IRS notice commentary related to lump sums

The Internal Revenue Service (IRS) recently issued Notice 2019-18, which reversed an earlier notice issued by the IRS. The previous notice (Notice 2015-49) informed plan sponsors of the IRS’ intent to amend the regulations under Internal Revenue Code Section 401(a)(9) to specifically disallow the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan, a temporary option to elect a lump-sum payment (e.g., lump-sum window) in lieu of future annuity payments.

In Notice 2019-18, the IRS reversed their previous position and via the Notice, allows plan sponsors to offer lump sums to retirees already in pay status. Therefore, defined benefit pension plan sponsors who are considering de-risking options may include as an alternative, offering lump-sum payments to participants and beneficiaries currently in pay status.

Lump-sum distributions are frequently used as a de-risking and/or cost-saving strategy in defined benefit plans. If you have questions about the advantages or disadvantages associated with offering lump sums to retirees including those already in pay status, please contact a member of Plante Moran’s employee benefits consulting group.