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Secure Act 2.0 - Will it impact allocation of retirement benefits?

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        Excerpted from the PlanSponsor newsletter article by Paul Mulholland, with [bracketed comments by DSG].

    Although the SECURE 2.0 of 2022, primarily focused on defined contribution plans, it also contains reforms to defined benefit [pension] plans. 

    Section 342 of SECURE 2.0 - [effective January 1, 2023] - the biggest change to DB plans found in the legislation, changes disclosure rules for DB plans that offer lump sum payments.

    DB plans often offer participants an opportunity to receive a lump sum instead of an annuity, which sponsors sometimes encourage, since when they remove the participant from the plan, they pay less insurance to the Pension Benefit Guaranty Corporation.  [We normally identify these plans as a "cash balance" plan, a hybrid plan that allows for an annuitized payout that you would expect from a defined benefit plan, and an option to make a lump sum withdrawal that you would expect to see in a defined contribution plan. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/cash-balance-pension-plans]

    [Is it better to take a lump sum or an annuity? See -

    Congress was concerned that many participants were making bad financial choices related to these lump sums, so they required new disclosures for DB plans that offer them.

    “For years, the federal government has allowed businesses to get out of their pension obligations by offering cash settlements to their employees, frequently in amounts that are much less than insurance companies would charge to assume those obligations.  Most people took the check, which was often for tens of thousands of dollars, without knowing that their pension rights were worth far more, and the government didn’t require that they be told.  Now, finally, Congress is acting to help those who still have their pensions.”  

    [In other words, the present value of a lump sum payment was far less than the present value of the stream of annuitized  benefits that the Participant would have received over his/her lifetime (assuming that the COLA rate selected is correct, and assuming that the PBGC  discount rate selected is correct, and assuming that the Participant retires at the age selected, and assuming that the Participant's life expectancy is correctly predicted by the mortality tables used, and assuming that the Alternate Payee lives long enough to receive his/her share of the Participant's benefits.]  

    The new rules under Section 342 require the plan to communicate the following to participants at least 90 days before the lump sum becomes available: the value of the lump sum relative to annuities available under the plan; the interest rate and mortality figures used to calculate the lump sum; that buying their own annuity with the lump sum could be more expensive than taking an annuity under the plan; and the tax rules involved in taking a lump sum.

    Many plan participants have already taken lump sums without knowing it may not have been in their best interest. Gotbaum says, “After more than a million horses have left the barn, the federal government says you should put up a sign saying that, ‘By the way horses, you have other options,’ i.e. you’re being screwed.”

    [You will notice that nothing in the Secure 2.0 Act addresses divorce or QDROs. And these are issues that we must consider.  

    1.  Is the Plan a "cash balance" plan that offers a lump sum payment or an annuitized payout? 
    2.  If the Plan is not a "cash balance" plan can it nevertheless offer a choice between a lump sum payment or an annuitized payout?  In short, have all defined benefit plans been turned into "cash balance" plans regardless of the language of the Plan documents? 
    3.  Can a Participant elect to take a portion of the defined benefit plan as a lump sum and the balance as an annuitized payout?  Or must it be one or the other?  
    4.   Can the Alternate Payee who has been awarded a percentage of the marital portion in accordance with the Bangs/Pleasant formula take his/her share: (i) all as a lump sum using the denominator of the coverture fraction as the date of divorce; or, (ii) all as an annuitized payout, and if so, must it be in the form of a life annuity or will other options be available; or, (iii) partly as a lump sum and partly as an annuitized payout? 
    5.  Will the Alternate Payee be bound by the options selected by the Participant? 
    6.  If the Alternate Payee can elect options different from those options selected by the Participant doesn't that change the allocation of benefits from a "shared interest" (per Bangs/Pleasant) to a "separate interest"?
    7.  If the Alternate Payee selects a partial lump sum, is it clear that any survivor annuity benefit will be applicable only to the annuitized payout?]  

