n-19-18.pdf

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Notice 2019-18

Offering a Lump-Sum Payment Option to Retirees Currently Receiving Annuity
Payments under a Defined Benefit Plan
I. PURPOSE
This notice is to inform taxpayers that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) no longer intend to amend the
required minimum distribution regulations under § 401(a)(9) of the Internal Revenue
Code (Code) to address 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 in lieu of future annuity payments.
II. BACKGROUND
A. Section 401(a)(9) and Required Minimum Distributions
Section 401(a)(9) prescribes required minimum distribution rules for a qualified
plan under § 401(a). In general, under these rules, distribution of each employee’s
entire interest must begin by the required beginning date. The required beginning date
generally is April 1 of the calendar year following the later of (1) the calendar year in
which the employee attains age 70½, or (2) the calendar year in which the employee
retires. However, the ability to delay distribution until the calendar year in which an
employee retires does not apply in the case of a 5-percent owner (as defined in § 416).
If the employee’s entire interest is not distributed by the required beginning date,
§ 401(a)(9)(A) provides that the entire interest must be distributed, beginning not later
than the required beginning date, in accordance with regulations, over the life of the
employee or lives of the employee and a designated beneficiary (or a period not
extending beyond the life expectancy of the employee or the life expectancy of the
employee and a designated beneficiary). Section 401(a)(9)(B) prescribes required
minimum distribution rules that apply after the death of the employee.
Section 1.401(a)(9)-6, A-1(a) provides that, absent an applicable exception, in
order to satisfy § 401(a)(9), distributions of an employee’s entire interest under a
defined benefit plan must be paid in the form of periodic annuity payments for the
employee’s or beneficiary’s life (or the joint lives of the employee and beneficiary) or
over a period certain that is no longer than a period permitted under § 1.401(a)(9)-6, A-3
or A-10, as applicable (which is approximately equal to the joint and last survivor life
expectancy of the employee and an assumed beneficiary who is 10 years younger than
the employee, with a longer period if the sole beneficiary is the employee’s spouse and
the spouse is more than 10 years younger). The regulations prohibit any change in the

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period or form of the distribution after it has commenced, except in accordance with
§ 1.401(a)(9)-6, A-13. If certain conditions are met, § 1.401(a)(9)-6, A-13(a) permits
changes to the payment period after payments have commenced in association with an
annuity payment increase described in § 1.401(a)(9)-6, A-14.
Section 1.401(a)(9)-6, A-1(a) also provides that periodic annuity payments must
be nonincreasing or may increase only as otherwise provided, such as permitted
increases described in § 1.401(a)(9)-6, A-14. Section 1.401(a)(9)-6, A-14(a)(4) permits
annuity payments to increase “[t]o pay increased benefits that result from a plan
amendment.” In addition, § 1.401(a)(9)-6, A-14(a)(5) permits annuity payments to
increase “to allow a beneficiary to convert the survivor portion of a joint and survivor
annuity into a lump sum upon the employee’s death,” but no similar rule is provided with
respect to conversion of an employee’s annuity benefit during an employee’s life or
conversion of a beneficiary’s annuity other than upon the employee’s death.
B. Notice 2015-49 and Participant Elections to Convert Annuities to Immediate
Lump Sum Payments
A number of sponsors of defined benefit plans have amended their plans to
provide a limited period during which certain retirees who are currently receiving lifetime
annuity payments from those plans may elect to convert their annuities into lump sums
that are payable immediately. These arrangements are sometimes referred to as
retiree lump-sum windows. Although the treatment under § 401(a)(9) of such a right to
convert a current annuity into an immediate lump sum payment has not been addressed
explicitly in regulations or other generally applicable published guidance, the addition of
such a right to a plan has been treated in some instances as an increase in benefits that
is described in § 1.401(a)(9)-6, A-14(a)(4) (with the result that the annuity payment
period would be permitted to change under § 1.401(a)(9)-6, A-13(a)).
On July 9, 2015, the IRS issued Notice 2015-49, 2015-30 I.R.B. 79, which
informed taxpayers that the Treasury Department and the IRS intended to propose
amendments to the required minimum distribution regulations under § 401(a)(9) to
address the use of lump-sum payments to replace ongoing annuity payments under a
qualified defined benefit plan. These amendments to the regulations would have
provided that a lump-sum or other accelerated payment made pursuant to a plan
amendment to a qualified defined benefit plan that gives a participant currently receiving
annuity payments the right to convert those annuity payments into an immediate lump-
sum or other accelerated payment is not treated as a payment of increased benefits
described in § 1.401(a)(9)-6, A-14(a)(4). Consequently, a retiree lump-sum window
would not have been eligible for the § 1.401(a)(9)-6, A-13(a) exception under which an
annuity payment period may be changed in association with an annuity payment
increase described in § 1.401(a)(9)-6, A-14. Notice 2015-49 explained that the

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§ 401(a)(9) provisions and related regulations regarding pension plan annuities were
crafted to provide an administrable way to ensure that a distribution of the employee’s
benefit will not be unduly tax-deferred. For example, a pension plan may not permit an
employee who has passed the required beginning date to defer distribution of the bulk
of the employee’s benefit (and thus defer the tax) until later in life, while taking relatively
small periodic benefits in the interim. In addition, under the regulations, a defined
benefit plan may not permit the annuity payment period to be changed or the annuity
payment to be increased, except in a narrow set of circumstances specified in the
regulations, such as in the case of retirement, death, or plan termination. Notice 2015-
49 further explained that if a participant has the ability to accelerate annuity distributions
at any time, then the actuarial cost associated with that acceleration right would result in
smaller initial benefits, which would contravene the purpose of § 401(a)(9).
Notice 2015-49 provided that the Treasury Department and the IRS intended that
these amendments to the regulations would apply as of July 9, 2015, except in the case
of a retiree lump-sum window with respect to which specified concrete steps (adoption,
specific authorization to adopt, collective bargaining, or written communication furnished
to participants) with respect to the plan amendment had been taken, or a determination
letter or letter ruling had been received, before that date. In addition, Notice 2015-49
provided that the IRS would not express an opinion in private letter rulings or
determination letters as to the federal tax consequences of a retiree lump-sum window.
III. RETRACTION OF INTENT TO PROPOSE REGULATIONS UNDER § 401(a)(9)
The Treasury Department and the IRS no longer intend to propose the
amendments to the regulations under § 401(a)(9) that were described in Notice 2015-
49. However, the Treasury Department and the IRS will continue to study the issue of
retiree lump-sum windows. Until further guidance is issued, the IRS will not assert that
a plan amendment providing for a retiree lump-sum window program causes the plan to
violate § 401(a)(9), but will continue to evaluate whether the plan, as amended, satisfies
the requirements of §§ 401(a)(4), 411, 415, 417, 436, and other sections of the Code.
During this period, the IRS will not issue private letter rulings with regard to retiree lump-
sum windows. However, if a taxpayer is eligible to apply for and receive a
determination letter, the IRS will no longer include a caveat expressing no opinion
regarding the tax consequences of such a window in the letter.
IV. EFFECT ON OTHER DOCUMENTS
Notice 2015-49 is superseded.
V. DRAFTING INFORMATION

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The principal author of this notice is Thomas C. Morgan of the Office of the
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes). However, other personnel from the IRS participated in development of this
guidance. For further information regarding this notice, please contact Mr. Morgan at
(202) 317-6700 (not a toll-free number).