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IRS Eliminates Lump-Sum Cashout Windows for Pension Plan Retirees in Pay Status

Sep 21, 2015

The Internal Revenue Service recently announced in Notice 2015-49 an intention to eliminate the ability of pension plan sponsors to provide lump-sum cashout windows for retirees already receiving annuity payments from the plan. This change will not impact plan participants not yet in pay status under a pension plan. The IRS will effect the change by amending the required minimum distribution regulations under Internal Revenue Code section 401(a)(9) to provide that defined benefit pension plans are prohibited from replacing any form of annuity for participants in pay status with a lump-sum payment or accelerating payments in any other form.  This change is intended to be retroactive to July 9, 2015 (date of the IRS Notice).

The change comes as a surprise to plan sponsors and practitioners as over the past few years the IRS issued several private letter rulings approving lump-sum cashout windows for retirees in pay status. The windows have been used by plan sponsors as a means of de-risking their plans in an effort to reduce PBGC premiums, as well as obtain relief from the financial impact of the accounting treatment associated with the funding of the defined benefit pension plan.

It is anticipated that there will be significant opposition to this change from plan sponsors and practitioners which may cause the IRS to modify or repeal the changes. Accordingly, sponsors of defined benefit pension plans should monitor these regulations for future changes.

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Peter Alwardt

Peter Alwardt is a Partner and the National Tax Leader of Employee Benefit Plans, specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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