Defined benefit plans to be prohibited from replacing annuities with lump-sum payments

By Sally P. Schreiber, J.D.

In Notice 2015-49, the IRS announced that it will amend the Sec. 401(a)(9) required minimum distribution regulations to prohibit the use of lump-sum payments to replace annuity payments in defined benefit plans. Some plans have treated the right to accelerate benefits and receive a lump sum as complying with the regulations because the plans claim there is an increase in benefits, which is required under the rules.

The IRS noted that the Sec. 401(a)(9) regulations reflect an intent, among other things, to prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a defined benefit plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. The IRS has concluded that a broad exception for increased benefits in the regulations permitting lump-sum payments to replace rights to ongoing annuity payments would undermine that intent.

To prevent this practice, the IRS intends to amend Regs. Sec. 1.401(a)(9)-6, A-14(a)(4), to provide that the types of benefit increases permitted include only those that increase the ongoing annuity payments, not those that accelerate the annuity payments. The new rules will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

The amendments, when they are issued, will apply as of July 9, 2015, the date the notice was issued, except for certain grandfathered benefit plans.    

 Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.

SPONSORED REPORT

How the election may affect taxation of business income

This report summarizes recent proposals to reform the U.S. business income tax system and considers the path to enactment of any such legislation.

VIDEO

How to Excel pivot a general ledger

The general ledger is a vast historical data archive of your company's financial activities, including revenue, expenses, adjustments, and account balances. J. Carlton Collins, CPA, shows how to prepare data for, and mine data with, PivotTables.

QUIZ

Did you follow 2016’s biggest accounting news?

CPAs will remember 2016 as a year of new standards and new faces. How well did you follow the biggest accounting events? The 7 questions in this quiz will help you find out