GM and Ford, sponsors of two of the largest pension plans in the country, are offering lump sum settlements to retirees who are already collecting monthly pension benefits. The IRS approved each company's pension buy-out proposal earlier this year in PLRs 201228045 and 201228051.

Cashing out these benefits offers many advantages to the employer. The companies no longer take on the risk of investing sufficient assets to pay future benefits and no longer have to pay pension insurance premiums to the Pension Benefit Guaranty Corporation (PBGC) on behalf of participants who take the lump sum offer. Plan participants may be reluctant to give up a guaranteed lifetime stream of income, but the employer may elect to purchase commercial annuities for the benefit of retirees who decline the lump sum option. For example, Verizon announced it would transfer some of its pension liabilities to an insurance company by purchasing a group annuity contract, without offering lump sum distributions.

In addition to the financial and accounting considerations that go into designing a pension buy-out program, it is important to consider tax and pension rules. Although the IRS approved the Ford and GM plans, employers hoping to implement their own pension settlement program should consider requesting a ruling specific to their own program. Some of the decisions involved with carrying out a pension buy-out program, such as choosing a commercial annuity provider, trigger fiduciary obligations. Plan sponsors may want to appoint an independent fiduciary to represent the interests of the plan and its participants in transactions involving the transfer of pension liabilities to an annuity provider.

-- Vanessa Walts