IRS Wants Heads-Up on Risk Transfer Provisions

By Nevin Adams • July 13, 2016 • 0 Comments
If your plan sponsor clients are working to get a defined benefit determination letter, the IRS now wants to know if those plans have lump sum risk transfer language.

For plans that do, the IRS wants the appropriate plan section identified, as well as an indication as to whether the plan satisfies one of the conditions in Notice 2015-49. The IRS is looking for that information in either the cover letter to their application or an attachment.

Risk Transfer Patterns

On June 9, 2015, the IRS issued IRS Notice 2015-49, which provided that qualified DB plans generally are not permitted to replace any joint and survivor, single life or other annuity currently being paid with a lump sum payment or other accelerated form of distribution, effective immediately.

In recent years, many DB plans adopted provisions allowing employees who were already receiving annuity payments to accelerate their remaining payments by receiving lump sums in lieu of the future annuity stream. In fact, a year ago, the Mercer/CFO Research 2015 Risk Survey plan-sponsors-to-act/ found that nearly two thirds (59%) of sponsors surveyed have already offered some type of one-time lump sum payment to vested DB plan participants — and nearly half (49%) of survey participants stated their companies are likely to employ some form of lump sum payout in the next two years.

Determination Letter Process

With its most recent announcement, the IRS says that if the plan sponsor advises that the plan has risk transfer language and satisfies one of the four conditions in Notice 2015-49, the IRS will review the plan document to verify that it satisfies the qualification requirements of the Internal Revenue Code and that the plan’s determination letter will contain a favorable caveat providing reliance on the risk transfer language.

Plans with risk transfer language that don’t meet one of the conditions in Notice 2015-49 won’t receive a determination letter unless the risk transfer language is removed.

For all other DB plans, the IRS says that the determination letter will contain a caveat that the plan has no reliance that any risk transfer language satisfies the requirements of the Code. This approach will be used if the plan sponsor:

  • doesn’t include the information on a cover letter or attachment;

  • doesn’t respond to the request; or

  • responds that the plan doesn’t have risk transfer provisions.

For DB plan applications already submitted, the IRS says it will request the plan sponsor to inform them of that information.