IRS to Eliminate Common ERISA Pension Plan De-Risking Strategy: IRS Announces Intention to Prohibit Lump-Sum Payout of In-Pay Annuities

Sullivan & Cromwell LLP - July 13, 2015

Last week, the Internal Revenue Service issued Notice 2015-49 (the “Notice”) announcing that it intended to prohibit one type of common defined benefit plan “de-risking” strategy – offering a cash-out window during which retirees who are then receiving annuity payments can elect to receive a lump-sum payment in lieu of remaining annuity payments.  The proposed amendments have not been published, but the Treasury Department and the IRS intend the revisions to apply as of July 9, 2015, except for certain cash-out windows that had already been adopted or communicated as of that date.  The amended regulations are not expected to prohibit other defined benefit de-risking strategies, such as offering a lump-sum option to those terminated plan participants who are not yet receiving benefits or contracting with a third-party insurance company to provide annuities to plan participants to satisfy a portion of outstanding liabilities.