IRS Changes Course on Lump Sums to Retirees

Snell & Wilmer

In Notice 2019-18, the Internal Revenue Service (the “IRS”) changed its position and now will permit employers to offer lump sum payments to retirees who are currently receiving annuity payments from a defined benefit plan.  This is a reversal from its position in Notice 2015-49, in which the Treasury Department and the IRS stated that they intended to propose amendments to the required minimum distribution regulations to address the payment of lump sums to replace ongoing annuity payments under a defined benefit plan.  Prior to the issuance of Notice 2015-49, a number of defined benefit plans started offering retirees who were receiving annuities an opportunity to elect to convert their annuities into lump sum benefits during a limited period of time in what became known as “de-risking” transactions.  The issuance of Notice 2015-49 prohibited the payment of lump sums to participants in pay status as such payments could violate the required minimum distribution provisions of the Internal Revenue Code (the “Code”).  The issuance of Notice 2015-49 essentially stopped the practice of offering lump sums to those retirees receiving annuities.

However, the IRS has changed course and in Notice 2019-18, the IRS indicated that it will continue to study the issue of permitting the retirees to convert their annuities into lump sums during a limited period of time.  While the IRS is studying this issue, the IRS will not challenge these types of amendments as a violation of the Code’s required minimum distribution regulations, but it will continue to evaluate whether this type of plan amendment satisfies other sections of the Code.  In addition, the IRS has indicated that it will not issue private letter rulings to plan sponsors covering this issue.

A copy of the Notice is available here.

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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