Ending Lump-Sum Payouts for Retirees in Pay Status

The Treasury Department (Treasury) and the Internal Revenue Service (IRS) have issued guidance (Notice 2015-49) that puts a halt to one defined benefit plan de-risking approach: offering participants already in pay status the opportunity to elect lump sums or other accelerated payment forms. Other lump-sum de-risking strategies (e.g., offering lump sums to terminated vested participants, through early retirement windows or at plan termination) are not affected. Certain lump-sum offers to pay-status retirees already in progress are grandfathered, as discussed below.

The Notice states that Treasury and the IRS will be issuing regulations, effective July 9, 2015 (the date of the Notice), that amend the minimum required distribution (MRD) rules to provide that the conversion of an annuity that is in pay status to an accelerated payment (such as a lump sum) violates the MRD rules.

The Notice provides that the IRS will not challenge pay-status lump-sum offers that are underway as of July 9, 2015 that are part of a program described below:

• Programs adopted (or specifically authorized by a board, committee or similar body with authority to amend the plan) prior to July 9, 2015;
• Programs for which a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015;
• Programs with respect to which a written communication to affected plan participants stating an explicit and definite intent to implement the lump-sum risk transferring program was received by those participants prior to July 9, 2015; and
• Programs adopted in accordance with an agreement between the plan sponsor and an employee representative (with which the plan sponsor has entered into a collective bargaining agreement) specifically authorizing implementation of such a program that was entered into and was binding prior to July 9, 2015.

If you have any questions about this guidance, please contact your Sibson consultant or send us a note.