On July 9, 2015, the IRS issued Notice 2015-49, effectively overturning a stream of Private Letter Rulings issued since 2012 (the widely known Ford/GM Rulings) where the IRS had ruled that a qualified defined benefit plan could be amended to permit a participant in pay status to elect to commute the remaining value of the annuity payments to a lump sum payment during a temporary “window period.” This type of amendment ¯ to permit participants/beneficiaries in pay status to elect a lump sum that was not otherwise available under the terms of the plan ¯ is often referred to as a “de-risking” amendment and is no longer permitted, generally effective July 9, 2015. Importantly, plan sponsors can continue to provide these lump sum windows for participants that are not in pay status (e.g., deferred vested participants).
This change in position is likely tied to government concerns that retirees are ill-prepared to manage lump sum distributions and the view that continued lifetime pension payments are a critical part of an individuals financial security during the retirement years. Moreover, we suspect the Notice is primarily a result of continued lobbying by retiree groups to get some action at a policy level to slow this trend. The release was certainly kept under close wraps – unlike most published guidance in development. As a result of this Notice, plan sponsors can no longer transfer the risks of increased longevity and investment loss to participants already in pay status. The IRS will be issuing proposed regulations to clarify the scope of this new restriction. Please see the attached memo for further information.