    [Thought experiment:  See attached present value calculation.  Let's say our Participant, Bill, has reached age 65, the normal retirement date in his pension plan where he can get full and unreduced benefits.  His HR department advises him that his monthly pension will be $5,000/month for his lifetime, or he can take an immediate lump sum of $700,000 and either roll all or part of it over tax free to an IRA  or all or part of it take a taxable distribution.  Bill consults his local actuary, Marc Pushkin, in Baltimore, and asks for advice.  "What is the present value of my pension, Marc?"  

    Marc pulls up his program, (more sophisticated than the one used by me,) and plugs in $5,000/month as the monthly pension amount, and Bill's current age, 65.  

    He checks the PBGC website - and determines that the current discount rate is 2.8%. and assumes that it will remain the same from the date that Bill goes into pay status until his death.*   https://www.pbgc.gov/prac/interest/ida - (Disregard the fact that the January, 2023, 4044 rate is actually 4.86%.)  *Speculative?

    He checks with the plan and finds out that, on the average,* retired Participants receive a 2% COLA each year and Marc assumes that this will remain the same from the date that Bill goes into pay status until his death. Speculative?  Actuaries believe that if you put your right foot in boiling water and your left foot in ice water, on average you will be comfortable.

    He assumes that Bill will actually retire at age 65* - although these calculations are often made years earlier - and he may retire earlier, or later, or he may die and never collect a dime of his pension. *Speculative?  

    He checks the UP-94 mortality table and determines that Bill will live for 17.9 years after the date of his retirement at his assumed age of 65.  Speculative because Bill has had 3 heart attacks and suffers from atrial fibrillation and ventricular tachycardia not well controlled by medication.  Marc will admit that mortality tables are for generic people and does not take in account things like medical history or genetic factors. 

    Based on these assumptions, Marc computes the present value of Bill's pension to be $964,865.*  In other words, if you put $964,865 into a savings account earning 2.8% interest per annum until Bill's death, and if at age 65 Bill actually retires and starts to take his pension payments of $5000/month, and if he receives a COLA of 2% per annum until his death, and if he lives for another 17.9 years after age 65, his savings account will be ZERO.  If the 2.8% interest discount rate changes, or if the COLA percentage changes, or if Bill expires before 17.9 years have expired, the present value of his pension could be less than $964,865 - as little as ZERO if he dies before receiving that first check.  *In the past, before the enactment of Family Law Article, Section 8-204(b)(2), it was common for the court to make a monetary award to the Alternate Payee of 50% of the present value computed as above.  They still have the statutory authority to do so if the Alternate Payee complies with the notice requirement of that section.

    And did I mention that the above calculations don't take income taxes into account and have a tendency to change from year to year.    
    So Bill has two options:  Take an annuity and hope that over the next 17.9 years all of the assumptions above will fall into place.  Or take a lump sum of $700,000.  What would you advise him to do?  Plus valet in manibus avis unica quam dupla silvis - a bird in the hand is worth two in the forest.  A contented mind is a perpetual feast.  Half a loaf is better than none.  Better an egg today than a hen tomorrow.  "Do you feel lucky"... Dirty Harry

    Let's say Bob and Helen have two major assets, the house with an equity of $500,000, and Helen's pension with a present value computed as above of $625,000.  Helen's attorney suggests that Helen keep her pension and Bob keep the house equity.  What do you tell Bob to do?   Assume a 20% tax rate on Helen's pension so that $625,000 less 20% state and Federal taxes = $500,000.  Suppose the equity in the house was only $425,000?  Food for thought.]  

I am looking for input concerning the impact, if any, that Secure 2.0 will have on the allocation of benefits under defined benefit and defined contribution plans. 

