Overview

The IRS announced (Notice 2015-49, released July 9, 2015) its intent to amend the minimum distribution regulations under Section 401(a)(9) to restrict the use of lump-sum payments offered under qualified defined benefit pension plans. The regulations will state that any pension plan participant in receipt of a joint and survivor, lifetime or any other annuity form cannot change the form of payment to a lump sum or any other accelerated form of distribution.

Technical position

Under Section 401(a)(9), distribution of an employee's entire interest in a qualified retirement plan generally must begin by the later of when the employee retires or the calendar year in which the employee attains age 70 1/2 (the required beginning date). The IRS maintains that, in order to satisfy Section 401(a)(9), distributions of an employee's interest must be paid either in its entirety no later than this required beginning date or, alternatively, must begin to be paid by the required beginning date in the form of periodic annuity payments over the participant's life or joint lives of the participant and the beneficiary. The regulations prohibit any change in the period or form of the distribution after it has commenced, except in accordance with Reg. Section 1.401(a)(9)-6, A-13. If certain conditions are met, Reg. Section 1.401(a)(9)-6, A-13(a) permits changes to the payment period after payments have commenced in association with an annuity payment increase described in Reg. Section 1.401(a)(9)-6, A-14.

Reg. Section 1.401(a)(9)-6, A-1(a) provides that annuity payments are permitted to increase only on the bases described in Reg. Section 1.401(a)(9)-6, A-14, which permits annuity payments to increase as result of a plan amendment. Reg. Section 1.401(a)(9)-6, A-14(a)(5) permits beneficiaries to convert the survivor portion of a joint and survivor annuity into a lump sum upon the employee's death. The IRS's view is that there are no other exceptions provided to convert a participant's annuity benefit during such a participant's life.

Timing

The regulations will be effective as of July 9, 2015.

There are limited exceptions for certain plan sponsors that had started a program of offering lump-sum options to plan participants in receipt of benefits before July 9, 2015. The exceptions apply to plan sponsors that have undergone one of the four following steps to starting such a program: (1) board (or equivalent authority) authorization of the program before July 9, 2015; (2) receipt of a determination letter from the IRS permitting the program; (3) written notification of the program received by affected plan participants before July 9, 2015; or (4) adoption of the program in a collective bargaining arrangement before July 9, 2015.

Implications

The forthcoming regulations eliminate a valuable pension risk management tool for plan sponsors. Plan sponsors have offered plan participants in payment status the opportunity to take their remaining benefits in a lump-sum distribution during a limited time. Risk-transfer programs have gained popularity in recent years. The voluntary programs allowed plan participants in payment status the option to receive a single payment in exchange for their future annuity payments. The programs transferred longevity and investment risk to the participants who opted for such programs. Participants opting for such programs argue that it provides additional flexibility regarding the timing of the use of their benefits. Plan sponsors have offered the programs to reduce the size of their pension plans and associated risk.

Plan sponsors that have been contemplating offering their retirees lump sums but have not completed one of the four steps listed above need to explore alternative means to accomplishing their objectives. These plan sponsors will have to reevaluate their pension risk management strategies. The notice identifies that the IRS will not challenge plan sponsors that have undertaken one of the four steps listed above to offering lump sum options to plan participants in receipt of benefit (referred to as "Pre Notice Acceleration"). Those sponsors will need to document their compliance with one of the four steps prior to July 9, 2015.

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