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IRS intends to prohibit replacement of annuity payments with lump-sum payments

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Tax Hot TopicsThe IRS issued Notice 2015-49 to inform taxpayers that it intends to amend the required minimum distribution regulations under Section 401(a)(9) to largely prohibit the use of lump-sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.  

This rule change is meant to address defined benefit plans that provide a period during which retirees who are currently receiving annuity payments may convert that annuity into a lump sum that is payable immediately. According to the IRS, these arrangements are sometimes referred to as lump-sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retiree. The rule amendment would provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump-sum payment or other accelerated form of distribution.  

The IRS has not yet issued proposed regulations to reflect this rule change, but once it does and the regulations become final, the agency intends the new rules to be applied, with certain exceptions, as of July 9, 2015.  

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Eddie Adkins
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eddie.adkins@us.gt.com

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