Treasury changes lump-sum pension buyout rules: What it means for workers, retirees

The government has updated a rule that governs worker and retiree pension plans.

The U.S. Treasury Department recently released new guidelines in March that allow employers to offer a lump-sum payout to Americans in order to buy them out of future annuity payments.

Previously, under the Obama administration, the Treasury had said it would stop allowing lump-sum payouts in 2015 to people already receiving pension payments, which resulted in a decision among most employers to stop offering them.

This move was designed to protect retirees, who — under a defined benefits plan — receive guaranteed payments for life. The lump-sum payout gives retirement income intended to last a lifetime to the individual all at once.

Justin Halverson, a partner and lead advisor at financial planning firm Great Waters Financial, told FOX Business the change in rules could lead to scenarios where retirees are taken advantage of.

“If they take the lump sum payment, it may seem like a lot of money upfront; however, they may be shortchanged in the long run,” Halverson explained. “Companies typically prefer to get this lifelong obligation off of their books which is why they would prefer to pay the lump sum, but in many cases, retirees need the stable guaranteed income for life and the payment may be a better option than the lump sum.”

Some companies want to hand off the responsibility of the annuity payments as it weighs on their books — a process referred to as “de-risking.”

However, it may not be all bad news. Joe Wirbick, president of financial planning firm Sequinox, told FOX Business he likes the lump sum offers because, for one, it could reduce tax liabilities.

If a worker transitioned the lump-sum payment into a Roth IRA, for example, retirement savings could grow tax-free (though contributions are made with after-tax money).

Additionally, Wirbick noted pensions span a lifetime, meaning if a worker or retiree were to die young, the money would be lost. The lump-sum alternative gives workers a chance to pass that money along to children or future generations.

Wirbick also argued monthly pension income generally doesn’t protect a beneficiary from inflation, but a lump-sum allows the worker to select a retirement strategy that could actually let him or her to outpace inflation.


About 26.2 million workers and retirees are covered by single-employer plans — or defined benefits plans sponsored by one employer — according to the Pension Benefit Guaranty Corporation’s fiscal 2018 report. That includes 23,400 pension plans.

Overall, however, there has been a shift away from traditional pension plans.

In 1996, nearly 80 percent of large private-sector employers allowed defined benefit pension plans, as reported by Forbes. By 2017, that number had dropped to about 20 percent.

Among the companies that terminated their pension plans last year include AutoZone and Sherwin-Williams.