IRS Requesting DB Lump-Sum Payment Window Information

The Internal Revenue Service (IRS) has said applicants requesting determination letters for their defined benefit (DB) plans should identify whether the plan has lump-sum risk transfer language in either the cover letter to their application or an attachment.

For plans that do, they must also identify the appropriate plan section and whether the plan satisfies one of the conditions in Notice 2015-49. In Notice 2015-49, the IRS announced its intent “to amend the required minimum distribution regulations under § 401(a)(9) of the Internal Revenue Code to address the use of lump-sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.” Effective July 9, 2015, DB plan sponsors may no longer offer a lump-sum window to participants who have begun receiving installments.

On its website, the IRS says if the plan sponsor advises that the plan has risk transfer language and satisfies one of the four conditions in Notice 2015-49, the agency will review the plan document to verify that it satisfies the qualification requirements of the Code. The plan’s determination letter will contain a favorable caveat providing reliance on the risk transfer language.

Plans with risk transfer language that do not meet one of the conditions in Notice 2015-49 won’t receive a determination letter unless the risk transfer language is removed.

For all other DB plans, the determination letter will contain a caveat that the plan has no reliance that any risk transfer language satisfies the requirements of the Code. This approach will be used if the plan sponsor:

• Doesn’t include the information on a cover letter or attachment;
• Doesn’t respond to the request; or
• Responds that the plan doesn’t have risk transfer provisions.

For DB plan determination letter applications the IRS has already received, it will request the plan sponsor provide this information.