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Case of the Week: The End of Certain Lump Sum Windows

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Florida is representative of a common question related to pension de-risking and lump sums. The advisor asked:

“What is this I hear that the IRS will not allow defined benefit plans to offer lump sums anymore?”

Highlights of Discussion


  • IRS Notice 2015-49 provides a heads up that the IRS intends to amend the required minimum distribution (RMD) regulations under Internal Revenue Code Section (IRC §) 401(a)(9), to prohibit certain, but not all lump-sum windows effective retroactively to the notice's release date (July 9, 2015).

  • Consequently, if finalized as proposed, qualified defined benefit plans are no longer allowed to replace any joint and survivor, single life, or other annuity currently being paid to a plan participant with a lump-sum payment or other accelerated form of distribution. A limited exception applies for grandfathered “Pre-Notice Accelerations.”

  • Lump-sum windows for existing annuity payment recipients that were: (1) adopted by the sponsor; (2) approved by PLR or determination letter; (3) announced to participants; or (4) authorized pursuant to a collective bargaining agreement as of July 9, are referred to as a Pre-Notice Acceleration. Pre-Notice Accelerations can proceed as established and are unaffected by these proposed changes to the regulations.

  • If your client is a separated employee (no longer works for the company that sponsors the defined benefit plan) who has not yet begun receiving payments, this notice does not change the ability of the plan sponsor to offer him or her the lump-sum distribution window — plan permitting. If your client is receiving lifetime annuity payments and received notification of a lump-sum window prior to July 9, the company should be able to proceed under a pre-notice grandfathered exception.

  • Notice 2015-49 alludes to the reason for the abrupt change. As part of their strategies to reduce ongoing plan liabilities, a number of plan sponsors have amended their plans to provide a limited window of time during which certain retirees — those currently receiving a form of lifetime annuity payments from those plans — may elect to convert those annuities into immediately payable lump sums.

  • Based on reports from the Government Accountability Office and the Advisory Council on Employee Welfare and Pension Benefit Plans, the administration is concerned that retirees may not have the skills and/or resources available to them to effectively manage lump-sum distributions to produce sufficient financial resources in retirement. There has been a growing sentiment among lawmakers and regulators that guaranteed lifetime income payments are a necessity for financial success in retirement.


Conclusion

When released, the Learning Center will perform a complete analysis of and report on the anticipated amended regulations that prohibit certain lump-sum windows from defined benefit plans going forward. Financial advisors working with defined benefit sponsors or plan participants should make their clients aware of the change immediately.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

© 2015 Columbia Management Investment Advisers, LLC. Used with permission.

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