March 21, 2019
Authored by: Denise Erwin and Steven Schaffer
On March 6, 2019, the IRS announced that it will not amend the minimum required distribution regulations under Code section 401(a)(9) to expressly prohibit lump-sum window elections for retirees who are already receiving annuity payments under a defined benefit pension plan. This practice has never been clearly permissible under existing RMD regulations. Nevertheless, some plan sponsors seeking to “de-risk” their pension liability received private letter rulings in the past permitting such action. Then the IRS issued Notice 2015-49 announcing that it would propose amendments to the RMD regulations clarifying that lump sum windows for retirees are not be permitted. Now the IRS has altered course on this issue again with Notice 2019-18.
Thoroughly confused? Not surprising given the shifting positions of the IRS on this issue.
Existing regulations state that once annuity payments have commenced over a period of time, the period may only be changed in accordance with certain exceptions enumerated in Treas. Reg. 1.401(a)(9)-6, Q&A-13. One enumerated exception is for annuity payment increases described in Q&A-14. The regulations under Q&A-14 provide that annuity payments may increase to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single-sum distribution upon the employee’s death. They do not expressly recognize a similar right to convert an annuity into to a lump sum during the employee’s lifetime. They do, however, permit the payment of “increased benefits that result from a plan amendment.” Plan sponsors interested