Plan amendment offering lump-sum payment option did not violate minimum distribution requirement

The minimum distribution requirements of Code Sec. 401(a)(9) would not be violated if a defined benefit plan was amended to offer a lump-sum payment option for a limited period of time to the plan’s participants and beneficiaries for whom annuity payments had already begun, according to an IRS letter ruling. This ruling was based on a representation that the limited window to elect a lump-sum benefit satisfied Code Sec. 417(e) and IRS Reg. §1.417(e)-1.

A company in the entertainment industry sponsored a qualified defined benefit plan that offered a number of distribution options. The company proposed to amend the plan to offer, during a limited period of time, a lump-sum payment option to participants, beneficiaries, and alternate payees of the plan who were in pay status. Under the amendment, these individuals would have a specified limited window period of no less than 60 days and no more than 90 days during which they could elect to receive the actuarial present value of their remaining benefits under the plan at the time of the election in the form of a single lump-sum payment. Elections by those choosing to receive the new distribution option would be subject to applicable spousal consent. The individuals who elect the new distribution option would be considered to have a new annuity starting date as of the first day of the month in which their new benefit was payable. The plan’s actuary confirmed that the lump-sum window program would not trigger benefit restrictions described in Code Sec. 436.

The company requested a ruling that the minimum distribution requirements of Code Sec. 401(a)(9) would not be violated if the company amended the plan to offer a lump-sum payment option, during a limited window period of no less than 60 days and no more than 90 days, to the plan’s participants, beneficiaries, and alternate payees for whom annuity payments had already begun.
The IRS noted that the proposed amendment would result in a change in the annuity payment period. The annuity payment period would be changed in association with the payment of increased benefits as a result of the addition of the lump-sum option. In addition, the individuals who decided to change their distribution option would be considered to have a new annuity starting date as of the first date of the month in which the new benefit was payable. Because the ability to select a lump-sum option would only be available during a limited window, the increased benefit payments would result from the proposed plan amendment and, as such, was a permitted benefit increase under IRS Reg. §1.401(a)(9)-6, Q&A-14(a)(4).

Based on the company’s representation that the lump-sum window option satisfied Code Sec. 417(e) and IRS Reg. §1.417(e)-1, the IRS concluded that the minimum distribution requirements of Code Sec. 401(a)(9) would not be violated if the company amended the plan to offer a lump-sum window option, during a limited window period of no less than 60 days and no more than 90 days, to the plan’s participants, beneficiaries, and alternate payees for whom annuity payments had already begun.

Source: IRS Letter Ruling 201427023.

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