How Minimum Present Value Segment Rates Affect Your Pension

Minimum present value segment rates are the three interest rates the IRS publishes each month that set the floor on what a defined benefit pension plan must pay you if you take your benefit as a lump sum instead of a lifetime monthly annuity. Lower rates produce a larger check. Higher rates shrink it. A two-point swing can move an offer by tens of thousands of dollars.

The Three Rates and What Each One Covers

A pension promises monthly payments for life. Turning that promise into a single cash figure means discounting every future payment back to today’s dollars, and the segment rates are the discount rates federal law requires the plan to use. Every qualified defined benefit plan must apply them when calculating a lump sum worth more than $7,000.

Before 2008, plans used one interest rate tied to the 30-year Treasury bond. The problem: that single rate discounted a payment due next year the same way it discounted one due 30 years out, even though short and long rates rarely move together. The Pension Protection Act of 2006 replaced the single rate with three.

The first segment rate applies to benefit payments expected during the first five years after your annuity starting date.
The second segment rate applies to payments expected in years 6 through 20.
The third segment rate applies to all payments expected beyond year 20.

The plan’s actuary projects your monthly pension over your life expectancy, splits those payments into the three buckets above, discounts each bucket at its matching rate, and adds the three results. That sum is the minimum lump sum the plan must offer.¹

Where the Numbers Come From

Treasury publishes the rates monthly through the IRS. Each month’s figures are drawn from a corporate bond yield curve built from AAA, AA, and A-rated bonds with at least $250 million in outstanding par value.² Treasury builds a daily yield curve from those bonds, averages the daily curves across the month, and pulls each segment rate from the portion of that curve matching its time horizon.

One distinction trips people up. The segment rates used for pension funding under IRC Section 430 use a 24-month rolling average of the corporate bond curve. The minimum present value segment rates used for your lump sum do not. They use a single month’s yields, with no 24-month smoothing.³ That makes lump-sum rates far more responsive to current market conditions than funding rates, which lag.

Each month’s rates are based on bond data from the prior month. For reference, the August 2025 rates published by the IRS were 4.20% for the first segment, 5.29% for the second, and 6.08% for the third.⁴

How the Rates Produce Your Lump Sum

The calculation starts with projecting every monthly payment you would receive if you stayed in the plan and collected a lifetime annuity. That projection uses an IRS-prescribed mortality table. For distributions with stability periods beginning in 2026, plans use the unisex static mortality table published in IRS Notice 2025-40.⁵ The table assigns a probability of death at each age, which fixes how many payments the plan expects to make.

Once the payment stream is projected, the actuary sorts every payment by when it falls. Years one through five go into the first bucket at the first segment rate. Years 6 through 20 go into the second bucket at the second segment rate. Everything beyond year 20 goes into the third bucket at the third segment rate. The discounted values are summed.¹

Your age at distribution heavily influences the result. A 45-year-old has decades of projected payments stacked into the third bucket, so the third segment rate dominates. A 62-year-old nearing retirement has far more payments falling into the first and second buckets, so those rates carry more weight. Two participants with identical monthly benefits can receive very different lump sums based on age alone.

Why a Small Rate Move Changes the Check So Much

The relationship is inverse. When rates rise, your lump sum falls. When rates drop, your lump sum grows. A higher discount rate assumes the plan can earn more on money it keeps, so it needs to hand you less today to equal the value of your future payments.

The dollar impact is not trivial. If you’re owed $5,000 per month and the discount rate used is 4%, the lump-sum equivalent over 20 years of payments comes to roughly $815,000. At a 6% rate, that same stream produces about $688,000, a drop of roughly $127,000. A two-point rate increase cuts the payout by about 16%.⁶

Because these rates track corporate bond yields without any long smoothing period, they can shift meaningfully from one month to the next. Delaying a distribution by a few months in a rising-rate environment can produce a noticeably smaller offer. Falling rates have the opposite effect. The timing of your distribution matters, and your plan’s rate-selection rules decide how much that timing is actually worth to you.

Which Month’s Rates Actually Apply to You

Even though the IRS publishes new segment rates every month, your plan does not necessarily recalculate using whatever rate was just released. Two plan-document provisions control which month’s rates apply to your distribution: the stability period and the lookback month.

The Stability Period

The stability period is how long a single set of segment rates stays in effect. A plan can define it as one calendar month, one plan quarter, one calendar quarter, one plan year, or one calendar year.¹ A plan with an annual stability period locks in one set of rates for the whole year, so everyone taking a lump sum that year uses the same rates no matter which month they leave. A plan with a monthly stability period updates every month.

The choice has real consequences. Under an annual stability period you can know your rates months in advance. Under a monthly period, they can shift right up to your distribution date. If you have any flexibility on timing, the stability period tells you how much that flexibility is worth.

The Lookback Month

The lookback month determines which month’s published rates the plan uses for a given stability period. Plans can select the first, second, third, fourth, or fifth full calendar month before the start of the stability period.¹ If your plan has a quarterly stability period beginning January 1 and a four-month lookback, the rates applied to January through March distributions come from the rates published for September of the prior year.

A longer lookback creates a bigger lag between current market conditions and the rates on your offer. That lag works for you or against you depending on which direction rates moved in the interim. Both the stability period and the lookback month must be spelled out in the plan document and applied the same way to every participant. Your HR department or plan administrator can tell you which options your plan uses.

Checking the Rates Used on Your Offer

Plan administrators run these calculations, but accepting the number without review is a mistake. Errors happen. Wrong benefit accrual dates, incorrect salary histories, and misapplied segment rates are all common enough that checking the math is worth the effort.

Under ERISA, you have the right to request a written pension benefit statement from your plan administrator showing your total accrued benefits and the earliest date those benefits become nonforfeitable. The statement must be written in language an average participant can understand, and you can request one per 12-month period.⁷

When you get a lump-sum offer, ask the plan administrator to confirm four things: which segment rates were used, which lookback month applied, which stability period applied, and which mortality table was used. Cross-check the segment rates against the IRS monthly publications.³ If the numbers don’t match, or if your service history or benefit formula looks wrong, you can file a formal claim.

If the plan denies your claim, federal regulations give you at least 180 days to appeal. The plan must provide a full and fair review, and for post-service benefit claims it has 30 days to issue a determination at each level of review.⁸ You generally have to exhaust the plan’s internal appeal before bringing a lawsuit under ERISA, so treat the appeal deadline seriously.

1
eCFR. 26 CFR 1.417(e)-1 – Restrictions and Valuations of Distributions From Plans Subject to Sections 401(a)(11) and 417
2
Federal Register. Corporate Bond Yield Curve for Determining Present Value
3
Internal Revenue Service. Minimum Present Value Segment Rates
4
Internal Revenue Service. Notice 2025-47 – Minimum Present Value Segment Rates
5
Internal Revenue Service. Notice 2025-40 – Updated Static Mortality Tables for Defined Benefit Pension Plans
6
CNBC. How Rising Interest Rates Affect Pension Lump Sum or Annuity Decision
7
Office of the Law Revision Counsel. 29 USC 1025 – Reporting of Participant’s Benefit Rights
8
U.S. Department of Labor – Employee Benefits Security Administration. Benefit Claims Procedure Regulation FAQs