Employee Benefits-IRS Issues Letter Allowing A Plan To Offer A Lump Sum Payment Option To Participants Already In Pay Status Without Violating Code Section 401(a)(9)

July 26, 2012

In a Letter Ruling, dated April 19, 2017, the Internal Revenue Service (the "IRS") faced the question of whether section 401(a)(9) of the Internal Revenue Code (the "Code") would be violated if a qualified defined benefit plan is amended to offer-once, for a limited period of time of no less than 60 days and no more than 90 days- a lump sum option to participants already in pay status, that is, participants already receiving annuity payments. Under the lump sum option, a participant who elects the lump sum would receive the remaining value of his or her annuity in a lump sum payment, in lieu of receiving any more annuity payments.

In analyzing this question, the IRS said that the proposed amendment would result in a change in the annuity payment period. The change is associated with the payment of increased benefits due to the lump sum. Those who elect the lump sum will be treated as having a new annuity starting date, which will be the first day of the month in which the lump sum is payable. Since the ability to select a lump sum option is available only during a limited window period, increased benefit payments will result from the proposed plan amendment, and as such are a permitted benefit increase under Treas. Reg. Sec. 1.401(a)(9)-6, Q & A-14(a)(4).

As a result, the IRS concluded that the amendment in question will not cause the plan to violate section 401(a)(9).