In Notice 2015-49 the IRS announced that it proposes to amend the regulations related to required minimum distributions under IRC §401(a)(9) to provide a defined benefit plan will generally not be permitted to replace any annuity being paid with a lump sum payment or other accelerated form of distribution. The IRS plans to make these regulations effective generally as of July 9, 2015.
These regulations are meant to address the following situation, one which it is clear the IRS is unhappy with:
A number of sponsors of defined benefit plans have amended their plans to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk transferring programs because longevity risk and investment risk are transferred from the plan to the retirees. For purposes of compliance with the requirements of § 401(a)(9), the addition of such a right to convert a current annuity into an immediate lump sum payment has been treated in some instances as an increase in benefits that is described in § 1.401(a)(9)-6, A-14(a)(4) (with the result that the annuity payment period would be permitted to change under § 1.401(a)(9)-6, A-13(a)).
Specifically the IRS complains:
The Treasury Department and the IRS intend to amend the regulations under § 401(a)(9) that address the distribution of an employee's interest after the required beginning date. Those regulations reflect an intent, among other things, to prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a defined benefit plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. The Treasury Department and the IRS have concluded that a broad exception for increased benefits in § 1.401(a)(9)-6, A-14(a)(4) that would permit lump sum payments to replace rights to ongoing annuity payments would undermine that intent.
The revised regulations will permit only changes that increase ongoing annuity payments, but not any that accelerate the payments. That would be true even for acceleration of benefits the participant was entitled to prior to the amendment even if the plan also simultaneously increases the annuity benefit.
Since such programs are already in progress and participants likely have an outstanding option to accelerate, the regulations will provide some transition rules. The notice indicates the IRS expects to craft an exception when any of the following conditions are met:
- The amendment creating the option was adopted (or specifically authorized by a board, committee, or similar body with authority to amend the plan) prior to July 9, 2015;
- A plan with respect to which a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015;
- A program 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
- A program 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.
Such programs will be referred to as a “Pre-Notice Acceleration” and the IRS will not challenge accelerations under these programs.
The notice does provide some special rules for private letter ruling requests while this issue is pending:
In light of the pending guidance, any private letter ruling or determination letter issued by the IRS or the IRS Office of Chief Counsel involving a plan that provides for a lump sum risk-transferring program will generally include a caveat expressing no opinion as to the federal tax consequences of the lump sum risk-transferring program. However, the IRS and the IRS Office of Chief Counsel may determine that the addition of a right to make a Pre-Notice Acceleration is an increase in benefits that is described in the current § 1.401(a)(9)-6, A-14(a)(4).
For now those with defined benefit plans who have such a program will wish to check to insure it meets the “Pre-Notice Acceleration” rules if any accelerations under the program take place on or after July 9, 2015. Clearly it would seem risky to attempt to adopt or implement a new program of this sort unless the IRS either abandons the regulation project or makes changes in the regulations. Thus advisers who deal with such programs should follow closely the developments in this area as the IRS issues the proposed revisions and, eventually, adopts the final regulations.