IRS re-opens possibility of retiree lump-sum windows under pension plans

Tax Hot Topics newsletter The IRS announced in Notice 2019-18 that, until further guidance is issued, it would no longer take the position that retiree lump-sum windows violate the required minimum distribution rules under Section 401(a)(9). Retiree lump-sum windows describe the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit pension plan a temporary option to elect a lump-sum payment in lieu of future annuity payments.

Until July 9, 2015, a significant number of pension plan sponsors offered these windows to their participants in pay status as one of several “de-risking” strategies to reduce their pension plan obligations – which were satisfied for each participant who elected to receive a lump sum payment in lieu of the remaining annuity payments due. The investment and longevity risks associated with providing annuity payments were also shifted from the pension plan to the participants who elected lump sums.

Partly in response to concerns raised by participant rights groups and other interested parties about these windows, the IRS announced in Notice 2015-49 that it intended to propose regulations that would take the position that retiree lump-sum windows violate the required minimum distribution rules under Section 401(a)(9). These rules generally require pension plans to commence benefit distributions no later than April 1 of the calendar year following the later of (1) the calendar year in which the employee attains age 70 ½, or (2) the calendar year in which the employee retires. The rules also provide that, once any minimum lifetime benefits commence, the payments generally cannot be changed or increased, except in a narrow set of circumstances, such as in the case of death or plan termination. The 2015 notice also indicated the proposed regulations generally would apply as of July 9, 2015 – retroactive to the date of the notice – effectively eliminating the ability to offer retiree lump-sum windows going forward.

Notice 2019-18 announces that the IRS no longer intends to propose the regulations described in the 2015 notice and, until further guidance is issued, will not assert that retiree lump-sum windows violate the required minimum distribution rules. However, the IRS explained that it will continue to study the issue further and will continue to evaluate whether any retiree lump-sum windows offered satisfy all of the other qualification requirements, including, but not limited to, Sections 401(a)(4) (the nondiscrimination requirements), 411 (the vesting requirements), 415 (the annual benefit limitations), 417 (the minimum survivor annuity requirements) and 436 (the funding status based limits on certain benefits, including lump sums). Retiree lump-sum windows also raise potential issues under other areas of the law. Thus, although Notice 2019-18 re-opens the possibility of retiree lump-sum windows again, pension plan sponsors should proceed cautiously and should consult with appropriate professionals with experience in these types of windows.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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