The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...
By Beth J. Dickstein, Esq., Matthew E. Johnson, Esq., Robert A. Ferencz, Esq., and Michael J. Kinn, Esq.
On July 9, 2015, the Treasury Department and Internal Revenue Service (IRS) announced in Notice 2015-49 (the IRS Notice) that they intend to amend the required minimum distribution regulations under §401(a)(9) to provide that qualified defined benefit pension plans are generally not permitted to replace any form of annuity already in pay status with a lump-sum distribution or any other accelerated form of distribution. It is intended that such change to the regulations, when it occurs, will be effective retroactive back to July 9, 2015, with some exceptions for "Pre-Notice Accelerations," a term defined in the IRS Notice.
Over the past few years, a growing number of employers have been offering lump-sum windows to plan participants. Such windows provide limited-time opportunities for participants to elect to receive their benefits in the form of a lump sum (subject to spousal consent rules) in situations where lump sums are not otherwise available under a particular plan. These windows are usually part of an employer "de-risking program" whereby the employer seeks to reduce the financial impact of the accounting treatment applicable to funding its pension plans.
Offering such a window to participants already in pay status, as compared to participants waiting to commence their benefit, raises the concern that the acceleration in payment method might violate the current required minimum distribution regulations under §401(a)(9). In particular, current regulations allow such an acceleration only under certain circumstances, including a plan amendment that increases benefits. For that reason, many employers have not provided such windows to participants already in pay status without first obtaining a favorable private letter ruling from the IRS. Over the past few years, the IRS has issued a number of such private letter rulings, each holding, in effect, that a plan amendment allowing participants already in pay status to elect a lump sum distribution that is the actuarial equivalent of their remaining annuity payments is an increase in benefits for purposes of the current regulations.
The IRS Notice states that, effective immediately, the IRS will no longer issue such private letter rulings. In addition, the Treasury Department and the IRS intend to amend the current regulations to provide that a lump sum window provided to a participant already in pay status will violate the required minimum distribution rules of §401(a)(9). It is intended that such change, when it occurs, will be effective retroactive back to July 9, 2015. However, it is intended that such change will not apply to, and the IRS will not seek to take any action with respect to, any "Pre-Notice Acceleration," namely, any acceleration of annuity payments that is in association with a plan amendment specifically providing for implementation of a lump sum risk-transferring program:
For more information, in the Tax Management Portfolios, see Bosley and Hutzelman, 370 T.M., Qualified Plans — Taxation of Distributions, and in Tax Practice Series, see ¶5550, Tax Aspects of Qualified Retirement Plans.
© 2015 Sidley Austin LLP. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)