IRS Announces Retiree Lump-Sum Windows Are Back On The Table

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Pension plan sponsors have been looking for opportunities to manage their growing pension liabilities for many years now. In 2015, the Internal Revenue Service (IRS) closed the door on sponsors who were considering offering pension plan retirees a lump-sum settlement option. In an unexpected move Wednesday, the IRS released Notice 2019-18, stating that the IRS and Department of the Treasury (Treasury Department) no longer intend to amend the regulations under Internal Revenue Code § 401(a)(9) to prohibit retiree lump-sum windows in defined benefit plans. Sponsors of pension plans may now, once again, consider whether a retiree lump-sum window is a viable option to help manage their pension liability.

Plan sponsors sometimes use lump-sum windows as a way to “de-risk” their plans from market volatility, mortality table changes, changes in funding rules, increasing PBGC premiums, and a number of other uncertainties. Prior to the issuance of Notice 2015-49, plan sponsors would often offer deferred-vested participants not yet in pay status the option to take during a short period of time (i.e. during a “window”) a lump-sum payment of their benefit; they would sometimes also offer retirees currently receiving lifetime annuity payments a similar option to convert their annuities to immediate lump-sums (known as a “retiree lump-sum window”).

In the midst of a growing trend of sponsors offering retiree lump-sum windows, the IRS expressed disapproval of them as a violation of the Code’s required minimum distribution rules. In response, it issued Notice 2015-49, which indicated that, while lump-sum windows for deferred-vested participants not yet in pay status were permissible, regulations would be amended to clarify that retiree lump-sum windows would violate the Code’s required minimum distribution rules. This closed the door on a significant opportunity for sponsors to use these windows for de-risking.

Wednesday’s announcement signals a complete 180 from the IRS and Treasury Department from its position nearly four years ago. Notice 2019-18 indicates that the Treasury Department and the IRS will keep a close eye on retiree lump-sum windows, and it hinted that further guidance may be issued sometime in the future. In the meantime, it appears that plan sponsors can again consider whether a retiree lump-sum window is an appropriate feature, without fear of retribution from the IRS–at least for the time being. Sponsors considering a retiree lump-sum window should remember that such amendments are still subject to other qualification rules and consult with qualified counsel to ensure the feature meets the Code requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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