Companies That Buy Pensions
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Many companies within the automotive industry have announced new pension lump sum payment programs that impact certain current salaried retirees or former employees. In some cases these companies are also providing a new option for current salaried employees to receive a lump sum pension benefit upon retirement. This is now a trend among a number of companies outside the automotive industry as well. NCR, Sears, The New York Times, Equifax, TRW, Lockheed Martin, J.C. Penney, and Archer Daniels Midland are among a few of the companies that have come forward with a pension lump sum offer for certain retirees.
A 2018 study by the National Bureau of Economic Research found that households where the head turned 70 in 1992 incurred an average of $122,000 in medical spending, including Medicaid payments, over their remaining lives. For 1 percent of those seniors, their retirement health care expenses will exceed $600,000. The poorest households had a significantly lower risk because Medicaid covers the majority of their costs.
According to the U.S. Bureau of Labor Statistics, annual pretax income among households led by someone aged 75 or older averages about $35,500, while average annual expenditures were about $36,700, as reported in the 2014 Consumer Expenditure Survey. At more than $13,300, housing was the greatest expenditure for this age group, even though 82.5 percent of that group had no mortgage debt.
Mortgage payments can take up 30 percent of your income or more. If you still have a mortgage in retirement, it might make sense to sell annuity payments to erase that debt and eliminate that monthly bill.
However, there are circumstances in which selling payments makes sense, including immediate needs that overtake any benefits you are receiving from your annuity and the strength of your financial portfolio.
Taking the lump-sum payment from a pension buyout gives you the flexibility to leverage those funds in any way that fits your retirement plan best. Generally, in order to avoid paying taxes you would choose to move the funds into your own IRA account. Since pension funds are not taxed until received, the payment would be taxed unless moved into a tax-deferred account.
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The purpose of SB 236 is to provide a one-time supplement to employees and retirees, but the intent of the legislation is that an individual should not receive more than one supplement payment. So if you are an active employee that receives a supplement payment you will not receive the retiree supplement, unless you are receiving a survivor pension.
This list was started in 2012, after Ford and General Motors announced that they were offering lump sums to thousands of retirees and former workers. Read our related fact sheet, Should You Take Your Pension as a Lump Sum.
The employer can end the plan in a standard termination but only after showing PBGC that the plan has enough money to pay all benefits owed to participants. The plan must either purchase an annuity from an insurance company (which will provide you with lifetime benefits when you retire) or, if your plan allows, issue one lump-sum payment that covers your entire benefit. Before purchasing your annuity, your plan administrator must give you an advance notice that identifies the insurance company (or companies) that your employer may select to provide the annuity. PBGC's guarantee ends when your employer purchases your annuity or gives you the lump-sum payment. A state guaranty association may insure all or part of your annuity in such a case.
If the plan is not fully funded, the employer may apply for a distress termination if the employer is in financial distress. To do so, however, the employer must prove to a bankruptcy court or to PBGC that the employer cannot remain in business unless the plan is terminated. If the application is granted, PBGC will take over the plan as trustee and pay plan benefits, up to the legal limits, using plan assets and PBGC guarantee funds.
Under certain circumstances, PBGC may take action on its own to end a pension plan. Most terminations initiated by PBGC occur when PBGC determines that plan termination is needed to protect the interests of plan participants or of the PBGC insurance program. PBGC can do so if, for example, a plan does not have enough money to pay benefits currently due.
If your employer wants to end the plan, your plan administrator must notify you in writing that your plan is ending. You must get this notice, called the Notice of Intent to Terminate, at least 60 days before the \"termination\" date. If PBGC is terminating the plan, we notify the plan administrator and often publish a notice about our action in local and national newspapers.
Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract). Income received from foreign pensions or annuities may be fully or partly taxable, even if you do not receive a Form 1099 or other similar document reporting the amount of the income.
As a general rule, the pension/annuity article of most income tax treaties allows for exclusive taxation of pensions or annuities under the domestic law of the resident country (as determined by the residence article). This is generally true unless a treaty provision specifically amends that treatment. For example, some treaties provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country. There also may be special rules for lump-sum distributions.
With respect to government pensions/public pensions/annuities (typically covered under the Government Service article) or social security payments, generally the payments are only taxable by the country in which the government is making the payments. Note that what constitutes a government pension or public pension is dictated by the treaty, and the rule may apply narrowly.
If you live in the United States and receive a pension/annuity paid by a foreign payor, you must claim the appropriate treaty withholding exemption on the form, and in the manner specified by the foreign government. If the foreign government, and/or the foreign withholding agent, refuses to honor the treaty claim, make the treaty claim on your income tax return, or other prescribed form, filed with the foreign country. Additionally, you may be able to claim a Foreign Tax Credit on your U.S. federal individual income tax return for any foreign income tax withheld from your foreign pension or annuity. Be aware that a Foreign Tax Credit generally would not be permitted for tax withheld that is in excess of the liability under foreign law, taking into consideration applicable income tax treaties.
Apply the domestic law of each country to identify your residency, IRC 7701(b) in the case of the United States (see Chapter 1 of Publication 519, U.S. Tax Guide for Aliens, for the Green Card Test, Substantial Presence Test, or First Year Choice). Your residency determines how the treaty article on pensions/annuities will be applied.
If you determine you are a resident of one of the countries to the treaty, then you should refer to the benefits provided under the relevant treaty article dealing with pensions, annuities, government service, or social security payments.
If any of the above rules results in the determination of a single country of residency, then there is no need to continue with the remaining rules. On the other hand, if none of the above rules results in a single country of residency, then residency should be decided by the Competent Authorities of each country upon request by the taxpayer. Refer to Competent Authority Assistance for information on how to make a competent authority assistance request. Note that some treaties do not provide tiebreaker rules for determining the residency status of dual residents and you must request Competent Authority assistance to make a determination.
Absent application of a particular treaty provision, foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. They are not eligible for exclusion from taxable income the way a U.S. social security pension might be unless a tax treaty provides for an exclusion.
Most income tax treaties have special rules for social security payments. Generally, U.S. treaties provide that social security payments are taxable by the country making the payments. However, a foreign social security payment may also be taxable in the United States if you are a U.S. citizen or resident, as a result of the saving clause. And remember, not all treaties have the same provisions for foreign social security pensions, so always refer to the specific treaty at issue.
Income tax treaties may also contain special rules for pensions paid in respect of government service (typically found under the Government Service article). Many U.S. tax treaties provide that a pension received for government services will only be taxable by the payor country if the person is a citizen/national of the country to which government services are provided and is not a citizen or lawful permanent resident (green card holder) in the country where the services were performed. Benefits with respect to government pensions may vary from this treatment, so you should refer to the specific treaty at issue for deviations. In addition, it is important to remember that foreign government pensions received by a U.S. citizen or resident may be subject to the