IRS No Longer Has Immediate Plans to Issue Regulations on Defined Benefit Plan Post-Retirement Lump-Sum Distribution Windows

The IRS has announced it no longer intends to issue amended regulations under IRC §401(a)(9) in Notice 2019-18.  The IRS has previously announced in Notice 2015-49 that it had intended to revise the minimum distribution regulations to address the practice of offering a temporary lump sum payment option to beneficiaries of a defined benefit pension plan who were currently receiving annuity payments.

The issue arises with regard to rules found in Reg. §1.401(a)(9)-6.  The notice summarizes those rules as follows:

The regulations prohibit any change in the period or form of the distribution after it has commenced, except in accordance with §1.401(a)(9)-6, A-13. If certain conditions are met, § 1.401(a)(9)-6, A-13(a) permits changes to the payment period after payments have commenced in association with an annuity payment increase described in § 1.401(a)(9)-6, A-14.

Section 1.401(a)(9)-6, A-1(a) also provides that periodic annuity payments must be nonincreasing or may increase only as otherwise provided, such as permitted increases described in § 1.401(a)(9)-6, A-14. Section 1.401(a)(9)-6, A-14(a)(4) permits annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.” In addition, § 1.401(a)(9)-6, A-14(a)(5) permits annuity payments to increase “to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a lump sum upon the employee's death,” but no similar rule is provided with respect to conversion of an employee's annuity benefit during an employee's life or conversion of a beneficiary's annuity other than upon the employee's death.

The IRS’s original notice was issued in response to the following developments in employer sponsored defined benefit plans:

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 lifetime annuity payments from those plans may elect to convert their annuities into lump sums that are payable immediately. These arrangements are sometimes referred to as retiree lump-sum windows. Although the treatment under § 401(a)(9) of such a right to convert a current annuity into an immediate lump sum payment has not been addressed explicitly in regulations or other generally applicable published guidance, the addition of such a right to a plan 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)).

Notice 2015-49, issued in July of 2015, provided that the IRS would issue regulations that would clarify that such temporary lump-sum options were not permitted increases in the annuity amount.  The notice stated that the purpose of the minimum distribution rules of IRC §401(a)(9) were to ensure that amounts were not allowed to accumulate for excessive amounts of time in a tax deferred plan.  Actuarily, the notice stated, a plan that allowed for a post-retirement window in which a lump sum could be taken would need to provide for reduced benefits in earlier years to take into account that later option.

However, such revised regulations were never issued by the IRS.  The day before the new notice, Treasury had issued a revised policy statement in which the Department outlined what it perceived as issues with notices of intent to issue regulations when the related regulations were not issued for an extended period of time.  Thus, it’s not surprising that the IRS a day later announced a revision to the 2015 notice.

The new notice provides:

The Treasury Department and the IRS no longer intend to propose the amendments to the regulations under § 401(a)(9) that were described in Notice 2015-49. However, the Treasury Department and the IRS will continue to study the issue of retiree lump-sum windows. Until further guidance is issued, the IRS will not assert that a plan amendment providing for a retiree lump-sum window program causes the plan to violate § 401(a)(9), but will continue to evaluate whether the plan, as amended, satisfies the requirements of §§ 401(a)(4), 411, 415, 417, 436, and other sections of the Code. During this period, the IRS will not issue private letter rulings with regard to retiree lump-sum windows. However, if a taxpayer is eligible to apply for and receive a determination letter, the IRS will no longer include a caveat expressing no opinion regarding the tax consequences of such a window in the letter.