The Window Opens for Retiree Cashouts

In the past, the IRS has implicitly prohibited the offer of a lump sum payment in lieu of a monthly annuity – except in the case of a plan termination – to retirees already in pay status. For plan sponsors seeking to remove risk and lower PBGC premiums, this constrained the population eligible for a lump sum window to terminated vested participants. However, the IRS never formalized its position on this, leaving plan sponsors to wonder what options they had.

In the recently released Notice 2019-18, the IRS and Treasury Department state that while they will continue to evaluate the legality of a retiree lump sum window under the Internal Revenue Code and ERISA, they do not intend to propose amendments to the regulations prohibiting them. This gives plan sponsors the window of opportunity they’ve been looking for to offer lump sums to retirees.

A lump sum window is a temporary opportunity for former employees of an organization to elect a one-time distribution of their benefit in lieu of future annuity payments. Over the last few years, this has been a common strategy of plan sponsors looking for ways to reduce PBGC premiums and transfer liability out of their pension plan. But, in the absence of a full plan termination, it was restricted to terminated participants, and excluded actives and retirees already receiving annuities. Now, the IRS has openly stated it will not limit plan sponsors from offering a lump sum to retirees.

While this may not be the right strategy for every organization, it is worth a conversation to determine whether it makes sense for your organization. For a complimentary cost/benefit analysis of your specific plan, please contact Erica Harper or Rob Danesh at (585) 319-4218 or info@harperdanesh.com.