One de-risking strategy that has been popular with sponsors of defined benefit plans is the use of lump sum pay-outs. This strategy involves the payment of a single lump sum benefit to retirees or their beneficiaries currently being paid with an annuity payment. The Internal Revenue Service (IRS), however, has effectively put an end to this practice with Notice 2015-49, which prohibits defined benefit plans from replacing current annuity payments with lump sum pay-outs or other accelerated forms of distributions. The amendment to the Internal Revenue Code described in this Notice was effective as of July 9, 2015; however, lump-sum offers authorized before that date or for which Plan sponsors received a private letter ruling before that date will not be affected.

While the IRS’ recent action does eliminate one valuable de-risking option for Plan Sponsors, several other methods for mitigating the economic and demographic risks associated with sponsoring a defined-benefit pension plan do remain available, including plan design changes and investment policy changes. For more information, please contact Brendan Brady at bbrady@dopkins.com, a member of our Employee Benefits Plan Team or Chad O’Connell at coconnell@dopkins.com if you would like further information.

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About the Author

Brendan P. Brady CPA, CVA

Brendan is responsible for managing client engagements, team scheduling, training and development. He leads general and specialized audits as well as internal control projects, and is one of the leaders of the Firm’s employee benefit plan audit practice. He uses his experience to offer management advice and suggestions for improving operational efficiency by obtaining a thorough understanding of a business, not just from the controller’s standpoint, but from management’s and the operational side.