On July 9, 2015, the Internal Revenue Service (IRS) announced that the U.S. Department of the Treasury and the IRS intend to amend regulations to prohibit qualified defined benefit plans from paying lump sums to retirees and beneficiaries in a lump-sum window. In Notice 2015-49, the IRS reported that its intent is to have the amendments to regulations apply as of July 9, 2015, except in certain situations described below.
What does this mean?
Many pension plan sponsors have provided a lump-sum window offer to deferred vested participants, and some of these sponsors have included retirees and beneficiaries in the window. After July 9, 2015, plan sponsors will not be permitted to offer lump sums to retirees or beneficiaries in a lump-sum window unless the amendment satisfies one of the exceptions below. However, there is nothing included in the IRS Notice that would preclude offering a lump sums to deferred vested participants.
The amendments to the regulations are intended by the IRS to apply as of July 9, 2015. However, the amendments will not apply to a plan amendment for a lump-sum window in one of the following four situations:
1. If the amendment is adopted or authorized prior to July 9, 2015.
2. An amendment where a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015.
3. Where written communication to participants stating an “explicit and definite intent” to implement a lump-sum window was received by participants prior to July 9, 2015.
4. Adopted pursuant to a collective bargaining agreement between the plan sponsor and a union prior to July 9, 2015.
If the amendment satisfies one of these four exceptions, then a lump-sum payment in lieu of future annuity benefits for retirees and beneficiaries appears to be allowed.
It is not clear whether or not the IRS intends to prohibit defined benefit plans from paying lump sums to retirees and beneficiaries when a pension plan is terminated. This issue will need to be clarified when the amended regulations are published by the IRS.
Observations on regulatory action
Earlier this year, the U.S. Government Accountability Office (GAO) issued a report entitled “Participants need better information when offered lump sums that replace their lifetime benefits,” and the Pension Benefit Guaranty Corporation (PBGC) announced its plans to begin collecting data on pension plan de-risking measures. In a surprising move, IRS Notice 2015-49 was issued on July 9, 2015, with an intended effective date of July 9, 2015. There was little or no indication of pending guidance from the IRS or any indication that the IRS is open to feedback on the notice. This is unlikely to be the last step in the regulation of lump-sum windows.
Please contact a Milliman consultant to discuss how this notice might impact your intentions to offer a lump-sum window.