Notice 2015-49

[Andy the Actuary]

Anyone care to conjecture a rationale for this ruling which appears to be a solution for a non-existent problem?

[Effen]

The IRS perceives that elderly people are being taken advantage of in these lump sum buyouts. They are also concerned about changing mortality standards and want to slow down lump sum windows that occur before they can get the new 417(e) tables released.

Their main position is they don't agree with the two PLRs that were released that many have been using to justify lump sum windows for retired populations. In their mind the final regulation won't "change" anything that existed before the PLRs.

You will still be able to convert retired benefits to lump sums upon death, termination of employement, or in conjunction with a plan termination. You will not be permitted to simply offer your retired population a lump sum buyout.

[Andy the Actuary]

Thank you. I'm almost elderly and look forward to the government protecting me!

[mbozek]

The Obama administration believes that annuities should be the preferred form of payment for retirees and wants to discourage lump sums. Of course this change only applies to retirees who are currently receiving an annuity benefit. It doesn't apply to employees who can elect to receive a lump sum instead of an annuity when they retire.

[Andy the Actuary]

2015-49 appears to apply only to pensioners who have passed their RBD and not to younger recipients . Do you read it to apply to all pensioners irrespective of their age?

[Mike Preston]

Yes. Keep in mind that a person who elects to commence an annuity at any age must select an option that satisfies 401a9. The RBD stuff we fixate on is only for defining the latest age at which benefits must commence. But 401a9 is much more than just a pointer to how an RBD is determined.

[Andy the Actuary]

So, Mike, does this in your mind mean that if a participant started to receive monthly payments at age 55 that he could not elect a lump sum settlement at age 65? If this is the case, then Notice 2015-49 would eliminate retiree buyouts altogether.

[Mike Preston]

Correct, he could not. Yes, it does, with respect to existing benefits. If an individual retired at 55, receiving $1,000/month is provided with an increase from $1,000 to $1,200 through an amendment to increase benefits, said retiree could be offered a cashout of the additional $200/month. Once the payment of the increased $200/month is commenced in the form of an annuity, no cashout unless the plan is terminated.

[Andy the Actuary]

Thank you all.

[mbozek]

According to the iRS notice The reg is intended to prohibit offering a lump sum option to a retiree who is currently receiving an annuity. The IRS issued PLRs 201228045 and 201228051 which allowed a lump sum option under the existing (a)(9)-6 Q/A-1 regs. as a one time offer of a benefit increase resulting from a plan amendment..These rulings would now be prohibited.

[My 2 cents]

So, Mike, does this in your mind mean that if a participant started to receive monthly payments at age 55 that he could not elect a lump sum settlement at age 65? If this is the case, then Notice 2015-49 would eliminate retiree buyouts altogether.

1. Eliminating retiree buyouts altogether is, in my mind, the exact reason for the notice. Just because they let Ford do it a couple of years ago does not mean that it is something that should be permitted. As far as I am concerned, if their stated reason had been "because we said so" instead of whatever point they were making with respect to 401(a)(9), it would have been as welcome to me. I am opposed to the idea of the plan sponsor trying to save money by persuading retirees to give up their annuities. I might think differently if they were being offered lump sums based on insurance company net purchase rates instead of the rates under 417(e).

2. I don't think that it is possible to explain a lump sum buyout to a retiree population in a way that will be clearly understood by the retirees. I don't think that anyone already in pay status should be offered any choices when a defined benefit plan terminates, because of the potential for abuse. Let people not in pay status choose lump sums (whether doing so is in their best interests or not), but the sponsor should have to get out the wallet to buy annuities for those already retired.

3. Even if you do explain the offer in a way that allows the retirees to clearly understand their choices, while there may be some exceptions, how many septuagenarians and octogenarians are able to suddenly become competent investment managers?

4. If the participant had retired with spouse A, under a QJSA, then later divorced and married spouse B, how do you handle the spousal consent requirements for the election to cash the annuity out? Surely you would need the consent of spouse A (who would be losing his or her potential survivor annuity) and spouse B (since canceling the original QJSA for a new annuity start date would also require waiver of the QJSA for the current spouse), and what incentive would spouse A have to give up the survivor benefit?

