Calculate the lump sum value of pension benefits using IRC 417(e)(3) methodology.
Segment Rates (%)
Estimated Present Value:
Understanding Minimum Present Value Segment Rates
In the United States, defined benefit pension plans utilize specific interest rates known as Segment Rates to determine the minimum present value of a participant's benefit, particularly for lump sum distributions. This methodology is mandated under Internal Revenue Code Section 417(e)(3) and Section 430(h)(2).
How the 3-Segment Model Works
Instead of using a single discount rate, the IRS requires a corporate bond yield curve divided into three distinct maturity segments:
First Segment: Applies to payments expected within the first 5 years from the valuation date.
Second Segment: Applies to payments expected between 5 and 20 years from the valuation date.
Third Segment: Applies to payments expected 20 years or more after the valuation date.
The Calculation Logic
The calculation is an actuarial present value. For every year a payment is expected to be made, it must be "discounted" back to today's value using the rate corresponding to the time of payment. If you are currently age 45 and planning to retire at 65, your first payment in year 20 would be discounted using the Second Segment rate for the duration of the deferral plus the payment year.
Practical Example
Imagine a participant is owed $10,000 per year for 10 years, starting immediately. For the first 5 years, the 1st Segment rate (e.g., 5.12%) is applied to each payment. For the next 5 years (years 6-10), the 2nd Segment rate (e.g., 5.35%) is applied. The sum of these individual discounted values equals the Minimum Present Value.
function calculatePresentValue() {
var benefit = parseFloat(document.getElementById('annualBenefit').value);
var commencementAge = parseInt(document.getElementById('commencementAge').value);
var deathAge = parseInt(document.getElementById('deathAge').value);
var currentAge = parseInt(document.getElementById('currentAge').value);
var r1 = parseFloat(document.getElementById('seg1').value) / 100;
var r2 = parseFloat(document.getElementById('seg2').value) / 100;
var r3 = parseFloat(document.getElementById('seg3').value) / 100;
if (isNaN(benefit) || isNaN(commencementAge) || isNaN(deathAge) || isNaN(r1) || isNaN(r2) || isNaN(r3)) {
alert("Please fill in all fields with valid numbers.");
return;
}
var totalPV = 0;
var deferralYears = commencementAge – currentAge;
if (deferralYears < 0) deferralYears = 0;
var paymentYears = deathAge – commencementAge;
if (paymentYears <= 0) {
alert("Life expectancy must be greater than commencement age.");
return;
}
// Loop through each annual payment
for (var i = 1; i <= paymentYears; i++) {
// The actual time from 'now' to when the payment occurs
var t = deferralYears + i;
var rate;
// Determine which segment applies based on time 't'
if (t <= 5) {
rate = r1;
} else if (t <= 20) {
rate = r2;
} else {
rate = r3;
}
// Standard Present Value Formula: PV = PMT / (1 + r)^t
var pvOfPayment = benefit / Math.pow((1 + rate), t);
totalPV += pvOfPayment;
}
var resultArea = document.getElementById('resultArea');
var pvOutput = document.getElementById('pvOutput');
var breakdownText = document.getElementById('breakdownText');
pvOutput.innerText = totalPV.toLocaleString('en-US', {style: 'currency', currency: 'USD'});
breakdownText.innerHTML = "Based on a " + paymentYears + " year payout period starting in " + deferralYears + " years, using the provided 417(e) segment rates.";
resultArea.style.display = 'block';
}