Some defined benefit plans offer no lump sum payment option. For the many that do, the choice is an “all or nothing” lump sum payment or annuity payments (fixed payments for a period). The IRS recently announced great news to those participants wanting or needing more flexibility when facing how their retirement plan payments come to them. New IRS rules clarify and simplify the rules for distributing a benefit that is split between an annuity and a lump sum. This rule joins others the IRS has announced that are more user-friendly and is aimed at helping a retiree avoid dissolving their retirement plans too quickly. The rule applies to payments beginning on or after January 1, 2017, but plan sponsors may use them earlier.
Prior to this new rule, a plan had to value the entire retirement benefit. This value was based on statutory interest rates and mortality tables. The new rules provide that statutory interest rates are applied only to the part of the retirement benefit paid out as a lump sum (not as an annuity). The remaining payments depend on how the plan defines the amount that can be paid as a lump sum.
Again, the government aims to promote lifetime income choices, especially annuities. Many believe participants are better served with choices – the choice to have some of their payments in annuities and some in a lump sum. The annuity offers financial protection, especially if the retiree lives longer than expected. The lump sum offers increased cash flow upon retirement.
Plans should be reviewed, at present, to determine whether current language in the plan needs to be changed. Plan sponsors should have language allowing for a split payment to participants. The IRS is giving relief from the anti-cutback rules if the plan language change is made by December 31, 2017.
If you have any questions about the new rules or whether your plan language should be changed, please contact your Nyhart consultant.