Many defined benefit plan sponsors are looking for ways to reduce the on-going liability and the volatility of the annually required contributions to their defined benefit plans, which is sometimes referred to as “de-risking.” One de-risking strategy involves offering lump-sum payouts to retirees in pay status as a replacement of their annuity payments. This strategy was never approved by the IRS on a universal basis, but the IRS, in private letter rulings (“PLRs”), ruled that Ford and General Motors were able to employ this strategy in connection with their defined benefit plans. While PLRs only apply to the parties requesting the ruling (e.g., Ford and GM), PLRs are often times viewed as informal guidance on the IRS’s views on certain issues. After the Ford and GM PLRs, some plan sponsors decided to offer lump-sums to retirees in pay status as a replacement of annuity payments.
On July 9, 2015, the IRS released Notice 2015-49 providing that, effective immediately, lifetime income options (e.g., single life or joint and survivor annuities) currently being paid cannot be replaced by lump-sums or other accelerated forms of distribution. The Notice provides that the IRS and Treasury Department intend to amend the required minimum distribution regulations under Section 401(a)(9) of the Internal Revenue Code to generally prohibit changes to the annuity payment period for ongoing annuity payments, including accelerating annuity payments by offering an option for a lump-sum payment to replace rights to ongoing annuity payments. As a result of this guidance, plans that offer an option for retirees in pay status to elect a lump-sum to replace their annuity payments must amend the Plan to remove such option. Counsel familiar with these issues may be able to assist plan sponsors whose plans offer such an option or have offered the option in the past.