With IRS Retraction, Lump Sum Buyout Opportunities for Retirees Are Permitted Once Again

On March 6, 2019, the IRS announced its intention to abandon further efforts, at least temporarily, to prohibit defined benefit plans from offering voluntary lump sum cashouts to retirees who are already in pay status.  In Notice 2019-18, the IRS has revisited its July 9, 2015 announcement and retracted its previously stated intention to amend the required minimum distribution (RMD) rules under Section 401(a)(9) of the Internal Revenue Code to ban such offerings. 

 

For historical background, defined benefit plan sponsors have been for years devising ways to offset longevity and investment risks and ever-rising Pension Benefit Guaranty Corporation premiums.  This includes prevalent strategies such as offering lump sum cashout opportunities to deferred vested participants and transferring retiree benefit obligations to third party insurance companies.  By 2015, an increasingly common “de-risking” strategy was to offer in-pay participants and beneficiaries an optional lump sum buyout of their benefits to end the plan’s ongoing financial and administrative obligations to them.  Indeed, the rising popularity of lump sum windows was due in no small part to the IRS issuing several private letter rulings, disposing of lingering legal uncertainties associated with the RMD rules.  However, the IRS abruptly reversed course with Notice 2015-49.  Expressing concern for the risk shifting from plan sponsors to retirees (echoed by the Department of Labor and PBGC), the IRS stated its intention to expressly prohibit lump sum windows of this kind through clarifying guidance under Code Section 401(a)(9).

 

Fast-forwarding to the present, Notice 2019-18 states that, although the IRS will not issue further private letter rulings regarding retiree lump sum windows, it will also no longer assert that these offerings are violations of RMD rules or caveat favorable determination letters as to the tax consequences.

 

While it is not entirely evident why the reasons articulated in Notice 2015-49 are no longer of concern the IRS, it is clear that a plan amendment initiating a lump sum window for in-pay retirees will no longer carry a risk of plan disqualification.  Thus, for defined benefit plan sponsors, one effective de-risking option has been revived, at least for now.