IRS Notice on Pension Lump Sums Causes Confusion

Peer comments on social media platforms sometimes get it wrong

By Stephen Miller, CEBS July 14, 2015

A recent notice from the Internal Revenue Service, meant to address a relatively constrained issue involving distributions from defined benefit pension plans, has led to confusion—especially in casual social media discussions.

On July 9, 2015, the IRS issued Notice 2015-49, “Use of Lump Sum Payments to Replace Lifetime Income Being Received by Retirees Under Defined Benefit Pension Plans.” In the notice, the IRS announced guidance “to amend the required minimum distribution regulations under Section 401(a)(9) of the Internal Revenue Code to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.”

The regulations, as amended, “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.”

The decision is effective immediately, except with respect to certain pension de-risking arrangements already in place. Proposed amendments to the regulations under section 401(a)(9) of the tax code will be issued in the near future confirming this position, the IRS said.

The notice, in effect, says that pension plan sponsors won’t be able to offer a lump sum to a vested participant if the plan has already started making annuitized pension payouts to that participant. That is, it applies only to individuals who are already receiving annuity distributions. The IRS appears to be concerned about participants being shortchanged on the value on their vested benefits if a switch is made from annuitization to a lump-sum distribution once payouts are underway.

Unfortunately, the notice led some employees vested in a defined benefit pension plan to think that the IRS is preventing pension lump-sum payouts as an option at all, which is not the case.

For instance, a discussion thread titled IRS: No more lump sum in lieu of defined benefit annuity?, on the popular investment discussion site (inspired by the investment philosophy of index-fund pioneer John Bogle), included anonymous comments such as:

“A shame for anyone who was in the midst of making such a decision (unless they would have declined the lump sum and stayed with the annuity)”


“It is unfortunate that a number of people may have thought they had a choice offered by employers, and POOF, no choice ...”

The Real Deal

Anne Waidmann, director in the Human Resource Services practice at consultancy PricewaterhouseCoopers (PwC), confirmed to SHRM Online that “Defined benefit plans may continue to offer a lump sum as an optional form of benefit upon retirement, but under the new guidance, plans may not offer retirees an opportunity to convert an annuity to a lump sum after payments have already begun in an annuity form.”

Waidmann provides further analysis of the new guidance and its effect on plan sponsors in a PwC alert, “IRS Notice Prohibits Offering Lump Sums to Retirees in Pay Status” (to be posted online shortly), where she noted:

Under the regulations, the period over which an annuity is to be paid may be changed only in certain limited circumstances, such as a plan termination or the employee’s actual retirement (if he or she retires after distributions have commenced). The regulations further provide that annuity payments may not increase, except in accordance with certain permitted exceptions. ... The amendment will provide that the types of permitted benefit increases described in the regulations include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments.”

Similarly, attorneys Sarah Kregor and Dan Salemi of Franczek Radelet P.C. pointed out in an online post that the new guidance will “prohibit lump-sum cashout windows for pension plan retirees already in pay status,” but “lump-sum windows may still be offered to deferred vested participants/beneficiaries who have not yet begun receiving benefits.”

Survey findings released by Mercer in July 2015 found that nearly two thirds (59 percent) of companies sponsoring defined benefit pension plans have already offered some type of one-time lump sum payment to vested plan participants. This trend seems set to continue, as 49 percent of survey participants stated their companies are likely to employ some form of lump sum payout in the next two years.

Social Media Pitfalls

Discussions on social media platforms often can provide helpful insights from one’s peers. But unfortunately, they can sometimes help spread misinformation, which takes us back on the Bogleheads site, where another commenter expressed misplaced concern over the new guidance:

“Seems like always something. Lol. So 4 years ago I retired and I opted to take the lump sum. If I understand it that account would be fine and with no restrictions right? I also am going to retire again with the same company in March and will have a retirement worth about $200,000. At that time I won't be able to take the lump sum. Is that correct?”

To which another board participant replied, with a bit of social media snark:

“For now it's a narrow focus—plans can still offer lump sums as an optional form—not sure where you're coming from?”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow Me on Twitter.

Related SHRM Articles:

GAO: Pension Lump Sum Offers Need Better Explanations, SHRM Online Benefits, March 2015

Employers Weigh Lump-Sum Pension Cashouts, SHRM Online Benefits, May 2014

More Pensions to Offer Lump-Sum Payout Windows, SHRM Online Benefits, February 2013

A Lump-Sum Window Can Help 'De-Risk' a Pension Plan, SHRM Online Benefits, May 212

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