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 IRC §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 IRC §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.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
Beth J. Dickstein
Matthew E. Johnson
Michael J. Kinn
Sidley Employee Benefits Practice
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