5. And then there are the people unable to act on their own behalf. If a nursing home has power of attorney for a resident retiree, is it not obvious that there is a serious conflict of interest?

[Andy the Actuary]

All valid 2-cents worth points.

Presumably, then, the feds should step in and crack down on unscrupulous lenders charging usurious interest rates to uneducated people? A lot more egregious and wide-spread than annuity buyouts. See attached which is unconscionable.

Frankly, I don't believe the feds have gone far enough -- lump sums should be forbidden -- period, as they frustrate the purpose of a defined benefit pension plan to provide a guaranteed lifetime income. Unless there was an exception, this would likely eliminate the non-retirement vehicles that are no more than tax-shelters for wealthy professionals.

SLPD 3-12-2015 She borrowed $100, and paid back $3,592.pdf

[My 2 cents]

Another thought on the subject of lump sum windows for retirees (back in the days when they were permitted):

While the decision to offer such a program may be considered to be a settlor function (i.e., made by the sponsor unencumbered by fiduciary issues), it should be clear that carrying out the program if adopted, from design of communication materials to the management of elections, is unquestionably subject to fiduciary standards, and must not in any way put the sponsor's financial interests ahead of those of the participants, especially if it is not made clear what adverse effects of an affirmative election might be.

We are all better off without it being in the toolkit.

To Andy the Actuary: I am not going to look at the article you attached to your last comment. I am too easily outraged and it would probably not be good for my health to read it! Also, does the ability to take lump sums from defined contribution plans frustrate their purpose of allowing workers to save money for retirement? I still remember a conversation with an HR head who pointed to a car in the employee parking lot, identifying it as her distribution from the retirement plan at her former employer. Tsk, tsk!

[david rigby]

2 Cents touches on an excellent point: why isn't there a requirement to rollover a(ny) lump sum distribution?

Of course, Congress pushed that button (a little) when they added IRC 401(a)(31) for direct rollovers/20% withholding. (I doubt we will see anything stronger anytime soon.)

[tymesup]

It's not OK for a plan to change the rules once the game has started, but it's OK for the government to do so.

It's OK to offer a participant a lump sum at one point in time, but not at another.

Employers should just keep paying PBGC premiums, no matter how high they go.

Employers should just keep paying their consultants fees', no matter how high they go.

The government may change the rules whenever it would like to do so. It does not need to announce the changes in advance. It does not need to ask for comments.

Have I got this right?

[mbozek]

There will never be any laws restricting the ability of employees to take their retirement benefits in a lump sum when they are eligible to receive benefits, e.g., termination because employees want portability of their money and Congress does not want to take any political heat from voters who don't want restrictions on their benefits. Congress will leave it to the employer to decide what the distribution options should be. I remember back in the day when TIAA -CREF only issued retirement annuity contracts (RA) that did not allow a lump sum unless the employee died. They caught a lot of flack for the lack of portability and colleges began offering mutual funds in their retirement plans so T/C created group retirement annuities (GRA) that paid a lump sum. Besides buying a car is good for the economy.

One unknown unknown is whether congress may weigh in on the change in the tax regs limiting lump sum options since it will increase the cost of funding DB pension plans which increases deductions and reduces tax revenue.

[Belgarath]

If I may, let me play Devil's Advocate for a moment. I don't for a moment dispute most of the points made. But, If I had reason to believe my remaining life expectancy was short, and my spouse (if I'm married) is amendable and will have sufficient assets, why is my being able to get a lump sum so evil? This would be a great thing in some circumstances. Or if the lump sum is made based on low current interest rates, and rampaging inflation returns in the future so that my monthly annuity is practically worthless - there are various scenarios one could posit.

However, for policy purposes, with the greatest good for the greatest number, etc...I realize most people are better off with the monthly payment.

