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Restrictions on Payment of Lump Sums and Accelerated Benefits

A plan is not allowed to pay lump sums if the plan is less than 60 percent funded. A plan subject to this restriction can only pay a monthly benefit equal to a lifetime monthly annuity.

 

If the plan is more than 60 percent funded but less than 80 percent funded, a plan with a lump-sum option can only pay out 50 percent of the benefit as a lump sum. The rest must be paid as a lifetime monthly annuity. If the employer sponsoring the pension plan is in bankruptcy, then the plan is prohibited from paying lump sums unless the plan is at least 100 percent funded.

 

The above restrictions apply to other kinds of benefits in addition to lump sums. These benefits, known as accelerated benefits, are any benefits available under the terms of the plan that pay an amount larger than a lifetime monthly annuity. An example of an accelerated benefit is a 10-year-certain benefit, where the entire benefit is paid out in monthly increments for 10 years rather than for the life of the participant. For most plans this restriction will mean that the only available benefit options will be a single life annuity and a joint and survivor annuity.

 

Read about the other benefit restrictions:

 

Earning future pension benefits under the plan

 

Improvements in benefits

 

Shutdown benefits

 

 

 

Return to the fact sheet on benefit restrictions in single employer plans.

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