Under the new rules, some companies may no longer be able to provide retiring workers with lump-sum distributions. Some of these employers may even be forced to freeze their plans as a result of the new rules.
Under the 2006 Pension Protection Act, employers with calendar-year defined-benefit plans must have actuaries certify the funded status of their plans by April 1. Any plan that is certified to be less than 80 percent funded will have to reduce the amount of lump-sum distributions they can pay out. Employers with plans that are certified to be less than 60 percent funded will have to freeze their plans and won’t be able to pay any lump-sum distributions to retiring employees.
To make life easier for employers, however, the IRS is letting companies provide certified funding data for their plans as of January 1, 2007, provided they offer the 2008 data by October 1. However, companies that provide 2007 data have to take 10 percent off their funded status. For example, if a company’s plan was 90 percent funded as of January 1, 2007, it would be certified for 80 percent.
The new rules require HR executives to work more closely with actuaries.
“This is really a paradigm shift for HR,” says Ken Steiner, a resource actuary at Watson Wyatt Worldwide. “As soon as the actuary certifies to a percentage [that the plan is funded], it can change the plan operation in the blink of an eye and plan administrators will have to change what they are doing.”
While consultants at Watson Wyatt and Sibson Consulting say most of their clients’ plans fall above the 80 percent mark even with the penalty, around 20 percent of them will fall below that threshold and will have to restrict the amount of lump-sum distributions they pay out to retiring employees.
The HR executives at these companies need to figure out when and how they are going to communicate to employees that their lump-sum payments may be reduced or eliminated or that the plans are being frozen.
“Those employees who are retiring in the next few months are already asking HR for a calculation on how much they will receive from their pensions,” says Robert McAree, Sibson Consulting’s retirement practice leader. “HR needs to know if these employees’ benefit payments are going to be different than what they expect.”
Companies have 30 days to alert employees to a change in their benefit payments, but consultants say most firms should try to get ahead of that if possible.
Even companies that think they are in compliance for the April 1 deadline must be sure they are still fine for the October 1 deadline, consultants say. Companies missing that deadline automatically will be deemed as having plans that are less than 60 percent funded and will have to freeze their plans, which won’t allow them to pay lump-sum distributions.
“If HR hasn’t heard from an actuary about this, they better reach out to them now,” says Kathy FitzPatrick, a principal with Towers Perrin. “This is a call to action.”