On March 6, the Internal Revenue Service (IRS) issued Notice 2019-18, which would allow sponsors of defined benefit pension plans to offer retirees in pay status the opportunity to elect a lump sum payment in lieu of continued annuity payments. This development represents an about-face for the IRS, which abruptly shut down retiree lump sum windows in 2015—seemingly forever—when it indicated its intention to propose regulations under the required minimum distribution (RMD) rules of Internal Revenue Code Section 401(a)(9) that would specifically prohibit retiree lump sums.
For nearly a decade, pension plan sponsors have engaged in strategic “de-risking” efforts to manage pension plan volatility, interest rate, and longevity risks. An early de-risking step taken by many pension plans—terminated vested lump sum window opportunities—evolved into retiree lump sum window programs as the IRS issued a series of private letter rulings (PLRs), most notably to Ford and GM in 2012, indicating that a plan could design a temporary window program that would allow retirees in payment status to receive the present value of their remaining annuity payments in a single lump sum. These retiree lump sum window programs were criticized by policy makers, who expressed concerns with retirees "cashing out" their lifetime income stream of payments for a single lump sum that might run out well before the retirees die.
As we discussed in an earlier blog post, just as retiree lump sum window opportunities started gaining in popularity, the IRS unexpectedly issued Notice 2015-49, which prohibited plans from making lump sum offers to retirees in payment status. Notice 2015-49 advised that the IRS would issue amended regulations retroactive to July 9, 2015, to expressly prohibit these offerings and effectively nail the coffin shut on retiree lump sum window programs.
Just as unexpectedly as the 2015 announcement, the IRS has issued Notice 2019-18, reversing course and reopening the door to retiree lump sum offerings. The IRS announced that it no longer intends to propose amendments to the RMD regulations as originally announced, and that it will not assert that a plan's offering of a retiree lump sum window violates the RMD requirements of Code Section 401(a)(9). The IRS did note that any retiree lump sum window program must continue to satisfy all of the other legal requirements applicable to pension plans (nondiscrimination, funding-based benefit limitations, etc.). Further, the IRS indicated that it will continue to study retiree lump sum windows and will not issue additional PLRs on these issues. So, while retiree lump sum window programs may again be considered by pension plan sponsors, it is possible that the IRS may rethink its position in the future.
Notice 2019-18 represents a significant change to the de-risking landscape. Although a retiree lump sum window program may not be appropriate for all plans, it should again become part of the discussion for plan sponsors seeking additional opportunities to de-risk their pension plans.
If you have questions about this notice, please reach out to the authors or your Morgan Lewis contact.