IRS Reverses Course on Lump-Sum Payment Windows to Certain Retirees

The IRS had previously put a halt to the practice of defined benefit (DB) plan sponsors offering lump-sum windows to retirees in pay status, saying it intended to amend regulations so that such an acceleration of payments would not be allowed.

In Notice 2019-18, the Department of the Treasury and the IRS announced they no longer intend to amend the required minimum distribution regulations under Section 401(a)(9) of the Internal Revenue Code to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments.

In 2015, the agencies announced their intention to amend the minimum distribution regulations, noting that the regulations prohibit any change in the period or form of a retiree’s annuity distribution after it has commenced, with a few exceptions. The IRS noted that plan sponsors which have offered lump-sum windows to retirees receiving annuity payments, in an effort to de-risk their defined benefit (DB) plans, have treated the right to convert a current annuity into an immediate lump sum payment as an increase in benefits that is described in current regulations. It said at the time that amendments to the regulations will prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a DB plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. 

In the current notice, the Treasury Department and the IRS say they will continue to study the issue of retiree lump-sum windows, and 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 Section 401(a)(9), but will continue to evaluate whether the plan, as amended, satisfies the requirements of other sections of the Code. 

Also, during this period, the IRS will not issue private letter rulings with regard to retiree lump-sum windows.  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.