Rev. Rul. 81-57

Section 1. Purpose and Background

This revenue ruling provides actuarial adjustment factors required under section 401(j) of the Internal Revenue Code for plans which provide nonbasic benefits.

Section 401(j) of the Internal Revenue Code prescribes the maximum basic benefit which may accrue under a defined benefit plan for each plan year of participation by a self-employed individual (an employee within the meaning of section 401(c)(1) of the Code) or a shareholder-employee of an electing small business (Subchapter S) corporation.

The maximum basic benefit which may accrue in any year is based on a table of statutory percentages in section 401(j). The percentages limit the "basic benefit" which may accrue in any year.

A "basic benefit" is defined in section 401(j)(5) as a benefit in the form of a straight line annuity commencing at the later of age 65 or 5 years after the day the participant's current period of participation began (basic commencement date), under a plan which provides no ancillary benefits and to which employees do not contribute.

Section 1.401(j)-1(c)(3) of the Income Tax Regulations provides that the Commissioner shall provide adjustments to assure that the total benefit, including any plan benefit other than the basic benefit, does not exceed the actuarial equivalent of the maximum basic benefit.

Section 1.401(j)-4(b)(1) of the regulations provides that the value of certain distributions which include insurance contracts may not exceed the actuarial equivalent of the maximum benefit that could be provided to that participant.

Sections 2, 3, and 4 of this revenue ruling provide appropriate adjustments for plans with nonbasic benefits. Section 5 provides a procedure for determining the actuarial equivalent of the maximum basic benefit for purposes of section 1.401(j)-4(b)(1) of the regulations.

Section 2. Application

A nonbasic benefit will exceed the actuarial equivalent of the maximum basic benefit if the amount of the nonbasic benefit which accrues in any year exceeds the product of the maximum basic benefit for such year and the appropriate nonbasic adjustment factors determined under section 3.

Generally, these adjustments are based on the 1971 Group Annuity Mortality Table (male) without projection and 6 percent interest. Other adjustments not provided by this ruling must be determined on the same basis.

Section 3. Adjustment Factors

.01 Scope--This section provides factors for adjusting for nonbasic benefits provided by a plan. Subsection .02 provides factors for adjusting for benefits commencing at a date other than the basic commencement date. Subsection .03 provides factors for adjusting for benefits in a form other than as a life annuity. Subsection .04 provides factors for adjusting for pre-retirement death benefits and subsection .05 provides a factor for adjusting for disability.

.02 Benefits commencing at other than basic commencement date--In the case of a plan providing for benefits which commence at a date other than the basic commencement date (BCD) the adjustment factor shall be the actuarial equivalent factor for a benefit commencing at such date instead of on the basic commencement date. For benefits commencing no earlier than five years before the basic commencement date and no more than five years after the basic commencement date, the adjustment factor shall be obtained from the following table.

 Years                          Years

      1. Joint and Survivor Annuity

   Years

3. Installment refund: same as life annuity with period certain above, based on guaranteed period (or estimated average guaranteed period for all participants).

4. Cash refund: Same as installment refund.

5. Modified cash refund (employee contributions reduced by prior payments are refunded at death): 1.00

      6. Annuity Certain

 Specified Maximum

.04 Pre-retirement death benefit adjustment--This factor is determined using the method described in section 8.03 of Rev. Rul. 71-446, 1971-2 C.B. 187, 191 using the 1971 Group Annuity Mortality Table (male) without projection and 6% interest. The factors for certain common death benefits are indicated in paragraphs (1) through (3).

1. If the pre-retirement lump sum death benefit does not exceed the accumulated contributions which would have been made under the individual level premium funding method, and the current cost of all other death benefits or life insurance is includible in the gross income of the participant, the factor shall be based on the age of the participant when his/her current period of participation began.

                            Pre-Retirement

3. If, before a specified age, the pre-retirement death benefit is a lump-sum benefit as described in (1), and, after the specified age, the death benefit is an early survivor annuity as described in (2), the factor shall be the lesser of the factor from (1) and the factor from (2) above.

.05 Disability Adjustment Factor--If the plan provides a qualified disability benefit (as defined in section 411(a)(9) of the Code), commencing at disability and payable for life, or until recovery from disability before normal retirement age, and such benefits are payable only for the period of time when an employee is eligible for and receives disability benefits under the Social Security Act, the factor shall be .90.

If the plan provides any other payments to the participant before attainment of normal retirement age, each such benefit must satisfy this ruling when treated as a separated nonbasic benefit.

Section 4. Example

A, a self-employed individual, enters a defined benefit plan at age 30. The plan provides the maximum benefits on compensation up to $50,000 in the form of a 10 year certain and continuous annuity commencing at age 65 with a pre-retirement insured death benefit equal to 100 times his projected monthly annuity. The plan provides other forms of annuity benefits as the actuarial equivalent using the 1971 Group Annuity Mortality Table (male) without projection at 6% interest. If A's compensation for the first year equals $20,000, the maximum basic benefit which could accrue under the plan equals $1,300 (6.5% of $20,000). Since the plan provides that benefits will be paid in a nonbasic form, the maximum nonbasic benefit which could accrue under the plan equals $981.89 ($1,300 maximum basic benefit times .91 adjustment for form of annuity times .83 adjustment for pre-retirement death benefit) or 4.9% (6.5% times .91 times .83). Because all other forms of annuity benefits are determined as the actuarial equivalent of the normal form using the 1971 Group Annuity Mortality Table (male) without projection and 6% interest, such other forms of annuity benefits satisfy the requirements of this revenue ruling.

Section 5. Certain Insurance Contract Distributions

For purposes of section 1.401(j)-4(b)(1) of the regulations, the actuarial equivalent of the maximum benefit that could be provided to a participant is the product of:

(i) The total annual life annuity benefit that would be permitted under section 401(j) for the participant for all years of participation and commencing at the time of the distribution of the insurance contract, adjusted to reflect all pre-retirement ancillary benefits provided by the plan and,

(ii) The amount shown for males in Table A in section 1.401(j)-4(a)(1)(ii) of the regulations.