The Ax Falls On Defined Benefit Plan Lump Sum Cash-Out Programs

On July 9, 2015, the Treasury Department and IRS announced plans to implement a significant regulatory change that will effectively prohibit "lump sum risk-transferring programs" for defined benefit pension plans. These programs typically permit a participant receiving annuity payments from the plan to elect, during a pre-established election period (a "window"), to have future annuity payments accelerated into a single, lump sum payment. The lump sum payments made under such a program help reduce the plan's overall benefit liabilities.

Many employers have implemented programs of this type in the past few years. Interest began in earnest in 2012 when the IRS issued a pair of private letter rulings addressing some of the tax-qualification issues associated with accelerating annuity payments. One of the issues addressed in the rulings (and which was reiterated in five other private letter rulings issued over the following two years) was whether the lump sum payment of