Compliance July 10, 2015

Conn. Passes Protection for Transferred Pension Assets

Legislation in Connecticut will protect transferred pension assets from creditor claims.
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Connecticut Governor Dannel Malloy signed Public Act 15-167 into law, bringing additional protections to retirees’ assets from creditor claims.

Under the text of the law, any annuity contract to which employee defined benefit (DB) plan assets are transferred and lose protections of the Employee Retirement Income Security Act (ERISA) and insurance by the Pension Benefit Guaranty Corporation (PBGC) will be considered a trust protected from claims of creditors.

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In a statement, the advocacy group ProtectSeniors.org said the expanded protections come “at a time when more and more U.S. companies have been offloading their pension obligations to investors, primarily U.S. based insurers.”

The protections in the law are extended to other retirement accounts, including:

  • “any trust, custodial account, annuity or insurance contract established as part of a Keogh plan or a retirement plan established by a corporation which is qualified under Section 401, 403, 404 or 409 of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended;”
  • assets contributed to or rolled into “any individual retirement account [IRA] which is qualified under Section 408 of said internal revenue code to the extent funded, including income and appreciation;” and
  • “any medical savings account established under Section 220 of said internal revenue code, to the extent such account is funded by annual deductible contributions or a roll-over from any other medical savings account as provided in Section 220(f)(5) of said internal revenue code.”

The PBGC has expressed concern about the loss of protections for assets involved in a pension risk transfer, and the Pension Rights Center has called for a moratorium on such actions.

Legislation was also introduced in the New York State Senate and Assembly that would provide protections and new disclosures for retirees whose pension assets and accrued benefits are sold or transferred by former employers.

Compliance July 10, 2015

IRS Announces Halt to Certain Lump-Sum Offerings

Effective July 9, DB plan sponsors may no longer offer a lump-sum window to participants who have begun receiving installments.
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The Internal Revenue Service has issued Notice 2015-49 announcing its intent “to amend the required minimum distribution regulations under § 401(a)(9) of the Internal Revenue Code to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.”           

Required minimum distribution (RMD) regulations provide that if the entire interest of the employee is not distributed by the required beginning date following the later of retirement or attainment of age 70 1/2, it must be distributed, beginning no later than the required beginning date, over the life of the employee or lives of the employee and a designated beneficiary. The agency notes that absent an applicable exception, distributions of an employee’s entire interest must be paid in the form of periodic annuity payments for the employee’s or beneficiary’s life.

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The regulations prohibit any change in the period or form of the distribution after it has commenced, with a few exceptions. If certain conditions are met, current regulations provide for changes to annuity payments that increase the payments. The IRS notes that plan sponsors which have offered lump-sum windows to retirees receiving annuity payments, in an effort to de-risk their defined benefit (DB) plans, have treated the right to convert a current annuity into an immediate lump sum payment as an increase in benefits that is described in current regulations.

Effective July 9, the IRS intends that the types of permitted benefit increases include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments. Amendments to the regulations will prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a DB plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. 

The amendments do not apply to lump sum risk-transfer programs in place prior to July 9, 2015. 

Notice 2015-49 is here. 

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