Rulings Signal DB Retiree Lump-Sum Windows Comply with Law

August 6, 2014 ( – The Internal Revenue Service (IRS) has issued a number of private letter rulings finding defined benefit (DB) plan lump-sum windows offered to beneficiaries already in pay status do not violate the law.

Specifically, the IRS determined that the minimum distribution requirements of section 401(a)(9) of the Internal Revenue Code would not be violated if the companies requesting the private letter rulings amended their plans to offer a lump-sum payment option, during a limited window period, to certain participants and beneficiaries for whom annuity payments have already begun. Companies use lump-sum windows to transfer pension liability, and thus risk, off their books (see “Reducing DB Costs, Risk via Lump-Sum Windows”). It is important to note that private letter rulings only apply to the company and situation about which the ruling is requested; however, they can provide a clue about the regulator’s stance.

The rulings explain that Treasury Regulation section 1.401(a}(9}-6 sets forth the rules governing required distributions from defined benefit plans and annuity contracts. Treasury Regulation section 1.401(a}(9)-6, Q&A-13(a) states that an annuity payment period may be changed in association with an annuity payment increase described in A-14 of that section, and section 1.401(a)(9}-6, Q&A­14(a}(4) provides that annuity payments from a qualified plan may increase if the payment of increased benefits results from a plan amendment.

According to the IRS the proposed plan amendments establishing lump-sum windows will result in a change in the annuity payment period. The annuity payment period will be changed in association with the payment of increased benefits as a result of the addition of the lump-sum option. In addition, eligible annuitants who wish to change their current distribution option will be considered to have a new annuity starting date as of the first day of the month in which their new benefit is payable. Because the ability to select a lump sum will only be available during a limited window, the increased benefit payments will result from the proposed amendment, so they are permitted under the Treasury regulations.

An alert from law firm King & Spalding notes that the IRS issued two such private letter rulings (PLRs) in 2012, and in March of this year issued five more.

According to the law firm, PLR 201422028, PLR 201422029,  PLR 201422030,  PLR 201422031,  and PLR 201424031 confirm the IRS’ position that retiree lump-sum windows can comply with Code Section 401(a)(9), and the outcome does not change if:

  • the programs are offered by multiple employer plans or plans covering collectively-bargained employees;
  • no financial counseling is offered to retirees making the election; or
  • financial counseling is offered to retirees making the election but such counseling is not independent, (provided that the counseling provides “information and guidance sufficient to enable participants to clearly understand their options without steering participants to a particular result.”