IRS Puts Hurdle in Way of Pension De-Risking


It just got more difficult for defined benefit plans interested in de-risking strategies to replace various types of annuity payments for participants already in pay status with lump-sum payouts. 

The Internal Revenue Service and Treasury Department announced in Notice 2015-49 on July 9 their intentions to amend the required minimum distribution rules under tax code Section 401(a)(9) to bar defined benefit plans from replacing various kinds of annuity payments with lump-sum payments, or other accelerated distributions in some circumstances, essentially bringing to a halt a growing practice among struggling pension plans.

“The regulations, as amended, will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution,” the agencies said in the notice.

The IRS and Treasury said the future changes will be effective as of July 9, 2015, with some exceptions for “certain accelerations of annuity payments.”

A growing wave of companies have engaged in de-risking strategies, such as transferring all or a portion of their pension plan's assets and liabilities to an insurance company through an involuntary annuity buyout or directly to plan participants through a voluntary lump-sum distribution. Activity has picked up in this space since 2012, when General Motors Co. led the way for other multibillion-dollar jumbo deals by offering a lump-sum distribution payment to 42,000 retirees and their beneficiaries.

David N. Levine, a principal at Groom Law Group Chartered, told Bloomberg BNA that the notice reflects concerns that the IRS, the Department of Labor and the Pension Benefit Guaranty Corporation have had about these risk-transferring practices, particularly when plans offer participants in pay status the option of taking a lump-sum distribution within a specified window.

The federal agencies “like lifetime income. They're not as enamored with lump sums from pension plans. At the same time, they haven't had many tools to shut down or limit these windows,” Levine said. What the notice basically does is say, “Sorry, effective now, you can't do it anymore,” he said.

While the guidance will rein in some of the de-risking practices, it won't completely curtail them, Thomas G. Schendt, a partner in Alston & Bird LLP's Washington office, told Bloomberg BNA.

“It doesn't curtail it as much as they could have done, but it does have some impact on it,” he said.

Joshua Gotbaum, former director of the PBGC and guest scholar at the Brookings Institution, praised the guidance, telling Bloomberg BNA, “Today, the Treasury acted to protect retirement security, by making sure that pensions cover retirees for life, rather than being converted to a lump-sum payment that is here today and gone when people really need it.”

Excerpted from a story that ran in Pension & Benefits Daily (07/10/2015).

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