No lump-sum cash payment to the beneficiary of a retiree?

[joel]

I understand that the IRS is currently considering the elimination of lump-sum settlements to the beneficiaries of a retiree. Please bring me up to date? What types of plans will be affected?

Peace,

Joel L. Frank

[Mike Preston]

Where did you hear that?

[joel]

On the website of the New York State Teachers' Retirement System as follows:

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IRS Considers Change That Would End Lump Sum Beneficiary Payments

The Internal Revenue Service (IRS) is considering a change that would prevent us and other pension systems from offering retirement options providing a beneficiary with a lump sum payment.

STRS has joined with other pension administrators, lawyers, financial consultants and related organizations to voice opposition with this possible change. While it is unclear when to expect an IRS ruling on this matter, we will use this Web site, our Hotline (800-782-0289) and System publications to share information as it becomes available. You may also want to monitor the IRS Web site (www.irs.gov).

In the meantime, System members who request estimates of their STRS retirement benefits will receive the following disclaimer:

"IRS regulations may eliminate retirement options that provide a beneficiary with a lump sum payment upon the death of a retiree. As a result, although we may have provided estimated figures under these options, they may not be available to you at retirement."

Updated 9/5/2002

[Mike Preston]

Oh, that.

My understanding is that this would be the result of the revised 401(a)(9) regulations. Specifically, the elimination of the account balance method forces a plan to provide, at age 70 and 1/2, the participant with an annuity distribution. While the annuity can provide for continuation upon death, such as is paid with a joint and survivor annuity, it doesn't seem to be able to provide a lump sum death benefit.

As you can surmise, I am pretty much in the same camp as those that posted the information on the nystrs.org web site. That is, I hope that the efforts being marshalled to convince the IRS to restore the account balance method as a means of satisfying 401a9 in defined benefit plans will be successful.

I'm not aware of anything that would preclude a lump sum death beneift below the point in time when required distributions under 401a9 are required, though. In that sense, I think the language on the website is a bit rougher than it needs to be. But I suppose being able to offer the death benefit only up until a retiree reaches age 70 and 1/2 wouldn't mean much to most retirees.