Five New IRS Private Letter Rulings Confirm IRS’s Position Allowing Retiree Cashouts

by King & Spalding
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[author: Donna Edwards]

Background:

We reported in 2012 on two private letter rulings (“PLRs”) issued by the IRS (PLR 201228045 and PLR 201228051) blessing certain retiree cashout programs. A retiree cashout program is a de-risking strategy used by defined benefit pension plan sponsors to reduce the impact of the volatility of large pension obligations.

Specifically, the 2012 rulings addressed whether the Code1 Section 401(a)(9) minimum distribution rules would be violated by a defined benefit plan offering a lump sum payment option, during a limited “window” period, to the plan’s participants and beneficiaries for whom annuity payments had already begun (i.e., those in “pay status”). The Code Section 401(a)(9) regulations provide that once annuity payments begin, they cannot be changed and must be non-increasing. However, an exception in the Code Section 401(a)(9) regulations allows an annuity payment period to be changed, and the annuity payments to be increased, in conjunction with a plan amendment that increases plan benefits. The IRS concluded in both rulings that because the ability to elect the lump sum option would only be available during a limited period, the increased benefit payment (in the form of the lump sum) would result from a plan amendment increasing plan benefits, and the change in the annuity payment period would be in conjunction with that plan amendment, each as permitted by the Code Section 401(a)(9) regulations.

Five New PLRs in 2014

The IRS did not release any rulings addressing retiree cashout programs after the two 2012 rulings until 2014. During May and June 2014, the IRS issued five new PLRs addressing retiree cashout programs, dated from March 5, 2014 through March 21, 2014. See PLR 201422028, PLR 201422029, PLR 201422030, PLR 201422031, and PLR 201424031.

The facts of the 2014 rulings are very similar to the facts of the 2012 rulings, with just a few differences:

  • One ruling addresses a plan covering collectively-bargained employees where the plan already offers a lump sum option to non-collectively bargained employees;
  • One ruling addresses a multiple employer plan;
  • There was no financial counseling offered in three of the five rulings, and a fourth merely indicated that retirees would be provided with “information and guidance sufficient to enable participants to clearly understand their options without steering participants to a particular result.”
  • None of these differences appeared to impact the IRS’s analysis or the outcome of the rulings. As in the 2012 rulings, the IRS concluded in each 2014 ruling that because the ability to elect the lump sum option would only be available during a limited period, the increased benefit payments would result from a plan amendment increasing plan benefits, and the change in the annuity payment period would be in conjunction with that plan amendment, each as permitted by the regulations.

Insights:

The 2014 rulings confirm the IRS’s position that retiree cashout programs 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”)

Please note that an IRS PLR may not be used or cited as precedent, and is applicable only to the taxpayer who requested it.

1The Internal Revenue Code of 1986, as amended.

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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