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IRS Reins in Pension De-risking Options

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 (generally referred to as lump sum risk-transferring programs, in that longevity risk and investment risk are “transferred” from the plan to the retirees) — 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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