In recent years, pension plans and their employer sponsors looking to “de-risk” their exposure have been increasingly offering “lump sum pension buyout” offers to employees, where a pensioner receiving ongoing payments has the opportunity to convert the remaining expected payments to a one-time lump sum that can be rolled over to an IRA.
Yet while the conversion of a lump sum to a pension isn’t always a bad deal – at least if the lump sum is ‘reasonably’ valued – in practice the lump sum offers have been so ‘modest’ that even a recent non-partisan GAO study raised the concern that participants may not be getting enough information (and therefore may not be making the right decision) when the offer comes.
Accordingly, the Treasury has announced plans to issue an updated version of Treasury Regulation 1.401(a)(9)-6, Q&A-13 and Q&A-14, that will limit the ability of pension plans to offer lump sum pension buyout offers to those receiving ongoing payments. And the IRS announced in IRS Notice 2015-49 that the new rules will be effective retroactively back to July 9th of 2015, rendering lump sum buyout offers dead, effective immediately.
Notably, the crackdown on the employee pension buyout offer will not limit the ability to choose a lump sum versus a pension at the time of retirement, but it will prevent those from receiving ongoing pension payments from commuting those payments into a lump sum. For most, that’s probably good news, given ‘questionable’ buyout offers (and Congress beginning to scrutinize various "pension advance" schemes), and concerns about the ability of some retirees to manage the investment and longevity risk that they take on with a lump sum. However, for those in poor health or who fear their underfunded defined benefit plan may default (and don’t want to rely on PBGC backing), the new rules have taken a potential buyout offer off the table. And ironically, while the purpose of the new rules was to shore up protections for pensioners, the elimination of yet another means by which plan sponsors can “de-risk” their pension exposures may only serve to further accelerate the slow-motion demise of the defined benefit plan altogether.