Consumer price index
(ii) Consumer price index. An index is described in this paragraph (o)(2)(ii) if it is a consumer price index that is based on prices of all items (or all items excluding food and energy) and issued by the Bureau of Labor Statistics, including an index for a specific population (for example, urban consumers or urban wage earners and clerical workers) and an index for a geographic area or areas (for example, a metropolitan area or State). (iii) Consumer price index with banking. An index is described in this paragraph (o)(2)(iii) if it is a percentage adjustment based on a cost-of-living index described in paragraph (o)(2)(ii) of this section, or a fixed percentage if less. In any year when the cost-of-living index is lower than the fixed percentage, the fixed percentage may be treated as an increase in an eligible cost-of-living index, provided it does not exceed the sum of (A) The cost-of-living index for that year, and (B) The accumulated excess of the annual cost-of-living index from each prior year over the fixed annual percentage used in that year (reduced by any amount previously utilized under this paragraph (o)(2)(iii)(B)). (iv) Adjustment based on compensation for position. An index is described in this paragraph (o)(2)(iv) if it is a percentage adjustment based on the increase in compensation for the position held by the employee at the time of retirement, and provided under either (A) The terms of a governmental plan (within the meaning of section 414(d)), or (B) The terms of a nongovernmental plan, as in effect on April 17, 2002. (3) Additional permitted increases for annuity contracts purchased from insurance companies. Payments made from an annuity contract purchased from an insurance company will not fail to satisfy the nonincreasing payment requirement in paragraph (a)(1) of this section merely because the payments are increased in accordance with one or more of the following (i) As a result of dividend payments or other payments that result from actuarial gains (within the meaning of paragraph (o)(5) of this section), but only if (A) Actuarial gain is measured no less frequently than annually; (B) The resulting dividend payments or other payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the payment of the annuity over the remaining period of the annuity (beginning no later than the year following the year for which the actuarial experience is measured); and (C) The issuer of the contract uses reasonable actuarial methods and assumptions, as determined in good faith, when calculating the initial annuity payments, the issuer's experience with respect to those factors, and the amount of the dividend payments or other payments; (ii) As a result of a shortening of the payment period with respect to the annuity or a full or partial commutation of the future annuity payments, provided that the amount of the payment pursuant to the commutation is determined using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract. (iii) To provide a final payment upon death that does not exceed the amount by which the total consideration paid for the contract exceeds the aggregate amount of prior distributions under the contract; or (iv) To provide a short-term advance of payments under the annuity, under which annuity payments that would otherwise satisfy the requirements of this section are paid up to one year before the payments were scheduled to be made. (4) Additional permitted increases for annuity payments from a qualified trust. Annuity payments made under a defined benefit plan qualified under section 401(a) (including payments under an annuity contract purchased from an insurance company that provides the same benefits that would have been payable under the defined benefit plan if an annuity contract had not been purchased, but not an annuity contract that provides other benefits) will not fail to satisfy the nonincreasing payment requirement in paragraph (a)(1) of this section merely because the payments are increased in accordance with one of the following (i) As a result of dividend payments or other payments that result from actuarial gains (within the meaning of paragraph (o)(5) of this section), but only if (A) The actuarial gain is measured no less frequently than annually; (B) The resulting dividend payments or other payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the annuity over the remaining period of the annuity (beginning no later than the year following the year for which the actuarial experience is measured); (C) The actuarial gain taken into account is limited to the actuarial gain from investment experience; (D) The assumed interest used to calculate actuarial gains is not less than 3 percent; and (E) The payments are not increasing by a constant percentage as described in paragraph (o)(1)(iii) of this section; or (ii) To provide a final payment upon the death of the employee that does not exceed the excess of the actuarial present value of the employee's accrued benefit (within the meaning of section 411(a)(7)) calculated as of the annuity starting date using the applicable interest rate and the applicable mortality table under section 417(e) (or, if greater, the total amount of employee contributions plus interest) over the total of payments before the death of the employee. (5) Actuarial gain defined. For purposes of this paragraph (o), actuarial gain means the difference between an amount determined using the actuarial assumptions (that is, investment return, mortality, expense, and other similar assumptions) used to calculate the initial payments before adjustment for any increases and the amount determined under the actual experience with respect to those factors. Actuarial gain also includes differences between the amount determined using actuarial assumptions when an annuity was purchased or commenced, and the amount determined using actuarial assumptions used in calculating payments at the time the actuarial gain is determined. (6) Examples. This paragraph (o) is illustrated by the following examples. (i) Example 1. Variable annuity(A) Facts. A retired participant Z1 in Plan X, a defined contribution plan, attains age 72 in 2021. Z1 elects to purchase Contract Y1 from Insurance Company W in 2025. Contract Y1 is a single life annuity contract with a 10-year period certain. Contract Y1 provides for an initial annual payment calculated with an assumed interest rate (AIR) of 3 percent, which is assumed for purposes of this example to be a reasonable interest rate selected in good faith. Subsequent payments are determined by multiplying the prior year's payment by a fraction, the numerator of which is 1 plus the actual return on the separate account assets underlying Contract Y1 since the preceding payment (which is reasonably determined in good faith) and the denominator of which is 1 plus the AIR during that period. (B) Analysis. Under paragraph (o)(3)(i) of this section, payments