Notice 2015-49

[Effen]

I think you are getting some terminology confused. In your example, he is NOT receiving a "lump sum". He is receiving an annual annuity. A lump sum is a one-time payment equal to the present value of the annuity.

Your participant will still be able to receive a lump sum upon termination of employment, or upon plan termination, assuming the plan is properly amended to accomplish it.

[figure 8]

Thanks for the reply.

Okay, yea. I know it's technically an annual annuity. I was just trying to do some creative thinking.

Regarding your last statement though - how do you see that as the case, given this language from the notice: "The exception for changes to the annuity payment period provided in § 1.401(a)(9)-6, A-13 (as intended to be amended) would not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments."

[rcline46]

Because your participant did NOT elect an annuity, he did not elect ANYTHING. He is being forced by the law to Required Minimum Distributions.

[Effen]

Also, the IRS has been very clear in their comments since the notice was published that they do not intend to change anything that existed before a few PLRs were released that triggered the run to cash out retirees. They have been clear that participants who are receiving an annuity will be able to convert to a lump sum at the time of separation from service or plan termination.

[Mike Preston]

Reed, your statement is not correct in a db plan environment. The participant must commence receipt of an annuity allowable under the terms of the plan. If the participant signs nothing, he or she is paid out in the normal form and it counts as an election.

[rcline46]

While I agree the participant must get what looks like an annuity in a form provided by the plan, I disagree that no affirmative election counts as an election. The participant is being forced (required) to take a distribution they did not choose. When they choose to make an election, they can choose any form provided by the plan where someone who made a choice earlier usually cannot make another choice later.

[mbozek]

Reg 1.409(a)(9)-6 Q/A-1(a) states that distributions of a participant's entire interest under a DB plan must be paid in the form of periodic annuity payments for the life or joint life of employee and beneficiary. "Once payments have commenced over a period the period may only be changed in accordance with A-13 of this section." Seems like an automatic distribution without an election is an annuity payment for life under the plan.

[Mike Preston]

Reed, you may have a plan that keys the options available under A-13 to whether or not an affirmative election has previously been made. But I doubt it.

[figure 8]

Reg 1.409(a)(9)-6 Q/A-1(a) states that distributions of a participant's entire interest under a DB plan must be paid in the form of periodic annuity payments for the life or joint life of employee and beneficiary. "Once payments have commenced over a period the period may only be changed in accordance with A-13 of this section." Seems like an automatic distribution without an election is an annuity payment for life under the plan.

Yea, unfortunately I see this as not mattering whether something is elected. A-13 provides for a change from annuity to lump sum, and the Notice seems to say that A-13 can no longer do that.

I imagine there are quite a few small plans out there with owners who have RMDs payable as annuities. The intent of the Notice is to put an end to retirees being "cashed out" of plans via lump sum. An owner of a small plan taking an RMD is a totally different situation. Often times these really small plans have no retirees, and it seems silly to require this owner to find an annuity provider when terminating the plan, when he had been intending to do a rollover of his entire remaining benefit at termination all along.

Hopefully someone can offer some hope that these people be treated differently when the IRS issues its actual amendment? As of right now, it doesn't look favorable for these small plan RMD-taking owners.

[Mike Preston]

Read this whole thread. Aren't you confusing A-13 with A-14?

[figure 8]

Also, the IRS has been very clear in their comments since the notice was published that they do not intend to change anything that existed before a few PLRs were released that triggered the run to cash out retirees. They have been clear that participants who are receiving an annuity will be able to convert to a lump sum at the time of separation from service or plan termination.

Effen, is there a place I can see these comments? The ERISA attorney I talked to said that their practice is currently pretty firm on the stance that basically no one receiving an annuity can convert to a lump sum, even if the plan is terminating. And this is generally speaking for all plans, not just a comment based on a particular plan's document or anything.

[figure 8]

Read this whole thread. Aren't you confusing A-13 with A-14?

I don't think so. 13 is the one that deals with changing from an annuity to a lump sum. But it's certainly possible I'm just plain confused about something in general with this Notice. I hope I'm wrong, but I'm not understanding how I'm misinterpreting this section from the Notice (bolded/underlined is my emphasis):

The Treasury Department and the IRS intend to amend the regulations under § 401(a)(9) that address the distribution of an employee’s interest after the required beginning date. Those regulations reflect an intent, among other things, to prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a defined benefit plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. The Treasury Department and the IRS have concluded that a broad exception for increased benefits in § 1.401(a)(9)-6, A-14(a)(4) that would permit lump sum payments to replace rights to ongoing annuity payments would undermine that intent. Accordingly, the Treasury Department and the IRS intend to propose amendments to § 1.401(a)(9)-6, A-14(a)(4) to provide that the types of permitted benefit increases described in that paragraph include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments. The exception for changes to the annuity payment period provided in § 1.401(a)(9)-6, A-13 (as intended to be amended) would not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

[Effen]

Sorry, I don't have anything in writing but I have been at several meetings with high ranking IRS representatives who were very clear on this point. Once the minutes from the meetings are published, I can provide something more concrete.

In the meantime, you can assume that by the time your participant is ready to terminate the plan, it should be accepted as common knowledge.

[figure 8]

Sorry, I don't have anything in writing but I have been at several meetings with high ranking IRS representatives who were very clear on this point. Once the minutes from the meetings are published, I can provide something more concrete.

In the meantime, you can assume that by the time your participant is ready to terminate the plan, it should be accepted as common knowledge.

Thanks. That is reassuring. Was this point that they were clear on regarding all annuitants who are in a plan that's terminating, or was it just regarding someone who is taking RMDs?

[Mike Preston]

It is all annuitants. You need to read your bolded section again. 13 and 14 work together. 13 says "here are the reasons you can accelerate". Clearly, plan termination is one of them. Another is a "benefit increase" as defined in 14. The "benefit increase" in 14 is being amended out and the reference in 13 will be changed so that it no longer references a benefit increase as defined in 14. There is nothing in anything that says the other reasons allowed for acceleration in 13 are being removed.

But to walk back from this just a little bit, the ability to accelerate a true increase remains. So, if somebody is receiving $1,000/month and the plan terminates then they can be offered an accelerated form. Further, if somebody is receiving $1,000/month and a benefit increase increases this amount to $1,100 then they can be offered an accelerated form only on the increased amount of $100/month unless the plan is being terminated.

[figure 8]

Thanks, Mike. It makes my head hurt, but I see it now. It's sort of like one of those magic eye books - I just have to stare at the IRS language in just the right way for it to become clear.