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IRS Permits Lump Sum Window Programs for Retirees in Pay Status

Section 401(a)(9) of the Internal Revenue Code provides that, by the required beginning date, an employee’s accrued benefit in a tax-qualified retirement plan must either be paid in full or commence to be distributed as a nonincreasing annuity. The Treasury Regulations issued under Code Section 401(a)(9) contain an exception to the nonincreasing annuity requirement which permits increases due to a plan amendment that increases plan benefits. Some practitioners have interpreted the exception to permit sponsors to amend a plan to offer a lump sum window program to retirees already in pay status (i.e., the option for a retiree to convert the unpaid portion of her existing annuity into a one-time, lump-sum payment during a specified window period). In Notice 2015-49, the IRS announced its intent to amend the Treasury Regulations to expressly prohibit defined benefit plans from offering such lump sum window programs to retirees in pay status. In Notice… Continue Reading

IRS Proposes to Eliminate Lump Sum Cashout Windows for Defined Benefit Plan Retirees in Pay Status

In Notice 2015-49, the IRS announced that it proposes to amend the Treasury Regulations under Section 401(a)(9) of the Internal Revenue Code, effective as of July 9, 2015, to prohibit defined benefit plan sponsors from amending their plans to offer a lump sum cashout window to participants already in pay status. The announcement does not affect lump sum cashout windows for participants who are not already in pay status. Notice 2015-49 contains limited exceptions for cashout windows (i) that received a favorable private letter ruling before July 9, 2015; (ii) that were adopted or authorized by an entity with authority to amend the plan before July 9, 2015; (iii) that were adopted pursuant to a collective bargaining agreement in place before July 9, 2015; or (iv) for which participants received a written notice before July 9, 2015, communicating a definite intent to offer a cashout window. IRS Notice 2015-49 can… Continue Reading

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