made from an annuity contract purchased from an insurance company will not fail to satisfy the nonincreasing payment requirement on account of payment increases that result from actuarial gains (within the meaning of paragraph (o)(5) of this section), if the conditions set forth in paragraphs (o)(3)(i)(A) through (C) of this section are satisfied. The payment increases under Contract Y1 are the result of actuarial gain within the meaning of paragraph (o)(5) of this section because they are the result of the difference between investment experience and the 3 percent interest rate used to calculate the initial payments under Contract Y1. Contract Y1 satisfies the requirement of paragraph (o)(3)(i)(A) of this section because actuarial gain under Contract Y1 is measured annually. Contract Y1 satisfies the requirement of paragraph (o)(3)(i)(B) of this section because the actuarial gains are paid over the remaining period of the annuity beginning in the year following the year for which the actuarial experience is measured. Contract Y1 satisfies the requirement of paragraph (o)(3)(i)(C) of this section because the issuer of Contract Y1 used reasonable actuarial methods and assumptions, as determined in good faith, when calculating the initial annuity payments, the issuer's experience with respect to those factors, and the amount of adjustments under Contract Y1. (C) Conclusion. Because payments under Contract Y1 increase only as a result of actuarial gain, and those increases satisfy the conditions set forth in paragraphs (o)(3)(i)(A) through (C) of this section, those increases are described in paragraph (o)(3)(i) of this section and therefore are excepted from the nonincreasing payment requirement of paragraph (a)(1) of this section pursuant to the exception under paragraph (o)(1)(vii) of this section. (ii) Example 2. Participating annuity(A) Facts. A retired participant Z2 in Plan X, a defined contribution plan, attains age 73 in 2025. Z2 elects to purchase Contract Y2 from Insurance Company W in 2025. Contract Y2 is a participating single life annuity contract with a 10-year period certain. Contract Y2 provides for level annual payments with dividends paid in a lump sum in the year after the year for which the actuarial experience is measured or paid out levelly beginning in the year after the year for which the actuarial gain is measured over the remaining lifetime and period certain (that is, the period certain ends at the same time as the original period certain). Dividends are determined annually by the Board of Directors of Company W based upon a comparison of actual actuarial experience to expected actuarial experience in the past year, with those amounts determined on a reasonable basis in good faith. The initial payment was determined in good faith using reasonable actuarial assumptions and methods. (B) Analysis. Under paragraph (o)(3)(i) of this section, payments made from an annuity contract purchased from an insurance company will not fail to satisfy the nonincreasing payment requirement on account of payment increases that result from actuarial gains (within the meaning of paragraph (o)(5) of this section), if the conditions set forth in paragraphs (o)(3)(i)(A) through (C) of this section are satisfied. The payment increases under Contract Y2 are the result of actuarial gain within the meaning of paragraph (o)(5) of this section. Contract Y2 satisfies the requirement of paragraph (o)(3)(i)(A) of this section because actuarial gain under Contract Y2 is measured annually. Contract Y2 satisfies the requirement of paragraph (o)(3)(i)(B) of this section because the resulting increases are paid either in the form of a lump sum or over the remaining period of the annuity beginning in the year following the year for which the actuarial experience is measured. Contract Y2 satisfies the requirement of paragraph (o)(3)(i)(C) of this section because the issuer of Contract Y2 used reasonable actuarial methods and assumptions, as determined in good faith, when calculating the initial annuity payments, the issuer's experience with respect to those factors, and the amount of adjustments under Contract Y2. (C) Conclusion. Because payments under Contract Y2 increase only as a result of actuarial gain, and those increases satisfy the conditions set forth in paragraphs (o)(3)(i)(A) through (C) of this section, those increases are described in paragraph (o)(3)(i) of this section and therefore are excepted from the nonincreasing payment requirement of paragraph (a)(1) of this section pursuant to the exception under paragraph (o)(1)(vii) of this section. (iii) Example 3. Participating annuity with dividend accumulation(A) Facts. The facts are the same as in paragraph (o)(6)(ii) of this section (Example 2), except that the annuity provides a dividend accumulation option under which Z2 may defer receipt of the dividends to a time selected by Z2. (B) Conclusion. Because the dividend accumulation option permits dividends to be paid commencing later than the end of the year following the year for which the actuarial experience is measured, the dividend accumulation option does not meet the requirements of paragraph (o)(3)(i)(B) of this section. Neither does the dividend accumulation option fit within any of the other permissible increases described in paragraph (o)(3) of this section. Accordingly, payment increases pursuant to the dividend accumulation option are not excepted from the nonincreasing payment requirement of paragraph (a)(1) of this section pursuant to the exception under paragraph (o)(1)(vii) of this section. Thus, Contract Y2, and consequently any distributions from the contract, fail to meet the requirements of this paragraph (o) and thus to fail to satisfy the requirements of section 401(a)(9). (iv) Example 4. Participating annuity with dividends used to purchase additional death benefits(A) Facts. The facts are the same as in paragraph (o)(6)(ii) of this section (Example 2), except that the annuity provides an option under which actuarial gain under the contract is used to provide additional death benefit protection for Z2. (B) Conclusion. Because this option permits payments as a result of actuarial gain to be paid commencing later than the end of the year following the year for which the actuarial experience is measured, the option does not meet the requirements of paragraph (o)(3)(i)(B) of this section. Neither does the option fit within any of the other permissible increases described in paragraph (o)(3) of this section. Accordingly, payment increases pursuant to the dividend accumulation option are not excepted from the nonincreasing payment requirement of paragraph (a)(1) of this section pursuant to the exception under paragraph (o)(1)(vii) of this section. Thus, Contract Y2, and consequently any distributions from the contract, fail to meet the requirements of this paragraph (o) and thus to fail to satisfy the requirements of section 401(a)(9).