IRS Releases Additional Rulings on Lump-Sum Windows

by Eversheds Sutherland (US) LLP
Contact

The practice of offering lump-sum distributions has become increasingly popular among defined benefit plan sponsors looking to decrease volatility or other defined benefit plan risks. In some situations, plan sponsors offer the lump sum to participants in pay status as well as terminated vested participants who have not yet commenced payments. In late May 2014, the Internal Revenue Service (IRS) released a series of four private letter rulings concluding that defined benefit pension plan amendments allowing participants in pay status to elect, during a limited time period, lump-sum distributions of their remaining plan benefits were permissible under the required minimum distribution rules of the Internal Revenue Code (IRC). 

The rulings follow two similar private letter rulings issued by the IRS in 2012, and highlight the fact that these types of arrangements require a range of considerations under the IRC and Title I of the Employee Retirement Income Security Act (ERISA), regardless of whether they are offered to terminated vested participants or participants in pay status.

The Rulings

The requesting plan sponsors all noted that they had experienced increased volatility in their pension plan obligations in recent years, which had made them less competitive in the global market. As a result, they wished to amend their plans to offer participants and beneficiaries in pay status a limited window of time in which they could elect to receive their remaining plan benefits in one lump-sum payment. Several of the requesting plan sponsors also noted that they would allow terminated vested participants to participate in the window, but did not request rulings with respect to those individuals.

The window period lump-sum option was structured in the 2012 rulings and the 2014 rulings as follows. The affected payees could keep their current form of payout, or elect any of the applicable new options made available by the plan amendment:

PLR

Duration of Window Period

New Payout Option(s) Offered to Payees:

201228045*

60-90 days

 

  • Lump sum
  • Qualified joint and survivor annuity (QJSA)
  • Qualified optional survivor annuity (QOSA)

201228051*

30-60 days

 

  • Lump sum
  • QJSA
  • QOSA

201422028

60-90 days

 

  • Lump sum
  • QJSA (married participants)
  • QOSA (married participants)
  • Single life annuity (SLA) (single participants)

    NOTE: Beneficiaries and alternate payees only offered a lump sum.

201422029*

30-60 days

 

  • Lump sum
  • Normal form of plan payment
  • QOSA

201422030*

60-90 days

 

  • Lump sum
  • QJSA
  • QOSA
  • SLA

201422031

60-90 days

 

  • Lump sum
  • QJSA
  • QOSA

    NOTE: Beneficiaries and alternate payees only offered a lump sum or single life annuity.

*On the face of these rulings, there were no apparent distinctions between the forms of payment made available to participants and the forms of payment made available to beneficiaries and alternate payees.

Each requesting plan sponsor represented, among other things, that:

  • Its methods for valuing the lump-sum distributions would comply with IRC Section 417(e) and that the window would not trigger any of the benefit restrictions described in IRC Section 436; and
  • Applicable spousal consent requirements would be met. All elections would require spousal consent. In the event a participant had remarried since his or her initial annuity starting date, spousal consent would include, if applicable, the participant’s current and former spouses.

At issue in these rulings (as well as the IRS’s earlier 2012 rulings) was whether the proposed lump-sum distributions would violate the IRC’s required minimum distribution rules. The required minimum distribution rules provide that once a participant or beneficiary begins receiving lifetime annuity payments, his or her monthly payment amount may not increase and his or her payment period may not be modified except in specific, limited circumstances. One such circumstance is when a plan amendment provides for the payment of increased benefits. Although the addition of the lump sum-option would result in an increased payment amount and shortened payment period, the IRS concluded that the election to cash out the remainder of the annuity would be permissible because the lump-sum option was being offered pursuant to a plan amendment and only during a limited window period. The IRS also noted in PLR 201422031 that, as long as the portion of any lump-sum distribution attributable to that year’s required minimum distribution is not treated as an eligible rollover distribution, the lump-sum option itself would not trigger the excise tax under IRC Section 4974 for failure to take a required minimum distribution.

The 2014 rulings had been pending since as early as October or November 2012, and were issued on March 5, 6 and 7, 2014.

Other Considerations

Similar to its 2012 rulings, the IRS noted that it was only expressing an opinion with respect to the required minimum distribution issue, and not with respect to any other potential tax consequences, or any implications under Title I of ERISA. The rulings emphasize the fact that there are a number of additional issues that plan sponsors and fiduciaries should consider in designing these types of programs, whether offered to participants in pay status or not. Some of these issues include:

  • Spousal Consent – Lump-sum offers must comply with the same spousal consent rules that apply to initial benefit elections.

  • QJSA Rules – In addition to the lump-sum option, the plan must still make qualified joint and survivor annuities and qualified optional survivor annuities available to participants.

  • IRC Section 436 Benefit Restrictions – The plan’s adjusted funding target attainment percentage (AFTAP) cannot fall below 80%, because this would trigger restrictions on the plan’s ability to offer lump-sum distributions.

  • IRC Section 415 Benefit Limitations – IRC Section 415 imposes limits on the amount of a participant’s plan benefit. For participants already in pay status, these limits must be satisfied on the participant’s initial annuity starting date, as well as the subsequent lump-sum payment date.

  • IRC Section 417(e) Valuation Methods – IRC Section 417(e) contains specific rules regarding the interest rates that must be used in calculating lump-sum distributions.

  • Eligibility for Window – The plan sponsor will have to decide who will be eligible to elect lump-sum distributions (e.g., terminated vested participants, participants in pay status, beneficiaries, or alternate payees). The lump-sum window must also satisfy certain nondiscrimination requirements.

  • Disclosure of Lump Sum Consequences – Participants must receive sufficient information to understand the consequences of electing a lump-sum distribution and the value of the monthly annuity they are giving up. A plan sponsor and/or fiduciary might consider facilitating participants’ access to professional financial advice.

  • Communication Timing – Plan fiduciaries must decide how far in advance participants should be notified of the lump-sum window.

  • Length of Window – Plan fiduciaries will have to decide on an appropriate amount of time to allow participants to consider and elect the lump-sum option.

  • Lost or Missing Participants – There may be participants who cannot be located for all or a portion of the election window.

  • Coordination with Other Benefit Plans – Taking a lump-sum distribution may have an impact on long-term disability payment offsets for participants on disability or the ability of retirees to use pension annuity distributions to pay retiree medical premiums.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP
Contact
more
less

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!