After a four-year rule-making process, the U.S. Department of Treasury and IRS have released final regulations intended to encourage participants in defined benefit pension plans to take part of their savings in an annuitized payment stream, as opposed to electing to take the entire benefit in a lump sum.

In the final rule published in the Federal Register on Sept. 9, regulators note that the Treasury Department and IRS “believe that many participants are better served by having the opportunity to receive a portion of their retirement benefits in annuity form while receiving accelerated payments for the remainder of their benefits to provide increased liquidity during retirement.”

Cathy Weatherford, CEO of the Washington, D.C.-based Insured Retirement Institute, which had lobbied for clarified rules that would expand participants choice in determining how they receive their benefits while still protecting the value of a lifetime income guarantee, issued a statement in support of the final rule.

“This rule will provide pension plan participants with more flexibility when given the option of a lump sum or an annuity,” said Weatherford. “It removes the all-or-nothing choice that these workers must make when given the option, and in doing so, it will hopefully encourage more Americans to take their benefit, at least in part, in the form of a lifetime income stream.”

Under existing regulatory requirements, plan sponsors were required to apply minimum present value requirements, or interest rate and mortality assumptions set by Congress, to both the annuitized and lump-sum portions of the benefits if a participant chose to split the forms of payment.

Those rules, first established in 1988, encouraged many participants to forgo a monthly, annuitized stream of distribution, opting instead for a lump-sum distribution to free up liquidity in retirement.

In doing so, those participants invite greater investment risk, and potentially expose themselves to longevity risk — or a scenario in which they outlive their savings, Treasury and the IRS noted in their final rule.

How it would work

The final rule allows plan sponsors to apply the minimum present value requirements under IRS rules only to the portion of the total benefit that is paid in a lump sum.

The reminder of the total benefit that is distributed in annuitized form can be valued using typical “annuity equivalence factors,” according to analysis on practicallaw.com, an editorial service written by attorneys to help the legal industry interpret laws and regulations.

Going forward, sponsors can take two approaches to so-called bifurcated pension benefit distributions for plan years beginning Jan. 1, 2017, when the new rule takes effect:

In order for the minimum present value requirements to apply to only the lump-sum portion of the distribution, a plan can apply the “explicit” bifurcation rule, under which the minimum value requirements are applied to the lump sum as if the lump sum were the entire benefit.

Or, a sponsor can apply the minimum present value requirements to the lump sum if the remainder of the total benefit to be annuitized satisfies a minimum requirement.

The annuitized portion of the total benefit must be no less than the greater of the participant’s total accrued benefit in annuitized form, or the annuity payment is actuarially equivalent of the lump sum payment.

The final rule, which was simplified from its proposed form subsequent to stakeholders’ comments, offers seven specific examples of how the new rule is applied to determining bifurcated distributions.

Those examples, and the entire rule, can be viewed here.

Instant Insights /

IRS: DB participants can split between annuities and lump-sum payments

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