Category: Qualified Plans

IRS Ends Lump Sum Risk Transferring Programs in Defined Benefit Plans

Treasury Department and the IRS announced today in Notice 2015-49 that they intend to amend the required minimum distribution regulations under Code Section 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.

The revised regulations will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. These amendments to the regulations will apply as of July 9, 2015.

Background

Section 401(a)(9) prescribes required minimum distribution rules for a qualified plan under Code Section 401(a). Under the regulations, a defined benefit pension plan cannot permit a current annuitant to convert their annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. In addition, the regulations permit annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.”

A number of defined benefit plan sponsors have amended their plans pursuant to this “plan amendment” exception to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.

In 2012, the IRS issued Private Letter Rulings to General Motors and Ford specifically approving such programs for those companies. See PLR 201228045 and PLR 201228051. While Private Letter Rulings do not apply to anyone other than the person to whom they are issued, many employers found support in those PLRs for their risk transfer programs. With the change in the regulations announced today, those PLRs no longer provide any support.

Conclusion

The Treasury Department and the IRS have concluded that a broad exception for increased benefits that would permit lump sum payments to replace rights to ongoing annuity payments (of the kind approved in the two 2012 PLRs) would undermine the intent of the required minimum distribution regulations. Therefore, the exception for changes to the annuity payment period provided in the regulations (as intended to be amended) will 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.

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IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs

On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.

While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.

DOL Provides Timing Relief for Fee Disclosures in Participant-Directed Individual Account Plans

On March 19, 2015 the Department of Labor issued final rules that give retirement plan administrators a two-month window in which to provide annual fee disclosures to plan participants. Under existing regulations, plan administrators must provide fee disclosures to participants in plans with individually directed accounts at “at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis”. This 12-month rule presents some administrative difficulty because Plans that provide the disclosures in the same month every year could easily run afoul of the regulatory language if their disclosures are not done on the exact same day of the month each year.

The new rule replaces “12-month period” with “14-month period”, giving plan administrators a two month window each year in which to make the disclosures The new rules will become effective on June 17, 2015 (unless the DOL gets significant adverse comments on the rule, which is not expected). In the meantime, the DOL indicates that for enforcement purposes plan administrators can rely on the new rule immediately.

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