, but these are some of the key things that we have been involved with. With that general update, then we wanted to turn to the main part of this presentation. I'll turn it over to Larry and start with slide five.
Larry I: Good morning, this is Larry Isaacs, I'm an actuary in Laguna Niguel. I have been with the Service for 12 years. Prior to that I worked in the life insurance industry primarily valuing and pricing life insurance and annuities. But I also dealt with policyholders, the purchasers of these annuities and I'm going to bring my bias that I experienced from that part of my work history. In particular, I have found that many of the purchasers of annuities, and their children, didn't have the most sophisticated knowledge or the best understanding of what they bought.
A lot of people, who bought immediate annuities, didn't understand that they were irrevocable. They thought that they were like bank accounts and they could cash in their payments at any time. Something that I'm sure a lot of people know, but I just wanted to bring that up. As we mentioned back in February of 2012, we came out with four pieces of guidance.
Also the Council of Economic Advisers came out with a report as somewhat of a background to the guidance and I'm not going to go through all the details on all the slides, but they make the point that, something we probably all understand, that over the last 10, 20, 30 years there has been a movement from out of defined planned benefit plans, into defined contribution plans and IRAs as the means for people to supplement any benefits they might receive from Social Security when they reach ages above 65. We're talking at this point trillions of dollars in annuities and IRAs.
I am zooming through the first couple of slides here because I want to get to the guidances as soon as possible. We only have an hour here. The four pieces of guidance we came out with, as we've mentioned before, were the two revenue rulings and the proposed QLAC regulations and the proposed 417(e) regulations. I'm going to be talking about the revenue ruling 2012-3 and the proposed QLAC regulations.
Jumping ahead to the annuitization slide, I just wanted everybody to be clear what annuitization is and that's taking liquid assets you have and exchanging them usually or often irrevocably for a series of future income payments that are often guaranteed for life. Particular types of annuities that we usually refer to are immediate annuities and though the slide says they begin at the date of retirement they can actually begin at any time.
Looking at it from their insurance company side, a person comes in with some money by electronic transfer or check, and purchases an annuity that starts making payments for life. Some of them may be guaranteed, but in general they go on for as long as the person is alive or if it is a joint annuity, as long as a person and their beneficiary is alive.
A deferred annuity is an annuity that on paper sounds like it is going to be become an immediate annuity at some point in the future. But in reality, it's more like a bank account where the annuitant has the option of converting it to an immediate annuity. In fact, most holders of deferred annuities do not ever annuitize, they just hang onto the money until they die or decide to cash it in to pay for medical expenses or more optimistically buy a Winnebago and go out into the country.
The third type of annuity is a subset of deferred annuities are longevity annuities and these are annuities where they are a deferred annuity, but they are at some point going to automatically and irrevocably, convert into an immediate annuity. Typically, they will be purchased at age 60 or 65 and they will convert to an immediate annuity at age 80 or 85. This can be done in theory at any age. You can purchase it at 30 and can convert it at 80 or you can purchase it at 65 and convert at 70. The financial advantage here is that the money that you have placed in this longevity annuity, if you don't survive until the date that you were going to annuitize, that money is in effect available for all the people who do survive to the annuitization age.
So, if somebody purchased it at 65 and converts and 85, they are going to get much higher payments than they would if they started paying it at age 65. Clearly the advantage is when you get to these higher ages, your payments would be much higher than would otherwise be. I don't think it's any secret, that by the time you get to age 80 or 85, your expenses are going to go up even without regard to medical expenses or whether you need to go into assisted living or long-term care nursing facility.
They are going to go up just because it's harder to mow the lawn or vacuum the house or even drive. This is a real economic reason for purchasing a product where if you survive to age 85 or age 80, you start getting relatively large payments. One other point I want to make about insurance here is when somebody buys a term policy and they don't die and they don't collect, nobody gets mad at the insurance company. They don't feel like they were cheated.
However, if you buy an annuity and you decease early, their children get really upset because they think the insurance company is stealing the money and they don't realize that the insurance company, and I hate to use the word count on, but takes into account the fact that a certain amount of people are going to die before they get their money back that they used to purchase the annuity and the insurance companies are going to be using those amounts to pay higher benefits to those who survive, to pay benefits for people as long as they live.
