Lump-Sum Payments Focus of Debate Over De-Risking Strategies, Attorney Says

Plan sponsors' use of lump-sum payments to settle pension obligations for retirees in pay status has emerged as the leading issue in the debate over pension de-risking, an employee benefits attorney said during a recent conference session.         

Rosina B. Barker, a partner at Ivins, Phillips & Barker Chartered in Washington, said that it is unclear under the law whether a plan sponsor can offer retirees in pay status a lump-sum option except as part of a plan termination.         

Plan sponsors' ability and desire to distribute lump sums to participants in pay status and follow up with annuity purchases for those not taking the lump sum has become the focus of the political and policy action on de-risking, she said Jan. 25 to a session of the American Bar Association Section of Taxation's 2014 Midyear Meeting in Phoenix.         

Various pension de-risking strategies have emerged in recent years as pension plan sponsors have sought to deal with financial, demographic and Pension Benefit Guaranty Corporation premium risk, Barker said. In addition to design- or portfolio-based strategies, plan sponsors also have looked to settle their pension obligations either via lump-sum distributions or purchase of annuity contracts, she said.         

There is no legal problem under the Employee Retirement Income Security Act or the tax code in an offer of a lump sum or annuity to active employees as part of a plan termination or to terminated vested employees in pay status, Barker said. However, she said, the law is not as clear on whether plan sponsors can offer retirees in pay status a lump sum, except in the case of a plan termination, which typically contemplates a spinoff into two separate plans, one for retirees in pay status and another plan for all other participants.         

In a pair of 2012 private letter rulings, the IRS was receptive to a one-time lump-sum offer to retirees in pay status, concluding that this constituted a permissible plan amendment increasing benefits under the plan, Barker said. However, she cautioned, those rulings are applicable only to the taxpayers who requested them.         

An employer contemplating this action today might want to consider getting a new PLR from the IRS, she said.         

Barker also said that the IRS might be having second thoughts about whether these PLRs were a good idea in the first place. “I hope we get an answer on that question soon,” she said.           

Barker said she thinks, however, that Congress settled the policy debate through a variety of statutory enactments favoring lump-sum distributions and participants' ability to manage their own retirement investments.         


While the question of lump sums to retirees in pay status dominates the current political and policy debate over de-risking, the use of group annuity contracts to settle pension obligation is also drawing policymakers' attention, Barker said.         

The ERISA Advisory Council, for example, recommended in November that the Department of Labor clarify that the “safest annuity available” standard under Interpretive Bulletin 95-1 applies even absent a plan termination, and that it consider safe harbors for fiduciaries in their consideration of the bulletin's factors in choosing an annuity, Barker said.         

Barker said these recommendations came as somewhat of a surprise, since most practitioners already believe that the “safest annuity available” standard applies with or without a termination.         

In addition, she said, outside of a few circumstances commanded under ERISA, the DOL has never suggested that there are safe harbors for fiduciary deliberations.         

Among the fiduciary duties suggested by witnesses who testified before the council is that the fiduciary make sure that the participant is never made worse off than his or her current situation, Barker said.         

“I don't see this as a fiduciary duty” or standard, she said, because a lot of plan amendments leave participants worse off.         

“However, this seems to be on the minds of people who are thinking about developing fiduciary law through the courts,” she said.

 Excerpted from a story that ran in Pension & Benefits Daily (1/29/2014).