[My 2 cents]

Back when I was younger, I thought that retirement plan participants who took lump sums should be deemed ever after to have assets at least equal to the present value of those annuity payments that would not have been payable yet, for purposes of eligibility for such things as Medicaid and other welfare programs. I recognize now that this would be too harsh in effect. But "buying a car" is not good for the economy to the extent that it is being bought with funds that will be needed later for food, clothing and shelter, especially if the general public is expected to provide those necessities.

Between the fact that people are not all that good about saving/preserving saved funds for their old age and the fact that nowadays there are too many ways for the unscrupulous to separate lump sum recipients from their funds (scams, identity theft, unsuitable investment vehicles, etc.), I have enough issues dealing with the currently-employed choosing lump sums. For those long past their working days, it just seems to easy for bad decisions to be made. I can easily imagine a courtroom scene where an elderly person testifies "I never thought that if I took the lump sum offer that the monthly checks would stop." Can you?

[jpod]

Naive, perhaps, but maybe the government should figure out something to do to actually encourage large employers (rather than just doctors and lawyers) to go back into the DB business, rather than driving them away in droves.

[mbozek]

Other than offering free money to employers to contribute to the plan and claim a tax deduction I don't know of any incentive that would motivate an employer to take on a mortgage with unlimited liability for an infinite duration for an expense that adds 0 to the value of the plan sponsor. This is why only about 25% of S & P 500 offer DB plans and they are phasing the out their plans or closing participation to new hires. Its my understanding that Boeing stopped benefit accruals to its DB plan as of Jan 1.IBM terminated its cash balance plan about 10 years ago.

[jpod]

Getting rid of the reversion excise tax would be a good start. Allowing some access to surplus funds without having to terminate to fund employee health coverage costs would be another. I am sure that there are plenty of smart policy wonks in DC who could come up with ideas.

[AndyH]

It bothers me that the IRS seems to be liberally making policy instead of enforcing law. Overreach IMHO.

[Andy the Actuary]

Since America's bicentenniel year, actuaries have witnessed and been forced to participate in spoiled fruits of wrapping a social code (ERISA) around the Internal Revenue Code.

As pension forfeitures accrue owing to pension recipient mortality, the Plan possibly enjoys actuarial gains. Ultimately, this can lead down the line to reduced contributions and to taxable entities lower tax deductions. If the money is lump summed, the IRS will actually accelerate its revenue though the tax rate will be personal rather than corporate. From a policy perspective, the IRS would get paid sooner, which on the surface seems desirable.

But then the old social code competes. The government must protect retirees from themselves. Before they retire, protection comes in the form of reams of incomprehensible notices and disclosures. Forget ,hat whether you are a paralegal or work on an assembly line preparing burgers at McDonalds, you get the same words.

Most distressing is the other Andy's (AndyH) comment that the IRS has added lawmaking to its agenda while the checks and balances of our government stand idley by.

[figure 8]

I'm curious what others think about this example:

Small plan, say under 10 participants. But the owner (who is still actively working and running the company) is receiving an RMD each year. He is receiving an annual annuity payment - so just 1 payment each year. The amount increases each year due to ongoing accruals.

Even though he receives his payment in one "lump sum" each year, is this Notice saying that, since it's calculated as an annual annuity amount, he's going to have to continue to receive annuity payments once the plan terminates? Unfortunately that's how it's looking to me. That's very disappointing though, because the only reason he's taking annuities now is because it was thought that it could be changed once the plan terminates to a rollover.

Also, another question on something not necessarily related to my first situation - this Notice seems to say that the IRS "intends" to make an amendment retroactive to 7-9-15. What about a plan that is terminating right now, and intends to pay people out by the end of the year? Obviously it's a gamble because we don't know when the IRS will actually amend things (or if they will even actually do it as intended), but what if the plan can pay out before any actual amendment goes into place? Would that matter in the eyes of the government?

[figure 8]

The main line I'm hinging on from the Notice is:

"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."

A-13 refers to the line of the code that allows the annuity payment period to be changed in conjunction with (among other things) retirement or plan termination.

I'm just hoping there's something I'm overlooking here.

[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.