Last summer, the IRS effectively overturned a number of private letter rulings issued during the past several years. Those rulings allowed plans to amend their qualified defined benefit (DB) plan to permit a participant in pay status to elect to convert the remaining value of the participant’s annuity payments to a lump sum payment during a temporary “window period.” Subject to spousal consent rules, such windows provide limited-time opportunities for participants to elect to receive their benefits in the form of a lump sum where the plan doesn’t otherwise allow lump sum payments.
This “de-risking” strategy was seen as a way to address concerns over the increased volatility of plan assets and the fact that retiree longevity is increasing. In addition, the IRS indicated that it will amend the required minimum distribution rules to prohibit the acceleration of payments currently in annuity form.
Prior letter rulings generally allowed only lump sum distributions when the result increased the benefit amount. They also enabled the payout of an accelerated benefit in a joint and survivor payout plan only if the survivor was someone other than the retired plan participant.
Because of ambiguity about the actuarial standard for determining whether a lump sum benefit constituted an actual increase in benefits, most DB sponsors sought private letter rulings from the IRS authorizing their particular lump sum window programs. The IRS will no longer issue such rulings.
The IRS left the door open, however, to allowing lump sum and accelerated DB plan payouts. Sponsors may still use them if they occur in conjunction with a plan amendment written for that purpose, which was adopted or authorized by a private letter ruling, communicated to eligible plan participants, or incorporated into a labor union agreement adopted before the rule’s effective date.
For more information on BPM’s Employee Benefit Plan services, please visit our website page or contact Jenise Gaskin at 925-296-1040 or Mike Spence at 408-961-6300.