What follows is a brief note on recent developments with respect to de-risking.
IRS may suspend issuing Private Letter Rulings on retiree lump sum issue
We recently posted an article discussing IRS Private Letter Rulings holding that in certain circumstances the payment of lump sums to retirees currently receiving annuities does not violate Tax Code minimum distribution rules. The rulings deal with an important issue in de-risking transactions involving retirees. As we understand it, while there may be a small number of these rulings still ‘in the pipeline’ that may be completed, after that IRS is unlikely to consider issuing any more.
The normal procedure – where, as in the case of de-risking, there is ongoing demand for more rulings – is for IRS to issue a Revenue Ruling similar to the previous Private Letter Rulings. A Revenue Ruling, unlike a Private Letter Ruling, establishes a general rule that may be relied on by taxpayers other than the taxpayer requesting the ruling. The current controversy over de-risking, however, makes it unlikely that IRS will issue such a Revenue Ruling in this case. Sponsors considering a de-risking transaction involving offering lump sums to retirees (the issue raised in the Private Letter Rulings) should consult with counsel as to how to proceed.
State de-risking legislation
In at least two states, Connecticut and New York, legislation has been introduced that, if adopted, would significantly restrict de-risking transactions. The Connecticut bill (as introduced) provides:
- require mandatory disclosures, regulatory approval and an opportunity to challenge or opt out from any pension de-risking transaction attempting to transfer retiree benefits from an ERISA protected plan to a substitute pension benefit provider not covered under ERISA;
- clarify and expand State Guaranty Association coverage to equal the scope of coverage offered by the Pension Benefit Guaranty Corporation so retirees are provided notice and an opportunity to be heard; and
- provide additional protections against de-risking including mandatory disclosures by the transferring entity and the substitute pension benefit provider, uniform fiduciary standards and disclosures, uniform and equivalent protection from creditors and bankruptcy trustees and the right of retirees to request a lump sum, cash out option at transfer and at regular intervals thereafter.
The New York legislation was very similar. Our understanding is that the Connecticut bill (which was introduced in 2013) is not moving. The status of the New York bill is unclear.
Obviously this legislation, if passed and if it were enforceable, would present serious issues for sponsors wishing to engage in a de-risking transaction. It’s not clear at all, however, that there is significant support for this legislation. And there are questions about whether this legislation, if passed, would survive ERISA’s preemption provision.
This action by de-risking opponents is similar to the strategy being used by auto-IRA proponents (see our article State retirement/auto-IRA legislation), turning to state legislatures in a context where federal Congressional action is unlikely.
In response to sponsor de-risking activity, participant advocacy groups are mobilizing. At the moment, and given political gridlock, there is no movement to ‘do something’ in Congress. In the agencies – where, as we understand it, there is concern about de-risking – we see some ‘push back’ (that may possibly be behind the suspension of issuance of de-risking Private Letter Rulings). But without legislation there does not appear to be a lot the agencies can do. The report on last summer’s ERISA Advisory Council focused on enhancing disclosure. So, again, the advocacy groups are getting creative and going to state legislatures to do something.
As we understand it, GAO is at work on a report on de-risking that may be critical in a number of respects and that may lend momentum to the efforts of the advocacy groups.
We will continue to follow this issue.