IRS, Labor Department proposals aim to increase retirement options and transparency

BY KEN TYSIAC
February 2, 2012

Federal initiatives designed to broaden options and increase transparency in retirement plans were announced Thursday.

The IRS issued proposed regulations that would make it easier for defined benefit pension plans to offer combinations of lifetime income and single-sum cash payments (REG-110980-10). Other proposed regulations released on Thursday would relax the required minimum distribution rules to allow IRA participants to purchase annuities that begin at an advanced age (REG-115809-11). (For coverage, see “Prop. regs would ease required minimum distribution rules for older retirees who purchase certain annuities.”) The IRS also issued two revenue rulings to clarify how rules protecting employees and spouses apply when plan sponsors allow rollovers to or purchases of annuities from the plan (Rev. Rul. 2012-3; Rev. Rul. 2012-4).

The proposals are designed to make it easier for retirees to manage the risk that they will outlive their retirement savings and to receive their benefits in regular payments for as long as they live. A Treasury fact sheet says the nation’s private pension system is shifting from lifetime retirement income to lump-sum cash payments. Just 21% of the $11.2 trillion in private pension assets in 2011 was maintained in defined benefit plans; the rest was held in defined contribution plans and IRAs.

The changes proposed in REG-110980-10 are designed to enable individuals to receive a portion of the plan benefit as a stream of monthly payments while taking the remainder in a single, lump-sum cash payment. The proposed regulations would encourage such “split options” by changing the minimum present value requirements for defined benefit plan distributions to permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form. Defined benefit plans would be allowed to apply actuarial assumptions on interest rates and mortality benefits only to the portion of the distribution being paid as a lump sum. The partial annuity portion of the benefit could be determined using the plan’s regular conversion factors.

These changes are proposed to become effective when finalized and would apply to distributions with annuity starting dates in plan years beginning after that date.  

Rev. Rul. 2012-4 will allow employees receiving lump-sum cash payments from their employer’s defined contribution plan to roll over some or all of those amounts to the employer’s defined benefit pension plan, if the employer will allow it, in order to receive an annuity from that plan.

Rev. Rul. 2012-3 is designed to eliminate uncertainty about how 401(k) spousal protection rules apply when employees purchase deferred annuities from their plans. It describes how the Sec. 411(a) qualified joint and survivor annuity and Sec. 417 qualified preretirement survivor annuity rules apply when a deferred annuity contract is purchased under a profit sharing plan in certain specified fact situations.

New Labor rule

Also on Thursday, the U.S. Department of Labor issued a rule requiring service providers to disclose information that will help pension plan administrators determine fair compensation and conflicts of interest that may exist on the part of those service providers.

The Labor rule is designed to help employers sponsoring pension and 401(k) plans get information about administrative and investment costs of such plans. Certain service providers will be required to disclose compensation they receive in connection with the services they provide. A three-month delay in the effective date of this rule gives service providers until July 1, 2012, to comply.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor .

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