Roadblock Removed Allowing for Retiree Lump Sums

by | Mar 11, 2019 | bytesize, Defined Benefit

The IRS has given plan sponsors the green light to move forward with offering lump sums to defined benefit plan retirees or other participants who are “in pay status”, receiving monthly checks. Or perhaps it’s more accurate to say that they’ve removed the Stop sign. Before digging into the items a plan sponsor could consider related to such a lump sum offer, let’s take a quick look back at how we got here:


Simplified History & Timeline
  • Pre-2010: Retiree lump sums were not offered, largely thought to be prohibited by Internal Revenue Code §401(a)(9), aside from special situations such as plan terminations
  • 2010-2014: Several Private Letter Rulings (PLRs) were issued by the IRS, allowing for these retiree lump sums to be offered (for only the Plan that requested the PLR)
  • 2015: IRS puts a stop to these offers, noting (via Notice 2015-49) that it will amend §401(a)(9) such that it will be impermissible for a sponsor to amend a Plan in order to allow for such lump sum offers after July 9, 2015
  • March 6, 2019: IRS backtracks, saying it no longer intends to amend §401(a)(9). Thus Notice 2015-49 is superseded. IRS also announces that it will not issue PLRs on this subject


Moving Forward

This recent Notice isn’t exactly a ringing endorsement from the IRS saying that these lump sums are OK, but, “until further guidance is issued, the IRS will not assert that a plan amendment providing for a retiree lump-sum window program causes the plan to violate §401(a)(9)”. The IRS and Treasury intend to continue to study this issue, but until/unless further guidance is issued, the retiree lump sum is once again an option for defined benefit plan sponsors.

But is this an option that sponsors should consider?


Financial Considerations

Before rushing out to offer lump sums to all your retirees, consider this: it could be less expensive to buy annuities for these retirees. And buying annuities for retirees will become more expensive if retirees have been offered a lump sum, but have declined the offer. Other factors to consider:

  1. Interest rates are generally higher (by 30 basis points or so, currently) for calculating lump sums than for determining balance sheet liabilities and annuity buyouts. Interest rates also offer potential arbitrage opportunities, such as the current situation for calendar year Plans, where lump sums can be paid using rates that are materially higher than current rates.
  2. Lump sums use a unisex mortality table, whereas annuity purchases will consider factors such as gender and collar (i.e. blue collar vs. white collar) – thus the lump sum is much more attractive for a group of blue collar male retirees than for a group of white collar female retirees. An annuity purchase for the blue collar males might wind up being cheaper than paying out lump sums (even before we account for anti-selection)
  3. Anti-selection: Those retirees that opt for the lump sum are more likely to be in poor health. Thus, the retiree is able to act on health knowledge which the Plan cannot consider, usually to the detriment of the Plan. The flip side of this is that any retirees who do not accept a lump sum offer will likely be healthier than average, and this can be considered when pricing an annuity purchase, resulting in more costly annuities for those who remain in the Plan after such a lump sum offer.
  4. Expenses: there is an expense associated with offering these lump sums. The cost of amending the Plan, sending out election packages and processing payments must be weighed against the potential savings (e.g. PBGC premium savings, future administrative savings, etc.). The take-rate of a retiree lump sum offer will likely be lower than a similar offer for terminated vested participants (TVs), and the ultimate savings (both the $ per year and # of future years) are likely smaller for retirees than for TVs. Thus, lump sum offers for retirees won’t necessarily offer the same savings as a lump sum offer for TVs. Still, Plans paying the maximum (capped) PBGC variable rate premium would likely benefit from a retiree lump sum offer, at least for those retirees with relatively small annual benefits.


Other Considerations

Some companies may want to ensure that all retirees have a guaranteed monthly payment for life. Others might prefer that its retirees have options to select what is best for them (e.g. taking a lump sum to pay off high interest mortgage, credit card, or medical expenses may be more important than having a lifetime annuity). Each sponsor will have a different approach when it comes to paternalism over pension benefits, and this approach should be considered prior to making a lump sum offer.



The IRS notice definitely leaves the door open to revisiting this issue in the future. Therefore, if a retiree lump sum window is right for your Plan, you may need to act soon to ensure this gets done before the IRS takes further action.

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