In recent years, many pension plan sponsors have sought to reduce pension liabilities by offering lump sum "window" programs. Such programs are one of several popular risk-reduction (or "de-risking") strategies employed by plan sponsors. Lump sum window programs generally allow former employees a limited period of time to elect a lump sum cash-out of accrued pension benefits. Lump sum window programs are often limited to terminated employees who have not yet commenced their pension benefits. However, some employers have offered annuitants (participants in pay status) an opportunity to elect a lump sum in lieu of any future payments under the original annuity.
Under Notice 2015-49, lump sum cash-out offers to current annuitants would no longer be permitted. The guidance informs the benefits community that the IRS intends to amend the Section 401(a)(9) "required minimum distribution" regulations to prohibit the practice. The new regulations will be effective back to the date of Notice 2015-49: July 9, 2015. With limited exceptions for annuitant lump sum cash-out programs in place or announced before that date, this form of "de-risking" is now effectively prohibited. The change is largely driven by policy concerns: lump sum payments transfer the investment and life longevity risk from the plan to retirees. Plan sponsors considering a lump sum program as a form of "de-risking" should be aware that only current annuitants are impacted by the change: lump sum windows are still permitted for participants whose annuities have not commenced.
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