IRS Issues Notice 2015-49 Eliminating Further Lump Sum Windows for Retirees in Pay Status Under Qualified Defined Benefit Pension Plans

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.


By Beth J. Dickstein, Esq., Matthew E. Johnson, Esq., Robert A. Ferencz, Esq., and Michael J. Kinn, Esq.

Sidley Austin

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:

  •   adopted (or specifically authorized by a board, committee or similar body with authority to amend the plan) prior to July 9, 2015;
  •   with respect to which a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015;
  •   with respect to which a written communication to affected plan participants stating an explicit and definite intent to implement the lump sum risk-transferring program was received by those participants prior to July 9, 2015; or
  •   adopted pursuant to an agreement between the plan sponsor and an employee representative (with which the plan sponsor has entered into a collective bargaining agreement) specifically authorizing implementation of such a program that was entered into and was binding prior to July 9, 2015.

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.

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