The problem is that pension plan participants-particularly those in defined contribution plans- take their benefits in lump sum form, as opposed to a lifetime pension. Before long, the money is gone. One solution is to allow the plans to provide better lifetime pensions (i.e., a lifetime income choices). With this in mind, the Internal Revenue Service (the “IRS”) has issued a Fact Sheet, announcing that-as a first step toward the lifetime income solution, it is releasing an initial package of proposed regulations and rulings intended to remove impediments and otherwise ease the offering of lifetime income choices.
The Fact Sheet says that, to summarize, the new package of proposed regulations and rulings makes it easier for pension plans to offer workers a wider range of choices as to how to receive their retirement benefits by:
–making it easier to offer combination options that avoid an “all-or-nothing” choice, such as the option to take a portion of an individual’s plan benefit as a stream of regular monthly income payable for life, while perhaps taking the remainder in a single lump-sum cash payment;
–enabling employer plans and IRAs to offer an additional option in the form of “longevity annuities” – which permit employees to use a limited portion of their account balance to provide lifelong retirement income beginning at age 80 or 85, protecting those who live beyond average life expectancy from running out of savings;
–making clear that employees receiving lump-sum cash payouts from their employer’s 401(k) plan can transfer some or all of those amounts to the employer’s defined benefit pension plan (if the employer has one and is willing to allow this) in order to receive an annuity from that plan (giving employees access to the defined benefit plans’ relatively low-cost annuity purchase rates); and
–resolving uncertainty as to how the 401(k) plan spousal protection rules apply when employees choose deferred annuities (including longevity annuities) from their plans.
The Fact Sheet continues by discussing the above concepts in more detail.