These rules will be primarily of interest to actuaries and others who do benefit calculations for pension plans. Sponsors of pension plans should discuss the implications of these rules with the plan’s actuary.

The final rule on present value

The final rule on present value generally follows the proposed rule issued in 2016, which addressed changes made by the Pension Protection Act of 2006, including interest rates, mortality tables, and related issues. It also deletes obsolete transition rules.

This final rule generally applies to distributions with annuity starting dates that occur on or after October 1, 2024.

Pre-retirement mortality

In valuing a benefit that is paid before normal retirement age, the final rule, as did the 2016 proposed rule, requires that the plan take into account the probability of pre-retirement mortality in the present value determination. The mortality discount is required even if the plan provides an ancillary pre-retirement death benefit (i.e., a death benefit that is not part of the accrued benefit).

The final present value rule also clarifies that a plan using the required pre-retirement mortality discount would not violate the requirement that the qualified joint and survivor annuity (QJSA) be the most valuable benefit in situations where the plan also paid an ancillary pre-retirement death benefit, even if of equal value to the accrued benefit under the plan, and the present value of this death benefit was included in the present value calculation of the plan accrued benefit.

In the case of a benefit that includes a component resulting from employee contributions, the total lump sum is equal to the present value of the employer-provided component reflecting the mortality discount plus the present value of the employee-provided component without reflecting the mortality discount. While this is a change in how some plans calculated present value based on previous IRS guidance, the rule provides relief so that if a portion of a participant’s benefit was previously paid out based on the old rules, there is no requirement for redetermining the remaining accrued benefit to take into account the change in present value methodology. The rule also provides that when the benefit includes an employee-provided component, the lump sum of the entire benefit (including the employer-provided piece) may be calculated with no mortality discount and still satisfy the requirement for the QJSA to be the most valuable benefit form.

The final rule does not address applying a post-retirement mortality adjustment in the calculation of lump-sum distributions after normal retirement age. The Treasury said that post-retirement mortality adjustment will be addressed in a future project.

Social Security level-income options

The Social Security level-income option (SSLIO) readjusts the payout of the accrued benefit so that the participant receives a higher payout from the plan before Social Security starts, and a lower one after, resulting in the participant having level retirement benefits (Social Security and pension) over the participant’s lifetime. The final rule allows the plan to view the SSLIO as an optional form of benefit that is paid as a non-decreasing annuity for life plus a temporary annuity payment that starts at retirement and ends at a time when the participant can receive Social Security payments. The plan can be amended to bifurcate the calculation to apply the minimum present value requirements only to the temporary annuity portion of the benefit.

Changes in lookback months and stability periods

Many plans use lookback and stability periods to determine the interest rate and mortality table to use when determining lump-sum payments. This allows the plan to have a lead time and consistency. Plans generally are not allowed to cut back accrued benefits by amendment, and a change in the lookback period or stability period could result in such a cutback.

The prior rules had an exception — the participant must receive the higher of the present value using the old assumptions set or the new assumptions set for one year following the amendment — but only for minimum present value calculations. The final rule applies that exception to all situations in which stability and lookback periods are amended on or after January 19, 2024.

The final rule on the corporate bond yield curve

The final rule on the corporate bond yield curve rule, which generally follows a June 23, 2023 proposed rule, clarifies that the interest rates published by the IRS should be used without further adjustment for determining present value in all pension plans and minimum required contribution calculations for single-employer pension plans.

Up to now, the Treasury excluded callable bonds from the yield curve determination. Generally, callable bonds will continue to be excluded. However, under the final rule, bonds for which the callable feature may only be exercised during the last year before maturity will be included in the determination of the yield curve. The Treasury indicates that this will significantly increase the number of bonds in the data set and more accurately reflect the market. The Treasury believes that, in general, the addition of these bonds should lower the yield curve because they add high quality bonds, which have lower interest rates.

The change will apply for yield curves for months that begin on or after February 1, 2024.

Next step

Sponsors of pension plans should discuss with the plan’s actuary whether any of the changes in how the present value is calculated affects current operations.