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Publications | March 11, 2019
2 minute read

IRS Clears the Path for Offering Lump Sum Buyouts to Retirees

The IRS has flip-flopped on whether pension plans can offer lump sum buyouts to participants who are already receiving benefit payments.

After issuing a couple of private letter rulings in 2012 allowing limited retiree lump sum windows (which caused more plans to offer them), the IRS then seemed to grow increasingly concerned that participants offered these cash-outs would not understand the implications of giving up a lifetime pension benefit for a lump sum.

This concern led to a 2015 IRS Notice that effectively prohibited retiree buyouts. In that ruling, the IRS warned it would be amending the required minimum distribution (RMD) regulations to provide that the RMD rules are violated if participants currently in pay status cash out future pension payments. The IRS’s rationale was that a form of payment cannot be changed after payments have started. Read about that ruling here

However, new IRS Notice 2019-18 once again clears the path for these buyouts. In this Notice, the IRS says it will not amend the RMD rules after all. The new Notice also says that until further guidance is issued, the IRS will not claim that a plan amendment providing for a retiree lump-sum window program causes the plan to violate the RMD rules.

This is good news for employers who wish to de-risk their pension plan liabilities. In addition to purchasing annuities to transfer benefit liabilities to an insurance company and cashing out terminated vested participants, the option to also offer buyouts to retirees is back on the table. Of course, a buyout must still satisfy other Internal Revenue Code requirements, such as nondiscrimination, vesting, benefit limits, survivor annuity, and restrictions for underfunded plans, but those are all manageable issues.If you are thinking about whether a retiree buyout makes sense for your plan, contact any member of our Employee Benefits & Executive Compensation Practice Group.