Pension & Benefits News Retiree lump-sum windows now permitted
Monday, March 25, 2019

Retiree lump-sum windows now permitted

By Pension and Benefits Editorial Staff

The IRS has announced that it no longer plans to amend its required minimum distribution (RMD) regulations to prohibit a defined benefit from allowing still-living retirees that are currently receiving annuity payments to convert their annuity payments into a lump-sum payment.

IRS had planned to narrow “increase in benefits” exception for annuity payment changes. Generally, after distributions have commenced, changes in the period or form of the distributions are prohibited. However, there are limited exceptions. One exception under IRS Reg. §1.401(a)(9)-6, A-14(a)(4) permits annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.” A number of defined benefit plan sponsors had amended their plans to provide a limited period during which certain retirees who were currently receiving joint and survivor, single life, or other life annuity payments from those plans could elect to convert that annuity into a lump sum that was payable immediately.

In July 2015, the IRS announced that it planned to propose amendments to the regulations to provide that the types of permitted benefit increases that count for these purposes are limited to those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments. The IRS intended that the amendments to the regulations would apply July 9, 2015. However, the IRS provided that the annuity payment periods under certain “pre-notice accelerations” would be permitted to be changed.

IRS and Treasury change their minds. Now, the IRS says it no longer plans to amend its RMD regulations. The Treasury Department and the IRS will continue to study the issue of retiree lump-sum windows. Until further guidance is issued, the IRS will not assert that a plan amendment providing for a retiree lump-sum window program causes the plan to violate the RMD rules, but will continue to evaluate whether the plan satisfies other applicable qualified plan requirements. During this period, the IRS will not issue private letter rulings concerning retiree lump-sum windows. However, if a taxpayer is eligible to apply for and receive a determination letter, the IRS will no longer include a caveat expressing no opinion regarding the tax consequences of such a window in the letter.

IRS Notice 2015-49 is superseded.

SOURCE: IRS Notice 2019-18.

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