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Pension Benefit Guaranty Corporation (PBGC) Intends to Monitor Lump-sum and Annuity Cashouts Under Defined Benefit Plans

The Pension Benefit Guaranty Corporation (PBGC) stated in a filing published in the Federal Register on September 23, 2014, that it intends to require that plan sponsors report to the PBGC “certain undertakings” to cashout or annuitize benefits for specified groups of employees under defined benefit pension plans.  PBGC intends to make this reporting part of the 2015 PBGC premium filing procedures.

Recently, many defined benefit pension plan sponsors have been implementing lump-sum distribution windows, primarily to former employees who are not receiving benefits, as part of a de-risking strategy.  If participants elect to take lump-sum distributions in lieu of annuity payments, the plan sponsor can minimize the risk of interest rate fluctuations negatively affecting plan assets. 

In addition, lump-sum distribution windows under defined benefit pension plans typically have the effect of reducing the number of defined benefit pension plan participants because eligible participants are paid their full benefit under the plan at the time of the lump-sum distribution.  The reduction in defined benefit pension plan participants has the effect of reducing premium payments due from such plans to the PBGC. 

Some pension rights advocates have recently raised public policy concerns about the increasing use of lump-sum cashouts, claiming that cashouts jeopardize the retirement security of plan participants by providing them with unrestricted access to their retirement funds.  However, it is the reduction in premium payments that is likely most concerning to the PBGC.  PBGC relies on annual premium payments from a dwindling number of ongoing defined benefit pension plans to fund guaranteed benefits under plans that have been taken over by the PBGC.

At this time, the PBGC is only proposing to require disclosure of certain lump-sum distributions and annuitizations, and has not proposed any other type of PBGC review or oversight. 

© 2017 McDermott Will & Emery

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About this Author

Nancy Gerrie, Corporate Attorney, McDermott Law Firm
Partner

Nancy Gerrie is a partner at the law firm of McDermott Will & Emery LLP and the partner-in-charge of the Firm’s Chicago office.  She works with corporations, partnerships, limited liability companies and tax-exempt entities on a variety of retirement plan and other employee benefit plan matters, including the design, amendment, administration and termination of pension, profit sharing, 401(k), employee stock ownership and welfare and benefit plans.

312-984-6936
Maureen O'Brien, McDermott Will Emery, qualified plan design Attorney, welfare Administration lawyer
Counsel

Maureen O'Brien is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  She focuses her practice on advising clients on a broad range of employee benefits matters, including qualified plan design, welfare plan design, employee benefit plan compliance issues, fiduciary matters, multiemployer pension plan issues and nonqualified deferred compensation plans.

312-984-3242