Internal Revenue Service
Revenue Ruling
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smRev. Rul. 76-47
1976-1 C.B. 109
Section 411
Caution: Amplified by Rev. Rul. 89-60
IRS Headnote
Minimum vesting standards. Conversion factors are provided for the allocation of accrued benefits between employee and employer contributions when the normal retirement age under a defined benefit plan is not age 65 and the actuarial adjustment required, when the normal form of benefit is other than a single life annuity (without ancillary benefits), is set forth.
Full Text
Rev. Rul. 76-47 [fn1]
Section 1. Introduction.
Section 411(c) of the Internal Revenue Code of 1954 prescribes the required allocation of accrued benefits between employer and employee contributions for contributory plans. In the case of a defined benefit plan, providing an annual benefit in the form of a single life annuity (without ancillary benefits such as payments continuing to a beneficiary after the death of the participant) commencing at normal retirement age, the accrued benefit derived from contributions made by an employee requires a computation using an appropriate conversion factor.
The term "appropriate conversion factor" means the factor necessary to convert an amount equal to the accumulated contributions to a single life annuity without ancillary benefits, commencing at normal retirement age, and shall be ten percent for a normal retirement age of 65.
This Revenue Ruling applies only to contributory defined benefit plans and provides appropriate conversion factors (1) when the normal retirement age under such a defined benefit plan is not age 65 and (2) to determine the minimum accrued benefit derived from employee contributions (see section 2.02 of this Revenue Ruling). It also sets forth the actuarial adjustment required when the normal form of benefit is other than a single life annuity (without ancillary benefits).
Sec. 2. Employee's Accrued Benefit.
.01 The employee's accrued benefit under section 411(a)(7) of the Code shall be determined in accordance with the terms of the plan. In the case of a retirement benefit other than the normal form of benefit, such benefit shall not be less than an actuarial equivalent of the normal form of benefit. Whenever any actuarial assumptions or actuarial tables are required for such determination, these shall be such as are prescribed by the plan or by any insurance or annuity contracts used to provide benefits under the plan.
.02 Notwithstanding paragraph .01 of this section of this Revenue Ruling, the amount of benefit under any form of retirement benefit other than the normal form of benefit shall not be less than the benefit that would be derived from employee contributions if such benefit were the normal form of benefit.
Sec. 3. Accrued Benefit from Employee Contributions.
.01 In general. The accrued benefit derived from contributions made by an employee under section 411(c)(2) of the Code shall be determined by using an appropriate conversion factor. Paragraph .02 of this section provides the appropriate conversion factor when the normal form of benefit is a single life annuity (without ancillary benefits) commencing at normal retirement age. When the normal form of benefit is other than a single life annuity (without ancillary benefits) commencing at normal retirement age, the appropriate conversion factor to be determined to the nearest one-tenth of one percent is the factor provided in paragraph .02 of this section based upon the participant's normal retirement age, or upon the participant's attained age if higher, multiplied by the actuarial adjustment factor determined according to paragraphs .03, .04 and .05 of this section; except that in the case of an annuity payable for a certain period of time without regard to whether any person continues to live, the appropriate conversion factor shall be determined according to paragraph .06 of this section.
.02 Conversion factors for various retirement ages. The appropriate conversion factor to provide a single life annuity (without ancillary benefits) commencing at normal retirement age is determined under the following table:
Normal Conversion
Retirement Age Factor
-------------- ----------
44 and under 6%
45 through 53 7%
54 through 59 8%
60 through 63 9%
64 through 66 10%
67 through 68 11%
69 through 71 12%
72 through 73 13%
74 through 75 14%
76 and above 15%
.03 Actuarial adjustment factor. The actuarial adjustment factors to be applied as in paragraph .01 above for certain forms of annuity income are shown below.
Actuarial
Normal Form Adjustment
of Annuity Factor
----------- ----------
1. Single life annuity
(without ancillary
benefits) 1.0
2. Joint and survivor
annuity
Actuarial Adjustment Factor
---------------------------
Joint & 50% Survivor
--------------------
Reduced
After Reduced
Joint Partici- After
& 100% pant's Death of
Age of Beneficiary Survivor Death Either
------------------ -------- ------- --------
20 or more years/*/ older
than participant .96 .98 1.39
15-19 years older than
participant .93 .96 1.32
10-14 years older than
participant .90 .95 1.21
5-9 years older than
participant .85 .92 1.11
0-4 years older than
participant .79 .88 1.00
0-4 years younger than
participant .79 .88 1.00
5-9 years younger than
participant .73 .84 .91
10-14 years younger than
participant .69 .82 .86
15-19 years younger than
participant .65 .79 .82
20 or more years younger
than participant .63 .78 .79
For other percentages between 50% and 100%, the conversion factor shall be determined by straight line interpolation in the above table to the nearest hundredth.
3. Life annuity with period certain (certain and continuous)
Years Actuarial
Certain Adjustment
Guaranteed Factor
---------- ----------
Less than 5 years 1.00
5 years .98
10 years .91
15 years .83
20 years .75
For periods between 5 and 20 years, the conversion factor shall be determined by straight line interpolation in the above table to the nearest whole percentage.
4. Installment refund: same as life annuity with period certain above, based on guaranteed period (or estimated average guaranteed period for all participants).
5. Cash refund: same as installment refund.
.04 Factors for varying annuities.
