Legislation before the U.S. Senate seeks to ensure that terminated vested participants and their beneficiaries are well-informed regarding how they receive payments.
The Information Needed for Financial Options Risk Mitigation (INFORM) Act (S. 4087), introduced by Sen. Patty Murray (D-WA), provides that plan sponsors which offer terminated vested participants a lump-sum window would be required to provide information to help those participants understand the financial trade-offs of choosing between a lump sum payment and lifetime annuity payments.
Under the bill, a plan sponsor which amends the plan to provide time for participants or beneficiaries to elect to receive a lump sum instead of monthly annuity payments would be required to provide notice:
- to each participant or beneficiary offered that lump sum, no later than 90 days before the first day on which the participant or beneficiary may make an election to receive a lump sum; and
- to the Secretaries of Treasury aand Labor (i.e., the IRS and DOL) and the Pension Benefit Guaranty Corporation (PBGC), no later than 30 days before the first day on which participants and beneficiaries may make an election regarding such a lump sum.
Notice to Participants and Beneficiaries
In greater detail, the notice to participants and beneficiaries would have to include:
- An explanation of how the lump sum was calculated, including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies.
- The relative value of the lump sum option for a terminated vested participant compared to the value of (1) the single life annuity and (2) the qualified joint and survivor annuity.
- Information regarding:
- —whether it would be possible to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum;
- —the potential ramifications of accepting the lump sum, including longevity risks and loss of (1) protections guaranteed by the PBGC, (2) protection from creditors, (3) spousal protections and (4) other protections;
- —the general tax rules related to accepting a lump sum, including rollover options and early distribution penalties with a disclaimer that the plan does not provide tax, legal or accounting advice, as well as a suggestion that participants and beneficiaries consult with their own tax, legal and accounting advisors before determining whether to accept the offer;
- —how to accept or reject the offer, the deadline for response, and whether a spouse is required to consent to the election; and
- —contact information for the point of contact at the plan sponsor from which participants and beneficiaries could get more information or ask questions regarding options.
Notice to Federal Agencies
The bill also would require a plan sponsor to provide notice to the IRS, DOL and PBGC regarding:
- the total number of participants and beneficiaries eligible for such lump sum option;
- the length of the limited period during which the lump sum is offered;
- an explanation of how the lump sum was calculated, including the interest rate, mortality assumptions, and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies; and
- a sample of the notice provided to participants and beneficiaries.
In addition, the plan sponsor would be required to provide an additional report to the IRS, DOL and PBGC no less than 90 days after the conclusion of the period during which participants and beneficiaries may accept a plan’s offer to convert their annuity into a lump sum. That report would include the number of participants and beneficiaries who accepted the lump sum offer and any other information the IRS and DOL may require.
The bill also calls for regulatory guidance to be issued within six months after the bill is enacted, including as model notices for plan sponsors to use.
Current Status
The bill has been referred to the Senate Health, Education, Labor, and Pensions Committee.