There are many reasons why people are not purchasing annuities and slide 10 has a long list of them. Some of these I have gone over in the past few minutes. Basically, the reasons don't buy these annuities is they don't like the irrevocability because they may need the money some day to pay for medical costs and they want to leave the money for their children.
Some are worried about the long term financial soundness of annuity providers. Just on a personal note, in my opinion, that is not really something someone should really worry about. Insurance companies are extremely heavily-regulated and have a tremendous track record of making payments that they promised.
Another reason is people don't understand that they can live a lot longer than they think they can and they are going to need other sources of income particularly, as they get to be old-old, which is typically people over age 80. A lot of people don't like paying the price of an annuity. There is going to be some cost to the annuity above and beyond the payments that they would receive. There is going to be small commissions and there is going to be administrative costs and that is all figured into the price.
Annuities are complex and people don't quite understand the product. There is one thing that is not on the list, annuities particularly fixed annuities, don't guard against inflation too well. Right now, interest rates are one, two, three percent and if interest rates were guaranteed to stay that way for the next 20 years that would be one thing, but if we get into a period of higher inflation, annuities purchased today based on inflation rates of one, two, three percent may not provide much in real benefits in the future. All that is background.
I'm going to get to Revenue Ruling 2012-3. This is a piece of guidance that came out that probably didn't contain too many surprises for people, but is important and we often come out with guidance that doesn't surprise people, just to eliminate any gray areas so people can make huge financial investments, and I'm talking insurance company primarily, without concern that they may get bitten. What we did here is come out with guidance that covered three situations.
The first situation is the most common one is the purchase of a plain, vanilla annuity by a 401(k) plan. When I say plain, vanilla annuity this is the kind of annuity where you put your money in, you can get it out at any point. It earns interest and at any point you want, you can annuitize it and turn it into a irrevocable immediate annuity. Basically we said in such a case, and I'm skipping to the holding here, that if you purchase such an annuity the plan was not subject to a QJSA and QPSA requirements until the annuity starting date or until the deferred annuity was annuitized.
The other two situations covered by that revenue ruling were one, where you purchase the deferred annuity, but at some point in the future it would automatically annuitize and you didn't have the option of cashing out. It was irrevocable. In that case we held that once it is a irrevocable, that you do have to get the QJSA and QPSA requirements as soon as you purchase the annuity even though the payments aren't going to start until much later.
The third situation was a version of the second one. It was one where the annuitization was automatic, but the matching contributions, remember this is a 401(k) plan, were forfeited upon the death of the participant. You might ask why somebody would buy that? The reason would be because if they did survive, the annuity payments would be higher. Again, we held in that third situation that the QJSA and QPSA requirements went into effect when the participant first invested in the annuity. The third holding we held in that revenue ruling was that in situations where a plan separately accounts for deferred annuity contracts, the remainder of the plan is not subject to QJSA and QPSA requirements. That was a clarification that people have asked us over the years and we put that in there also.
So, part of the plan is used to buy a deferred annuity and part of the plan is to invest in something else. The part that is investing in the something else was not subject to QJSA and QPSA requirements. When we came out with this guidance we recognized that this didn't cover all the possible situations, in fact, it didn't even cover the situations that people were most interested in. Those are ones where people annuitize, but under certain circumstances and for certain periods of time, they could stop their annuity payments or they could increase them or stop them and restart them and there was some QJSA and QPSA questions when those options are available.
We intend in the future to issue further guidance handling the more complicated questions, more complicated annuity arrangements. In review, the 2001-3 is really just the first step in coming out with guidance that handles the more exotic, where the products that are other than plain vanilla annuities.
I'm going to move on to the QLAC regulations. These are technically amendments to the 401(a)(9) regulations and certain other regulations, primarily the 408 regulations.