1. If any benefit is automatically adjusted upward each year by a predetermined percentage, the actuarial adjustment factor determined according to paragraph .03 of this section shall be decreased by 8% for each 1% of annual increase in benefits. (For example, if benefits increase 2% per year under a 10 year certain and continuous annuity, the actuarial adjustment factor is .84 X .91, or .7644.)
2. If any benefit is automatically adjusted by the percentage change in a cost-of-living index with no maximum limit, or a maximum limit of 4% per year or more, on the amount of increase, the actuarial adjustment factor shall be determined as if the benefit were to increase automatically 4% each year.
3. If any benefit is automatically adjusted by the percentage change in a cost-of-living index with a maximum limit of less than 4%, the actuarial adjustment factor shall be determined as if the benefit were to increase each year by the maximum limit.
4. If any benefit is automatically adjusted in proportion to any change in wage rates or a wage index, the actuarial adjustment factor shall be determined as if the benefit were adjusted by the percentage change in a cost-of-living index.
5. If any benefit is a variable annuity which is automatically adjusted after retirement by investment experience higher or lower than an assumed investment return, the actuarial adjustment factor shall be determined as if the benefit were automatically increased each year by the excess, if any, of 51/2% over the annual assumed investment return.
.05 Other factors. If any actuarial adjustment factor cannot be determined according to paragraph .03, it shall be determined to provide an actuarially equivalent amount for a person retiring at age 65, with any joint annuitant also age 65, according to the UP-1984 Mortality Table without age setback with interest at 5%, regardless of the actual sex and age of any participant or beneficiary. Copies of such table are available by writing Pension Actuarial Branch E:A:P, Internal Revenue Service, Washington, D.C. 20224. Such actuarial adjustment should reflect adjustments described in paragraph .04 above, if any.
.06 Annuities certain.
1. If a benefit is payable monthly for a stated period of time without regard to whether any person continues to live, the appropriate conversion factor is determined according to the following table:
Conversion Factor for
Number of Annual Annuity
Years Payable Monthly
--------- ---------------------
1 100.0%
2 52.4
3 35.8
4 27.5
5 22.5
6 19.2
7 16.8
8 15.1
9 13.7
10 12.6
11 11.7
12 11.0
13 10.4
14 9.8
15 9.4
16 9.0
17 8.6
18 8.3
19 8.1
20 7.8
If the period of time is not a whole number of years, the conversion factor shall be determined by straight line interpolation in the above table to the nearest tenth of a percent.
2. For amounts payable at the beginning of each period, other than monthly, the conversion factor shown in subparagraph 1 above shall be multiplied by the factor shown:
Annually .978
Semi-annually .990
Quarterly .996
3. Factors for annuities certain not shown in subparagraphs 1 and 2 above shall be calculated using 5 percent interest per annum.
The following example illustrates the application of the principles set forth in this ruling.
A contributory defined benefit plan subject to the minimum vesting requirements of section 411 of the Code provides that the accrued benefit is a benefit in the form of a single life annuity equal to 2 percent of the average of the highest three consecutive years of participation. Employee A entered the plan in 1976 at age 60, participated in the plan for four years, and separated from service with a 40 percent nonforfeitable benefit in the employer derived accrued benefit. A elected a benefit of 10 years certain and life thereafter. The 10 year certain and life thereafter benefit, under the actuarial assumptions specified in the plan, is 88 percent of the benefit payable under the normal form specified by the plan. Employee A's highest three consecutive years' compensation averaged $30,000. Employee A's mandatory employee contributions plus 5 percent interest compounded annually amounted to $6,000 on the date of separation and $6,300 on his normal retirement date. Employee A's total mandatory contributions without interest were $5,429. Employee A made no voluntary employee contributions. Employee A's nonforfeitable benefit on a 10 year certain and life thereafter basis may be computed in accordance with the following worksheet:
1. Total accrued benefit under plan
under normal form $2,400
2. Total mandatory employee contributions
with interest to normal retirement age 6,300
3. Total mandatory employee contributions
without interest 5,429
4. Appropriate conversion factor for normal
form of benefit (per section 411(c)(2)(B)(ii)) 10%
5. Line 2 X Line 4 630
6. Lesser of Line 1 and Line 5 630
7. Line 3 X Line 4 543
8. Accrued benefit derived from employee
contributions under normal form (Greater of
Line 6 and Line 7) 630
9. Accrued benefit derived from employer
contributions (Excess, if any, of Line 1
over Line 8) 1,770
10. Nonforfeitable percentage under plan
applicable to accrued benefit derived from employer
contributions .40
11. Line 9 X Line 10 708
12. Total nonforfeitable accrued benefit under
normal form (Line 8 + Line 11) 1,338
13. Actuarial factor under terms of plan to
adjust normal form of benefit into optional form .88
14. Line 1 X Line 13 2,112
15. Appropriate conversion factor for optional form
determined under this Revenue Ruling 9.1%
16. Line 2 X Line 15 573
17. Lesser of Line 14 and Line 16 573
18. Line 3 X Line 15 494
19. Accrued benefit derived from employee
contributions under optional form (Greater of
Line 17 and Line 18) 573
20. Actuarial equivalent under plan of
nonforfeitable accrued benefit
(Line 12 X Line 13) 1,177
21. Total nonforfeitable accrued benefit under
optional form (Greater of Line 19 or Line 20) 1,177
[fn1] Also released as TIR-1439, dated Jan. 28, 1976.