Groups Suggest Changes to Proposal Encouraging Partial Annuities

The American Society of Pension Professionals & Actuaries (ASPPA) and the ASPPA College of Pension Actuaries specifically addressed section 417(e) of the Internal Revenue Code dealing with the present value requirement for DB plans.  

“The welcomed clarity for the minimum present value rule should be enhanced by similar specificity for companion issues such as notice and election requirements and options for communicating relative values of distribution options,” the groups said in their letter. They pointed out that while the relative value regulation allows for separate disclosures about separate parts of benefits, it does not explain what options are suitable for those disclosures.  For example, is a plan permitted to use different sets of interest and mortality assumptions that are appropriate to the separate parts of benefits?   

The groups also suggested that where a participant has a right under the plan to split benefits in two or more pieces, they are best served by bifurcated notices, elections and disclosures. This is especially true in the case where the participant is permitted to commence distribution of the parts at different dates, the letter pointed out.  

Because plans have been providing bifurcated benefits previously without guidance, the groups said the final regulations should specify that the addition of specific rules for bifurcated benefits at this time is not intended to call into question approaches for handling bifurcated benefits for periods prior to the effective date of the amended regulation.  

The letter also said final regulations should include an example demonstrating their intent to apply to situations in which the reason for the partial lump sum distribution is the grandfathering of the option in connection with an amendment eliminating the optional form of distribution(as contrasted with a service-based change in benefit structure). The example should illustrate the principal supported by the proposal that a subsidy provided by the partial lump sum can have a non-proportional effect on the participant’s remaining accrued benefit. In addition, the example should emphasize that the partial distribution rule applies where the remainder benefit is paid at a different date.  

In February, the IRS issued a proposed regulation changing a regulatory requirement to make it simpler for DB pension plans to offer combinations of lifetime income and a single-sum cash payment (see “Treasury Proposals Pave Way for Offering Lifetime Income Options”). The proposal is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.