On July 9, 2015, the Internal Revenue Service (IRS) issued Notice 2015-49, Use of Lump Sum Payments to Replace Lifetime Income Being Received By Retirees Under Defined Benefit Pension Plans, amending the required minimum distribution regulations under section 401(a)(9) of the Internal Revenue Code (IRC). The regulation, as amended, no longer permits qualified defined benefit plans to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution.
The regulation prohibits any change in the period or form of the distribution of the annuity if the retiree has not received a full distribution of their retirement benefit by the required beginning date, as defined, except in accordance with section 1.401 (a)(9)-6 of the IRC which permits changes to the period after payments have commenced in association with an annuity payment increase.
Previous use of lump sum distributions
A number of plan sponsors have introduced strategies to convert annuities paid to retirees into immediate lump sum distributions in their defined benefit plan in an effort to "de-risk" the plan by shifting longevity and investment risk from the plan to the retirees, often referred to as risk-transferring programs. To comply with the regulations, the position is that the addition of this right to convert a current retiree annuity into an immediate lump sum payment was treated as an increase in benefits; therefore, the plan amendment was permitted and the program implemented.
Exceptions to amended regulation
Notice 2015-49 reflects the intent to prohibit, in most cases, changes to an annuity period for ongoing annuity payments including accelerating these payments. With this issuance, the only permitted benefit increases would be those that increase the ongoing annuity payments. Notice 2015-49 will apply as of July 9, 2015, for all defined benefit plans with four excepted conditions including lump sum risk-transferring programs that:
- Were adopted or were specifically authorized by a board, committee, or a body of authority of the plan prior to July 9, 2015;
- Obtained a private letter ruling or determination letter issued by the IRS prior to July 9, 2015;
- Issued written communication to affected participants stating an explicit and definite intent to implement a program and received by the participants prior to July 9, 2015; and
- Adopted pursuant to an agreement entered into through collective bargaining by the plan sponsor authorizing implementation of a lump sum program and was binding prior to July 9, 2015.
A program that satisfies one of these four conditions is referred to as a pre-notice acceleration and would be allowed.
Companies should review their benefit plans for any planned lump sum or accelerated distributions and consult with their tax and employee benefit plan advisors to ensure compliance with the amended regulation.
For more information on this topic, or to learn how Baker Tilly employee benefit plan specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.