If you are one of the lucky few employees who participate in an employer’s defined benefit retirement plan, you previously had to choose between receiving your benefits in a lump sum or in annuity payments. However, in the final rule adopted by the Treasury Department, defined benefit plans are allowed to offer participants the choice of taking a portion of their benefit in a lump sum and the remainder in annuity payments.
These new rules are designed to increase a participant’s flexibility in designing his or her retirement income. As Treasury explained, on the one hand, for plans that permitted a distribution of either lump sum or annuity payments, many participants were reluctant to take the annuity payments and instead chose a lump sum to maximize their flexibility. On the other hand, those participants who chose a lump sum distribution also worried they could outlive their retirement savings without a monthly guaranteed income.
This final rule streamlined the 2012 proposed rule by allowing two (rather than three) ways to split a benefit between a lump sum and an annuity. Under the first rule, a plan is permitted to divide the participant’s benefit by first determining the “present value” (calculated under Treas. Reg. § 1.417(e)-1(d)) of the specified portion of a participant’s accrued benefit as if that portion were the participant’s entire accrued benefit. This rule, however, does not impose any requirements on the distribution options for the remaining portion of the accrued benefit.
Under the second rule, a partial lump sum satisfies the present value calculation if the remaining portion of the participant’s accrued benefit satisfies a minimum requirement that, if expressed in the normal form of benefit under the plan and commencing at normal retirement age (or at the current date, if later), is no less than the excess of: (1) the participant’s total accrued benefit expressed in that form; over (2) the annuity payable in that form that is actuarially equivalent of the lump sum determined using the applicable interest rate and the applicable mortality table.
If a plan provides for an early retirement benefit, a retirement-type subsidy, an optional form of benefit, or an ancillary benefit, the plan must specify which portion of the participant’s benefit is subject to these rules. This is necessary to determine the extent to which the early retirement benefit, retirement-type subsidy, optional form of benefit, or ancillary benefit applies with respect to the remaining portion of the accrued benefit.
This final rule is effective September 9, 2016 and applies to distributions with annuity starting dates in plan years beginning on or after January 1, 2017.