Plan sponsors who want to
“de-risk” their pension plans will no longer be able to give participants who
are currently receiving monthly annuity benefits the option to convert that
benefit to a lump sum, according to new rules from the IRS. IRS Notice
2015-49, issued June 9, provides that qualified DB plans generally are not
permitted to replace any joint and survivor, single life or other annuity
currently being paid with a lump sum payment or other accelerated form of distribution,
effective immediately.
The IRS noted that a number of DB
plan sponsors have amended their plans to provide a limited period during which
certain retirees who are currently receiving joint and survivor, single life or
other life annuity payments from those plans may elect to convert that annuity
into a lump sum that is payable immediately— a process that the IRS says has
been considered in some instances as a permitted increase in benefits.
Going Forward
While this doesn’t affect the
current exceptions for plan termination and a participant’s retirement, the IRS
regulations seek, in most cases, to prohibit changes to the annuity payment
period for ongoing annuity payments from a DB plan for retirees who are past
the required minimum distribution date (age 70-1/2), including those type of
changes accelerating (or providing an option to accelerate) ongoing annuity
payments. Going forward, the regulations would permit only the type of benefit
increases that actually increase the ongoing annuity payments, and not include
those that merely accelerate the annuity payments into a lump sum.
There are exceptions, basically
for programs already in motion or ones that have already been communicated to
beneficiaries, if one of the following occurred prior to July 9:
- A plan amendment providing for the retiree lump
sum window was adopted (or authorized by the board or other governing
authority).
- Plan participants received written
communications detailing “an explicit and definite intent to implement” the
program.
- Implementation of the retiree lump sum window
program was authorized by a binding collective bargaining agreement.
- IRS issued a private letter ruling or
determination letter approving the window program.
GAO’s Call for Oversight
Earlier this year the Government
Accountability Office (GAO) published a report calling on the Department of Labor to improve
oversight by requiring plan sponsors to notify the agency when they implement
lump sum windows, and to coordinate with the Treasury Dept. to clarify guidance
on the information sponsors provide to participants. As part of that report,
the GAO identified 22 plan sponsors who had offered lump sum windows in 2012,
involving approximately 498,000 participants and resulting in lump sum payouts
totaling more than $9.25 billion. Most of these payouts went to participants
who had separated from employment and were not yet retired, but some went to
retirees who were already receiving pension benefits.
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