If, for example, the Participant retires during the marriage and elects to annuitize his defined contribution vested balance, and if a divorce occurs at some later date, is the Alternate Payee bound by the Participant's election.  Can the Participant make such an election without the consent of his current spouse?  Can the Participant elect a life only option and deprive the Alternate Payee of any survivor annuity benefits?   Can the Participant elect survivor annuity benefits that will not be available to the Alternate Payee if she predeceases the Participant?   Will a QDRO supersede/revoke/prevent/direct such an election? 

I have seen nothing addressing the original Secure Act or Secure 2.0 as it relates to the allocation of pension and retirement benefits and/or the ability of a QDRO control such allocation of benefits.   


DSG Listserv PV Computation.pdf

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Since the Retirement Equity Act of 1984, an ERISA-governed defined-benefit pension plan’s participant does not elect against a qualified preretirement survivor annuity or a qualified joint and survivor annuity without the participant’s spouse’s consent.

ERISA § 205 [29 U.S.C. § 1055] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true

Also since the Retirement Equity Act of 1984, a qualified domestic relations order may provide a benefit to a participant’s spouse or former spouse.

ERISA § 206(d)(3) [29 U.S.C. § 1056(d)(3)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true

Neither SECURE 2019 nor SECURE 2022 impairs those provisions of the Employee Retirement Income Security Act of 1974.

If new ERISA § 113 requires a notice or disclosure, it must, among other requirements, compare a single sum to a qualified joint and survivor annuity.

As before, how a participant and a spouse negotiate their division of property happens, subject to the QDRO conditions, under law external to the ERISA-governed pension plan.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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I'm not commenting on QDRO related issues, but this is not an issue for cash balance plans in general, nor for any other defined benefit plan with a lump sum option. It is an issue for pension plans that amend for a limited time lump sum window during which a participant must decide between a lump sum or annuity.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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What CuseFan explains is why my note said: “If new ERISA § 113 requires a notice[.]”

ERISA § 113(a) applies only when a pension plan’s sponsor “amends the plan to provide a period of time during which a participant or beneficiary may elect to receive a lump sum, instead of future monthly payments[.]”

I reminded us about ERISA’s spouse’s-consent and QDRO regimes because the inquirer’s law practice is domestic relations.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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  • 1 month later...


There are a few SECURE 2.0 provisions that affect QDROs that you may have overlooked. 

SECURE 2.0 Act section 339 says that now DROs issued by Indian Tribal Governments (or subdivisions, agencies or instrumentalities thereof) under tribal domestic relations laws can now be qualified - just as if they were issued by a State.  

Another interesting SECURE 2.0 provision is section 327, which says that starting in 2024, employer-based plans can now permit surviving spouses to elect to treat the account/benefit they inherit from the participant as their own for required minimum distribution (RMD) purposes.  (Up to now, this type of treatment was only available for IRAs inherited by spouses, but not for employer sponsored plans).   This could affect the latest time when an alternate payee's separate account or segregated share can commence to be paid out under a QDRO. 

Yet, another interesting provision, section 325, makes designated Roth accounts not subject to the RMD rules during the participant's lifetime and makes them more like Roth IRAs (which could affect the timing when such accounts are required to be commenced with regard to an AP's separate account while the participant is still alive). This section is applicable starting with the 2024 distribution calendar year. Generally, under the RMD rules, the AP's account is treated like a separate account of the participant while the participant is still alive and then is treated like a beneficiary account after the participant's death. So, this could also delay the RMD commencement timing for an AP's separate accounts (that are held in a designated Roth account) until after the participant's death. If at the death of the participant, the spousal AP elects to treat the account as her own under the surviving spouse election rule I mentioned in the previous paragraph, it would seem the AP could then delay the RMDs on the designated Roth accounts portion of her account until the AP's own death.  (Again this type of treatment was available in the IRA world before, so an AP who was allocated a portion of the participant's designated Roth account would have been able to achieve a similar result by rolling the designated Roth account to her own Roth IRA account. Now AP's can get the same treatment in an employer sponsored plan - that is, if the plan doesn't force them out sooner than the law requires). 


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