United States: IRS Shuts Down Pension Plan De-Risking Technique Of Offering Lump Sums To Retirees In Pay Status

In an unexpected development, the Internal Revenue Service (IRS) recently issued Notice 2015-49, which essentially prohibits qualified defined benefit pension plans from offering retirees who are in pay status an option to convert their annuities into immediate lump sums. The notice refers to these offers as "lump sum risk-transferring programs."

Over the past few years, many plan sponsors have made or considered these types of offers as one technique for "de-risking" their qualified pension plans. A lump sum distribution in this context effectively transfers the longevity risk and investment risk from the pension plan to the retirees. In addition, the retirees are no longer considered to be participants in the plan for ERISA purposes, and the plan sponsor no longer needs to pay Pension Benefit Guaranty Corporation (PBGC) premiums with respect to those retirees.

Notice 2015-49

The notice announces that the IRS intends to amend the required minimum distribution regulations under section 401(a)(9) of the Internal Revenue Code of 1986, as amended (the Code), to provide that qualified defined benefit pension plans generally are no longer 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. The IRS indicated that it intends that the future amendments will apply retroactively as of July 9, 2015, the date the notice was issued, except with respect to certain accelerations that were already in process before that date (discussed further below).

The required minimum distribution rules under Code section 401(a)(9) generally provide that a participant's benefits under a qualified retirement plan must begin to be distributed no later than the participant's required beginning date, which is generally defined as April 1 of the calendar year following the later of: (i) the calendar year in which the employee attains age 70-1/2, or (ii) the calendar year in which the participant retires (subject to a special rule for owners of more than 5% of the plan sponsor).

The required minimum distribution rules also require that any distributions other than lump sums commencing on a participant's required beginning date must be paid in the form of periodic annuity payments for the participant's life (or the joint lives of the participant and his or her beneficiary) or over a period certain that is no longer than a period permitted under the applicable regulations. The required minimum distribution rules generally prohibit any changes in the period or form of the distribution after it has commenced, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement (i.e., for participants who commenced benefits while still employed), death, or plan termination.

The current regulations also permit increases in annuity payments, to pay increased benefits that result from a plan amendment. The IRS issued at least 10 private letter rulings in 2012 and 2014 that interpreted this exception to apply to plan amendments that were adopted to implement lump sum risk-transferring programs. Private letter rulings cannot be relied upon or cited as authority by taxpayers other than the taxpayers to whom the rulings were issued.

In direct contrast to these private letter rulings, Notice 2015-49 explains that the IRS intends to propose amendments to the required minimum distribution regulations to provide that the types of permitted benefit increases allowed under the "plan amendment" exception would include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments themselves – that is, annuities can no longer be converted to lump sums under the plan amendment exception.

Effective Date

The IRS intends that the new regulations will apply as of July 9, 2015 (the date the notice was issued). However, the notice provides further that the changes are not expected to apply to lump sum risk-transferring programs that fall within one of the following four categories (referred to hereinafter as "Pre-Notice Accelerations"):

  1. a program adopted (or specifically authorized by a board, committee, or similar body with authority to amend the plan) prior to July 9, 2015;
  2. a program with respect to which a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015;
  3. a program with respect to which a written communication to affected plan participants stating an explicit and definite intent to implement the lump sum risk-transferring program was received by those participants prior to July 9, 2015; or
  4. a program adopted pursuant to an agreement between the plan sponsor and an employee representative (with which the plan sponsor has entered into a collective bargaining agreement) specifically authorizing implementation of such a program that was entered into and was binding prior to July 9, 2015.

Implications for Plan Sponsors

If you have been considering or are in the process of implementing a lump sum risk-transferring program, you should consider the extent to which, if any, you may fall within one of the four categories of Pre-Notice Accelerations. If you find that you do, you may be able to continue to pursue or implement the lump sum risk-transferring program.

If not, you should consider the extent to which you may be able to continue to offer a similar type of lump sum program. For example, it appears that plan sponsors should still be able to offer lump sums to certain participants who are not currently in pay status (e.g., participants who have terminated employment with vested benefits, but who have not commenced distributions). In addition, the notice is not clear on whether the new regulations would apply only to retirees who have reached their required beginning date (i.e., generally the later of age 70-1/2 or retirement) or whether the new regulations would apply to all participants in pay status (i.e., even those who have not reached their required beginning date). The notice is also not clear on whether lump sums can continue to be offered to any retirees in pay status in connection with the formal termination of a plan, which is another exception under the current Code section 401(a)(9) regulations in addition to the plan amendment exception.

There are also other de-risking techniques that defined benefit pension plan sponsors may want to consider (and that were not addressed in the notice), including, but not limited to:

  • Liability-Driven Investing – aligning a plan's investments with the duration of its liabilities;
  • Freezing the plan with respect to eligibility or future benefit accruals;
  • Formally terminating the entire plan or only a portion of the plan (e.g., a spin-off termination); and
  • An annuity buy-out or buy-in – purchasing annuities from an insurance company to provide all or a portion of the accrued benefits under the plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Bradley Arant Boult Cummings LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Bradley Arant Boult Cummings LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions