IRS No Longer Prohibits Retiree Lump Sum Windows in Defined Benefit Pension Plans

Defined benefit (DB) plan sponsors can once again offer retirees and beneficiaries receiving annuity payments a limited opportunity to convert their benefits into a lump sum. IRS Notice 2019-18, issued on March 6, ends a de facto ban on retiree lump sum windows, which had become a popular DB plan de-risking strategy until the IRS essentially outlawed it in Notice 2015-49, issued July 9, 2015.

IRS’s Surprising Change of View

The 2015 Notice said that the IRS would propose regulations under Section 401(a)(9) retroactively effective to July 9, 2015, forbidding the acceleration of in-pay status benefits into lump sum cash outs. But the 2019 Notice says that the IRS will not issue those regulations after all. The 2019 Notice also confirms that the IRS will:

  • Not challenge plan amendments adding retiree lump sum windows as possible Section 401(a)(9) violations of the required minimum distribution rules.
  • No longer issue private letter rulings on retiree lump sum windows.
  • No longer caveat determination letters for plans that include retiree lump sum window provisions.

Senior citizen groups had pushed hard for the 2015 ban out of concern that retirees would outlive their income if they could convert lifetime income streams into lump sums. Even though the 2019 Notice says that the IRS will continue studying the issue, no rationale was given for the sudden (and somewhat surprising) change.

Pros and Cons of Retiree Lump Sum Windows

The table below shows some pros and cons of a retiree lump sum window.

For more information on our employee benefit plan services, please contact Ed Ryan, CPA at 703.652.1124 or please feel free to leave us a message below.

By Rich McCleary and Beth Garner

Copyright © 2019 BDO USA, LLP. All rights reserved.

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Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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