IRS Won’t Challenge DB Plans That Offer a Lump-Sum Distribution Window, for Now

The IRS released notice Notice 2019-18 that is of importance to defined benefit (DB) pension plans that may be considering an amendment to allow lump sum payments to participants already receiving annuitized (lifetime) payments.  Notice 2019-18 declares that the IRS is suspending a previously-announced plan to revise required minimum distribution rules under Treasury Regulation 1.401(a)(9) that govern such benefit changes. Only under limited circumstances are such changes allowed under these regulations.

As background, the IRS points out that a number of sponsors of DBd plans have amended to provide a limited period during which certain retirees may elect to convert their annuities (lifetime income payments) into lump sums. Because the previously-announced plan to revise the governing regulations has been withdrawn, the IRS states that “until further guidance is issued,” the agency will not claim that such plan amendments offering a lump sum payment opportunity violate governing regulations.

Past IRS practice had authorized DB plans to offer these limited lump sum payment opportunities if they had applied for and received a private letter ruling (PLR), or an IRS determination letter on a plan’s qualified status. Notice 2019-18 states that the IRS will no longer issue PLRs on this issue, but does not rule out the option to consider such amendments in a plan’s determination letter filing.