Entire interest
(2) Entire interest. For purposes of applying the rules in 1.401(a)(9)-5, the entire interest under the annuity contract as of December 31 of the relevant valuation calendar year is treated as the account balance for the valuation calendar year described in 1.401(a)(9)-5(c). The entire interest under an annuity contract is the dollar amount credited to the employee or beneficiary under the contract (that is, the notional account balance) plus the actuarial present value of any additional benefits (for example, survivor benefits in excess of the dollar amount credited to the employee or beneficiary) that will be provided under the contract. However, paragraph (m)(3) of this section describes certain additional benefits that may be disregarded in determining the employee's entire interest under the annuity contract. The actuarial present value of any additional benefits described under this paragraph (m) is to be determined using reasonable actuarial assumptions, including reasonable assumptions as to future distributions, and without regard to an individual's health. (3) Exclusions(i) Additional value does not exceed 20 percent. The actuarial present value of any additional benefits provided under an annuity contract described in paragraph (m)(2) of this section may be disregarded if the sum of the dollar amount credited to the employee or beneficiary under the contract and the actuarial present value of the additional benefits is no more than 120 percent of the dollar amount credited to the employee or beneficiary under the contract and the additional benefits are one or both of the following (A) Additional benefits that, in the case of a distribution, are reduced by an amount sufficient to ensure that the ratio of the sum to the dollar amount credited does not increase as a result of the distribution; and (B) An additional benefit that is the right to receive a final payment upon death that does not exceed the amount by which the total consideration paid exceeds the amount of prior distributions. (ii) Return of premium death benefit. If the only additional benefit provided under the contract is the additional benefit described in paragraph (m)(3)(i)(B) of this section, the additional benefit may be disregarded regardless of its value in relation to the dollar amount credited to the employee or beneficiary under the contract. (iii) Additional guidance. The Commissioner, in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see 601.601(d) of this chapter), may provide additional guidance on additional benefits that may be disregarded. (4) Examples. The examples in this paragraph (m)(4), which use a 5 percent interest rate and the mortality table used for distributions subject to section 417(e)(3) provided in Notice 2019-67, 2019-52 IRB 1510, illustrate the application of the rules in this paragraph (m): (i) Example 1(A) Facts. G is the owner of a variable annuity contract (Contract S) under an individual account plan that has not been annuitized. Contract S provides a death benefit until the end of the calendar year in which the owner attains the age of 84 equal to the greater of the current Contract S notional account balance (dollar amount credited to G under the contract) and the largest notional account balance at any previous policy anniversary reduced proportionally for subsequent partial distributions (High Water Mark). Contract S provides a death benefit in calendar years after the calendar year in which the owner attains age 84 equal to the current notional account balance. Contract S provides that assets within the contract may be invested in a Fixed Account at a guaranteed rate of 2 percent. Contract S provides no other additional benefits. (B) Actuarial calculations. At the end of 2028, when G has an attained age of 78 and 9 months, the notional account balance of Contract S (after the distribution for 2028 of 4.55 percent of the notional account balance as of December 31, 2027) is $550,000, and the High Water Mark, before adjustment for any withdrawals from Contract S in 2028, is $1,000,000. Thus, Contract S will provide additional benefits (that is, the death benefits in excess of the notional account balance) through 2034, the year S turns 84. The actuarial present value of these additional benefits at the end of 2028 is determined to be $67,978 (12 percent of the notional account balance). In making this determination, the following assumptions are made: on average, deaths occur mid-year; the investment return on G's notional account balance is 2 percent per annum; and minimum required distributions (determined without regard to additional benefits under the Contract S) are made at the end of each year. The following two tables summarize the actuarial methodology used in determining the actuarial present value of the additional benefit. (C) Conclusion. Because Contract S provides that, in the case of a distribution, the value of the additional death benefit (which is the only additional benefit available under the contract) is reduced by an amount that is at least proportional to the reduction in the notional account balance and, at age 78 and 9 months, the sum of the notional account balance (dollar amount credited to the employee under the contract) and the actuarial present value of the additional death benefit is no more than 120 percent of the notional account balance, the exclusion under paragraph (m)(3)(i) of this section applies for 2029. Therefore, for purposes of applying the rules in 1.401(a)(9)-5, the entire interest under Contract S may be determined as the notional account balance (that is, without regard to the additional death benefit). (ii) Example 2(A) Facts. The facts are the same as in paragraph (m)(4)(i) of this section (Example 1), except that the notional account balance is $550,000 at the end of 2028. In this instance, the actuarial present value of the death benefit in excess of the notional account balance in 2028 is determined to be $97,273 (24 percent of the notional account balance). The following two tables summarize the actuarial methodology used in determining the actuarial present value of the additional benefit. (B) Conclusion. Because the sum of the notional account balance and the actuarial present value of the additional death benefit is more than 120 percent of the notional account balance, the exclusion under paragraph (m)(3)(i) of this section does not apply for 2029. Therefore, for purposes of applying the rules in 1.401(a)(9)-5, the entire interest under Contract S must include the actuarial present value of the additional death benefit.