3899 / Are there any situations in which a defined benefit plan participant’s benefit must, or may, be increased?

Editor’s Note: The SECURE Act, enacted December 20, 2019, amended IRC Sections 401(a)(9)(C)(i) and (ii) to change the “required beginning date” from age 70½ to age 72. These changes are effective for those turning age 70½ in 2020. However, the SECURE Act did not change Section 401(a)(9)(C)(iii) requiring an actuarial increase for a pension benefit under a defined benefit plan starting later than age 70½. Since subsections (i) and (ii) in the same subparagraph were amended to age 72, this failure to change the required actuarial increase provision to age 72 does not appear to be an accidental legislative oversight. ¹ Final regulations confirm that the required actuarial increase applies to an employee other than a 5-percent owner who retires in a calendar year after the calendar year in which the employee attains age 70½.²  Under the 2024 final regulations, benefits that are not vested are not required to be actuarially increased until they become vested.  Those regulations confirm that a plan is excepted from the actuarial increase requirement only if at least 85 percent of the individuals covered by the plan are employees of a church or a qualified church-controlled organization.

Actuarial Increase Requirement

Per the Editor’s Note above, if an employee (other than a 5 percent owner) retires after the calendar year in which the employee reaches age 70½, a defined benefit plan must actuarially increase the employee’s accrued benefit to take into account any period after age 70½ during which the employee was not receiving benefits under the plan.³ The increase must be provided starting on April 1 of the year after the employee reaches age 70½ and ending on the date when required minimum distributions commence in an amount sufficient to satisfy IRC requirements.⁴ This actuarial increase requirement does not apply to (1) plans that provide the same required beginning date (i.e., April 1 of the year after the employee reaches age 70½) for all employees, regardless of whether they are 5 percent owners and make distributions accordingly, and (2) governmental or church plans.⁵

Non-increasing Annuity Requirement

Except as otherwise provided below, annuity payments must be non-increasing, or must increase only:

(1)  in accordance with an annual percentage not exceeding that of an eligible cost-of-living index (e.g., one issued by the Bureau of Labor Statistics or certain others defined in the regulations);

(2)  in accordance 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 (see (1)) since the annuity starting date;

(3)  in accordance with the extent of the reduction in the amount of the employee’s payments to provide for a survivor benefit upon death but only if there is no longer a survivor’s benefit (because the beneficiary dies or is no longer the employee’s beneficiary subject to a QDRO);

(4)  in accordance with a plan amendment; or

(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.⁶

Additional Permitted Increases

If the total future expected payments from an annuity purchased from an insurance company exceed the total value being annuitized, payments under the annuity will not fail to satisfy the non-increasing payment requirement 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 on the employee’s death that does not exceed the excess of the total value being annuitized over the total of payments before the death of the employee;

(3)  as a result of dividend payments or other payments resulting from certain actuarial gains; and

(4)  an acceleration of payments under the annuity (as defined in the regulations).⁷

In the case of annuity payments made by a qualified defined benefit plan (i.e., paid directly from the trust rather than a commercial annuity), payments will not fail to satisfy the non-increasing payment requirement 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, at a rate that is less than 5 percent per year; (2) to provide a final payment on the death of the employee that does not exceed the excess of the actuarial present value of the employee’s accrued benefit (as defined in the regulations) over the total of payments before the death of the employee; or (3) as a result of dividend payments or other payments resulting from actuarial gain (measured and paid as specified in the regulations).⁸

An annuity contract purchased with an employee’s plan benefit from an insurance company will not fail to satisfy the rules of Section 401(a)(9) merely because of the purchase, provided the payments meet the foregoing requirements.⁹ 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 amount required for one interval must be made no later than the end of that payment interval.¹⁰