Bill would require notice to terminated members regarding lump sum/annuity payment options
The legislation before the US Senate aims to ensure that vested participants and their beneficiaries are well informed about how they receive payments.
The Information Needed for Financial Options Risk Mitigation (INFORM) Act (S. 4087), introduced by Sen. Patty Murray (D-WA), provides that plan sponsors who offer plan members who have acquired rights to a lump sum payment window would be required to provide information to help those participants understand the financial trade-offs of choosing between a lump sum payment and life annuity payments.
Under the bill, a plan sponsor who amends the plan to give members or beneficiaries time to elect to receive a lump sum instead of monthly annuity payments would be required to provide notice:
- to each participant or beneficiary who has been offered this lump sum, no later than 90 days before the first day on which the participant or beneficiary can elect to receive a lump sum; and
- to the Secretaries of Treasury and Labor (i.e. IRS and DOL) and the Pension Benefit Guaranty Corporation (PBGC), no later than 30 days before the first day that participants and beneficiaries may make an election regarding such lump sum.
Notice to Participants and Beneficiaries
In more detail, the notice to members and beneficiaries should include:
- An explanation of how the lump sum was calculated, including the interest rate, mortality assumptions, and whether any additional plan benefits were included in the lump sum, such as early retirement grants.
- The relative value of the lump sum payment option for a terminated member compared to the value of (1) the single life annuity and (2) the qualifying joint and survivor annuity.
- Information about:
- — whether it would be possible to replicate the plan’s payment stream by purchasing a comparable retail annuity using the lump sum;
- —the potential ramifications of accepting the lump sum, including longevity risks and the loss of (1) PBGC backed protections, (2) creditor protection, (3) spousal protections, and ( 4) other protections;
- —general tax rules for accepting a lump sum, including rollover options and early distribution penalties with a disclaimer that the plan does not provide tax, legal or accounting advice, and a suggested participants and beneficiaries to consult their own tax, legal and accounting advisers before deciding whether to accept the offer;
- —how to accept or reject the offer, the time frame for responding, and whether a spouse is required to consent to the choice; and
- —contact details for the point of contact at the plan sponsor where members and beneficiaries can get more information or ask questions about the options.
Notice to Federal Agencies
The bill would also require a plan sponsor to provide notice to the IRS, DOL, and PBGC regarding:
- the total number of participants and beneficiaries eligible for this lump sum payment option;
- the length of the limited period during which the lump sum is offered;
- an explanation of how the lump sum was calculated, including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement grants; and
- a sample of the notice provided to members and beneficiaries.
In addition, the plan sponsor would be required to provide a supplemental report to the IRS, DOL, and PBGC at least 90 days after the end of the period in which participants and beneficiaries can accept the plan offer. a plan to convert their pension into a lump sum. . This report would include the number of participants and beneficiaries who accepted the lump sum offer and any other information the IRS and DOL may require.
The bill also calls for regulatory guidance to be issued within six months of the bill’s enactment, including in the form of model notices for plan sponsors to use.
The bill was referred to the Senate Committee on Health, Education, Labor and Pensions.