Pursuant to its initiative to encourage retirement plans to offer better lifetime income options (see my blog of last Tuesday), in Revenue Ruling 2012-4, the Internal Revenue Service (the “IRS”) has provided guidance on rollovers from a defined contribution plan toa defined benefit plan to obtain an annuity. The overall thought is that the defined benefit plan could buy an annuity at a better rate than the participant acting on his/her own.
The Revenue Ruling deals with a qualified defined benefit plan, which accepts a direct rollover from a qualified defined contribution plan maintained by the same employer. The Ruling asks whether the defined benefit plan satisfies §§ 411 and 415 of the Internal Revenue Code (the “Code”), when it provides an annuity determined by converting the amount rolled over into an actuarially equivalent immediate annuity using the applicable interest rate and the applicable mortality table under § 417(e). Subjects to facts which the Revenue Ruling presents, it concludes that §§ 411 and 415 are not violated.
The Revenue Ruling then asks how the result would change if different actuarial factors were used to compute the annuity. The focus is on § 411(c), which sets forth rules for determining the amount of a participant’s accrued benefit. The Revenue Ruling says that if the defined benefit plan were to determine the annuity by using a less favorable actuarial basis than required under the rules of § 411(c) (so that the annuity is smaller than required under the rules of § 411(c)), then the plan would not satisfy the requirements of § 411(a)(1). On the other hand, if the defined benefit plan were to determine the annuity using a more favorable actuarial basis than required under the rules of § 411(c) (so that the annuity is larger than required under the rules of § 411(c)), then the portion of the annuity that exceeds the benefit determined under the rules of § 411(c)(2)(B) (the rules for determining the accrued benefit derived from participant contributions) would be: (1) subject to the non-forfeiture rules of § 411applicable to benefits derived from employer contributions, and (2) included in the annual benefit for purposes of the § 415(b) limit.
The Revenue Ruling does not apply with respect to rollovers made before January 1, 2013. However, employers may rely on the ruling with respect to any rollovers made prior to that date.