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IRS Abruptly Reverses Course by Shutting Down Lump Sum Windows for Retirees in Pay Status

On July 9, the Internal Revenue Service (IRS) issued Notice 2015-49, which prohibits sponsors of qualified defined benefit pension plans from adopting lump sum windows for retirees in pay status.

As part of pension plan “de-risking” efforts initiated in recent years, some plan sponsors have implemented lump sum windows programs that provided retirees in pay status with the opportunity to receive the present value of their remaining monthly benefit payments in a single, lump sum payment. Practitioners had concerns about whether such programs were permissible and satisfied the required minimum distribution rules set forth in Internal Revenue Code section 401(a)(9) (which limits changes in the form and timing of periodic retirement benefits after payment has started), but the Internal Revenue Service issued a series of private letter rulings (highlighted by rulings issued to Ford and GM in 2012) indicating that the programs were permissible if implemented correctly. These IRS rulings drew heavy criticism in some quarters, with some policymakers expressing concerns about allowing retirees in pay status to accelerate a stream of monthly retirement benefits payments into a single lump sum payment. In mid-2014, with no explanation, the IRS abruptly stopped issuing private letter rulings on these issues and even returned some ruling applications that had been submitted but not yet reviewed.

The IRS broke its silence on these issues with the issuance of IRS Notice 2015-49 that prospectively bars lump sum window programs for retirees in pay status. However, the IRS indicated that certain lump sum window programs for retirees implemented, authorized, and/or communicated before July 9, 2015 will continue to be permitted.

For more information about IRS Notice 2015-49, see our LawFlash on this topic.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume V, Number 206
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About this Author

R. Randall Tracht, Morgan Lewis, labor and employment lawyer
Partner

R. Randall “Randy” Tracht advises clients on a broad range of employee benefits and executive compensation issues involving clients’ tax-qualified pension and 401(k) plans, health and retiree medical plans, non-qualified deferred compensation plans, equity incentive plans and other executive compensation arrangements, employment agreements, and fringe benefit plans. Randy represents and counsels a wide range of corporate and tax-exempt clients across the United States, including clients in the higher education, healthcare, retail, and energy sectors. His work includes...

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