Request a Proposal

IRS Allowing Lump Sum Windows for Retirees (for the time being)

The IRS issued Notice 2019-18 that effectively allows plan sponsors of defined benefit plans to offer lump-sum payment options to retirees that are currently receiving annuity payments.

  • In 2015, the IRS issued a notice that disallowed these payments, thereby eliminating one liability de-risking option for plan sponsors. At the time it also stated it would propose regulations under the “Required Minimum Distribution” rules. In the intermittent time, plan sponsors increased activity in lump-sum windows to terminated, vested participants.

On March 6th of this year, this notice stated the following:

  • “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.”

While this will probably not be the last word from the IRS on this matter, for the time being plan sponsors can take advantage of lump sum windows for their retirees currently receiving benefit payments, if they choose. (As always, plan sponsors should address specific lump sum opportunities with their actuary).

However, lump sum windows have been criticized by many in the industry for potentially creating a situation where a retiree’s lump sum payment is not reinvested in retirement savings but cashed out or spent, causing the retiree to outlive their savings.

Since the notice, there has not been a rush to offer lump sum payments to retirees. Rather, plan sponsors are choosing to carefully consider all issues related to this current situation.