U.S. Internal Revenue Service Announces Elimination of Lump Sum Windows for Retirees Already Receiving Benefits

July 9, 2015

Earlier today, the Internal Revenue Service ("IRS") released Notice 2015-49, announcing that defined benefit pension plans will no longer be permitted to offer lump sum cash out windows to retirees who are already receiving benefits in the form of an annuity. 

The IRS had previously issued a number of private letter rulings stating that such lump sum window programs were permissible under Treasury Regulations issued under Internal Revenue Code ("Code") section 401(a)(9).  Code section 401(a)(9) generally requires distribution of an employees’ interest in a tax qualified retirement plan to commence by no later than April 1st of the calendar year following the later of (a) the year in which the employee attains age 70 ½ or (b) the year in which the employee retires. 

Treasury Regulations issued under Code section 401(a)(9) provide that, absent an available exception, distribution of a participant’s interest in a plan must be paid in the form of periodic payments over the employee’s (or his or her beneficiary’s) lifetime or a permitted number of years.  These regulations prohibit any change in the period or form of the distribution after it has commenced, subject to limited exceptions.  One such exception allows annuity payments to increase to pay increased benefits resulting from a plan amendment.  The IRS had previously interpreted this provision to authorize lump sum window programs offered to current retirees pursuant to amendments to defined benefit pension plans.

The new guidance released today reverses this position finding that plans may no longer be amended to permit retirees to accelerate their distributions and convert them into a lump sum payable immediately.  The IRS intends to amend the Treasury Regulations under Code section 401(a)(9) to expressly address this point.

These new rules will apply effective as of July 9, 2015, with limited exceptions for lump-sum window programs (1) specifically approved or adopted prior to such date, (2) subject to a private letter ruling or determination letter that was issued by the IRS prior to such date, (3 that have been expressly communicated to plan participants in writing prior to such date, or (4) that are adopted pursuant to a written agreement between the plan sponsor and a union that was binding and entered into prior to such date.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Stephen W. Fackler – Palo Alto/New York (650-849-5385/212-351-2392, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (310-551-8746, [email protected])
Krista Hanvey – Dallas (214-698-3425, [email protected])

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