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IRC Sec. 417 Minimum Present Value Segment Rates

Defined Benefit plans that offer lump sum payments define the basis (i.e., the interest rate(s) and mortality table) for converting the normal form of payment (usually a life annuity) into a lump sum. Internal Revenue Code (IRC) Section 417 requires that the lump sum paid by a plan can not be less than the amount determined using the Section 417 interest rates and a specified mortality table. A Defined Benefit plan document defines the lookback month used to select the Section 417 segment rates for a given stability period (i.e., a plan month, plan quarter or plan year).

IRC Sec. 417 Segment Rates

IRC Sec. 430

For plans subject to ERISA funding requirements, IRC Section 430 defines the interest rates to be used in the determination of the ERISA Minimum Required Contribution. These rates are used to discount a Defined Benefit plan’s expected benefit payments to determine the plan’s Funding Target liability. Under IRC Section 430, a plan sponsor may choose to use either the Full Yield Curve or Segment Rates to discount liabilities. Segment Rates are an average of the Full Yield Curve rates over a 24-month period. These rates smooth interest rate volatility and reduce the yield curve into three interest rate segments for simplicity.

IRC Sec. 430 Full Yield Curve

IRC Sec. 430 Segment Rates

PBGC Lump Sum Rates

Many years ago the IRC Section 417 Minimum Lump Sum Basis was determined using PBGC interest rates. When this basis changed several years ago to another basis, some Defined Benefit plans maintained the PBGC basis going forward.

PBGC Lump Sum Rates

Other links

PBGC Maximum Guarantee

Social Security Administration

Joint Board for the Enrollment of Actuaries

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