Defined Benefit Plans to Be Prohibited From Replacing Annuities With Lump-Sum Payments

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 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.

Newsletter Articles

SPONSORED REPORT

States look to unclaimed property for revenue

State audits of abandoned and unclaimed property (AUP) have exploded in recent years. This report outlines the escheat process, common types of AUP, how different states are handling it and how companies can plan for potential audits and liabilities.

DEDUCTIONS

Understanding the new Sec. 199A business income deduction

The new deduction allows certain business owners to keep pace with the significant corporate tax cut provided by the Tax Cuts and Jobs Act.