A new Internal Revenue Service decision could boost employers and retirement planners but hurt life insurers and the Pension Benefit Guaranty Corp. (PBGC).
The IRS has announced the decision in IRS Notice 2019-18.
The notice will help a pension plan sponsor use the offer of a one-time cash payment to buy out a participant’s pension income stream.
A New Source of Rollover Business?
Today, most U.S. defined benefit pension plan sponsors pay pension insurance premiums to the PBGC. A sponsor’s PBGC premium bill depends on the number of participants in the sponsor’s plan, and the amount of benefits each participant has been promised.
Employers that want to dispose of pension liabilities can transfer pension risk to a life insurer, by buying a group annuity contract.
Under Notice 2019-18, an employer may be able to cut some of its pension liabilities without bothering to buy a group annuity. That shift could cut cases sizes when employers do buy group annuities to shed pension obligations.
The shift could also cut the number of people in U.S. pension plan, and PBGC pension insurance premium revenue.
U.S. workers and retirees already roll many types of lump-sum payments from employer plans into individual annuities, mutual funds held inside individual retirement accounts, and other retirement savings arrangements. Many workers who leave their employers before the normal retirement age cash out their pension plans.
But, if Notice 2019-18 leads to a large number of retirees accepting pension benefits buyout offers, the increase in the number of participants cashing out could increase the amount of rollover cash flowing into IRAs and individual annuities.
Notice 2019-18 History
Years ago, many defined benefit pension plan sponsors used group annuities to fund pension risk transfers.