In Notice 2015-49 the IRS placed limits on the ability of a plan to offer lump sums to participants that are receiving annuity payments from a defined benefit plan. The ability to allow participants to change from an annuity to a lump sum payment is a strategy often referred to as “de-risking” whereby the plan tries to manage risk by cashing out retirees and terminated participants and shifting the investment and longevity risks from the plan to the former participant. The issuance of this Notice by the IRS limits the ability to implement this strategy. Beginning July 9, 2015 plan sponsors were prohibited from converting annuity payments that have already commenced into a lump sum distribution. Following this notice, plan sponsors will generally need to restrict lump sum offers to participants before any annuity payments begin. There are exceptions under the Notice. A plan may still offer lump sum payments to participants already receiving annuities under any of the following circumstances:
- The amendment was adopted in accordance with a collective bargaining agreement in effect prior to July 9, 2015 that specifically authorizes the distribution;
- Affected plan participants received a written communication prior to July 9, 2015 stating an explicit and definite intent to implement the lump sum risk-transferring program;
- A private letter ruling or determination letter was issued by the IRS prior to July 9, 2015; or
- The plan adopted an amendment (or provided authorization to amend) prior to July 9, 2015 providing for lump sum distributions to those receiving annuity payments.
At this time, lump sum payments to participants already receiving annuity payments are still allowable in the context of a plan termination. However, the IRS is still planning on issuing additional guidance, so this could change in the future. If you have questions regarding the impact that this notice may or may not have on your plan, don’t hesitate to call your Nyhart consultant.