On March 6, 2019, the IRS issued Notice 2019-18, which provides that the Treasury Department and the IRS no longer intend to propose regulations generally prohibiting defined benefit plans from replacing any qualified joint and survivor, single life, or other annuity with a lump-sum payment or other accelerated form of distribution for plan participants in pay status. IRS Notice 2019-18 supersedes Notice 2015-49, which stated the intention of the Treasury Department and IRS to propose regulations generally prohibiting retiree lump-sum windows (see Legal Update, IRS Notice 2015-49 Prohibits Plans from Offering Lump Sum Risk Transferring Programs for Participants in Pay Status).

Section 401(a)(9)(A) of the Internal Revenue Code (Code) requires employer-sponsored retirement plans to include required minimum distribution (RMD) rules in their plan documents and comply with those rules to maintain their tax-qualified status under the Code (26 U.S.C. § 401(a)(9)(A)). Under the RMD requirements of Code Section 401(a)(9), plan participants must begin taking distributions from those plans annually, starting with the later of the year in which the participant:

(26 U.S.C. § 401(a)(9)(A); see Practice Note, Required Minimum Distributions from Retirement Plans.)

However, the actual payment of that first year's RMD may be deferred until the participant's required beginning date (RBD). The RBD for most participants is April 1 of the calendar year following the participant's first distribution calendar year (see Practice Note, Required Minimum Distributions from Retirement Plans: Required Beginning Date (RBD)). Once a participant's RBD is determined, he must take distributions for the first distribution calendar year and every year thereafter, unless there is an applicable exception (for more information, see Practice Note, Required Minimum Distributions from Retirement Plans: Annual Distributions Required).

Once the periodic annuity payments begin:

Code Section 401(a)(9) and the related Treasury Regulations are intended to ensure that:

Any plan participant who fails to properly receive an RMD is liable for an excise tax equal to 50% of the difference between the actual amount distributed and the RMD for the relevant tax year, though the penalty may be waived in certain situations (see Practice Note, Required Minimum Distributions from Retirement Plans: RMD Requirements and Penalties).

In Notice 2015-49, the IRS stated that it intended to amend the regulations under Code Section 401(a)(9) to generally prohibit lump sum risk transferring programs for participants in pay status as of July 9, 2015 (see Legal Update, IRS Notice 2015-49 Prohibits Plans from Offering Lump Sum Risk Transferring Programs for Participants in Pay Status). Specifically, the regulatory changes that the Treasury Department and IRS intended to propose included amendments to Treasury Regulation Section:

These amendments would not have applied to accelerations of ongoing annuity payments under a plan amendment adopted before July 9, 2015, which was the effective date of Notice 2015-49.

Notice 2015-49 also provided that the IRS would not express an opinion in private letter rulings or determination letters regarding the federal tax consequences of a retiree lump-sum window.

Notice 2019-18 states that the Treasury Department and the IRS no longer intend to propose the amendments to the regulations under Code Section 401(a)(9) that were described in Notice 2015-49. The Treasury Department and the IRS will continue to study the issue of retiree lump-sum windows. Until further guidance is issued, the IRS will not:

Practitioners should be aware that Notice 2019-18 includes a retraction of intent by the Treasury Department and the IRS regarding proposed regulations under Code Section 401(a)(9) that would have limited accelerated forms of distribution to participants in pay status but allowed them for participants who had not yet begun to receive their benefit payments. Under Notice 2019-18, these proposed regulations will not be issued, which means that lump-sum windows may still be available for defined benefit plan sponsors.