Important news about retiree lump-sum window programs in defined benefit plans

The IRS has announced big news: it is no longer intending to propose regulations prohibiting plan sponsors from offering limited-time retiree lump-sum window programs.

These programs used to be a popular way for plan sponsors to manage pension liabilities: a plan sponsor would amend its defined benefit plan to allow a retiree already receiving lifetime annuity payments to convert to a lump-sum payout. And the IRS seemed to bless the practice with a series of private letter rulings. But in 2015, the IRS announced it planned to propose regulations to prohibit the programs, explaining they violated minimum distribution rules – rules that stated once a participant begins receiving lifetime annuity payments, the benefits cannot be modified except in very narrow circumstances.

Now, the IRS has (partially) reversed course – although it will continue to study lump-sum window programs, it is taking further regulations off the table for now. The IRS will not be issuing private letter rulings on these programs, but it will consider them in applications for determination letters for those plans eligible to apply for letters.

Recommendation: Even with this announcement, lump sum window programs are not simple options for plan sponsors looking to de-risk their defined benefit plans. This is a complicated issue requiring careful analysis so as not to undermine a plan’s tax-qualified status. If you are considering making use of a window program, you should consult with your ERISA attorneys.

You can read IRS Notice 2019-18 here.