On March 6, 2019, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) released Notice 2019-18, pursuant to which they announced that the IRS no longer intends to issue amended regulations under section 401(a)(9) of the Internal Revenue Code (Code) that were expected to prohibit the practice of offering retiree lump-sum windows under a qualified defined benefit plan.
Prior to the issuance of Notice 2015-49 on July 9, 2015 by the IRS and Treasury Department, a growing number of qualified defined benefit plan sponsors had begun offering retirees who were receiving lifetime annuity payments a limited opportunity during which they could elect to convert their annuities into immediately payable lump sums, a practice commonly referred to as offering a “retiree lump-sum window.”
In Notice 2015-49, the IRS and Treasury Department effectively prohibited “retiree lump-sum windows” with an announcement that they intended to propose amendments to the required minimum distribution rules of section 401(a)(9) of the Code effective as of July 9, 2015. As a result of the amendments, offering a lump sum window to a participant already in pay status would violate the required minimum distribution rules of section 401(a)(9) except in limited circumstances.
Impact of Notice 2019-18
In a reversal, the IRS and Treasury Department indicated in Notice 2019-18 that they no longer intend to propose the regulations under section 401(a)(9) of the Code that were described in Notice 2015-49. Furthermore, although they will continue to study the issue of retiree lump-sum windows, the IRS will not assert that a plan amendment providing for a retiree lump-sum window program causes the plan to violate section 401(a)(9) of the Code until further guidance is issued, but will continue to evaluate whether the plan, as amended, satisfies the relevant requirements of the Code (e.g., nondiscrimination, minimum vesting, funding, qualified joint and survivor and funding-based benefit limitations). The IRS also announced that, while it would not issue private letter rulings with respect to retiree lump-sum windows, it would no longer include a caveat expressing no opinion regarding the tax consequences of a retiree lump-sum window in a determination letter.
Given this guidance, it appears that plan sponsors can once again consider offering retiree lump-sum windows as a potential strategy to de-risk defined benefit plan liabilities.
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