The primary purpose of this proposed regulation is that under the existing 401(a) (9) regulations it is extremely difficult to buy a longevity annuity. Prior to the regulation or until the regulation become finalized, you would need to take into account the value of the longevity annuity in determining your minimum required distribution. There is a couple of issues there, one it is difficult to value, and two, it might result in situations where you might have to use up quite a bit of the non-longevity annuity portion of your account.
With that in mind, we came out with the proposed QLAC regulations. The QLAC regulations define what a "QLAC" is. It's a qualified longevity annuity contract. In the regulation there is a limitation on the premiums that can be used to purchase the QLAC. It is basically the lesser of $100,000 or 25% of your account value. There is also a maximum age that a QLAC can be when payments can begin. They can't go any higher than age 85.
There are limits on the benefits payable after the death of the annuitant. In general, if the employee dies, the benefit must be a life annuity. If it is a spouse, the life annuity can begin upon the death of the annuitant or it can begin when the employee would have reached the age he intended to annuitize, the annuity starting date that is. But if it is a non spouse, the payments must begin immediately or the next year after the employee dies.
There is also some other requirements for QLACs in the proposed regulations. We don't allow variable annuities. The regulations don't allow variable annuities. The QLACs can't have cash values. The contract itself must say that it is a QLAC and it must satisfy all the other 401(a) (9) requirements. For example, you can't have a QLAC that has an automatic COLA of 10% a year. You could not purchase a contract that paid $1000 a year at age 85 and then $1100 at age 86 going up by 10% a year because that would be a violation of the other part of the 401(a)(9) regulations.
QLACs cover IRAs, 403(b) plans or it is possible to get a QLAC in an IRA or in a 403(b), 457(b), but you cannot get them in defined benefit plans. We will get to a lot of these in more detail in the next slide about the comments. A lot of the comments about the QLACs is that in IRAs you can get a gender-specific annuity and in DC plans in general you have to get unisex annuities, and the situation could arise where because of anti-selection insurance companies might be reluctant to issue QLACs to DC plans and we have comments on that, although there may not be much we can be about the unisex requirements, but QLACs are permitted in IRAs and 403(b) plans and 457(b) governmental plans.
They are not, at the moment, permitted in defined benefit plans in the proposed regulations. I should not have said at the moment because that implies that things may change. But we did get comments about permitting them in defined benefit plans. There are also a bunch of disclosure and annual reporting requirements in the QLAC regulations.
We received a lot of comments about the QLAC regulations. All of them started out very positively. The comments are what you would think. People thought that the $100,000 limit was too low and that the 25% limit, there might be situations where that would also be too low and that's no surprise. A lot of comments we got were requesting a return of premium feature. This gets into where I started back maybe 10-15 minutes ago, the fact that annuity purchasers tend to think of these annuities as bank accounts where they get checks every month, or a certain percentage of annuity purchasers think of these as bank accounts where they get checks every month and at any point they can get their money back.
That is not the case and is not something that can be changed easily. But one thing a lot of commentators suggested was that we permit a "return of premium feature." That would be if somebody died prematurely, that they would at least get back the money they put into the annuity. That definitely goes against the purpose of the regulations in that the purpose of the regulation is that most of the money does not go to the heirs of the annuitants but goes to the employees and their spouse.
However, one of the comments was that a return of premium feature could be provided without lowering the payments on the QLAC very much and that it is a worthy price to pay if it encourages people to pay to purchase these. It is a good point and one that certainly will be considered by the people who finalize the QLAC regulations, I'm sure.
Other comments we got were about having a "corrections program." The QLAC, the proposed regulations are complex and there was concern that people will make mistakes and there were many comments that we should come out with something that will let people fix minor what one commentator called "foot-falls." Other comments we have received about the consequence of excess premiums. Right now, if you pay a little too much for your QLAC, let's say you inadvertently pay $105,000 for the QLAC instead of $100,000, the whole thing would fail to be a QLAC and that typically would count as an annuity investment under the 401(a) (9) rules.
The comments were to the effect that the only thing should be carved back in is the extra premium. In my example where somebody paid $105,000, the first $100,000 would count as a QLAC and not the excess premium. We also got a lot of comments about the requirement in the proposed regulations that a QLAC that it must state that it is a QLAC. Many commentators felt that should not be necessary and it should be something that could be put in a separate disclosure.
