IRS Re-Opens the Door to Retiree Lump Sum Windows -

The IRS recently issued Notice 2019-18, reversing its prior position set forth in Notice 2015-49 that offering retirees in pay status the opportunity to elect a “cash out” of annuity benefits during a limited “window” violates the required minimum distribution (“RMD”) requirements of section 401(a)(9) of the Internal Revenue Code (the “Code”). Notice 2019-18 provides that the IRS no longer intends to amend the RMD regulations to prohibit the practice of offering retiree lump sum windows, and until further guidance is issued, will not assert that a plan amendment providing for a retiree lump sum window causes the plan to violate section 401(a)(9) of the Code. However, the IRS intends to continue to evaluate whether such windows might violate other Code provisions, including nondiscrimination, minimum vesting, benefit limitations, spousal protections and distribution restrictions.

BACKGROUND

The RMD regulations generally prohibit any change in the period or form of an annuity after distribution of the annuity has started, and requires that annuity payments be “non-increasing,” subject to specific exceptions set forth in the regulations. One exception allows annuity payments to increase if the payment of increased benefits results from a plan amendment. In private letter rulings issued prior to Notice 2015-49, the IRS ruled that the addition of a lump sum payment window constituted an increase in benefits that fit within the exception, with the result that a change in the annuity payment period would be permitted under the RMD

regulations.