Shut the Door

IRS Ends Defined Benefit Plan Lump Sum Payouts

Recently, the IRS effectively overturned a handful of private letter rulings issued over the past few years. Those rulings allowed plans to amend their qualified defined benefit (“DB”) plan to permit a participant in pay status to elect to convert the remaining value of their annuity payments to a lump sum payment during a temporary “window period.” Subject to spousal consent rules, these windows present limited-time opportunities for participants to elect to receive their benefits in the form of a lump sum where the plan otherwise would not allow lump sum payments.

This “de-risking” strategy was seen as a way to react to concerns over the increased volatility of plan assets, and the fact that retiree longevity has increased, and continues to do so. Also, the IRS stated that it will amend the required minimum distribution rules to prohibit the acceleration of payments currently in annuity form.

Prior letter rulings have generally only allowed lump sum distributions when the result of the distribution was an increase in the benefit amount. They also allowed the payout of an accelerated benefit in a joint and survivor payout plan only if the survivor was someone other than the retired plan participant.

Due to the ambiguity about the actuarial standard for determining whether a lump sum benefit constituted an actual increase in benefits, most DB sponsors sought private letter rulings from the IRS authorizing their particular lump sum window programs. Going forward, the IRS will no longer issue such rulings.

The IRS did leave the door open, however, to allow lump sum and accelerated DB plan payouts. Sponsors may still use them if they occur in conjunction with a plan amendment written for that purpose, which was adopted or authorized by a private letter ruling, communicated to eligible plan participants, or incorporated into a labor union agreement adopted before the rule’s effective date.