SECURE 2.0: New notice and disclosure requirements for lump-sum windows
A lump-sum window is one strategy an employer can use to de-risk its defined benefit (DB) pension plan. The SECURE 2.0 Act of 2022 will require additional notice and enhanced disclosure requirements for plans implementing a lump-sum window. The effective date of the new requirements will depend on when the U.S. Department of Labor (DOL) issues a final rule, but they could apply to lump-sum windows as early as 2024. In this article we break down the new requirements in Section 342 of the new law.
Pre-window plan notice to participants and beneficiaries
Plans must send a notice to participants and beneficiaries eligible for a lump-sum payout during the window, containing information that allows them to assess the option and to elect the lump sum instead of future monthly payments.
| Due date | Recipients of the notice |
|---|---|
| No later than 90 days prior to the first day of the window election period | Each participant and beneficiary offered the lump-sum payout |
The window election period is the period during which a participant or beneficiary may elect to receive a lump sum in lieu of monthly annuity payments.
Content of the notice
The notice must be written in a manner that can be understood by the average plan participant and must contain the following information.
- Available benefit options, including the estimated normal retirement benefit, whether the plan has a subsidized early retirement option or fully subsidized joint and survivor annuities, the monthly benefit amount if payments started immediately, and the lump-sum amount if elected.
- An explanation of how the lump sum was calculated, including the mortality and interest rate(s), and whether any additional benefits were included, such as early retirement subsidies.
- The relative value of the lump sum compared to the single life annuity (or other standard benefit form) and the qualified joint and survivor annuity.
- A statement that a commercial annuity providing a comparable annuity to the annuity available from the plan may cost more than the lump sum and that individuals should consult with an advisor if they are considering purchasing a commercial annuity.
- The risks of accepting the lump sum, including longevity risk, the loss of Pension Benefit Guaranty Corporation (PBGC) protections, loss of protection from creditors, and loss of spousal protections.
- The general tax rules related to accepting the 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 suggestion that individuals should consult with their own advisors before accepting the lump-sum offer.
- How to accept or reject the offer, the deadline for response, and whether the spouse must consent to the election.
- Plan administrator’s contact information to field questions and information requests from individuals.
Model notice
The DOL will issue a model notice that covers the information in items 3, 4, 5, and 6.
Pre-window plan notice to the federal agencies
The plan will be required to send the federal agencies this new notice before the lump-sum window starts.
| Due date | Recipients of the notice |
|---|---|
| No later than 30 days prior to the first day of the window election period | DOL and PBGC |
Content of the notice
This notice must include the total number of participants and beneficiaries eligible for the lump-sum payout, the length of the limited period during which the lump sum is offered, an explanation of how the lump sums were calculated—including mortality and interest rate(s), and whether any additional benefits were included, such as early retirement subsidies—and a sample of the notice sent to participants and beneficiaries.
Post-window plan report to the federal agencies
The plan will also be required to send the federal agencies this new report after the lump-sum window ends.
| Due date | Recipients of the report |
|---|---|
| Within 90 days after the end of the window | DOL and PBGC |
Content of the report
This report must include the number of participants and beneficiaries who accepted the lump-sum offer and any other information that the DOL may require.
Information made public
The information provided in the pre- and post-window reports to the DOL and PBGC will be made public, in a form that protects the confidentiality of the information provided.
Federal agency report to Congress
On the last day of the second calendar year after the agencies issue the final rule, and every two years thereafter (to the extent lump-sum windows have been reported), the DOL will summarize the plan notices and post-offer reports received during the applicable two-year reporting period in a report to Congress.
When guidance will be issued and effective
The law specifies that the Secretary of Labor, in consultation with the Secretary of Treasury, will issue regulations no earlier than December 29, 2023, one year after the enactment of SECURE 2.0. Such regulations will be applicable no earlier than the issuance of a final rule and no later than one year after issuance of a final rule.
Penalties for noncompliance
If the plan fails to send the above pre-window notices and post-window report, it may be subject to civil penalties or actions under the Employee Retirement Income Security Act (ERISA) section 502.
Keys to a successful lump-sum window
Once the decision has been made to implement a lump-sum window, successful execution requires coordination between plan legal counsel, the administrative team, and, in some cases, the plan actuaries. The plan amendment must be adopted, and the participant data needs to be compiled and cleaned up before the lump-sums can be calculated. In addition to the required participant notice above, the plan may want to implement a communication campaign that engages individuals multiple times to ensure higher responsiveness. The following articles provide tips to conducting an effective lump-sum window.
- Communication strategies to make lump-sum windows more effective
- Lump-sum windows: Engaging communication produces higher response rates
- Lump-sum windows: Administrative tips to consider
- Five things to consider for a lump-sum sweep
Learn more about other de-risking strategies
As mentioned above, a lump-sum window is just one way for plan sponsors to de-risk their DB plans. A lump-sum window might look even more attractive today since interest rates have risen significantly over the past year, resulting in smaller lump-sum payouts. Plan sponsors should carefully review the legal, actuarial, accounting, and plan funding implications of all possible de-risking strategies before choosing a lump-sum window. The following articles provide more insight into the various de-risking strategies plan sponsors could consider.
- De-risking opportunities in a rising interest rate environment
- The "1-2-3s" of pension de-risking: Three tactics for financial stability
- To evaluate pension risk transfer plan sponsors need the whole picture
- Defined benefit pension funding resurrection
- De-risking: Options available to reduce your pension plan footprint
Please contact your Milliman consultant to discuss how this provision of SECURE 2.0 may impact your plan(s).