DB Regulatory Update: Retiree Lump Sum Windows, EPCRS, Hybrid Plans

At their defined benefit regulatory update at the ASPPA Annual Conference, speakers Tom Finnegan and Kelsey Mayo took attendees on a fast-paced tour of recent regulatory developments. Here’s a look at three key developments.

 

Retiree Lump Sum Windows

 

In Notice 2019-18, the IRS reversed earlier guidance effectively prohibiting retiree lump sum windows, said Finnegan, a VP at CBIZ Retirement Plan Services. The IRS said it will not update previous regulations as indicated in IRS Notice 2015-49, which effectively ended those windows because they fail to satisfy the minimum distribution rules.

 

So why would a plan sponsor take advantage of the change in Notice 2019-18 and reinstate or implement a lump sum window? Finnegan touched on two reasons:

 

• the windows offer an opportunity to settle plan obligations, reducing financial statement volatility and reducing ongoing PBGC premiums; and
• to reduce administrative costs.

 

However, Finnegan cautioned that lump sum windows do create some unique challenges and potential drawbacks. First of all, lower take-up rates are typical, usually around 25%.

 

Second, they can cause anti-selection and lead to higher long term costs. Typically, both healthy retirees and those in poor health tend to choose the most valuable option, Finnegan explained. Healthy retirees are more likely to reject the lump sum and continue annuity payments based on their healthy life expectancies – which is the more expensive choice for them. And retirees in poor health will welcome the opportunity to take a lump sum based on their  life expectancies, which is the more expensive choice for them. All this could make an eventual annuity purchase for the remaining retirees in the plan substantially more expensive, Finnegan said.

 

And lastly, administration of retiree lump sum windows is complex, including benefit limits, MASDs, and consent requirements, and more.

 

EPCRS Changes Affect DB Plans

 

While most of the new provisions expanding the Self-Correction Program under the IRS’s EPCRS program applied to DC plans, some of those provisions do apply to DB plans as well, noted Mayo, lead benefits attorney at the Poyner Spruill LLP law firm.

 

First, Mayo noted, is the expansion for retroactive amendments. “You may be able to use the new, expanded SCP to correct a DB plan without having to go into the Voluntary Compliance Program,” she noted.

 

Also, all VCP filings must be done via the Pay.gov website, Mayo noted. Form 8950 is on Pay.gov. After figuring out the fee, it can be paid directly on Pay.gov, she said. The rest of the filing can be attached in pdf form, she said, but warned that there is a 15 megabyte size limit on attachments. Any pages over that limit must be faxed – that’s correct, faxed – to the IRS.

 

Determination Letter Expansion and Hybrid Plans

 

In a recent Revenue Procedure, Rev. Proc. 2019-20, the IRS implemented a limited expansion of its determination letter program, Mayo said. After shutting the program down a few years ago, the agency is now accepting applications for certain individually designed hybrid plans for a 12-month period that began Sept. 1, 2019. (Merged plans are also included, she noted.) The IRS will be ruling not only on the hybrid plan provisions, but on everything else, Mayo noted. “It’s a very generous waiver of any errors that they find with repect to the hybrid plan provisions,” she said. “So if you do have a hybrid plan that you not want go onto the prototype for some reason, I would strongly consider putting it into the determination letter program.”