IRS Revises Use of Lump Sum Payments to Retirees

Written By David Davala

On July 9, 2015, the IRS released Notice 2015-49, Use of Lump Sum Payments to Replace Lifetime Income Being Received By Retirees Under Defined Benefit Pension Plans.

The Notice states that the IRS and Treasury Department intend to amend the regulations to address the use of lump sum payments to replace annuity payments.

Current regulations do not allow a lump sum option for retirees except under certain conditions. However, one of the conditions is a plan amendment to increase benefits.

In the past few years, some plan sponsors have offered their retirees a lump sum. This was submitted in Private Letter Ruling requests where the sponsors stated that the lump sum offer was part of a plan amendment which increased benefits. The IRS ruled in the sponsors’ favor and granted the requests.

These lump sum offerings were usually part of a sponsor’s desire to transfer the mortality and interest risk of their defined benefit pension plans to the participants. There has been some concern about these transfers from the Department of Labor, the PBGC, Congress and others. The Government Accountability Office published a report in January of 2015 that concluded that retirees and others who are offered a lump sum are not given enough information to make an informed decision.

The amended regulations will close the loophole that was previously used by plan sponsors to offer participants currently receiving an annuity a lump sum. The effective date of the Notice is July 9, 2015. Sponsors who have already begun the process and have met certain requirements before this date can continue with offering lump sums to retirees.

It is this author’s opinion that there could be legislation proposed to drastically limit lump sums to all participants, not just retirees. This Notice closes a loophole that does not require legislative action.


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