Code section 401(a)(9)(A) requires employer-sponsored retirement plans to include RMD rules in their plan documents and comply with those rules to maintain their tax-qualified status under the Code. Under the RMD rules, plan participants must begin taking distributions from those plans annually, starting with the later of the year in which the participant (i) reaches 70.5 years of age or (ii) retires from employment (this date is called the required beginning date or RBD).
Under the RMD regulations, once the periodic annuity payments begin, those payments generally (i) cannot be changed and (ii) must not increase over time. One exception, however, allows annuity payments to increase if the increased payments are the result of a plan amendment (“increase in benefits” exception).
In several private letter rulings (PLRs) issued before Notice 2015-49, the IRS stated that the increase in benefits exception applied to plan amendments implementing retiree lump-sum windows, as long as certain requirements were met.
Given these PLRs, and although a PLR cannot be cited as precedent for an employer that it is not addressed to, a number of defined benefit plan sponsors amended their plans to offer retirees who were receiving annuity payments a one-time opportunity, or window, to elect to convert the annuity into a lump-sum payment as a permissible increase in benefits under the RMD regulations. By reducing the number of participants entitled to receive benefits from the plan, lump-sum windows are viewed as a useful option for defined benefit plan sponsors that want to “de-risk” their plans.
Opponents of the lump-sum window de-risking strategy voiced their concern that retirees would be shortchanged on the value of their vested benefits if they switched from annuitization (as in monthly payments for life) to a lump-sum distribution once payouts were underway and would outlive their lump-sum income.