IRS Announces Halt to Certain Lump-Sum Offerings

Effective July 9, DB plan sponsors may no longer offer a lump-sum window to participants who have begun receiving installments.

The Internal Revenue Service has issued Notice 2015-49 announcing its intent “to amend the required minimum distribution regulations under § 401(a)(9) of the Internal Revenue Code to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.”           

Required minimum distribution (RMD) regulations provide that if the entire interest of the employee is not distributed by the required beginning date following the later of retirement or attainment of age 70 1/2, it must be distributed, beginning no later than the required beginning date, over the life of the employee or lives of the employee and a designated beneficiary. The agency notes that absent an applicable exception, distributions of an employee’s entire interest must be paid in the form of periodic annuity payments for the employee’s or beneficiary’s life.

The regulations prohibit any change in the period or form of the distribution after it has commenced, with a few exceptions. If certain conditions are met, current regulations provide for changes to annuity payments that increase the payments. The IRS notes that plan sponsors which have offered lump-sum windows to retirees receiving annuity payments, in an effort to de-risk their defined benefit (DB) plans, have treated the right to convert a current annuity into an immediate lump sum payment as an increase in benefits that is described in current regulations.

Effective July 9, the IRS intends that the types of permitted benefit increases include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments. Amendments to the regulations will prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a DB plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. 

The amendments do not apply to lump sum risk-transfer programs in place prior to July 9, 2015. 

Notice 2015-49 is here