Administrative delay did not make pension buyout an accelerated payment

Plain-English summary

A governmental retirement system offered eligible members a lump sum in exchange for reduced future cost-of-living increases. Members elected the buyout with their retirement applications, but administrative calculations and final confirmation could occur after the annuity starting date while preliminary payments were being made. The IRS ruled that a confirmation delayed solely by administration was not a prohibited acceleration because the member made the election before benefits began. It also ruled that the reconciled preliminary payments did not create an impermissible acceleration because they ultimately equaled the annuity payments that should have been made from the starting date.

Ruling snapshot

• Question: Do delayed confirmation of a pension buyout and preliminary annuity payments violate the section 401(a)(9) payment rules?
• Outcome: approved, because the election preceded benefit commencement and the interim payments were reconciled to the final annuity
• Key authorities: IRC § 401(a)(9); Treas. Reg. § 1.401(a)(9)-6

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 201933006                                              Third Party Communication: None
 Release Date: 8/16/2019                                        Date of Communication: Not Applicable
 Index Number: 401.11-00
                                                                Person To Contact:
 ---------------------------------------------------            ------------------, ID No. ------------------
 ---------------------                                          Telephone Number:
 ---------------------                                          ----------------------
 --------------------------------------                         Refer Reply To:
 -----------------------------                                  CC:EEE:EB:QP1
                                                                PLR-132632-18
                                                                Date:
                                                                May 16, 2019




In Re: ------------------------------------------------------
-----------------------------------------------------------

 Legend:

 Plan          =   ---------------------------------------------------
 State         =   ----------
 Date 1        =   ----------------------
 Date 2        =   ------------------
 Date 3        =   --------------------
 Option 1      =   --------------------------------------
 Option 2      =   -----------------------------------

 Dear -----------:

 This is in response to your request dated October 29, 2018, as supplemented by
 information dated April 11, 2019, in which your authorized representatives request a
 private letter ruling on your behalf regarding the application of section 401(a)(9) of the
 Internal Revenue Code to Plan.

 The following facts and representations have been submitted under penalty of perjury in
 support of the rulings requested:

 Plan is a multiple-employer public employee retirement system established by State to
 provide retirement annuities and other benefits for employees, survivors and other
 beneficiaries of those employees of State’s universities, community colleges, and
 certain other educational and scientific agencies. Plan provides a qualified defined
 benefit plan under which there are two benefit options, Option 1 and Option 2. Plan
 also provides a qualified defined contribution plan. Members of Plan choose one of
 these three options upon employment with a covered employer. Members who first
PLR-132632-18                               2

become Plan members prior to Date 1, and who are not participants in the defined
contribution plan, are referred to as Tier 1 members. Plan represents that the
underlying defined benefit and defined contribution plans are qualified plans under
section 401(a) and governmental plans within the meaning of section 414(d).

Preliminary Payments

A member who retires after meeting applicable age and service requirements is entitled
to a retirement annuity from Plan. A member may specify the date that his or her
annuity period begins on his or her retirement application. However, a member’s
annuity payment period may not begin before the member’s termination of employment
nor more than one year before the member’s retirement application is received by Plan,
and must begin by his or her required beginning date under section 401(a)(9). A
member’s retirement begins with the beginning of his or her annuity payment period.

Plan requires an administrative period following a member’s retirement to calculate his
or her retirement annuity, which typically takes three weeks to six months to complete.
For the period that begins on the member’s effective retirement date and ends when the
retirement annuity calculation is finalized and paid, Plan provides members with a
portion of their retirement annuity. These preliminary payments are provided to reduce
the financial hardship on retirees during the calculation process, as Plan-covered
employment is not covered by Social Security, and many retirees are without any other
source of retirement income. The preliminary payments are calculated as a percentage
of the member’s estimated retirement annuity amount, with certain adjustments.

If a member’s retirement application is received at least 90 days before his or her
effective retirement date (the first day of the member’s annuity payment period), the
preliminary payments will begin on the first working day of the month following the
member’s effective retirement date and continue thereafter until Plan completes its
calculation of the member’s retirement annuity. If a retirement application is received
less than 90 days before the member’s effective retirement date, the preliminary
payments will begin as soon as practicable following the effective retirement date and
continue thereafter until Plan completes its calculation of the member’s retirement
annuity. After Plan finalizes the member’s retirement annuity calculation, it reconciles
the final retirement annuity amount with the amount of the preliminary payment, and it
provides a catch-up payment to the extent that the final retirement annuity amount
exceeds the preliminary payment amount, retroactive to the effective retirement date,
without interest. Similarly, if the retirement annuity is calculated to be less than the
amount of the preliminary payment, overpayments are recouped from future retirement
annuity payments, without interest.

