Lump sum windows (LSW) are an opportunity afforded by pension plan amendment to allow a limited period for eligible pension plan participants to convert their vested accrued monthly benefit to a one-time lump-sum payment. These projects have been very popular in the last several years due to many factors, including a desire to reduce balance sheet liability as well as to reduce PBGC premiums (in an environment where premiums continue to rise).
In guidance issued earlier this month, the IRS reversed the position it first took in 2015 indicating then that allowing a retiree in pay status to elect a lump sum cashout during a LSW project would be an impermissible “second bite at the apple” (because supposedly such an election would violate the required minimum distribution rules). The IRS has said that, for now, it will not assert that these retiree LSWs violate required minimum distribution rules. This means that pension plan sponsors planning (or perhaps even in the midst of) a LSW project may want to rethink whether retirees in pay status are included in the group offered the lump sum election. Those who have recently undergone a LSW project may (with counsel) consider whether another temporary LSW should be contemplated.
But remember, that when an employer establishes “a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time,” the IRS will take the position such benefits will be treated as a permanent feature in the plan (i.e., provided under the terms of the plan, regardless of the time periods intended). Thus, a series of windows should be vetted with counsel.
This is not the first time the IRS has changed its mind on this issue (approving the practice of extending a LSW to retirees of Ford in 2012), and it may not be the last. The IRS notes that it continues to study retiree LSWs. Accordingly, plan sponsors looking to avail themselves of this guidance as a de-risking strategy should consider action. Note, for pension plans considering this strategy, the IRS still will not offer private letter rulings specifically on this issue.