On July 9, 2015 the IRS issued a Notice of its intent to disallow lump sum offerings to retirees who are already receiving monthly benefits from the plan. Current law prohibits payments to retirees that would increase later in the annuity payment period (with limited exceptions such as for cost of living adjustments and plan amendments that increase benefits) because it could be used as a tactic to defer and/or minimize taxation of benefits. Making a lump sum offer to retirees is an increase later in the annuity payment period not expressly allowed by law, but many have interpreted the law to permit this activity, and it has been used often in recent years to de-risk a pension plan. There has been much controversy surrounding this de-risking tactic, but not because of deferring taxation, even though that’s the area of the law that is now expressly prohibiting it. Pension rights advocates believe that retirees, by turning in their guaranteed monthly income for a lump sum payment, are taking on risk they are neither properly informed about nor prepared well to manage. The IRS Notice 2015-49 is effective immediately and language changing the law will follow. Pension plans that have already been amended or have taken intentional moves toward the process of offering lump sums to retirees by July 9 may follow through with the process. In addition, it appears at this time that the IRS will still allow lump sum offerings to retirees upon plan termination and in other limited circumstances that are permitted by the plan document.
Blog authored by Cheryl Gabriel, CPC.