Trump Treasury Backtracks On Lump-Sum Pension Rules Meant To Protect Retirees
By: Ashlea Ebeling
Elder Law Associates Newsletter dated April 19, 2019
The Treasury Department told off employers back in 2015: Lump-sum pension buyouts for retirees already in payout status are a no-no. In practice, employers stopped offering them, per Notice 2015-49, despite the fact that proposed and temporary rules never came out. Now, in a Trump-era twist, the Treasury Department has backtracked with Notice 2019-18, a retraction of intent to propose regulations on the topic: “Offering a Lump-Sum Payment Option to Retirees Currently Receiving Annuity Payments under a Defined Benefit Plan.”
It’s a backtrack in a big way, and it may reopen the door to the problematic lump-sum offers. “After all our efforts until 2017 to encourage lifetime income and help restore pensions to the private pension system, here is another step backward by the Trump Treasury,” says J. Mark Iwry, who was in charge of retirement policy at Treasury when the 2015 Notice came out.
The 2015 notice made clear that the government’s position was that offering lump sums to retirees in pay status was not intended to be permitted. “We were trying to protect older people from company efforts to get them to sell back their no-cost defined benefit pensions for the company’s financial reasons,” Iwry says.
The idea of an employer-sponsored defined benefit pension plan is that you (and your spouse) get guaranteed payouts for life. As the plans became a drag on corporate balance sheets, companies started shedding pension liabilities by offering participants the option of taking a lump-sum buyout (cash) or transferring their pension to an insurer who would continue the lifetime payments. For retirees who say yes to the lump-sum offers, it wipes out federal protections of ERISA and turns lifetime retirement income into a one-time chunk that can easily be outlived. Ford and GM were the first to offer lump-sum buyouts to retirees in payout status in 2012, with the blessing of IRS private letter rulings.
While the lump sum may seem like a windfall, it often shortchanges the retiree. That’s a problem because of complicated formulas including interest rates and mortality tables. Norman Stein, a professor at Drexel University, calculates that people lose 15% to 20% on average when taking the lump sum. Another problem is that a lot of the people getting lump-sum offers are elderly, who might be influenced by financial advisors eager to get advisory fees or by children in financial trouble who want access to mom or dad’s money. “Both of those are alarming!” Stein says.
“This is really an awful move on the part of Treasury and the IRS,” says Karen Friedman, policy director of the Pension Rights Center. “We’re talking about retirees who are the most vulnerable.” Survivor benefits disappear along with the pension, hurting women disproportionately, she notes.
After the 2015 Notice, these lump-sum offers to retirees in payout mode stopped. Employers weren’t happy, as they hoped to continue the offers, and that’s what’s behind the new 2019 Notice. But their lobbyists didn’t get 100% of what they wanted, says Iwry. The Notice says the IRS will continue to study the issue of lump-sum windows. Companies would be well-advised to hold off and consider the risks.
Article Source: Forbes.com
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