Over the past several years, sponsors of defined benefit pension plans have examined and implemented ways to reduce their pension liabilities. This is sometimes referred to as “de-risking.” One de-risking option is for a plan to offer a limited-duration window where participants who normally do not have the option to do so can elect to receive the value of their benefits in a lump sum (rather than a stream of payments over an extended time-period).
Most often we see lump-sum windows being offered to participants who have terminated employment but are not yet eligible to commence benefits. However, in the not so distant past, the IRS issued some private letter rulings to companies allowing them to offer lump-sum windows to retirees already receiving annuity payments. In the wake of these rulings, according to the IRS, several plan sponsors that were not subject to the private letter rulings chose to amend their plans to provide for lump-sum windows for retirees receiving annuity payments.
This caught the attention of the IRS, which in 2015 announced its intention to adopt regulations (to be effective as of July 9, 2015) to prevent pension plans from offering lump sum windows to retirees who are already receiving annuity payments. (See our prior blog post on this topic by clicking here). This put an end to this de-risking practice.
Recently, the IRS unexpectedly reversed course and announced that it no longer intends to introduce those regulations. This effectively ends the IRS ban on a plan’s ability to offer lump sum windows to retirees receiving annuity payments. Plan sponsors now have a renewed opportunity to examine whether offering a lump-sum window to retirees makes sense for their plan.
Notwithstanding, offering a retiree lump-sum window is an endeavor that requires extensive analysis and planning for several reasons, such as:
• Several decisions need to be made by the plan sponsor. For instance, who will be offered the window and how long will the window last? • The plan document will need to be precisely amended to allow for the window. • Communications to participants who are offered the opportunity to participate in the window must be carefully crafted and include several required legal disclosures.