We have comments on whether variable contracts and participating, that is contracts that pay dividends, should be permitted. Here what the commentators are getting at was that there is an inflation risk. Right now annuities are being priced with underlying interest rates of one, two, three, four percent and a variable contract can guard against that. Particularly a variable contract that has a floor that guarantees at least one or two percent and that was in a comment that we received from a lot of people.
We also received some comments about the unisex mortality requirements in DC plans. I'm not sure we can do much about that. We received some comments, and these are related to the return of premium features that people want to see, about allowing QLAC to have cash surrender values and guaranteed minimum death benefits and other kind of death benefits. These all get into the point that if we make this so pure, no one will buy it. Their arguments are to allow features in the QLACs that encourage people to buy it even if the payments become lower than they otherwise would be, due to payments in effect going to beneficiaries.
At this point I'm going to, we rushed through this, but I just want to make the point that the people who work on the final regulations will go through every one of the comments, word by word, and take them into account very seriously. If anyone has any further comments, I realize that the deadline has probably passed, but if you send them along people will look at them. At this point I will hand it over to Carol and let her get to 201-4, not 2014-4. I'm sorry I didn't pick that up earlier. Carol?
Carol Z: Thanks Larry. Just to go back to some of the things that Larry was saying at the beginning of this presentation. There is a real advantage in having a lifetime guarantee in at least part of a retirement portfolio. A lot of people really don't understand how much they need to cover a lifetime worth of benefit payments. A lot of people are focused on the life expectancy and don't realize that is an average. If you have just enough to last through your life expectancy, there is an even chance of outliving it or passing away earlier.
We were looking for some ways to coordinate the defined contribution accounts that tend to account for more of people's retirement benefits -- trying to coordinate that to provide a lifetime guarantee. The QLAC that Larry was just talking about will solve that by having the annuity start at an advanced age. People can manage their defined contribution accounts to that fixed age and then have the lifetime guarantee kick in.
Another way that we looked at doing this is to encourage rollovers from the defined contribution plans into the defined benefit plan and therefore, allow for a guarantee through that defined benefit plan. The concept we were thinking about is that people would be more likely to choose an annuity for part of their retirement assets if they can buy it from their own DB plan. It's potentially less costly than if you are going to a commercial insurer. There is also the convenience factor. I think we have all heard about situations where people have enough investment options in their 401(k) accounts that they just get too confused and shut down because they just can't sort through all the options.
It is very likely to be the same thing when you are looking at insurance companies and trying to sort out which one to buy from, etc. As Larry pointed out, a lot of people really don't understand some of the minor points of these contracts so that would make it that much more difficult for them to buy it [an annuity] outside. But if their employer is making it available through a defined benefit plan, that might make them more likely to go that route, because at least they will know that the annuity they are getting is going to be on similar terms to what they are getting in their regular pension.
As Larry mentioned before, sometimes we come out with guidance that is not really new, it is just clarifying things. The revenue ruling in 2012-4 is the same thing, where 408 already provides for rollovers between qualified plans. This just really clarifies how it works when you rollover from a DC plan to a DB plan and providing additional defined benefits amounts. I am turning to slide 19. (I see we really carried over this typo, my apologies.) We recognize that there are some obstacles to taking advantage of some of these rollovers.
We have all read the press and see that there are fewer and fewer defined benefit plans. Those who do have defined benefit plans tend to be more in the mode of decreasing their exposure to these plans rather than increasing it. But again we thought that if employers were willing to take this on, it would be a real advantage for the employees. On the other hand, employees can have concerns about benefit security depending on how well-funded their plan is and how long they expect it to stay that way.
Again, there are some obstacles and of course one of the reasons why some of the insurance annuities are more expensive is because of the guarantees and the regulations that Larry referred to earlier. If we look to slide 20 then, the key holdings in this revenue ruling are first of all, if you take an amount into the defined benefit plan and convert that to an annuity using assumptions that apply to mandatory employee contributions, then this would not violate the anti-forfeiture rules in 411 or the 415-rules, rules applicable to the defined benefit amount.
