IRS on July 9 announced that it intends to amend regulations to prohibit defined benefit retirement plans from replacing retiree benefits being paid through joint and survivor, single-life or other annuity benefits with lump-sum distributions or other accelerated payments. The change is effective immediately, IRS said.
Notice 2015-49 will amend IRS required minimum distribution regulations to prohibit payment of an employee’s entire retirement benefit at once, amid increasing interest among DB plan sponsors in so-called derisking, or pension risk transfer, which may use lump-sum payments to quickly remove heavy pension obligations from corporate balance sheets.
In 2015, announcements of PRT transactions — closely aligned with anticipated but still-absent interest rate rises — have been limited but often amount to shifting billions of dollars in retirement asset management to retirees and insurance companies.
The large majority of lump-sum distribution offers made by derisking plan sponsors are directed at vested former employees not yet retired, but some retirees have received, and taken, these offers in recent years.
The now-familiar practice of offering a “window” during which former employees and some eligible retirees receiving benefit payments may elect to convert their annuity into an immediately payable lump sum is not affected by the notice if the option before July 9 was already: (1) adopted by a board authorized to amend the plan; (2) offered to retirees in written communication that’s been received; (3) related to a private letter ruling or determination letter issued by IRS; or (4) adopted by the plan sponsor and an employee unit that have entered into a collective bargaining agreement. These exempt conditions will be referred to by IRS as “Pre-Notice Acceleration.”
Benefit changes by plan sponsors that increase accrued, ongoing annuity benefit payments and do not accelerate the payments are permitted, IRS said. Existing regulations prohibit any “change in the period or form of the distribution after it has commenced,” except under certain circumstances spelled out in Section 401(a)(9) the federal tax Code, IRS said in the new notice.
The notice does not give guidance about the federal tax consequences of a lump-sum risk transfer program.
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