Client Alerts

IRS Amendments to Prohibit Lump-Sum Windows for Retirees Already Receiving Annuity Payments

By: Patricia A. Shlonsky and Stanley D. Prybe

About: Employee Benefits

On July 9, 2015, the Internal Revenue Service stated its intention to amend the required minimum distribution regulations to prohibit defined benefit pension plans from replacing any annuity in pay status with a lump-sum payment or other accelerated form of distribution. It was previously believed that existing annuities could be replaced with lump-sum payments under the provisions of the Code Section 401(a)(9) regulations that allowed for certain changes to the payment period of an existing annuity in connection with a plan amendment that increased benefits. The IRS intends to propose amendments to these regulations that would clarify that the changes permitted by the regulations do not include changes that would accelerate annuity payments already being received. The IRS intends that these amendments to the regulations will apply as of July 9, 2015.

Employers have been offering lump-sum windows or other buyout programs in which certain retirees with annuities in pay status could elect to receive their benefit in a lump sum. This was a popular trend over the last few years as companies looked to “de-risk” by shifting longevity and investment risks to the retirees and out of their plans. Certain lump-sum de-risking and similar programs that were in effect as of July 9, 2015 will be allowed to continue despite these changes. However, given that the IRS intends for these amendments to be effective as of July 9, 2015, it appears that these lump-sum de-risking and similar benefit-acceleration programs will no longer be allowed moving forward.

If you have any questions regarding any existing lump sum de-risking program, any proposed lump sum de-risking you may have been considering, or any other issues that may be triggered by IRS Notice 2015-49, please contact a member of the Employee Benefits Practice at Ulmer & Berne LLP.