Buyout Offered to Tier 1 Members

On Date 2, State legislature amended State law to provide two additional pension
payout options under Plan. Plan intends to offer an election to eligible Tier 1 members
PLR-132632-18                                3

to choose a lump sum payment in exchange for a delay and reduction in the cost-of-
living increase otherwise applicable to the member’s annuity (the “buyout”). Plan
provides that Tier 1 members are eligible to receive a retirement annuity in the form of a
single life annuity with an annual increase of 3% of the amount payable in the prior year.
It is available to eligible members only during the period commencing on the
implementation date (as defined by State statute) and ending Date 3. An eligible Tier 1
member who elects the buyout will receive an annual increase of 1.5% of the original
amount of the annuity beginning on January 1 following the later of the member’s 67th
birthday or one year after retirement. The accelerated pension benefit payment is a
lump sum payment equal to 70% of the difference between the present value of the 3%
compounded annually annual increase and the present value of the 1.5% simple
interest annual increase delayed until age 67, determined using actuarial factors that
are specified in Plan. The buyout reduces future cost-of-living increases to the
member’s annuity, but it does not change the beginning retirement annuity amount.
Under State law, eligible members must elect the buyout before any retirement annuity
is paid. Thus, a buyout is available only to a Tier 1 member who has not yet filed a
retirement application to commence his or her retirement annuity.

An eligible Tier 1 member must submit an application for the buyout at the same time
that the member submits an application for a retirement annuity. This election for the
buyout is based on an estimated annuity payment and estimated buyout amount. Upon
the election of an eligible Tier 1 member, Plan is required to calculate the finalized
buyout amount and offer the member the opportunity to confirm his or her election of the
buyout in a final election. Plan will pay the preliminary payments (as mentioned above)
to these members from their effective retirement dates and prior to confirming their
buyout elections in the same manner as they are paid to members who are not eligible
for the buyout or do not apply for the buyout.

Taxpayer requests the following rulings:

    1. An eligible Tier 1 member’s final election of the buyout that occurs after the
      member’s effective retirement date, and which is solely due to administrative
      delay in finalizing the claim for benefits, is not treated as an accelerated annuity
      payment after benefit commencement that is prohibited under section 401(a)(9)
      and § 1.401(a)(9)-6, Q&A-1.

    2. The payment of a preliminary payment to Tier 1 members who are eligible for the
      buyout prior to the member’s final election of the buyout due solely to
      administrative delay does not constitute annuity payments that may be
      accelerated upon election of the buyout in violation of section 401(a)(9) and
      § 1.401(a)(9)-6, Q&A-1.

Section 401(a)(9) provides that a trust shall not constitute a qualified trust unless the
plan provides that the entire interest of each employee (i) will be distributed to such
employee not later than the required beginning date, or (ii) will be distributed, beginning
PLR-132632-18                                 4

not later than the required beginning date, in accordance with regulations, over the life
of such employee or over the lives of such employee and a designated beneficiary (or
over a period not extending beyond the life expectancy of such employee or the life
expectancy of such employee and a designated beneficiary).

Section 1.401(a)(9)-6, Q&A-1(a) provides that in order to satisfy section 401(a)(9),
except as otherwise provided in § 1.401(a)(9)-6, distributions of the employee's entire
interest under a defined benefit plan must be paid in the form of periodic annuity
payments for the employee's life (or the joint lives of the employee and beneficiary) or
over a period certain that does not exceed the maximum length of the period certain
determined in accordance with § 1.401(a)(9)-6, Q&A–3. The interval between
payments for the annuity must be uniform over the entire distribution period and must
not exceed one year. Once payments have commenced over a period, the period may
only be changed in accordance with § 1.401(a)(9)-6, Q&A-13. Except as otherwise
provided in § 1.401(a)(9)-6 (such as permitted increases described in Q&A–14), all
payments (whether paid over an employee's life, joint lives, or a period certain) also
must be nonincreasing.

Section 1.401(a)(9)-6, Q&A-1(b) provides that the annuity may be a life annuity (or joint
and survivor annuity) with a period certain if the life (or lives, if applicable) and period
certain each meet the requirements of § 1.401(a)(9)-6, Q&A-1(a).

Section 1.401(a)(9)-6, Q&A-1(c) provides that annuity payments must commence on or
before the employee's required beginning date (within the meaning of § 1.401(a)(9)-2,
Q&A-2). The first payment, which must be made on or before the employee's required
beginning date, must be the payment which is required for one payment interval. The
second payment need not be made until the end of the next payment interval even if
that payment interval ends in the next calendar year. Similarly, in the case of
distributions commencing after death in accordance with section 401(a)(9)(B)(iii) and
(iv), the first payment, which must be made on or before the date determined under
Q&A-3(a) or (b) (whichever is applicable) of § 1.401(a)(9)-3, must be the payment which
is required for one payment interval. Payment intervals are the periods for which
payments are received, e.g., bimonthly, monthly, semi-annually, or annually. All benefit
accruals as of the last day of the first distribution calendar year must be included in the
calculation of the amount of annuity payments for payment intervals ending on or after
the employee's required beginning date.

