IRS Shifts Gears on Pension Plan Retiree Lump-Sum Window Alternative

Paying attention to the shifts in how the IRS interprets its regulations is an important part of benefits administration,  In recent Notice 2019-18, the IRS announced that there will be no amendments to regulations that will stop retiree lump sum windows in defined benefit pension plans and that this will not necessarily lead to a violation of minimum distribution rules. This is a shift in gears from 2015 guidance and the IRS will likely continue to review the issue.

IRS Shifts Gears

If your business has not considered this option, now is the time. Previous guidance by the IRS allowed non-terminating pension plans to offer retirees a chance to convert pension payments into lump sums. Doing so required paying attention to potential discrimination and prohibited payment issues. Further guidance in 2015 shifted gears again, allowing increased annuity payments, but not lump sum buy-outs. Plan sponsors requesting determination letters had to specifically indicate the plan’s lump sum risk transfer language and this language was no guarantee that it would qualify.

In the latest notice issued in 2019, the IRS has finally retracted the 2015 guidance and confirmed that no amendments will be made to regulations that currently permit lump sum buy-out windows. However, this notice also cautions that such windows must be clearly created so that they don’t violate other rules. Further, the IRS no longer requires lump sum risk transfer language in plan documents to receive a favorable determination letter.

Risks of Lump Sum Buy-Outs

While the IRS is currently allowing, with limitations, these lump sum buy-outs, it’s likely that the IRS will continue to consider, and possibly revise its stance on the matter. While your business should consider the option, it should also be aware that this may be a time-limited option and, in the future, lump sum buy-outs will not be allowed. Decisions should be made accordingly.

Further, any such buy-outs cannot violate regulations on distribution restrictions, nondiscrimination, maximum benefits limits, minimum vesting, qualified joint and survivor payments, and other regulations and restrictions located elsewhere in IRS regulation.

In light of both the advantages and risks, a business considering offering lump sum buy-outs will likely want to consult with expert benefit counsel like the team at Hall Benefits Law to determine if this is the right course. This is just one tool, of many, that businesses can use to de-risk pension plans or provide options to retirees looking for alternative ways to leverage their retirement accounts.

The small shifts in regulatory interpretation can have big impacts on a company’s benefits plans if used properly. To learn more, reach out to our team by calling 678-439-6236 or visiting the Hall Benefits Law website. We can help companies from New York to California study and understand their benefit plans and, if it’s the right option, make changes to take advantage of this new guidance by the IRS.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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