New Rules Prohibit Defined Benefit Plans From Substituting Lump-Sum Payments for Annuities

By Sally P. Schreiber, J.D.

In Notice 2015-49, the IRS announced that it will amend the Sec. 401(a)(9) required minimum distribution regulations to prohibit the use of lump-sum payments to replace annuity payments in defined benefit plans. Some plans have treated the right to accelerate benefits and receive a lump sum as complying with the regulations because the plans claim there is an increase in benefits, which is required under the rules.

The IRS noted that the Sec. 401(a)(9) regulations reflect an intent, among other things, to prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a defined benefit plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. The IRS has concluded that a broad exception for increased benefits in the regulations permitting lump-sum payments to replace rights to ongoing annuity payments would undermine that intent.

To prevent this practice, the IRS intends to amend Regs. Sec. 1.401(a)(9)-6, A-14(a)(4), to provide that the types of benefit increases permitted under that section of the regulations include only those that increase the ongoing annuity payments, not those that accelerate the annuity payments. The new rules will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

The amendments, when they are issued, will apply as of July 9, 2015, the date the notice was issued, except for certain grandfathered benefit plans.

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