The context for 415 is that if you have a benefit that is provided by employee contributions, then that benefit can be provided in addition to the 415 limit on benefits provided by the employer. The second key holding is that if the plan uses less generous assumptions to convert those amounts to DB benefits, then that violates the anti-forfeiture rules under 411. You have to at least provide what you would provide if those were mandatory employee contributions.
On the last holding, if it goes the other direction and the benefit is subsidized. If it is converted using more generous assumptions, then the subsidized portion is treated as an employer-provided benefit. That [the subsidized portion of the benefit] would count in terms of the 415 limit and it would have to be taken into consideration when you are applying 415 limits. It would be subject to the vesting rules for employer provided benefits.
Going on to slide 21, we got some feedback and some questions and I would like to take this opportunity to clarify some of the things from the revenue ruling itself. The revenue ruling had a fairly limited fact pattern. It involved a rollover [from a plan maintained by] the same employer providing the single-employer plan. It was an immediate benefit -- a number of other things that limited it. A number of people have asked whether that meant this rollover is only available in those circumstances.
That is not the case. This fact pattern was not intended to restrict rollovers. I mentioned before that 408 already provides for rollovers between qualified plans. But the reason that we had a limited fact pattern is that we wanted to focus on the issue and clarify the key holdings that we talked about in the prior slide. We didn't want to distract the reader or dilute the message by trying to deal with some side issues that could occur if we had broadened our fact patterns. Again, rollovers will still be permitted outside that fact pattern, but there may be issues other than what we raised in the revenue ruling itself.
Another point that I wanted to make is that under Section 436, a plan is not allowed to have additional accruals if the adjusted funding target percentage is under 60%. These rollovers would be considered an additional accrual under the plan, so if the AFTAP was under 60%, then this rollover cannot occur. That is not only in compliance with 436, but also it is intended to protect the participants whose benefit could be at risk if the plan is not well enough funded. This revenue ruling also does not apply to rollovers into 414 K accounts.
A number of these plans have 414(k) accounts which are essentially defined contribution accounts within a defined benefit "body," so to speak. The rollovers into that account are treated as DC rollovers and they are not subject to this revenue ruling. They can continue to be credited with the trust rate of return and they are not subject to conversion using employee contributory factors [while they are held in the 414(k) account].
This revenue ruling is effective for rollovers on or after January 2013. Plans may be doing rollovers already so we wanted to give them some time to adjust, to the extent that their procedures were any different from this revenue ruling. Although we are not holding you to the rules in this revenue ruling until January 1, 2013, you still can rely on it for any rollovers that occur before that.
With that, let me turn to the last topic which is the proposed regulation under 417(e) and it starts on slide 22. The concept here is that employees may be more willing to choose an annuity if they can all avoid an all-or-nothing choice. Right now, a lot of plans allow a lump sum or an annuity, but don't allow a partial lump sum; they don't allow splitting the distribution. Part of the reason we felt for that was that under 417(e), you have minimum present values for certain types of distributions, people usually think about lump sums and but also it affects social security leveling options and other benefits that are decreasing.
There is a long-standing rule that if any portion of the distribution would be subject to 417(e), then the entire distribution is subject to 417(e). If you have a partial lump sum under the current rules, then what that means is because it is taken as a package, the benefit decreases when you go from the initial lump sum to the ongoing annuity. Then it is subject to 417(e), and therefore subject to the minimum present value requirements.
What that means is if you have other actuarial adjustments -- for instance somebody has a joint-and-survivor annuity -- those actuarial factors have to be based on reasonable assumptions. They don't have to be based on the 417(e) minimum present value assumptions. But what happens then is if you have a partial lump sum, then the entire distribution becomes subject to 417(e) and you get a situation where perhaps the joint-and-survivor factors are not adequate to provide an entire package that meets the minimum present value requirements under 417(e).