Section 1.401(a)(9)-6, Q&A-14 provides that except as otherwise provided in this
section, all annuity payments (whether paid over an employee's life, joint lives, or a
period certain) must be non-increasing or increase only in accordance with one or more
of the following:

(1) With an annual percentage increase that does not exceed the percentage increase
in an eligible cost-of-living index as defined in paragraph (b) of this A-14 for a 12-month
period ending in the year during which the increase occurs or the prior year;
PLR-132632-18                                 5



(2) With a percentage increase that occurs at specified times (e.g., at specified ages)
and does not exceed the cumulative total of annual percentage increases in an eligible
cost-of-living index as defined in paragraph (b) of this A-14 since the annuity starting
date, or if later, the date of the most recent percentage increase. However, in cases
providing such a cumulative increase, an actuarial increase may not be provided to
reflect the fact that increases were not provided in the interim years;

(3) To the extent of the reduction in the amount of the employee's payments to provide
for a survivor benefit, but only if there is no longer a survivor benefit because the
beneficiary whose life was being used to determine the period described in
section 401(a)(9)(A)(ii) over which payments were being made dies or is no longer the
employee’s beneficiary pursuant to a qualified domestic relations order within the
meaning of section 414(p);

(4) To pay increased benefits that result from a plan amendment;

(5) To allow a beneficiary to convert the survivor portion of a joint and survivor annuity
into a single sum distribution upon the employee's death; or

(6) To the extent increases are permitted in accordance with paragraph (c) or (d) of this
A-14.

With regard to your first requested ruling, under § 1.401(a)(9)-6, Q&A-1(a), the stream
of annuity payments received by a Tier 1 member must be nonincreasing once benefits
commence. Accordingly, if a Tier 1 member began receiving annuity payments and
then was offered an election to convert a portion of the existing stream into a lump sum,
the amount of the payments would increase in the year the lump sum payment was
received, in violation of § 1.401(a)(9)-6, Q&A-1(a). However, under the facts of this
case, the election to receive the buyout occurs with the initial retirement application, at
which time a member may elect to receive or reject the buyout. If the member elects
the buyout, the buyout calculation is included as part of the overall annuity calculation
and is confirmed upon finalization of the calculations. Even though the preliminary
payments are paid to the member beginning on the annuity starting date, because the
election is made before the annuity starting date, an eligible Tier 1 member’s
subsequent confirmation of the election of the buyout after the member’s effective
retirement date, solely due to administrative delay in finalizing the buyout calculations
and the claim for benefits, is not treated as an accelerated annuity payment after benefit
commencement that is prohibited under section 401(a)(9) and § 1.401(a)(9)-6, Q&A-1.

With regard to your second requested ruling, pursuant to your representations, the
monthly preliminary payments are made to each retired member beginning on his or her
annuity starting date, and calculated based on his or her estimated monthly retirement
amount. The preliminary payments are paid during the administrative period that arises
for calculating the final annuity amount and are reconciled when the final amount is
PLR-132632-18                                  6

calculated. The reconciliation payments are not additional benefits because the amount
of the payments received by the member once the calculation is made equals what
would have been paid if equal annuity payments, as determined in the final calculation,
had been made starting on the annuity starting date. Therefore, the payment of
preliminary payments to Tier 1 members who are eligible for the buyout prior to the
member’s confirmation of the election of the buyout due solely to administrative delay
does not constitute annuity payments that are accelerated upon election of the buyout in
violation of section 401(a)(9) and § 1.401(a)(9)-6, Q&A-1.

The rulings contained in this letter are based upon information and representations
submitted by your authorized representatives and accompanied by a penalty of perjury
statement executed by an appropriate party, as specified in Rev. Proc. 2019-1, 2019-1
I.R.B. 1, § 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination. The Associate office will revoke or modify a letter ruling and apply the
revocation retroactively if there has been a misstatement or omission of controlling
facts; the facts at the time of the transaction are materially different from the controlling
facts on which the ruling was based; or, in the case of a transaction involving a
continuing action or series of actions, the controlling facts change during the course of
the transaction. See Rev. Proc. 2019-1, § 11.05.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of your authorized representatives.

                                        Sincerely,



                                        Laura B. Warshawsky
                                        Branch Chief
                                        Qualified Plans Branch 1
                                        Office of Associate Chief Counsel
                                        (Employee Benefits, Exempt Organizations, and
                                        Employment Taxes)



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