IRS Notice 2019-18: Changes to Proposed RMD Amendments Regarding Lump-Sum Payment Option to Retirees Currently Receiving Annuity Payments under a Defined Benefit Plan

Many of you are aware that in Notice 2015-49, the IRS and Treasury Department addressed the practice of offering lump sum buyouts of annuities currently being paid to retirees under a defined benefit plan (arrangements which are sometimes referred to as retiree lump-sum windows or lump-sum risk transferring/de-risking programs). Specifically, the IRS noted that such arrangements raise concerns under Internal Revenue Code ("Code") Section 401(a)(9)'s general rules, which prohibit any change in the period or form of an annuity distribution after it has commenced and which provide that annuity payments must be non-increasing. The IRS stated that such arrangements could be interpreted as falling within some of the exceptions permitting annuity payments to increase under Treas. Reg. § 1.401(a)(9)-6, Q&A-14(a)(4), which the IRS felt would contravene the underlying purpose of Code Section 401(a)(9). Thus, the IRS stated its intention to amend the minimum distribution regulations under Code Section 401(a)(9) to generally prohibit these arrangements from falling within the permitted increase exception under Treas. Reg. § 1.401(a)(9)-6, Q&A-14(a)(4).

On March 6, 2019, the IRS and Treasury Department issued Notice 2019-18, announcing they no longer intend to propose amendments to the minimum distribution regulations to address these de-risking arrangements. However, this Notice also cautioned that the IRS and Treasury Department will continue to study the issue of retiree lump-sum windows under Code Section 401(a)(9). If a retirement plan is eligible to receive a determination letter, the IRS will no longer include a caveat in the letter by which it expresses no opinion regarding the tax consequences of such an arrangement.

Of course, if you have any questions or comments regarding this development or if your plan/retirement system is interested in considering a de-risking approach, please contact Audra Ferguson Allen (317-263-2249), Robert L. Gauss (317-236-2133), or Lisa Erb Harrison (317-236-5806).

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.