You can have a situation where somebody has a $100 benefit and they want to take half as a lump sum and they get their lump sum and they find out the other half is not $50, it is $55. It gets confusing, gets difficult to administer and what we are finding is some employers may not have even realized that was the rule. But our concept was if we make it simpler and applied the 417(e) minimum present value requirements only to the portion that would otherwise be subject to 417(e) if it stood on its own, that might make it easier for people to offer a partial lump sum and give the employees a chance to hedge their bets by taking part of it as a lump sum and part of it as an annuity.
The hope is that if they have that choice then at least some of the benefit would come out as an annuity rather than as a lump sum. I think we have all seen situations where if people are offered a lump sum, they tend to take that even if it may not be in their financial best interest.
Moving on to slide 23, what this proposed regulation would mean is that 417(e) would only be applied to a portion of the benefit in three cases. The first is a plan with two separate benefits where they are determined separately and each portion of that benefit has its own options. A classic example is that of cash balance conversions where you have a traditional plan converted to a cash balance plan and the lump sum is available only with respect to the cash balance portion of the benefit. What this would do is the cash balance benefit could be paid under the rules for cash balance plans, under 417(e). The other portion from the traditional plan that would be paid as an annuity would not be subject to 417(e) [unless it was paid in the form of an annuity subject to 417(e) itself]. It would just use its own options and form factors, etc.
The second example we used was that was a proportional split. The concept there is the plan would provide the option of an annuity or a lump sum on the entire benefit, but would also allow somebody to take out a specified percentage of the benefit. They might be able to choose that they would take 25% as a lump sum and the rest as an annuity, or 75% as a lump sum and the rest as the annuity and so on. In that situation where you have that proportional split, the only portion of the benefit that would be subject to the 417(e) minimum present value would be the lump sum portion.
The third example that we used was if there was a fixed dollar amount. There, one of the things we were thinking about was a plan that would permit an employee to take a refund of employee contributions as a lump sum and pay the balance as an annuity. We would see plans where somebody could take up to, say, $10,000 as a lump sum and take the rest as an annuity, or if there was another fixed dollar amount, it would be only that fixed dollar amount subject to 417(e) and the rest would come under the regular annuity rules.
Going on to slide 24, we did have some questions and some feedback on that. I think the most common question has to do with the effective date. As I alluded to earlier, what we are finding is that some people didn't realize that the distribution was looked at as a package -- that if any portion of that was subject to 417 then the full amount would be. We are getting questions as to whether people can apply this [new] rule retroactively.
In that I caution you, because first of all, these are proposed regulations and are not final and they are not effective yet. There is no reliance on these regulations and it would be a bit aggressive to try to apply those rules currently. Some people have raised the point that the proposed regulations say if you already provide for a partial lump sum and follow the rules as far as the minimum present value requirements, that "package" is protected by 411(d)(6). With that you would not be able to just go to the new rules without protecting the benefits that had been earned to date.
People point out that if they are not doing that currently and they change their plans to provide for the current rules, then that creates a 411(d) (6) issue where one has not technically existed before. Again, they point to the fact that the current rules would require treating the 417(e) distribution as a package. Therefore, I would be very cautious to continue doing that [applying the proposed rules retroactively] without recognizing the old rules, particularly now that the regulations have drawn attention to that. In asking about this retroactive effective date, some people have pointed out that under 436 there is a bifurcation rule that allows plans that are subject to the partial restrictions on accelerated distributions to split the benefit and pay part of it as a lump sum part of it, part of it as an annuity.
In the 436 regulations there was a specific exemption from this 417(e) rule that treats the full amount as a package. The point that I wanted to make there is that the reason that Bifurcation rule was written the way it was, was it was an exception to the general rule. Please don't take that as an indication that the rules are changed currently.
It does look like we have ended a little bit early. Unfortunately, I know that just the structure of these phone forms does not allow for live questions. But if you do have any questions about the presentations, feel free to email us at the address. I put the address in the presentation. You can email questions to that address and those will be directed to Larry or me or someone else who can help you. That ends my prepared remarks. Mark, are you going to close this out or how does that work?
Mark Thanks everyone for listening. I don't have anything else. Good day everyone.
Carol Z: Yes. Thank you everyone.